
[Federal Register Volume 81, Number 86 (Wednesday, May 4, 2016)]
[Notices]
[Pages 26851-26853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10437]


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SECURITIES AND EXCHANGE COMMISSION

[Release No 34-77744; File No. SR-MSRB-2016-04]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of a Proposed Rule Change Consisting of 
Proposed Amendments to Rules G-12 and G-15 To Define Regular-Way 
Settlement for Municipal Securities Transactions as Occurring on a Two-
Day Settlement Cycle and Technical Conforming Amendments

April 29, 2016.

I. Introduction

    On March 1, 2016, the Municipal Securities Rulemaking Board (the 
``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (the ``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change consisting of proposed 
amendments to the MSRB Rules G-12 and G-15 to define regular-way 
settlement for municipal securities transactions as occurring on a two-
day settlement cycle and technical conforming amendments (the 
``proposed rule change'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on March 18, 2016.\3\ The Commission received four comment 
letters on the proposed rule change.\4\ This order approves the 
proposed rule change.
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    \3\ Securities Exchange Act Release No. 77364 (Mar. 14, 2016), 
81 FR 14906 (Mar. 18, 2016) (the ``Notice of Filing'').
    \4\ See Letters from Martin A. Burns, Chief Industry Operations 
Officer, Investment Company Institute (``ICI''), dated April 4, 2016 
(``ICI Letter''); Michael Nicholas, Chief Executive Office, Bond 
Dealers of America (``BDA''), dated April 8, 2016 (``BDA Letter''); 
Leslie M. Norwood, Managing Director and Associate General Counsel, 
Securities Industry Financial Markets Association (``SIFMA''), dated 
April 8, 2016 (``SIFMA Letter''); David T. Bellaire, Executive Vice 
President & General Counsel, Financial Services Institute (``FSI''), 
dated April 8, 2016 (``FSI Letter'' and, together with the BDA 
Letter, the ICI Letter, and the SIFMA Letter, the ``Comment 
Letters'').
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II. Description of the Proposed Rule Change

    The MSRB's proposed rule change consists of proposed amendments to 
Rule G-12, on uniform practice, and Rule G-15, on confirmation, 
clearance, settlement and other uniform practice requirements with 
respect to transactions with customers, to define

[[Page 26852]]

regular-way settlement for municipal securities transactions as 
occurring on a two-day settlement cycle (``T+2'') and technical 
conforming amendments.\5\ According to the MSRB, following the 
financial crisis in 2008, regulators implemented additional rules and 
regulations designed to reduce risk in the markets, achieve greater 
transparency and improve efficiency in the financial industry.\6\ 
Consistent with those goals, the MSRB stated that the securities 
industry launched a voluntary initiative to shorten the settlement 
cycle for securities transactions to reduce counterparty risk, decrease 
clearing capital requirements, reduce liquidity demands, and harmonize 
the settlement cycle globally.\7\
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    \5\ See supra note 3.
    \6\ Id.
    \7\ Id.
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    The MSRB has identified two MSRB rules--G-12(b)(ii)(B)-(D) and Rule 
G-15(b)(ii)(B)-(C)--essential to facilitate the move to T+2.\8\ As 
stated by the MSRB, these rules currently define regular-way settlement 
as occurring on a three day settlement cycle (``T+3'').\9\ The MSRB, 
therefore, proposes to amend Rules G-12(b)(ii)(B)-(D) and G-
15(b)(ii)(B)-(C) to define regular-way settlement as occurring on T+2, 
and to make certain technical conforming amendments to MSRB Rules G-
12(b)(i)(B), G-15(b)(i)(B), and G-15(g)(ii)(B).\10\
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    \8\ Id.
    \9\ Id.
    \10\ Id.
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    According to the MSRB, the migration to T+2 will provide 
significant benefits to the financial industry broadly.\11\ The MSRB 
stated that the benefits to the industry include the mitigation of 
counterparty risk, a decrease in margin requirements for National 
Securities Clearing Corporation's (``NSCC'') clearing members, a 
reduction in pro-cyclical margin and liquidity demands especially 
during periods of market volatility, and an increase in global 
settlement harmonization by aligning the U.S. markets with other major 
markets, such as the European Union.\12\ The MSRB also asserted that by 
shortening the time between trade and execution and settlement by one 
business day (from T+3 to T+2), the risk of counterparty default and 
the capital required to mitigate this risk would be reduced.\13\ In the 
MSRB's view, the likely costs of the proposed rule change, including 
the changes in processes and technology as well as behavioral 
modifications by the industry and investors, are justified by the 
likely benefits associated with transitioning to T+2.\14\
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    \11\ Id.
    \12\ Id.
    \13\ Id.
    \14\ Id.
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Proposed Amendments to MSRB Rules G-12(b)(ii)(B)-(D) and G-
15(b)(ii)(B)-(C)

    According to the MSRB, Rule G-12 establishes uniform industry 
practices for processing, clearance and settlement of transactions in 
municipal securities between a broker, dealer or municipal securities 
dealer and any other broker, dealer or municipal securities dealer.\15\ 
Specifically, the MSRB noted that Rule G-12(b)(ii) defines ``regular 
way'' settlement as occurring on a T+3 basis.\16\ As proposed by the 
MSRB, the proposed rule change would amend Rule G-12(b)(ii)(B)-(D) to 
define ``regular way'' settlement as occurring on a T+2 basis.\17\
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    \15\ Id.
    \16\ Id.
    \17\ Id.
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    According to the MSRB, Rule G-15 requires municipal securities 
brokers and municipal securities dealers to provide customers with 
written confirmations of transactions, containing specified 
information; and prescribes certain uniform practice procedures for 
dealers that transact municipal securities business with customers.\18\ 
Specifically, the MSRB noted that Rule G-15(b)(ii) defines ``regular 
way'' settlement as occurring on a T+3 basis.\19\ As proposed by the 
MSRB, the proposed rule change would amend Rule G-15(b)(ii)(B)-(C) to 
define ``regular way'' settlement as occurring on a T+2 basis.\20\
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    \18\ Id.
    \19\ Id.
    \20\ Id.
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Technical Conforming Amendments

    The MSRB has proposed technical conforming amendments to Rules G-
12(b)(i)(B), G-15(b)(i)(B) and G-15(g)(ii)(B).\21\ As proposed by the 
MSRB, Rules G-12(b)(i)(B) and G-15(b)(i)(B) would both be revised by 
replacing the reference to ``National Association of Securities 
Dealers, Inc.'' with the ``Financial Industry Regulatory Authority.'' 
\22\ Similarly, the MSRB proposes to amend Rule G-15(g)(ii)(B) to 
replace the reference to ``NASD Conduct Rule 2260(g),'' which is 
retired, and replace it with the current relevant rule cite ``FINRA 
Rule 2251(g).'' \23\
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    \21\ Id.
    \22\ Id.
    \23\ Id.
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Compliance Date

    The MSRB has stated that the compliance date of the proposed rule 
change will be announced by the MSRB in a notice published on the MSRB 
Web site, which date would correspond with the industry's transition to 
a T+2 regular-way settlement, which would include amendments by the SEC 
to Exchange Act Rule 15c6-1(a).\24\
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    \24\ Id.
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 III. Summary of Comments Received

    As noted previously, the Commission received four comment letters 
on the proposed rule change.\25\ The commenters generally support the 
proposed rule change. The SIFMA Letter, ICI Letter, FSI Letter, and BDA 
Letter, each, expressed general support for the proposed rule 
change.\26\ In its comment letter, however, BDA expressed concern with 
respect to the impact the proposed rule change will have on certain 
retail investors who purchase securities by written check.\27\ BDA made 
a substantially similar comment in its response to the MSRB's Request 
for Comment on Changes to MSRB Rules to Facilitate Shortening the 
Securities Settlement Cycle, published on November 10, 2015 (the 
``Request for Comment''), which the MSRB addressed in the Notice of 
Filing.\28\ The MSRB stated in the Notice of Filing that it believes 
that the vast majority of firms have access to technology that would 
enable their clients to deliver funds in order to settle their 
municipal securities trades on a T+2 basis, and firms should encourage 
their customers to leverage electronic funds payment to streamline 
processing.
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    \25\ See supra note 4.
    \26\ See SIFMA Letter; BDA Letter; ICI Letter; and FSI Letter.
    \27\ See BDA Letter.
    \28\ See supra note 3.
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    The BDA Letter and the SIFMA Letter each addressed the impact of 
the proposed rule change on MSRB Rule G-32.\29\ BDA expressed its 
desire that the MSRB leave Rule G-32 unchanged,\30\ while SIFMA 
expressed its belief that the proposed rule change provided ``an 
opportune time to revise customer disclosure requirements of brokers, 
dealers, and municipal securities dealers'' under Rule G-32 but stated 
that such considerations should not impede progress of the proposed 
rule change.\31\ Both BDA and SIFMA made substantially similar comments 
in their responses to the Request for Comment, which the MSRB noted in 
the Notice of Filing and stated that it may consider suggested 
clarifications in the future.\32\
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    \29\ See BDA Letter; See SIFMA Letter.
    \30\ See BDA Letter.
    \31\ See SIFMA Letter.
    \32\ See supra note 3.
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    The FSI Letter also expressed general support and agreement with 
the

[[Page 26853]]

proposed rule change, and noted interest in seeing the MSRB coordinate 
with other regulators and market participants to educate investors and 
other market participants about the effects of shortening the 
settlement cycle to T+2.\33\ The MSRB stated that it expects to 
coordinate implementation of a T+2 regular-way settlement cycle for 
municipal securities transactions with other regulators.\34\
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    \33\ See FSI Letter.
    \34\ See supra note 3.
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IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change as 
well as the comments received. The Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to the MSRB.
    In particular, the Commission finds that the proposed rule change 
is consistent with Section 15B(b)(2)(C) of the Act,\35\ which requires, 
among other things, that the rules of the MSRB be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in municipal 
securities and municipal financial products, to remove impediments to 
and perfect the mechanism of a free and open market in municipal 
securities and municipal financial products, and, in general, to 
protect investors, municipal entities, obligated persons, and the 
public interest. The Commission believes that the proposed rule change 
is consistent with Section 15B(b)(2)(C) of the Act because the proposed 
rule change is reasonably designed to remove impediments to, and 
perfect the mechanism of, a free and open market in municipal 
securities by shortening the time between trade execution and 
settlement by one business day. According to the MSRB, the benefits of 
the proposed rule change will enhance the overall efficiency of the 
securities markets, promote financial stability, and better align U.S. 
securities markets with global markets.
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    \35\ 15 U.S.C. 78o-4(b)(2)(C).
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    In approving the proposed rule change, the Commission has also 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation.\36\ The Commission does not believe 
that the proposed rule change would impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the Act.
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    \36\ 15 U.S.C. 78c(f).
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    For the reasons noted above, the Commission believes that the 
proposed rule change is consistent with the Act.

V. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-MSRB-2016-04) be, and hereby 
is, approved.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-10437 Filed 5-3-16; 8:45 am]
 BILLING CODE 8011-01-P


