[Federal Register Volume 88, Number 105 (Thursday, June 1, 2023)]
[Notices]
[Pages 35961-35964]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-11611]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97585; File No. SR-MSRB-2023-03]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of a Proposed Rule Change To Amend MSRB 
Rules G-12 and G-15 To Define Regular-Way Settlement for Municipal 
Securities Transactions as Occurring One Business Day After the Trade 
Date and To Amend Rule G-12 To Update an Outdated Cross Reference

May 25, 2023.

I. Introduction

    On March 28, 2023, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend MSRB Rules G-12 (``Rule 
G-12''), on uniform practice, and G-15 (``Rule G-15''), on 
confirmation, clearance, settlement and other uniform practice 
requirements with respect to transactions with customers, to define 
regular-way settlement for municipal securities transactions as 
occurring one business day after the trade date and a proposed 
amendment to Rule G-12 to update an outdated cross reference 
(``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 MSRB also requested that the proposed rule change be approved 
with an implementation date of May 28, 2024, to align with the 
implementation date for Exchange Act Rule 15c6-1, as amended.\3\
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    \3\ See Securities Exchange Act Release No. 96930 (Feb. 15, 
2023), 88 FR 13872, 13916 (Mar. 6, 2023) (``SEC's T+1 Adopting 
Release''). If the Commission's compliance date were to change, the 
MSRB stated that it would issue a regulatory notice to modify the 
compliance date to remain aligned with the Commission's compliance 
date. Securities Exchange Act Release No. 97257 (Apr. 6, 2023), 88 
FR 22075 n.3 (Apr. 12, 2023) (File No. SR-MSRB-2023-03) 
(``Notice'').
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    The proposed rule change was published for comment in the Federal 
Register on April 12, 2023.\4\ The Commission received three comment 
letters \5\ on the proposed rule change. On May 11, 2023, the MSRB 
responded to the comment letters.\6\ As described further below, the 
Commission is approving the proposed rule change.
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    \4\ See Notice, 88 FR at 22075.
    \5\ See Letter from Leslie M. Norwood, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, dated May 3, 2023 (``SIFMA Letter''); Letter from RJ 
Rondini, Director, Securities Operations, Investment Company 
Institute, dated May 2, 2023 (``ICI Letter''); and Letter from 
Gregory Babyak, Global Head of Regulatory Affairs, Bloomberg L.P., 
dated May 3, 2023 (``Bloomberg Letter'').
    \6\ See Letter to Secretary, Commission, from Saliha Olgun, 
Interim Chief Regulatory Officer, MSRB, dated May 11, 2023 (``MSRB 
Letter'').
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II. Description of the Proposed Rule Change

    The MSRB stated that, consistent with its strategic goal to 
modernize its rulebook, the proposed rule change would amend Rule G-
12(b)(ii)(B)-(D) and Rule G-15(b)(ii)(B)-(C) to define regular-way 
settlement for municipal securities transactions as occurring on one 
business day after the trade date (``T+1''). The MSRB wrote that this 
proposed rule change would align with regular-way settlement on T+1 for 
equities and corporate bonds under Exchange Act Rule 15c6-1, as 
amended.\7\ Although Exchange Act Rule 15c6-1, as amended, does not 
apply to municipal securities transactions,\8\ the MSRB stated that it 
believes that the regular-way settlement cycle for municipal securities 
transactions in the secondary market should be consistent with that for 
equity and corporate bond transactions.\9\ The MSRB explained that, to 
facilitate a T+1 standard settlement cycle, the MSRB proposed to amend 
Rule G-12(b)(ii)(B)-(D) and Rule G-15(b)(ii)(B)-(C) to define regular-
way settlement as occurring on the first business day following the 
trade date rather than on the second business day following the trade 
date.\10\
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    \7\ 17 CFR 240.15c6-1.
    \8\ Id.
    \9\ Notice, 88 FR at 22075.
    \10\ Id.
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A. Background

    The SEC initially adopted Exchange Act Rule 15c6-1 \11\ in 1993 to 
shorten the settlement cycle of most equity and corporate bond 
transactions from the industry standard of within five business days 
(``T+5'') to requiring settlement within three business days 
(``T+3'').\12\ The T+3 settlement cycle remained in effect until 2017 
when the SEC amended Exchange Act Rule 15c6-1 \13\ to require the 
settlement of most equity and corporate bond transactions within two 
business days (``T+2'').\14\ On February 15, 2023, the SEC adopted 
amendments to Exchange Act Rule 15c6-1 (``Amended Exchange Act Rule

[[Page 35962]]

15c6-1'') \15\ to further shorten the settlement process, requiring the 
settlement of most equity and corporate bond transactions on T+1.\16\
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    \11\ 17 CFR 240.15c6-1.
    \12\ Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR 52891 
(Oct. 13, 1993). In adopting Exchange Act Rule 15c6-1, the 
Commission set a compliance date of June 1, 1995, 58 FR at 52891.
    \13\ 17 CFR 240.15c6-1.
    \14\ Securities Exchange Act Release No. 80295 (Mar. 22, 2017), 
82 FR 15564 (Mar. 29, 2017).
    \15\ 17 CFR 240.15c6-1.
    \16\ Notice, 88 FR at 22075.
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    Amended Exchange Act Rule 15c6-1(a) \17\ prohibits a broker-dealer 
from effecting or entering into a contract for the purchase or sale of 
a security (other than an exempted security,\18\ a government security, 
a municipal security, commercial paper, bankers' acceptances, or 
commercial bills) that provide for payment of funds and delivery of 
securities later than T+1, unless the parties expressly agree to a 
different settlement date at the time of the transaction.\19\ The MSRB 
notes that the recent amendments to Exchange Act Rule 15c6-1 \20\ 
change only the standard settlement date for securities transactions 
covered by the existing rule and do not impact the existing exclusions 
enumerated in the rule.\21\
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    \17\ 17 CFR 240.15c6-1(a).
    \18\ 15 U.S.C. 78c(a)(12).
    \19\ The MSRB wrote that Exchange Act Rule 15c6-1 was also 
amended to prohibit a broker-dealer from effecting or entering into 
a contract for firm commitment offerings of securities (other than 
exempt securities) priced after 4:30 p.m. Eastern Time that provide 
for payment of funds and delivery of securities later than T+2, 
unless the parties expressly agree to a different settlement date at 
the time of the transaction. Notice, 88 FR at 22075 n.13.
    \20\ 17 CFR 240.15c6-1. See also SEC's T+1 Adopting Release, 88 
FR at 13874.
    \21\ Notice, 88 FR at 22075-76. The MSRB stated that Exchange 
Act Rule 15c6-2 improved the processing of institutional trades 
through new requirements for broker-dealers and registered 
investment advisers related to same-day affirmations. Notice, 88 FR 
at 22076 n.15. As Exchange Act Rule 15c6-2 does not apply to 
municipal securities, the MSRB stated that it is evaluating whether 
a like requirement should be considered under MSRB rules. Id.
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B. Summary of the Proposed Rule Change

    The MSRB explained that shortening the settlement process can serve 
to reduce operational risks that can be present between trade date and 
settlement date, which can promote investor protection, help reduce the 
risk of counterparty default and the capital required to mitigate this 
risk.\22\ The MSRB stated that, in support of these objectives and to 
promote regulatory consistency, it has consistently stated that the 
regular-way settlement cycle for municipal securities transactions in 
the secondary market should be consistent with that for equity and 
corporate bond transactions.\23\ The MSRB noted that market 
efficiencies could be eroded if market participants encounter different 
settlement cycles when replacing equity or corporate bonds with 
municipal securities.\24\ For that reason, the MSRB stated that it 
adopted a T+3 settlement cycle in 1994,\25\ and a T+2 settlement cycle 
in 2017.\26\ According to the MSRB, in order to continue to maintain 
consistency across asset classes and harmonize with Amended Exchange 
Act Rule 15c6-1,\27\ it proposed to amend Rule G-12(b)(ii)(B)-(D) and 
Rule G-15(b)(ii)(B)-(C), which both currently define regular-way 
settlement as occurring on T+2, to define regular-way settlement as 
occurring on T+1.\28\
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    \22\ Notice, 88 FR at 22076. See also SEC's T+1 Adopting 
Release, 88 FR at 13919.
    \23\ Notice, 88 FR at 22076. See, e.g., ``T+3 Settlement, 
Amendments Filed: Rules G-12 and G-15,'' MSRB Reports, Vol. 14, No. 
4 (August 1994) at 3; ``Report of the Municipal Securities 
Rulemaking Board on T+3 Settlement for the Municipal Securities 
Market'' (Mar.17, 1994); and Securities Exchange Act Release No. 
77364 (Mar. 14, 2016), 81 FR 14906 (Mar. 18, 2016) (File No. SR-
MSRB-2016-04).
    \24\ Notice, 88 FR at 22076.
    \25\ See Securities Exchange Act Release No. 34541 (Aug. 17, 
1994), 59 FR 43503 (Aug. 24, 1994) (File No. SR-MSRB-1994-10).
    \26\ See Securities Exchange Act Release No. 77744 (Apr. 29, 
2016), 81 FR 26851 (May 4, 2016) (File No. SR-MSRB-2016-04).
    \27\ 17 CFR 240.15c6-1.
    \28\ Notice, 88 FR at 22076.
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    The MSRB stated that, as a result, with regular-way settlement 
occurring on T+1, settlement for ``when, as and if issued'' 
transactions under Rule G-12(b)(ii)(C) would be required to be a date 
agreed upon by both parties that is not earlier than one business day 
after notification of the initial settlement date for the issue.\29\ 
Specifically, the MSRB stated that the proposed rule change would amend 
G-12(b)(ii)(C)(2) for ``when, as and if issued'' transactions not 
eligible for automated comparison to specify that the date agreed upon 
by both parties shall not be earlier than the first business day, 
rather than the second business day, following the date that the 
confirmation indicating the final settlement date is sent.\30\ For all 
other municipal securities transactions under Rule G-12(b)(ii)(D), the 
MSRB stated that the proposed rule change would amend the current time 
frame to provide that a broker, dealer or municipal securities dealer 
(a ``dealer'') would be prohibited from effecting a transaction that 
provides for payment of funds and delivery of securities later than the 
first business day, rather than the second business day, after the 
transaction unless expressly agreed to by the parties.\31\
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    \29\ Id. Pursuant to MSRB Rule G-34 (``Rule G-34''), on CUSIP 
numbers, new issue, and market information requirements, 
subparagraph (a)(ii)(E)(2), the initial settlement is to be provided 
to the registered clearing agency by the managing underwriter for 
the issue. With respect to transactions not eligible for automated 
comparison, the settlement date shall not be earlier than the first 
business day after the date that the confirmation indicating the 
final settlement date is sent. Notice, 88 FR at 22076 n.21.
    \30\ Notice, 88 FR at 22076. For ``when, as and if issued'' 
transactions required to be compared in an automated comparison 
system under Rule G-12(f)(i), the settlement date shall continue to 
be not earlier than two business days after notification of initial 
settlement date for the issue is provided to the registered clearing 
agency by the managing underwriter for the issue as required by Rule 
G-34(a)(ii)(E)(2). Notice, 88 FR at 22076 n.22.
    \31\ Notice, 88 FR at 22076. The MSRB explained that variable 
rate demand obligations may establish a settlement date expressly 
agreed to by the parties that may occur later than regular-way 
settlement to coincide with the reset date (e.g., T+5, T+3, etc.). 
See Three Day Settlement: Rules G-12(b) and G-15(b), MSRB Reports, 
Vol. 15, No. 12 (July 1995), available at https://www.msrb.org/sites/default/files/July1995-Volume15-Number2.PDF. See also Notice, 
88 FR at 22076 n.23.
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    The MSRB also explained that the proposed rule change would correct 
an outdated cross-reference within Rule G-12.\32\ Specifically, the 
MSRB explained that Rule G-12(b)(ii)(C) regarding the settlement date 
for ``when, as and if issued'' transactions currently cross-references 
Rule G-34 subsection paragraph (a)(ii)(D)(2) in referring to the 
obligation that a managing underwriter has to provide notification of 
initial settlement date of an issue to the registered clearing 
agency.\33\ The MSRB also wrote that this obligation remains in Rule G-
34 but was moved to subparagraph (a)(ii)(E)(2) due to previous 
amendments to Rule G-34. The MSRB indicated that correcting the cross-
reference will not alter the obligation of dealers under Rule G-34 or 
Rule G-12.\34\
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    \32\ Notice, 88 FR at 22076.
    \33\ Id.
    \34\ Id.
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C. Compliance Date

    The MSRB stated that the compliance date of the proposed rule 
change would be announced by the MSRB in a notice published on its 
website, which date would correspond with the industry's transition to 
a T+1 regular-way settlement consistent with the implementation of 
Amended Exchange Act Rule 15c6-1,\35\ which is currently scheduled for 
May 28, 2024. The MSRB indicated that if the SEC's compliance date were 
to change, the MSRB would issue a regulatory notice to modify the 
compliance date to remain aligned with the SEC's compliance date.\36\
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    \35\ Id. See also SEC's T+1 Adopting Release, 88 FR at 13916.
    \36\ Notice, 88 FR at 22076.
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III. Summary of Comments Received to the Proposed Rule Change

    The Commission received three comment letters \37\ on the proposed 
rule

[[Page 35963]]

change, as well as a response \38\ from the MSRB to the comment 
letters. Two of the three commenters expressed support for the proposed 
rule change and no commenters objected to the proposed rule change.
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    \37\ See SIFMA Letter; ICI Letter; Bloomberg Letter.
    \38\ See MSRB Letter.
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    Two commenters expressed support for the proposed rule change 
related to the alignment of municipal securities settlement with 
regular-way settlement on T+1 for equities and corporate bonds under 
Exchange Act Rule 15c6-1, as amended.\39\ Additionally, one commenter 
encouraged the MSRB to consider further a rule consistent with Exchange 
Act Rule 15c6-2, to improve the processing of institutional trades 
through new requirements for market participants related to same-day 
affirmations.\40\ The MSRB responded that it continues to evaluate 
whether a similar standard may be appropriate for the municipal 
securities market, and that it expect to engage stakeholders to inform 
this continued evaluation.\41\
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    \39\ See SIFMA Letter; ICI Letter.
    \40\ SIFMA Letter at 2.
    \41\ MSRB Letter at 2.
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    One commenter encouraged the MSRB and the SEC to consider 
permitting market participants a choice among financial identifiers for 
required reporting and for other regulatory use cases as specified in 
the MSRB's rules.\42\ The MSRB responded that it appreciated this 
feedback but believes that the comment is outside of the scope of the 
proposed rule change and should be considered separately.\43\
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    \42\ Bloomberg Letter at 1.
    \43\ MSRB Letter at 2.
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    The MSRB stated that it continues to believe the proposed rule 
change is reasonable and that the proposed rule change is necessary and 
appropriate to reduce operational risks, which can promote investor 
protection, help reduce risk of counterparty default and the capital 
required to mitigate this risk.\44\
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    \44\ Id.
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IV. Discussion and Commission's Findings

    The Commission has carefully considered the proposed rule change, 
the comment letters received, and the MSRB's response thereto. 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 believes that the proposed rule 
change is consistent with the provisions of Section 15B(b)(2)(C), which 
provides, in part, that the MSRB's rules shall 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.\45\ The Commission believes that the proposed rule 
change will: (i) 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; (ii) remove impediments to and perfect 
the mechanism of a free and open market in municipal securities and 
municipal financial products; and (iii) protect investors, municipal 
entities, obligated persons, and the public interest.
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    \45\ 15 U.S.C. 78o-4(b)(2)(C).
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A. Foster Cooperation and Coordination With Persons Engaged in 
Regulating, Clearing, Settling, Processing Information With Respect to, 
and Facilitating Transactions in Municipal Securities

    The Commission believes that the proposed amendments to Rule G-
12(b)(ii)(B) and (D) and Rule G-15(b)(ii)(B)-(C) would 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. In particular, the Commission notes that the 
proposed rule change applies the standard for regular-way settlement 
established by the SEC to transactions in municipal securities. As 
such, the Commission finds that the proposed rule change would continue 
to ensure that the settlement cycle remains synchronous across classes 
of securities (including municipal securities). By avoiding different 
settlement cycles for municipal securities, the proposed rule change 
would avoid regulatory confusion, simplify compliance, and reduce risk 
(e.g., operational error). These positive effects would be experienced 
by municipal securities market participants involved in regulating, 
clearing and settling, and processing information for municipal 
securities transactions.
    In addition, the proposed amendment to correct an outdated cross-
reference in Rule G-12(b)(ii)(C) is consistent with Section 
15B(b)(2)(C) of the Act,\46\ and correcting the cross-reference will 
not alter a dealer's obligations under Rule G-34 or Rule G-12. The 
Commission further believes that the proposed amendment promotes 
coordination with persons engaged in facilitating transactions in 
municipal securities by aiding dealers' understanding of the rule and 
facilitating compliance.
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    \46\ Id.
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B. Remove Impediments to and Perfect the Mechanism of a Free and Open 
Market

    The Commission also believes the proposed rule change would serve 
to remove impediments to and perfect the mechanism of a free and open 
market in municipal securities and municipal financial products. The 
Commission notes that the proposed rule change yields long-term 
benefits for a range of market participants including, but not limited 
to, operational cost savings, reduced counterparty risk due to a 
shorter settlement cycle, reduced market risk for unsettled trades, 
decreasing clearing capital requirements, reduced pro-cyclical margin, 
and therefore, reduced liquidity demands and risk. The Commission also 
believes the proposed rule change would promote regulatory consistency 
and market efficiency. In particular, the Commission notes that the 
proposed rule change institutes regular-way settlement for municipal 
transactions consistent with the standard settlement for other security 
classes, harmonized with Amended Exchange Act Rule 15c6-1.\47\ As the 
proposed rule change reduces liquidity demands and risk, as well as 
promotes regulatory consistency and market efficiency, the Commission 
finds that the proposed rule change removes impediments to and perfects 
the mechanism of a free and open market in municipal securities and 
municipal financial products.
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    \47\ 17 CFR 240.15c6-1.
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C. Protect Investors, Municipal Entities, Obligated Persons, and the 
Public Interest

    The Commission believes that the proposed rule change would promote 
investor protection and the public interest. The Commission notes that 
the proposed rule change will reduce the timeframe for regular-way 
settlement and avoiding misaligned settlement dates, which can serve to 
reduce risks

[[Page 35964]]

that can be present between trade date and settlement date (including 
the incidence of failed transactions). In addition, the Commission 
believes that a shorter standard settlement cycle would reduce 
liquidity risks that could arise by allowing investors to obtain the 
proceeds of securities transactions sooner. Given the associated risk 
reduction, the Commission finds that the proposed rule change would 
promote investor protection and the public interest.
    In approving the proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. Section 15B(b)(2)(C) of the Act 
\48\ requires that MSRB rules not be designed to impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. The Commission believes the proposed rule change to amend 
Rule G-12(b)(ii)(B)-(D) and Rule G-15(b)(ii)(B)-(C) would not impose 
any burden on competition and would not have an impact on competition, 
as the proposed rule change would apply a uniform standard for regular-
way settlement for municipal securities to align with the standard 
applicable to, among other securities, equity and corporate bond 
transactions under Amended Exchange Act Rule 15c6-1.\49\ In addition, 
the proposed rule change would apply equally to all dealers. The 
proposed rule would also change to correct an outdated cross-reference 
in Rule G-12(b)(ii)(C) to properly reference Rule G-34(a)(ii)(E)(2) 
rather than Rule G-34(a)(ii)(D)(2), which would not impose any burden 
on competition or have an impact on competition as the proposed change 
is technical in nature, does not impose any new obligation and enhances 
understanding of the rule. As all of these components of the proposed 
rule change would be applied equally to all registered dealers 
transacting in municipal securities, the Commission believes that the 
proposed rule change would not impose any additional burdens on 
competition that are not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \48\ 15 U.S.C. 78o-4(b)(2)(C).
    \49\ 17 CFR 240.15c6-1.
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    The Commission also finds that the proposed rule change will not 
hinder capital formation. As noted above, the proposed rule changes 
ensures a uniform settlement cycle across all asset classes of 
securities (including municipal securities), and would be applied 
equally to all dealers. As such, the Commission believes that the 
proposed rule change would promote clearer regulatory requirements for 
the clearance and settlements of municipal securities transactions. 
Furthermore, a shorter settlement cycle may reduce the volume of 
unsettled transactions that could potentially pose settlement risk, and 
also decrease liquidity risk by enabling market participants to access 
the proceeds of their transactions sooner. Therefore, the Commission 
also finds that the proposed rule change would promote efficiency of 
the clearance and settlement process, would not negatively impact the 
municipal securities market's operational efficiency.
    As noted above, the Commission received three comment letters on 
the filing. The Commission believes that the MSRB, through its 
response, addressed the commenters' concerns. For the reasons noted 
above, the Commission believes that the proposed rule change is 
consistent with the Exchange Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\50\ that the proposed rule change (SR-MSRB-2023-03) be, 
and hereby is, approved.
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    \50\ 15 U.S.C. 78s(b)(2).

    For the Commission, pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-11611 Filed 5-31-23; 8:45 am]
BILLING CODE 8011-01-P


