[17668]
June 10, 2004
TO: SMALL FUNDS COMMITTEE No. 36-04
RE: SEC ISSUES CONCEPT RELEASE ON SECURITIES TRANSACTIONS SETTLEMENT
The Securities and Exchange Commission ("SEC") has issued a concept release
requesting comment on methods to improve the safety and operational efficiency of the U.S.
clearance and settlement system and to help the U.S. securities markets achieve “straight-
through processing” (“STP”).1 Specifically, the Concept Release requests comment on: (1)
whether the SEC should adopt a new rule, or the self-regulatory organizations (“SROs”) should
be required to amend their existing rules, to require the completion of the confirmation and
affirmation process on trade date when a broker-dealer provides delivery-versus-payment
(“DVP”) or receive-versus-payment (“RVP”) privileges to a customer; (2) the benefits and costs
associated with implementing a settlement cycle for most broker-dealer transactions that is
shorter than three days (“T+3”); and (3) reducing the use of physical securities. The most
significant aspects of the Concept Release are summarized below.
I. Trade Confirmation and Affirmation
Currently, SRO confirmation rules require a broker-dealer to use the facilities of a
registered clearing agency, an entity that has received an exemption from clearing agency
registration, or a qualified vendor for the confirmation/affirmation of securities transactions
when the broker-dealer provides DVP or RVP privileges to the customer. SRO confirmation
rules also require the broker-dealer to have obtained an agreement from each customer with
DVP/RVP privileges that the customer will affirm each trade promptly upon receipt of the
confirmation.
The SEC states that it believes that investment managers/investment advisers should be
able to affirm their trades with their brokers on trade date. The Concept Release therefore
requests comment on how best to have the confirmation/affirmation process completed on
trade date for all institutional trades. Specifically, the Release states that SROs could amend
their confirmation rules to prohibit broker-dealers from extending DVP/RVP privileges to any
customer unless all trades with that customer are confirmed and affirmed on trade date or the
1 SEC Release Nos. 33-8398; 34-49405; IC-26384, (March 11, 2004), 69 FR 12922 (March 18, 2004) (“Concept Release”).
The Concept Release is available on the SEC’s website at http://www.sec.gov/rules/concept/33-
8398.htm.
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SEC could adopt a rule that would require broker-dealers to confirm and affirm trades on trade
date.2
The Release states that the SEC is of the view that industry-wide trade matching is the
best method to improve the confirmation/affirmation process and to achieve STP. It
acknowledges however, that the imposition of a requirement that all broker-dealers and their
institutional customers use a matching service raises some significant issues. For example,
mandating the use of a matching service for the confirmation/affirmation process for
institutional trades may stifle innovation and competition and may impose an unnecessary
burden on small and medium broker-dealers and asset managers. The Concept Release
therefore requests comment on whether all participants in institutional trades should be
required to use a matching service.
The Concept Release also requests comment on a number of specific issues relating to
trade date confirmation and affirmation including what would be the associated benefits, costs,
burdens and risks and whether the benefits would accrue evenly to all market participants.
Further, the Release requests comment on whether same-day confirmation and affirmation
would affect cross-border trading, and if so how. Finally, the Release asks what, if anything, the
SEC should do to facilitate the standardization of reference data and use of standardized
industry protocols by broker-dealers, asset managers, and custodians.
II. Securities Settlement Cycles
The Concept Release notes that, while the implementation of a T+3 settlement cycle in
the U.S. has been widely viewed as a success, the SEC believes that due to the growth of the
securities markets since 1995 when Rule 15c6-13 (the rule mandating settlement on T+3) became
effective, the participation of financial firms in multiple markets and the possibility of wide-
scale regional disruption, it is now appropriate to consider facilitating a more efficient clearance
and settlement system.
The Concept Release therefore requests comment on the current operation of Rule 15c6-1
and the costs and benefits of implementing a settlement cycle shorter than T+3. The SEC states
that while it believes that shortening the settlement cycle will reduce risk and increase
efficiency, it must still determine whether the benefits of establishing a shorter settlement cycle
justify its implementation costs.
The Concept Release requests comment on a number of issues relating to the shortening
of the securities settlement cycle including how it would affect efficiency and risk, whether
investors will still have the same information, benefits and protections they have in the current
T+3 environment and what securities should be exempted should the SEC undertake
rulemaking to shorten the settlement cycle beyond T+3. In addition, the Release requests
comment on whether achieving complete confirmation and affirmation rates on trade date is a
2 The Release requests comment on whether a new SEC rule should apply to all types of non-exempt securities and
what the time frame should be for implementation.
3 Rule 15c6-1 provides that “a broker or dealer shall not effect or enter into a contract for the purchase or sale of a
security (other than an exempted security, government security, municipal security, commercial paper, bankers'
acceptances, or commercial bills) that provides for payment of funds and delivery of securities later than the third
business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the
transaction.”
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prerequisite for shortening the settlement cycle, and if so, what are the additional costs for
shortening the settlement cycle once complete trade date confirmation and affirmation has been
achieved. Finally, the Release requests comment on the impact a shortened settlement cycle for
U.S. equities and corporate securities would have on cross-border trading by non-U.S. entities
of these instruments.
III. Immobilization and Dematerialization of Securities Certificates
The SEC states that while it endorses the concepts of immobilization or
dematerialization of securities certificates, it recognizes that these concepts raise significant
issues. Nevertheless, the SEC states that it believes it is time to explore ways to further reduce
the use of securities certificates and, as a result, reduce the risk, inefficiency, and cost related to
the use of certificates.
The Concept Release therefore requests comment on a number of specific issues relating
to immobilization or dematerialization, including whether securities should be completely
immobilized or dematerialized in the U.S. The Release also requests comment on whether there
are any operational, legal or regulatory impediments to immobilization or dematerialization.
Finally, the Release requests comment if the existence of a viable, widely available direct
registration system should be a prerequisite to complete immobilization or dematerialization.
Diane Butler Ari Burstein
Director – Transfer Agency & Associate Counsel
International Operations