Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Consisting of Proposed Amendments to Rule G-12, on Uniform Practice, Regarding Close-Out Procedures for Municipal Securities, 57960-57963 [2016-20205]
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Federal Register / Vol. 81, No. 164 / Wednesday, August 24, 2016 / Notices
protection of investors and the public
interest, in the context of the limited
permitted activities of CABs. Although
FINRA is providing flexibility to CABs,
we note that FINRA states that a CAB’s
supervisory procedures must be
appropriate for the member’s business,
size, structure and customers, and that
FINRA will monitor, as part of its
examination and surveillance process,
the development and operation of CABs’
business to identify emergency or
business disruptions at CABs that affect
the ability of the members to meet their
existing obligations to investors and
issuers. Accordingly, the Commission
believes that the proposed rule change
is reasonably designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest
consistent with Section 15A(b)(6) of the
Exchange Act.
IV. Conclusion
For the reasons discussed above, the
Commission finds that the rule change,
as modified by Amendment Nos. 1 and
2, is consistent with the Exchange Act
and the rules and regulations
thereunder, in particular with Section
15A(b)(6) of the Exchange Act, which
requires in part that FINRA’s rules be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest.121
It Is Therefore Ordered, pursuant to
Section 19(b)(2) of the Act,122 that the
rule change, SR–FINRA–2015–054, as
modified by Amendment Nos. 1 and 2,
be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.123
Robert Errett,
Deputy Secretary.
[FR Doc. 2016–20211 Filed 8–23–16; 8:45 am]
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78610; File No. SR–
NYSEArca–2016–82]
[FR Doc. 2016–20204 Filed 8–23–16; 8:45 am]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Designation of a
Longer Period for Commission Action
on a Proposed Rule Change To List
and Trade Shares of the JPMorgan
Diversified Event Driven ETF Under
NYSE Arca Equities Rule 8.600
BILLING CODE 8011–01–P
August 18, 2016.
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing of Amendment
No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change,
as Modified by Amendment No. 1,
Consisting of Proposed Amendments
to Rule G–12, on Uniform Practice,
Regarding Close-Out Procedures for
Municipal Securities
On June 20, 2016, NYSE Arca, Inc.
filed with the Securities and Exchange
Commission (‘‘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 to list and trade shares of the
JPMorgan Diversified Event Driven ETF
under NYSE Arca Equities Rule 8.600.
The proposed rule change was
published for comment in the Federal
Register on July 7, 2016.3 The
Commission received no comment
letters on the proposed rule change.
Section 19(b)(2) of the Act 4 provides
that, within 45 days of the publication
of notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is August 21,
2016. The Commission is extending this
45-day time period.
The Commission finds that it is
appropriate to designate a longer period
within which to take action on the
proposed rule change so that it has
sufficient time to consider the proposed
rule change. Accordingly, the
Commission, pursuant to Section
19(b)(2) of the Act,5 designates October
5, 2016, as the date by which the
Commission should either approve or
disapprove or institute proceedings to
determine whether to disapprove the
proposed rule change (File Number SR–
NYSEArca–2016–82).
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 78218
(Jul. 1, 2016), 81 FR 44339.
4 15 U.S.C. 78s(b)(2).
5 Id.
2 17
121 See
15 U.S.C. 78o–3(b)(6).
U.S.C. 78s(b)(2).
123 17 CFR 200.30–3(a)(12).
122 15
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Robert W. Errett,
Deputy Secretary.
PO 00000
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78611; File No. SR–MSRB–
2016–07]
August 18, 2016.
I. Introduction
On May 11, 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 Rule G–12, on uniform
practice, regarding close-out procedures
for municipal securities. The proposed
rule change was published for comment
in the Federal Register on June 1, 2016.3
The Commission received three
comment letters on the proposal.4 On
July 25, 2016, the MSRB responded to
the comments 5 and filed Amendment
No. 1 to the proposed rule change.6 The
6 17
CFR 200.30–3(a)(31).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b-4.
3 Securities Exchange Act Release No. 77903 (May
25, 2016) (the ‘‘Proposing Release’’), 81 FR 35111
(June 1, 2016).
4 See Letters to Secretary, Commission, from
Leslie M. Norwood, Managing Director and
Associate General Counsel, Securities Industry and
Financial Markets Association (‘‘SIFMA’’), dated
June 22, 2016 (the ‘‘SIFMA Letter’’); Michael
Nicholas, Chief Executive Officer, Bond Dealers of
America (‘‘BDA’’), dated June 22, 2016 (the ‘‘BDA
Letter’’); and David T. Bellaire, Esq., Executive Vice
president and General Counsel, Financial Services
Institute (‘‘FSI’’), dated June 22, 2016 (the ‘‘FSI
Letter’’).
5 See Letter to Secretary, Commission, from
Michael Cowart, Deputy Director, Professional
Qualifications and Assistant General Counsel,
MSRB, dated July 25, 2016 (the ‘‘MSRB Response
and Amendment Letter’’), available at https://
www.sec.gov/comments/sr-msrb-2016-07/
msrb201607-4.pdf.
6 Id. In Amendment No. 1, the MSRB partially
amended the text of the original proposed rule
1 15
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Federal Register / Vol. 81, No. 164 / Wednesday, August 24, 2016 / Notices
Commission is publishing this notice to
solicit comments on Amendment No. 1
to the proposed rule change from
interested persons and is approving the
proposed rule change, as modified by
Amendment No. 1, on an accelerated
basis.
II. Description of the Proposed Rule
Change
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In the Proposing Release, the MSRB
stated that a more timely resolution of
inter-dealer fails would ultimately
benefit customers by providing greater
certainty that their fully paid for
securities are in fact owned in their
account, not allocated to a firm short,
and would benefit dealers by reducing
the risk and costs associated with interdealer fails.
As further described in the Proposing
Release and the MSRB Response and
Amendment Letter, the MSRB states
that the purpose of the proposed rule
change is to significantly compress the
timing to initiate and complete a closeout by allowing a close-out notice to be
issued the day after the purchaser’s
original settlement date, with the last
day by which the purchasing dealer
must complete a close-out on an open
transaction being reduced to 10 calendar
days, with an option for the buyer to
grant the seller a one-time 10 calendar
day extension.7
With the vast majority of municipal
securities in book entry form and the
Depository Trust & Clearing
Corporation’s (‘‘DTCC’’) continued
efforts to promote dematerialization, the
MSRB proposed that firms should no
longer have to provide a 10-day delivery
window before implementing an
execution period. The MSRB believes a
three-day delivery window would be
sufficient as the majority of inter-dealer
fails are resolved within days of the
original settlement and/or a fail
situation is known prior to the original
settlement date.
Additionally, the current rule requires
that the earliest day that can be
specified as the execution date is 11
days after telephonic notice. The
proposed amendments would amend
the current allowable execution time
frame from 11 days to four days after
electronic notification. Accelerating the
execution date could improve a firm’s
likelihood of finding a security for a
change to shorten the period in which firms are
required to resolve an inter-dealer fail from 20
calendar days to 10 calendar days, and to permit
the buyer to grant the seller a one-time 10 calendar
day extension.
7 See supra notes 3 and 5. The rule as initially
proposed in the Proposing Release provided for a
period of 20 days in which a close-out must be
completed.
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buy-in, lower overall counter-party risk
and may further reduce accrual, capital
and other expenses.
Under the proposed rule change, a
purchasing dealer notifying the selling
dealer of an intent to close out an interdealer fail would continue to prompt
DTCC to ‘‘exit’’ the position from
DTCC’s continuous net settlement
(‘‘CNS’’) and the two parties are
responsible for effecting the close-out.
Because a municipal security may not
be available for purchase, incorporating
the buy-in procedures of a registered
clearing agency will often not solve the
inter-dealer fail. The MSRB expects
firms to not solely rely upon the CNS
system or the services of a registered
clearing agency to resolve inter-dealer
fails and take prompt action to close out
inter-dealer fails in a timely manner.
Under the proposed rule change,
regardless of the date the positions are
exited from CNS, the inter-dealer fail
must be resolved within 20 calendar
days of the purchasing dealer’s original
settlement date. The MSRB is also
proposing to retire the Manual on CloseOut Procedures.8
57961
Proposed Amendments to MSRB Rule
G–12(h)
Rule G–12, on uniform practice,
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.
The proposed amendments would
amend Rule G–12(h) by requiring closeouts to be settled no later than 20
calendar days after the settlement date.
The proposed amendments to G–
12(h)(i)(B) would allow for the close-out
process to continue to provide three
options to the purchasing dealer. The
three options include: (1) Purchase
(‘‘buy-in’’) at the current market all or
any part of the securities necessary to
complete the transaction for the account
and liability of the seller; (2) accept
from the seller in satisfaction of the
seller’s obligation under the original
contract (which shall be concurrently
cancelled) the delivery of municipal
securities that are comparable to those
originally bought in quantity, quality,
yield or price, and maturity, with any
additional expenses or any additional
cost of acquiring such substituted
securities being borne by the seller; or
(3) require the seller to repurchase the
securities on terms which provide that
the seller pay an amount which
includes accrued interest and bear the
burden of any change in market price or
yield.
Firms must coordinate internally to
determine which of the three close-out
options are appropriate for any given
fail-to-deliver situation. While a buy-in
may be the most preferred method, Rule
G–12(h) provides two other options to a
purchaser in the event a buy-in is not
feasible. Firms are reminded that,
regardless of the option agreed upon by
the counterparties, including a
cancelation of the original transaction,
the close-out transaction is reportable to
the Real-time Transaction Reporting
System (‘‘RTRS’’) as currently required
pursuant to Rule G–14.
Additionally, the proposed
amendments to Rule G–12(h)(i)(A)
would allow a purchaser to notify the
seller of the purchaser’s intent to closeout the transaction the first business day
following the purchaser’s original
transaction settlement date, instead of
waiting five business days as currently
required in Rule G–12(h)(i)(A).
Currently Rule G–12(h) references use
of the telephone and mail as part of the
notification process. The proposed
amendments would update Rule G–
12(h) throughout, to reflect modern
communication methods and widelyused industry practices that would
facilitate more timely and efficient
close-outs. For example, DTCC’s
SMART/Track is available for use by
any existing NSCC clearing firm or
DTCC settling member, allowing users
to create, retransmit, respond, update,
cancel and view a notice.
The proposed amendments to Rule G–
12(h)(i)(D) would require sellers to use
their best efforts to locate the securities
that are subject to a close-out notice
from a purchaser. The proposed
amendments to Rule G–12(h)(i)(E)(1)
would also require the seller to bear any
burden in the market price, with any
benefit from any change in the market
price remaining with the purchaser.
The proposed amendments would
also require a purchasing dealer that has
multiple counterparties, to utilize the
FIFO (first-in-first-out) method for
determining the contract date for the
failing quantity. Amendments to Rule
G–12(h)(iv) would require dealers to
maintain all records regarding the closeout transaction as part of the firm’s
books and records.
8 See Manual on Close-Out Procedures. The
Manual on Close-Out Procedures will be retired
because such procedures would be outdated and,
given the proposed rule change’s overall simplicity,
developing an updated version of the manual is not
warranted.
III. Summary of Comments Received
and the MSRB’s Response
As noted previously, the Commission
received three comment letters on the
proposed rule change and a response
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Federal Register / Vol. 81, No. 164 / Wednesday, August 24, 2016 / Notices
letter from the MSRB.9 The commenters
generally support the proposed rule
change.10 However, some commenters
asked for further clarification and
provided suggested amendments to the
proposed rule change.11 The MSRB has
responded to the commenters, as
discussed below.12
mstockstill on DSK3G9T082PROD with NOTICES
1. Shorter Close-Out Deadline
As noted above, the original proposed
rule change provided for a close-out
deadline of 20 calendar days. Both BDA
and SIFMA commented that they would
support an even shorter close-out
period, with both suggesting a period of
10 calendar days, with an option for the
buyer to consent to a 10-day extension,
for a maximum aggregate total of 20
days.13
In response to comments, the MSRB
proposed, in Amendment No. 1, to
amend the original proposed rule
change to require firms to resolve an
inter-dealer fail from 20 calendar days
to 10 calendar days and permit the
buyer to grant the seller a one-time 10
calendar day extension, which would
allow the buyer flexibility, while still
ensuring that inter-dealer fails would be
closed-out in a maximum of 20 calendar
days. The MSRB stated in the Proposing
Release that ‘‘a more timely resolution
of inter-dealer fails would ultimately
benefit customers by providing greater
certainty that their fully paid for
securities are in fact owned in their
account and not allocated to a firm
short, and would also benefit dealers by
reducing the risk and costs associated
with inter-dealer fails.’’ 14 The MSRB
states in the MSRB Response and
Amendment Letter that shortening the
close-out period from 20 calendar days,
as stated in the original proposed rule
change, to 10 calendar days will further
reduce the risk and cost associated with
inter-dealer fails.
2. Requests for Clarification and
Guidance
BDA commented that its member
firms still have outstanding questions
about how the proposed rule change
would impact close-out processes
related to accounts transferred to a
broker-dealer via the Automated
Customer Account Transfer Service
(‘‘ACATS’’), and requested additional
guidance from the MSRB regarding
close-outs through ACATS.15 SIFMA
requested further guidance from the
9 See
supra notes 4 and 5.
10 Id.
11 Id.
MSRB Response and Amendment Letter.
BDA Letter and SIFMA Letter.
14 See supra note 3.
15 See BDA Letter.
MSRB regarding close-outs with respect
to self-directed customer accounts, in
which broker-dealers are not allowed to
use discretion.16
The MSRB responded that both of
these requests for guidance are beyond
the scope of the proposed rule change,
both as originally proposed and as
amended by Amendment No. 1.17
IV. Discussion and Commission
Findings
The Commission has carefully
considered the proposed rule change, as
modified by Amendment No. 1, as well
as the three comment letters received
and the MSRB’s response. The
Commission finds that the proposed
rule change, as amended by
Amendment No. 1, is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to the MSRB.
In particular, the proposed rule
change is consistent with Section
15B(b)(2)(C) of the Act. Section
15B(b)(2)(C) of the Act requires that the
MSRB’s rules 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, in general, to protect
investors, municipal entities, obligated
persons, and the public interest.18
The MSRB states that the proposed
rule change would benefit investors,
dealers and issuers. Specifically, the
MSRB states that dealers may benefit
from clarifications and revisions that
more closely reflect actual market
practices. In addition, dealers may be
able to more quickly and efficiently
resolve inter-dealer fails, which may
reduce dealer risk, reduce the likelihood
and duration that dealers are required to
pay ‘‘substitute interest’’ to customers
and reduce systemic risk. The MSRB
further states that the proposed rule
change may also reduce the likelihood
and duration of firm short positions that
allocate to customer long positions,
reduce investor tax exposure and
increase investor confidence in the
market. According to the MSRB, issuers
and the market as a whole may benefit
from increased investor confidence.
12 See
13 See
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SIFMA Letter.
MSRB Response and Amendment Letter.
18 See 15 U.S.C. 78o-4(b)(2)(C).
In approving the proposed rule
change, the Commission has considered
the proposed rule’s impact on
efficiency, competition, and capital
formation.19 The Commission believes
the proposed rule change will improve
efficiency in the municipal securities
market. The Commission notes that all
of the commenters stated that the
proposed rule change would have
positive effects on municipal market
efficiency.20 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.
As noted above, the Commission
received three comment letters on the
filing. The Commission believes that the
MSRB, through its responses and
through proposed changes in
Amendment No. 1, has addressed
commenters’ concerns.
For the reasons noted above,
including those discussed in the MSRB
Response and Amendment Letter, the
Commission believes that the proposed
rule change, as amended by
Amendment No. 1, is consistent with
the Act.
V. Solicitation of Comments on
Amendment No. 1
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 1 to
the proposed rule change is consistent
with the Act. Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
MSRB–2016–07 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File
Number SR–MSRB–2016–07. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
16 See
17 See
PO 00000
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19 15
U.S.C. 78c(f).
supra note 4.
20 See
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Federal Register / Vol. 81, No. 164 / Wednesday, August 24, 2016 / Notices
VII. Conclusion
It Is Therefore Ordered, pursuant to
Section 19(b)(2) of the Act,21 that the
proposed rule change (SR–MSRB–2016–
07), as modified by Amendment No. 1,
be, and hereby is, approved on an
accelerated basis.
VI. Accelerated Approval of Proposed
Rule Change as Modified by
Amendment No. 1
mstockstill on DSK3G9T082PROD with NOTICES
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the MSRB. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–MSRB–
2016–07 and should be submitted on or
before September 14, 2016.
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(‘‘PRA’’) (44 U.S.C. 3501 et seq.) the
Securities and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the existing collection of information
provided for in Rule 17a–3 (17 CFR
240.17a–3), under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et
seq.). The Commission plans to submit
this existing collection of information to
the Office of Management and Budget
(‘‘OMB’’) for extension and approval.
Rule 17a–3 under the Securities
Exchange Act of 1934 establishes
minimum standards with respect to
business records that broker-dealers
registered with the Commission must
make and keep current. These records
are maintained by the broker-dealer (in
accordance with a separate rule), so they
can be used by the broker-dealer and
reviewed by Commission examiners, as
well as other regulatory authority
examiners, during inspections of the
broker-dealer.
The collections of information
included in Rule 17a–3 are necessary to
provide Commission, self-regulatory
organization (‘‘SRO’’) and state
examiners to conduct effective and
efficient examinations to determine
whether broker-dealers are complying
with relevant laws, rules, and
regulations. If broker-dealers were not
required to create these baseline,
The Commission finds good cause for
approving the proposed rule change, as
amended by Amendment No. 1, prior to
the 30th day after the date of
publication of notice in the Federal
Register. As discussed above,
Amendment No. 1 amends the proposed
rule change by shortening the required
time frame for firms to resolve an interdealer fail from 20 calendar days to 10
calendar days, and permitting the buyer
to grant the seller a one-time 10
calendar day extension.
The MSRB has proposed the revisions
included in Amendment No. 1 to further
reduce the risk and cost associated with
inter-dealer fails. As noted by the
MSRB, the only substantive change to
the proposed amendment, the
shortening of the close-out period, was
made to address concerns raised during
the comment period. The MSRB has
further noted that, in light of the stated
goal of the original proposal to compress
the timing for initiating and completing
a close-out, the revisions are consistent
with the original proposal and are
unlikely to be controversial.
For the foregoing reasons, the
Commission finds good cause for
approving the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis, pursuant to Section
19(b)(2) of the Act.
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For the Commission, pursuant to delegated
authority.22
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–20205 Filed 8–23–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE., Washington, DC
20549–2736.
Extension:
Rule 17a–3, SEC File No. 270–026, OMB
Control No. 3235–0033.
21 15
22 17
PO 00000
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
Frm 00087
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57963
standardized records, Commission, SRO
and state examiners could be unable to
determine whether broker-dealers are in
compliance with the Commission’s
antifraud and anti-manipulation rules,
financial responsibility program, and
other Commission, SRO, and State laws,
rules, and regulations.
As of April 1, 2016 there were 4,104
broker-dealers registered with the
Commission. The Commission estimates
that these broker-dealer respondents
incur a total burden of 2,763,566 hours
per year to comply with Rule 17a–3.
In addition, Rule 17a–3 contains
ongoing operation and maintenance
costs for broker-dealers, including the
cost of postage to provide customers
with account information, and costs for
equipment and systems development.
The Commission estimates that under
Rule 17a–3(a)(17), approximately
41,143,233 customers will need to be
provided with information regarding
their account on a yearly basis. The
Commission estimates that the postage
costs associated with providing those
customers with copies of their account
record information would be
approximately $13,577,267 per year
(41,143,233 × $0.33).1 The staff
estimates that broker-dealers
establishing liquidity, credit, and
market risk management controls
pursuant to Rule 17a–3(a)(23) incur onetime startup costs of $924,000, or
$308,000 amortized over a three-year
approval period, to hire outside counsel
to review the controls. The staff further
estimates that the ongoing equipment
and systems development costs relating
to Rule 17a–3 for the industry would be
about $30,677,094 per year.
Consequently, the total cost burden
associated with Rule 17a–3 would be
approximately $44,562,361 per year.
Written comments are invited on: (a)
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Commission, including whether the
information shall have practical utility;
(b) the accuracy of the Commission’s
estimate of the burden of the proposed
collection of information; (c) ways to
enhance the quality, utility, and clarity
of the information to be collected; and
(d) ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
Consideration will be given to
comments and suggestions submitted in
1 Estimates of postage costs are derived from past
conversations with industry representatives and
have been adjusted to account for inflation and
increases in postage costs.
E:\FR\FM\24AUN1.SGM
24AUN1
]]>Agencies
[Federal Register Volume 81, Number 164 (Wednesday, August 24, 2016)]
[Notices]
[Pages 57960-57963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20205]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78611; File No. SR-MSRB-2016-07]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, Consisting of Proposed Amendments to Rule G-12, on
Uniform Practice, Regarding Close-Out Procedures for Municipal
Securities
August 18, 2016.
I. Introduction
On May 11, 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 Rule G-12, on uniform practice, regarding close-out
procedures for municipal securities. The proposed rule change was
published for comment in the Federal Register on June 1, 2016.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 77903 (May 25, 2016)
(the ``Proposing Release''), 81 FR 35111 (June 1, 2016).
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The Commission received three comment letters on the proposal.\4\
On July 25, 2016, the MSRB responded to the comments \5\ and filed
Amendment No. 1 to the proposed rule change.\6\ The
[[Page 57961]]
Commission is publishing this notice to solicit comments on Amendment
No. 1 to the proposed rule change from interested persons and is
approving the proposed rule change, as modified by Amendment No. 1, on
an accelerated basis.
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\4\ See Letters to Secretary, Commission, from Leslie M.
Norwood, Managing Director and Associate General Counsel, Securities
Industry and Financial Markets Association (``SIFMA''), dated June
22, 2016 (the ``SIFMA Letter''); Michael Nicholas, Chief Executive
Officer, Bond Dealers of America (``BDA''), dated June 22, 2016 (the
``BDA Letter''); and David T. Bellaire, Esq., Executive Vice
president and General Counsel, Financial Services Institute
(``FSI''), dated June 22, 2016 (the ``FSI Letter'').
\5\ See Letter to Secretary, Commission, from Michael Cowart,
Deputy Director, Professional Qualifications and Assistant General
Counsel, MSRB, dated July 25, 2016 (the ``MSRB Response and
Amendment Letter''), available at https://www.sec.gov/comments/sr-msrb-2016-07/msrb201607-4.pdf.
\6\ Id. In Amendment No. 1, the MSRB partially amended the text
of the original proposed rule change to shorten the period in which
firms are required to resolve an inter-dealer fail from 20 calendar
days to 10 calendar days, and to permit the buyer to grant the
seller a one-time 10 calendar day extension.
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II. Description of the Proposed Rule Change
In the Proposing Release, the MSRB stated that a more timely
resolution of inter-dealer fails would ultimately benefit customers by
providing greater certainty that their fully paid for securities are in
fact owned in their account, not allocated to a firm short, and would
benefit dealers by reducing the risk and costs associated with inter-
dealer fails.
As further described in the Proposing Release and the MSRB Response
and Amendment Letter, the MSRB states that the purpose of the proposed
rule change is to significantly compress the timing to initiate and
complete a close-out by allowing a close-out notice to be issued the
day after the purchaser's original settlement date, with the last day
by which the purchasing dealer must complete a close-out on an open
transaction being reduced to 10 calendar days, with an option for the
buyer to grant the seller a one-time 10 calendar day extension.\7\
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\7\ See supra notes 3 and 5. The rule as initially proposed in
the Proposing Release provided for a period of 20 days in which a
close-out must be completed.
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With the vast majority of municipal securities in book entry form
and the Depository Trust & Clearing Corporation's (``DTCC'') continued
efforts to promote dematerialization, the MSRB proposed that firms
should no longer have to provide a 10-day delivery window before
implementing an execution period. The MSRB believes a three-day
delivery window would be sufficient as the majority of inter-dealer
fails are resolved within days of the original settlement and/or a fail
situation is known prior to the original settlement date.
Additionally, the current rule requires that the earliest day that
can be specified as the execution date is 11 days after telephonic
notice. The proposed amendments would amend the current allowable
execution time frame from 11 days to four days after electronic
notification. Accelerating the execution date could improve a firm's
likelihood of finding a security for a buy-in, lower overall counter-
party risk and may further reduce accrual, capital and other expenses.
Under the proposed rule change, a purchasing dealer notifying the
selling dealer of an intent to close out an inter-dealer fail would
continue to prompt DTCC to ``exit'' the position from DTCC's continuous
net settlement (``CNS'') and the two parties are responsible for
effecting the close-out. Because a municipal security may not be
available for purchase, incorporating the buy-in procedures of a
registered clearing agency will often not solve the inter-dealer fail.
The MSRB expects firms to not solely rely upon the CNS system or the
services of a registered clearing agency to resolve inter-dealer fails
and take prompt action to close out inter-dealer fails in a timely
manner. Under the proposed rule change, regardless of the date the
positions are exited from CNS, the inter-dealer fail must be resolved
within 20 calendar days of the purchasing dealer's original settlement
date. The MSRB is also proposing to retire the Manual on Close-Out
Procedures.\8\
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\8\ See Manual on Close-Out Procedures. The Manual on Close-Out
Procedures will be retired because such procedures would be outdated
and, given the proposed rule change's overall simplicity, developing
an updated version of the manual is not warranted.
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Proposed Amendments to MSRB Rule G-12(h)
Rule G-12, on uniform practice, 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. The
proposed amendments would amend Rule G-12(h) by requiring close-outs to
be settled no later than 20 calendar days after the settlement date.
The proposed amendments to G-12(h)(i)(B) would allow for the close-out
process to continue to provide three options to the purchasing dealer.
The three options include: (1) Purchase (``buy-in'') at the current
market all or any part of the securities necessary to complete the
transaction for the account and liability of the seller; (2) accept
from the seller in satisfaction of the seller's obligation under the
original contract (which shall be concurrently cancelled) the delivery
of municipal securities that are comparable to those originally bought
in quantity, quality, yield or price, and maturity, with any additional
expenses or any additional cost of acquiring such substituted
securities being borne by the seller; or (3) require the seller to
repurchase the securities on terms which provide that the seller pay an
amount which includes accrued interest and bear the burden of any
change in market price or yield.
Firms must coordinate internally to determine which of the three
close-out options are appropriate for any given fail-to-deliver
situation. While a buy-in may be the most preferred method, Rule G-
12(h) provides two other options to a purchaser in the event a buy-in
is not feasible. Firms are reminded that, regardless of the option
agreed upon by the counterparties, including a cancelation of the
original transaction, the close-out transaction is reportable to the
Real-time Transaction Reporting System (``RTRS'') as currently required
pursuant to Rule G-14.
Additionally, the proposed amendments to Rule G-12(h)(i)(A) would
allow a purchaser to notify the seller of the purchaser's intent to
close-out the transaction the first business day following the
purchaser's original transaction settlement date, instead of waiting
five business days as currently required in Rule G-12(h)(i)(A).
Currently Rule G-12(h) references use of the telephone and mail as
part of the notification process. The proposed amendments would update
Rule G-12(h) throughout, to reflect modern communication methods and
widely-used industry practices that would facilitate more timely and
efficient close-outs. For example, DTCC's SMART/Track is available for
use by any existing NSCC clearing firm or DTCC settling member,
allowing users to create, retransmit, respond, update, cancel and view
a notice.
The proposed amendments to Rule G-12(h)(i)(D) would require sellers
to use their best efforts to locate the securities that are subject to
a close-out notice from a purchaser. The proposed amendments to Rule G-
12(h)(i)(E)(1) would also require the seller to bear any burden in the
market price, with any benefit from any change in the market price
remaining with the purchaser.
The proposed amendments would also require a purchasing dealer that
has multiple counterparties, to utilize the FIFO (first-in-first-out)
method for determining the contract date for the failing quantity.
Amendments to Rule G-12(h)(iv) would require dealers to maintain all
records regarding the close-out transaction as part of the firm's books
and records.
III. Summary of Comments Received and the MSRB's Response
As noted previously, the Commission received three comment letters
on the proposed rule change and a response
[[Page 57962]]
letter from the MSRB.\9\ The commenters generally support the proposed
rule change.\10\ However, some commenters asked for further
clarification and provided suggested amendments to the proposed rule
change.\11\ The MSRB has responded to the commenters, as discussed
below.\12\
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\9\ See supra notes 4 and 5.
\10\ Id.
\11\ Id.
\12\ See MSRB Response and Amendment Letter.
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1. Shorter Close-Out Deadline
As noted above, the original proposed rule change provided for a
close-out deadline of 20 calendar days. Both BDA and SIFMA commented
that they would support an even shorter close-out period, with both
suggesting a period of 10 calendar days, with an option for the buyer
to consent to a 10-day extension, for a maximum aggregate total of 20
days.\13\
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\13\ See BDA Letter and SIFMA Letter.
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In response to comments, the MSRB proposed, in Amendment No. 1, to
amend the original proposed rule change to require firms to resolve an
inter-dealer fail from 20 calendar days to 10 calendar days and permit
the buyer to grant the seller a one-time 10 calendar day extension,
which would allow the buyer flexibility, while still ensuring that
inter-dealer fails would be closed-out in a maximum of 20 calendar
days. The MSRB stated in the Proposing Release that ``a more timely
resolution of inter-dealer fails would ultimately benefit customers by
providing greater certainty that their fully paid for securities are in
fact owned in their account and not allocated to a firm short, and
would also benefit dealers by reducing the risk and costs associated
with inter-dealer fails.'' \14\ The MSRB states in the MSRB Response
and Amendment Letter that shortening the close-out period from 20
calendar days, as stated in the original proposed rule change, to 10
calendar days will further reduce the risk and cost associated with
inter-dealer fails.
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\14\ See supra note 3.
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2. Requests for Clarification and Guidance
BDA commented that its member firms still have outstanding
questions about how the proposed rule change would impact close-out
processes related to accounts transferred to a broker-dealer via the
Automated Customer Account Transfer Service (``ACATS''), and requested
additional guidance from the MSRB regarding close-outs through
ACATS.\15\ SIFMA requested further guidance from the MSRB regarding
close-outs with respect to self-directed customer accounts, in which
broker-dealers are not allowed to use discretion.\16\
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\15\ See BDA Letter.
\16\ See SIFMA Letter.
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The MSRB responded that both of these requests for guidance are
beyond the scope of the proposed rule change, both as originally
proposed and as amended by Amendment No. 1.\17\
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\17\ See MSRB Response and Amendment Letter.
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IV. Discussion and Commission Findings
The Commission has carefully considered the proposed rule change,
as modified by Amendment No. 1, as well as the three comment letters
received and the MSRB's response. The Commission finds that the
proposed rule change, as amended by Amendment No. 1, is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to the MSRB.
In particular, the proposed rule change is consistent with Section
15B(b)(2)(C) of the Act. Section 15B(b)(2)(C) of the Act requires that
the MSRB's rules 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, in general, to protect investors, municipal
entities, obligated persons, and the public interest.\18\
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\18\ See 15 U.S.C. 78o-4(b)(2)(C).
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The MSRB states that the proposed rule change would benefit
investors, dealers and issuers. Specifically, the MSRB states that
dealers may benefit from clarifications and revisions that more closely
reflect actual market practices. In addition, dealers may be able to
more quickly and efficiently resolve inter-dealer fails, which may
reduce dealer risk, reduce the likelihood and duration that dealers are
required to pay ``substitute interest'' to customers and reduce
systemic risk. The MSRB further states that the proposed rule change
may also reduce the likelihood and duration of firm short positions
that allocate to customer long positions, reduce investor tax exposure
and increase investor confidence in the market. According to the MSRB,
issuers and the market as a whole may benefit from increased investor
confidence.
In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition, and
capital formation.\19\ The Commission believes the proposed rule change
will improve efficiency in the municipal securities market. The
Commission notes that all of the commenters stated that the proposed
rule change would have positive effects on municipal market
efficiency.\20\ 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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\19\ 15 U.S.C. 78c(f).
\20\ See supra note 4.
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As noted above, the Commission received three comment letters on
the filing. The Commission believes that the MSRB, through its
responses and through proposed changes in Amendment No. 1, has
addressed commenters' concerns.
For the reasons noted above, including those discussed in the MSRB
Response and Amendment Letter, the Commission believes that the
proposed rule change, as amended by Amendment No. 1, is consistent with
the Act.
V. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
to the proposed rule change is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-MSRB-2016-07 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-MSRB-2016-07. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the
[[Page 57963]]
submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the MSRB. All comments received
will be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-MSRB-2016-07 and should be submitted on
or before September 14, 2016.
VI. Accelerated Approval of Proposed Rule Change as Modified by
Amendment No. 1
The Commission finds good cause for approving the proposed rule
change, as amended by Amendment No. 1, prior to the 30th day after the
date of publication of notice in the Federal Register. As discussed
above, Amendment No. 1 amends the proposed rule change by shortening
the required time frame for firms to resolve an inter-dealer fail from
20 calendar days to 10 calendar days, and permitting the buyer to grant
the seller a one-time 10 calendar day extension.
The MSRB has proposed the revisions included in Amendment No. 1 to
further reduce the risk and cost associated with inter-dealer fails. As
noted by the MSRB, the only substantive change to the proposed
amendment, the shortening of the close-out period, was made to address
concerns raised during the comment period. The MSRB has further noted
that, in light of the stated goal of the original proposal to compress
the timing for initiating and completing a close-out, the revisions are
consistent with the original proposal and are unlikely to be
controversial.
For the foregoing reasons, the Commission finds good cause for
approving the proposed rule change, as modified by Amendment No. 1, on
an accelerated basis, pursuant to Section 19(b)(2) of the Act.
VII. Conclusion
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-MSRB-2016-07), as modified
by Amendment No. 1, be, and hereby is, approved on an accelerated
basis.
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\21\ 15 U.S.C. 78s(b)(2).
For the Commission, pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-20205 Filed 8-23-16; 8:45 am]
BILLING CODE 8011-01-P
