Bonds

The Municipal Securities Rulemaking Board has filed proposed amendments with the Securities and Exchange Commission aimed at shortening the settlement cycle to one business day for broker-dealer transactions.

The proposed amendments to Rule G-12 on uniform practices and G-15 on confirmation, clearance and settlement practices are being advanced in an effort to bring the rules in line with the Commission’s recent shortening of the settlement cycle for corporate bonds.

The adoption of such rules by the Commission is a direct response to the “meme stock” events of 2021 to “make our market plumbing more resilient, timely, orderly and efficient,” SEC chairman Gary Gensler said. The filings by the MSRB were announced as part of a handful of regulatory initiatives and are being applauded by dealer groups.

“SIFMA welcomes the MSRB’s filing to amend rules G-12 and G-15 to conform the ‘regular-way’ settlement cycle for municipal securities to that of other securities governed by SEC Rule 15c6-1,” said Leslie Norwood, managing director and associate general counsel of the Securities Industry and Financial Markets Association. “SIFMA has been a leader in the effort to accelerate the U.S. securities settlement cycle from trade date plus 2 days (T+2) to trade date plus one day (T+1).  We believe this acceleration of the settlement cycle will improve market resiliency by further reducing risk that exists while a trade is being finalized, benefit investors by shortening the execution time frame between buying or selling their securities, and reduce the level of margin market participants must post to offset the settlement risk.”

“SIFMA has been working on this project since 2020 and has been a leader in the industry effort to move to T+2 in 2017 and T+3 in 1995.  Shortening the settlement cycle has been a multi-year effort that involves significant preparation and testing,” Norwood added.

“At first glance, this looks like an amendment to bring MSRB Rules G-12 and G-15 into line with the SEC’s recent approval of T+1 clearing across the capital markets. If so, it is an appropriate action for the Board to take,” said Michael Decker, senior vice president for research and public policy at the Bond Dealers of America. “We will review the proposal in detail and provide feedback as appropriate.”

Efforts to shorten the settlement cycle for bond transactions began in 1993 for corporate bonds, when the window was shortened to T+3 from T+5. Rules for the muni market soon followed.

“The MSRB 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,” the MSRB said. 

The settlement cycle was then left untouched until 2017, when it was amended to T+2.

The proposed amendments to G-15 also include requirements for dealers to provide pricing reference information on retail customer confirmations.

Dealers will incur some costs for system changes that would shift to T+1 from T+2 and firms with smaller revenue bases and/or firms that only participate in the muni market may be disproportionately affected, the MSRB said.

“Since most firms, whether they clear themselves or through a third-party firm, would be required to upgrade the technology for the transition to a T+1 settlement cycle for all other relevant securities, the system costs would already be realized and there should be minimal or no incremental cost for the municipal securities settlement cycle change,” the board added.

The SEC estimates that costs for system updates would be approximately $874,000 per firm for dealers serving institutional investors only and $1.276 million per firm for dealers also serving retail investors. The MSRB believes select dealers may also choose to use a third-party clearing firm, if the cost for outsourcing is lower than the SEC estimates.

The date to comply with changes to Rule G-12 and G-15  is contingent upon the implementation of amended SEC Rule 15c6-1 and will be announced in a notice on the MSRB’s website. The SEC rule is set to take effect on May 28, 2024 and if the SEC’s compliance date were to change, the MSRB would issue a regulatory notice to continue their alignment with the SEC.

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