81 FR 57960 - 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

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 164 (August 24, 2016)

[Federal Register Volume 81, Number 164 (Wednesday, August 24, 2016)]
[Notices]
[Pages 57960-57963]
From the Federal Register Online  [www.thefederalregister.org]
[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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. 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 (http://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