WASHINGTON – Municipal market groups are generally supporting a Municipal Securities Rulemaking Board proposal to speed up settlements of muni transactions to two from three days.
The MSRB has proposed amendments to modify its Rule G-12 on uniform practice, G-15 on confirmation, clearance, and settlement, and other requirements to move to a T+2 settlement cycle with respect to transactions with customers. The MSRB's proposal would be tied to Securities and Exchange Commission changes to a T+2 cycle under its Rule 15c6-1 and would be part of an industry migration to the new cycle that would be completed by the end of the third quarter of 2017. The last time the settlement timeframe changed was in 1995, when it shifted to T+3 from T+5.
Leslie Norwood, managing director and associate general counsel for the Securities Industry and Financial Markets Association, told the MSRB that SIFMA supports the change and thinks it is important for the settlement cycle to line up with that of corporate and equity bond markets under Rule 15c6-1. SIFMA asked the MSRB to finalize its changes to the necessary rules no later than the second quarter of 2016 to make sure market participants have enough time to implement necessary changes and run both internal tests and tests with other industry participants before the transition is completed in 2017.
Norwood also suggested that the MSRB revisit its Rule G-32 on disclosure in connection with primary offerings, as long as it would not inhibit the MSRB's changing of its other rules. Rule G-32 requires that dealers deliver a copy of the official statement to the customer before selling the security and Norwood said SIFMA has concerns about a shortened timeframe for that delivery. If the MSRB revisits the rule, she said, it should both make clear that the rule applies to all dealers and not just underwriters. The MSRB should also harmonize the rule changes with the SEC's "access equals delivery" rule to only require paper statements on a transaction-by-transaction basis at the customer's request, she said.
SIFMA and the Investment Company Institute currently co-chair the Industry Steering Committee that was formed in 2014 to lead the move to a shorter settlement cycle.
Martin Burns, the ICI's chief industry operations officer, told the MSRB that ICI believes "a shorter settlement cycle will help improve the overall efficiency of securities markets, align the United States with other global markets, and promote financial stability." He added that although it might be preferable to wait for the SEC to act first to change its rule, the MSRB should not view SEC action as a prerequisite to making its changes.
Bond Dealers of America chief executive officer Mike Nicholas said that while BDA agrees with the MSRB about the need for a consistent settlement cycle between muni, corporate, and equity markets and that the alignment will improve market efficiencies, the group's members still have concerns. He predicted firms that only participate in the muni market will need longer to gather information about the costs of the transition than the one month the MSRB gave commenters to consider the rule.
Nicholas, citing the varied settlement dates on new issues in different states, suggested the shortened settlement requirement should only apply to the secondary market, an application that "would ultimately allow for one harmonized settlement cycle under which 'regular way' municipal securities transactions would settle on parity with that of the equity and corporate bond markets."
BDA also is concerned about how Federal Reserve Board Regulation T and SEC Rule 15c6-1, which do not apply to the muni market but require broker-dealers to cancel or liquidate a cash account transaction if it has not been paid for within five business days, could affect retail investors given a shorter cycle. Many retail customers still send checks for payment, Nicholas said, and brokers who do a large amount of retail business will have to do additional testing before the cycle is shortened.
Nicholas also shared a concern similar to SIFMA's about Rule G-32, but recommended the MSRB avoid changing other rules affected by the shortened cycle as a way of minimizing the regulatory and compliance cost impact of the proposed rules without limiting the benefits of the shortened settlement cycle.
The idea for a change to a T+2 settlement cycle started in 2012 when the Depository Trust and Clearing Corp. sponsored a cost-benefit analysis of shortening the settlement cycle to either T+2 or T+1. It released a white paper in 2014 that gave its reasoning for going to a T+2 cycle.
The DTCC also formed the ISC in 2014 and the new committee later sent a letter to the SEC laying out the necessary steps the commission and other regulatory agencies would need to take to make the changes. In the letter, the ISC recommended the relevant regulatory organizations confirm their support for the transition by the third quarter of 2015 and adopt the necessary rule changes by the second quarter of 2016. That timeline allows the transition to T+2 by the third quarter of 2017, the ISC said.
The MSRB said in its regulatory notice that it believes it is on schedule to meet those deadlines.
SEC commissioners Michael Piwowar and Kara Stein said in June they want the settlement cycle shortened as soon as possible. SEC chair Mary Jo White said in a September letter to SIFMA and ICI that she would work to make regulatory and other changes to support shortening the settlement cycle by 2017.
