SEC approves amendments to Rule G-12 to facilitate T+1

The Securities and Exchange Commission has approved amendments to Municipal Securities Rulemaking Board Rule G-12 on uniform practices, adding a section to the rule that makes dealers involved in municipal securities transactions subject to the T+1 settlement cycle, another step towards the larger industry move shortening the settlement cycle.

The proposal aligns MSRB Rule G-12 with Exchange Act Rule 15c6-2. That rule does not apply directly to munis, but “the MSRB believes that the same-day allocation, confirmation and affirmation process for municipal securities transactions in the secondary market should be consistent with that for equity and corporate bond transactions,” the SEC noted.

The proposal received comment letters from the Securities Industry and Financial Markets Association and Investment Company Institute, both of which supported the amendments but expressed some desire for guidance.

“An issue that could use clarity is the treatment of securities that trade after 4:30 p.m.,” Leslie Norwood, managing director, associate general counsel and head of municipal securities at SIFMA wrote, urging practical guidance for the market. “Allocations, confirmations and affirmations related to securities that trade after 4:30 p.m. should only be required not later than a specified time on T+1, such as Noon, due to the practical realities of staff coverage issues at broker-dealers, buyside customers, custodians, agents or other necessary parties.”

Ernesto Lanza, chief regulatory and policy officer at the MSRB responded to commenters in a separate letter filed with the SEC, pushing back on SIFMA’s calls for additional practical guidance.

“While the MSRB appreciates SIFMA’s feedback, it disagrees with the suggestion of extending the affirmation process from the end of trade date to the next day as it would deter the core purpose of the proposed rule change of facilitating the industry’s move to T+1 settlement,” Lanza wrote. “It would also disrupt the regulatory consistency and market efficiencies to be achieved by adopting a consistent standard of completing the trade matching and affirmation process on the trade date for all securities and harmonizing with Exchange Act Rule 15c6-2.”

“Firms have the option to structure its written agreements or policies and procedures to address challenges associated with the timing considerations,” Lanza added. “Specifically, as noted in the Commission T+1 adopting release, firms can ‘choose to specify how to accelerate the process to accommodate end of day trading, as well as how to staff their operations to ensure that the parties are available to complete allocations, confirmations and affirmations across multiple time zones.'”

The MSRB considered instituting specific time frames to complete trades by, but purposely left the language as “end of the day on trade date” for firms to “maximize their internal processes to meet the appropriate cutoff times”.

“The MSRB believes that this would allow for the relevant parties to negotiate terms and expectations that are responsive to their specific operational arrangements and in turn facilitate the same day allocation, confirmation and affirmation to further facilitate the timely settlement of the transaction,” Lanza wrote.

The MSRB has set a May 28 compliance date for the amended rule.