The Financial Industry Regulatory Authority (FINRA), an independent, not-for-profit organization authorized by U.S. Congress to protect America’s investors, recently became the second regulatory organization to publish updated rule changes to facilitate shortening the settlement cycle to two days (T+2) in the U.S.
“FINRA is the leading non-governmental regulator for all securities firms doing business with the U.S. public, and as such, it was very important to have their support and rule amendments for T+2,” said John Abel, Executive Director, The Depository Trust & Clearing Corporation (DTCC). “This is an enormous industry effort, and FINRA’s support gives us significant momentum. We are appreciative of the ongoing support from FINRA and all the regulators and Self-Regulated Organizations (SROs).”
The following is a Q&A with Kosha Dalal, Associate VP and Associate General Counsel, Office of General Counsel, Regulatory Practice and Policy, FINRA:
Q1: Has FINRA published rule changes for T+2?
KD: Yes, in March 2016 we published Regulatory Notice 16-09, in which we proposed amendments to the various rules identified and sought comment on the proposed changes. Currently, we are in the process of reviewing the input we received from commenters as well as from our meetings with several industry committees, and making any appropriate changes. We will then file the proposed rule amendments with the Securities and Exchange Commission (SEC) for its review and approval.
The effective date for any proposed rule changes would be in coordination with the industry timeline, which is currently expected to be September 5, 2017.
Q2: Are the rule amendments extensive?
KD: FINRA has identified various rules that will need to be amended to support the industry-wide movement to a T+2 settlement cycle. The FINRA rule changes are largely operational or definitional changes relating to securities settlement, such as amending the definition of “regular way” settlement as occurring on T+2.
FINRA believes these amendments do not drive significant change; rather, the changes in the operations and implementation by the industry arise as we work toward a shorter settlement cycle.
Q3: Are there industry comments that need to be addressed?
KD: The comments generally have been very supportive. Some commenters have also included a number of suggestions or highlighted areas of potential concern, which we will consider as part of our rulemaking process.
Taking into account public comments is an essential part of open and transparent rulemaking, and ultimately leads to smarter, more effective and practical rules. That’s a good result for the industry, regulators and investors.
SIFMA and ICI submitted supporting letters as they (along with DTCC) are leading the industry move to T+2. Commenters did raise some areas for FINRA to consider, and we will do so as part of our rulemaking process.
Q4: What is FINRA’s position about the industry move to T+2?
KD: FINRA supports shortening the settlement cycle. In particular, FINRA is supporting the industry effort through the issuance of Regulatory Notice 16-09 seeking comment on proposed rule changes and the rulemaking process; evaluating the impact on our own technology and operations; and participating in industry discussions led by SIFMA, ICI and DTCC relating to a shortened settlement cycle.
The industry has articulated key benefits from reducing the settlement cycle, including aligning U.S. markets with other major global markets; reducing risk exposure and counterparty risk; and decreasing the additional margin and liquidity needs that can occur in market dislocations.
FINRA is proposing to align its rule set to support the effort to achieve and implement the industry-wide initiative.
Related Articles: MSRB Publishes Rule Changes to Facilitate Shortening the Securities Settlement Cycle (December 18, 2015)