MSRB Publishes Rule Changes to Facilitate Shortening the Securities Settlement Cycle

The Municipal Securities Rulemaking Board (MSRB), an industry self-regulatory organization (SRO) created 40 years ago to regulate broker-dealers that buy, sell and underwrite municipal securities, is poised to be among the first of the regulatory entities to publish updated rule changes to facilitate shortening the settlement cycle to two days (T+2) in the U.S.

Because U.S. Securities and Exchange Commission (SEC) rules that define settlement for equities and corporate bonds do not apply to municipal securities, the purpose of the MSRB rule amendments is to facilitate shortening the settlement cycle specifically for transactions in municipal securities.

“The MSRB strongly believes that for consistency across securities types, the settlement cycle for municipal securities should be the same as that of the equity and corporate bond markets,” said Justin Pica, Director of Product Management for Market Transparency, MSRB. “Among other reasons, this consistency ensures that investors would not be at a disadvantage compared to the settlement cycle for equity and corporate bond market participants, nor would investors have to deal with different settlement cycles when trading equity or corporate debt for municipal securities.”

The draft MSRB rule amendments, published for comment on November 10, 2015, are available on for 30 days, until December 10. The request for public comment is an opportunity for market participants to support or refute the issues raised in the draft amendments, as well as identify any potential problems that a shortened settlement cycle could pose.

After the comment period, it is up to the MSRB Board of Directors to review and authorize the changes. Pica anticipates – provided there are no significant issues raised during the comment period – that the final, amended MSRB rules related to the shortened settlement cycle will be filed with the SEC in the first quarter of 2016.

“We learned a lot from the work done in 1995 with the move from T+5 to T+3, and we were also able to leverage work from the industry initiative in the early 2000s for T+1 – which became Straight-Through-Processing (STP) – in helping us identity the rules that would need to be changed,” Pica said. “The MSRB acted on many of the recommendations from the STP initiative, most notably requiring real-time matching of inter-dealer transactions, which should help smooth the transition to a shortened settlement cycle for municipal securities transactions.”

"It was important to the T+2 Industry Steering Committee (ISC) to have the support of the MSRB, and especially its willingness to consider necessary rule changes, consistent with decisions of other regulators,” said Tom Price, co-chair of the ISC and Managing Director of the Technology, Operations and Business Continuity Group, SIFMA. “Achieving T+2 by Q3 2017 will require a coordinated effort across the industry, and we are appreciative of the ongoing support from the MSRB.”