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Federal Register / Vol. 86, No. 168 / Thursday, September 2, 2021 / Notices
lotter on DSK11XQN23PROD with NOTICES2

Securities on BSTX to access the shorter settlement cycles of T+1 and T+0 that are already being used by NSCC and DTC today represents a change that is both entirely consistent with and in furtherance of broader industry efforts to move the standard settlement cycle to T+1 and that could also incrementally and immediately provide market participants with the benefit of shorter settlement cycles that T+2 where BSTX
Participants seek those benefits as provided in proposed Rule 25060h.
The Exchange agrees with DTCC
representatives who have recently stated that the time to settlement equals counterparty risk which can become elevated during market shocks. It can also lead to the need for higher margin requirements, which are critical to protecting the financial system and investors against a firm default. 67 The Exchange believes that BSTX
Participants should be permitted to manage these settlement and margin risks through the structure that is provided in proposed Rule 25060h.
The Exchange also believes, as described in more detail below, that the structure in proposed Rule 25060h would allow them to do so in a manner that is consistent with Section 6b5 of the Exchange Act and the requirement for the rules of the Exchange to be designed to perfect the mechanism of a free and open market 68 because under proposed Rule 25060h, any Order with a T+1 Preference or Order with a T+0
Preference will continue to interact with any other order in the Security against which it is marketable including any order in the Security that does not include a parameter indicating a preference for settlement faster than T+2 and a resulting execution will always settle using the latest settlement timing associated with two matching orders.
The Exchange believes that facilitating shorter settlement cycles as permitted under the rules, policies, and procedures of a registered clearing agency is consistent with Section 6b5
of the Exchange Act 69 because it is in the public interest and furthers the protection of investors as well as helps perfect the mechanism of a free and open market and the national market system. Specifically, the Exchange 67 DTCC Press Release, DTCC Proposes Approach to Shortening U.S. Settlement Cycle to T+1 Within 2 Years, February 24, 2021 quoting Murray Pozmanter, Head of Clearing Agency Services and Global Business Operations at DTCC, https
www.dtcc.com/news/2021/february/24/dtccproposes-approach-to-shortening-us-settlementcycle-to-t1-within-two-years.
68 15 U.S.C. 78fb5.
69 Id.

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believes that BSTX Participants have an interest in being able to access riskreducing market functionality that is presently available and compatible with market structure, such as shorter settlement cycles, and that this can reduce costs for market participants settling trading obligations in that Security and reduce settlement risk. For example, market participants settling trades in a Security on a T+2 basis must post margin collateral to NSCC for two trading days. The margin collateral cannot otherwise be used until settlement on T+2. In addition, and as reflected in statements by DTCC
described above, by shortening the timing of settlement from T+2 to T+1 or T+0, the risk horizon for a potential default in settling the trade is correspondingly shortened as well. This means that market participants engaged in a transaction settling transactions on shorter settlement cycles than T+2
receive the benefits of not having to encumber collateral assets for as long and facing a shorter period of settlement risk. The Exchange believes that these benefits in turn free up assets to be used elsewhere in financial markets, thereby helping to promote the efficient allocation of capital and perfecting the mechanism of a free and open market.70
All else being equal, the Exchange believes that a BSTX Participant may find that between two otherwise identical stocks, one for which it may be able to settle the transaction more quickly is more attractive than one that settles over a longer duration and potentially requires collateral to be held for a longer period.
The Exchange notes that the proposed potential for shortened settlement timing for an Order with a T+0
Preference or an Order with a T+1
Preference will in no way impact or prevent any market participant that desires to effect a trade in a Security on BSTX from doing so. This is because under proposed Rule 25060h, any Order with a T+1 Preference or Order with a T+0 Preference will continue to interact with any other order in the Security against which it is marketable including any order in the Security that does not include a parameter indicating a preference for settlement faster than T+2 and a resulting execution will always settle using the latest settlement timing associated with two matching orders. Accordingly, non-BSTX
Participants seeing a quote in a Security on BSTX will remain able to execute against that quote posted on BSTX even if that quote includes a latent parameter for a preference for T+0 or T+1
70 Id.

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settlement where consistent with the rules, policies and procedures of a registered clearing agency. In this way, the Exchange believes that the proposal is fully compatible with the current market structure and would help perfect the mechanism of a free and open market consistent with the requirement in Section 6b5 of the Exchange Act 71
by allowing for shorter settlement times than T+2 where consistent with the rules, policies and procedures of a registered clearing agency and where both parties to a transaction in a Security indicate a preference for faster settlement than T+2.
Finally, because all orders in Securities submitted to BSTX would at the time of the order entry be presumed to settle on a regular way T+2 basis and would interact with any other order against which the order is marketable, the Exchange believes that Orders with a T+0 Preference and Orders with a T+1
Preference would be considered protected within the meaning of Rule 611 of the Exchange Act.72 Orders with a T+0 Preference and Orders with a T+1
Preference would not fall within the exception for protected quotation status set forth in Rule 611b2 of the Exchange Act because they will only settle more quickly than T+2 where all of the conditions in Rule 25060h are met, as described above, where settlement faster than T+2 is consistent with the rules, policies and procedures of a registered clearing agency.73
In adopting amendments to SEC Rule 15c61 in 2017 to shorten the standard settlement cycle for most broker-dealer transactions in securities from T+3 to T+2, the Commission stated its belief that the shorter settlement cycle would have positive effects regarding the liquidity risks and costs faced by members in a clearing agency, like NSCC, that performs central counterparty 74 CCP services, and that it would also have positive effects for other market participants.
Specifically, the Commission stated its belief that the resulting reduction in the amount of unsettled trades and the period of time during which the CCP is exposed to risk would reduce the amount of financial resources that the CCP members may have to provide to support the CCPs risk management process . . . and that this reduction 71 Id.
72 17

CFR 242.611.
CFR 242.611b2.
74 See 17 CFR 240.17Ad22a2 defining the term central counterparty to mean a clearing agency that interposes itself between the counterparties to securities transactions, acting functionally as the buyer to every seller and the seller to every buyer.
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