MSRB Rule G-12(h) on Fails and Close-Outs

Summary

SIFMA ¹ provided comments to the MSRB on issues related to ensuring timely close-outs of failed municipal securities transactions pursuant to MSRB Rule G-12(h) (the "Rule"). SIFMA also applauds the MSRB's ongoing overall efforts to modernize its rules to reduce undue compliance burdens on regulated entities while continuing to provide appropriate investor and issuer protections.

Excerpt

The MSRB's 2016 amendments to the Rule greatly reduced settlement fails. However, settlement fails continue to occur in the municipal securities market and moreover, there have been recent regulatory enforcement actions with significant fines. Many of these remaining fails arise from market structure and clearing system mechanics-rather than dealer inaction or misconduct. Issuer behavior (e.g. back-dated calls and redemptions) and Continuous Net Settlement ("CNS") pairing dynamics contribute to settlement fails. These operational challenges limit the degree of control broker-dealers can exercise over settlement outcomes and complicate compliance with Rule G-12(h)'s close-out framework. Dealers that demonstrate efforts to comply by acting in a reasonably commercial manner should not be found in violation of the Rule. Regulatory change in this area is needed without further delay.

In furtherance of the MSRB's stated goals, it should:

• Clarify that Rule G-12(h) does not and has never imposed strict liability on a purchaser if an inter-dealer fail-to-receive persists for more than 10 or 20 calendar days (inclusive of extensions), as the case may be, given that the broker-dealer is constrained by investor client considerations and operational and other market structure issues;
• Make clear in the Rule that both the firm failing to receive and firm failing to deliver securities have responsibilities pursuant to the Rule, with the firm failing to receive operationally obligated to initiate close-out action; and
• Require firms to exit transactions that fail to settle from the CNS process at the Depository Trust and Clearing Corporation ("DTCC"), and issue interpretative guidance regarding the use of DTCC's Reconfirmation and Re-pricing Service ("RECAPS") for municipal securities.