September 11, 2023
Submitted electronically to: [email protected]
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549-1090
Re: File No. S7–11-23 — Daily Computation of Customer and Broker-Dealer Reserve Requirements under the Broker-Dealer Customer Protection Rule
Dear Ms. Countryman:
The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to comment on the proposal of the Securities and Exchange Commission (the “Commission or the “SEC”) to require certain broker-dealers to compute the reserve requirements (the “Customer Reserve Formula”) under Exchange Act Rules 15c3-3 and 15c3-3a (the “Customer Protection Rule”) on a daily basis (the “Proposal”).2
SIFMA strongly supports measures that meaningfully enhance customer protection and reduce the risk of loss to the Securities Investor Protection Corporation (“SIPC”) Fund. For this reason, many of our members carry private insurance to provide customers with protection against loss on top of what is available from SIPC, hold buffers in their reserve accounts well in excess of what is required by the Customer Protection Rule, and promptly sweep or deposit inflows of customer funds into sweep programs or designated Special Reserve Bank Accounts even when not required under the Customer Protection Rule. We therefore applaud the Commission’s consideration of whether there are possible amendments to the Customer Protection Rule that would further enhance customer protection.
At the same time, however, it is imperative that the Commission carefully measure the benefits of any such changes and weigh them against the complexities they may create and the costs they impose on firms and their customers. It is not beneficial to customers to make changes that provide minimal protection at high expense. In this regard, there are a number of respects in which the Proposal falls short.
First, the Proposal grossly underestimates the costs of shifting to a daily computation. Many firms currently spend dozens of man-hours per week to perform the reserve account computation on a weekly basis. Shifting to a daily calculation would require firms to train substantially more employees at a time when the pool of available candidates is quite limited. Daily computation would also necessitate costly, time-consuming systems modifications at a time when firms are overhauling systems to address a variety of other regulatory mandates. The Proposal does not acknowledge either of these costs.
Second, the Proposal does not address other measures in the Commission’s rules that already limit mismatch risk. Most notably, the Proposal does not consider the interplay of a daily computation requirement with the existing requirement that firms that calculate net capital using the alternative method (“Alternative Method Firms”) must reduce their aggregate debits by 3% when performing the reserve account calculation (the “3% Debit Reduction”). The aim and function of the 3% Debit Reduction is to address the same mismatch risk cited in the Proposal. Requiring firms to comply with both requirements accordingly provides minimal benefit and simply ties up liquidity that could be used to allow customers to access U.S. capital markets.
Third, the Proposal’s breadth is such that it would require many firms whose activities do not give rise to significant mismatch risk to move to a daily computation, and ignores significant variation in business models that needs to be addressed before a rule is finalized. For example, although many firms have total credits in excess of the proposed $250 million threshold (the “Threshold”), they also have debits that mostly, if not entirely, offset the credits. The result in such circumstances is a minimal (if any) net credit position and thus minimal mismatch risk.
Fourth, the Proposal does not address existing voluntary steps by firms that limit the possibility of customer or SIPC Fund losses. In particular, the Proposal does not consider that many firms promptly transfer customer inflows into Special Reserve Bank Accounts and Sweep Programs in accordance with Exchange Act Rule 15c3-3(j)(2)(ii). This practice is just as effective (arguably more so) at ensuring those funds are available in a broker-dealer liquidation than a complex computational requirement.
Fifth, the Proposal fails to recognize the significant complexities and ambiguities that arise from a daily calculation. These include how to address exigent circumstances, partial or full financial market or bank closures, and the difficulty of obtaining and reconciling all relevant data in a timely and cost-effective basis each day.
Any final rule must take due account of these considerations. In addition, the Commission should further consider alternative compliance mechanisms, particularly for firms whose business models do not principally involve carrying positions for customers. Lastly, any final rule should have an implementation timeline that is reasonable in light of the operational efforts that will be required for many firms to move to a daily computation, especially since other potentially competing Commission regulatory mandates will require the devotion of shared firm resources.
In order to ensure that the benefits of any final rule clearly and demonstrably outweigh the costs and to provide clarity, the Commission should:
- Eliminate the 3% Debit Reduction Requirement: Since daily calculations largely eliminate the mismatch risk that the 3% Debit Reduction is designed to mitigate, the Commission should eliminate the 3% Debit Reduction for firms that perform daily reserve account calculations, such that these firms are instead subject to the requirement to reduce their Item 10 debit balance items by 1% (the “1% Debit Reduction”).
- Incorporate a Net Credit Position Into the Threshold: The Commission should adjust the Threshold so that it only applies if a firm both (A) has average credits of at least $250 million over a twelve month period and (B) has average excess credits over debits of at least $10 million or more over a 52 week period (excluding the Debit Reduction).
- Codify and Simplify Guidance Permitting Firms to Take Account of Funds they Promptly Sweep or Deposit: The Commission should codify and simplify previous guidance making clear that firms need not deposit or maintain in Special Reserve Bank Accounts customer inflows that firms sweep or deposit into Sweep Programs or Special Reserve Bank Accounts on a same or next day basis.
- Permit Firms to Calculate Certain Low Volatility Inputs Less Frequently than Daily: The Commission should confirm that firms may compute certain low volatility in low value inputs in the reserve account computation on a less-than-daily basis, such that firms are not required to spend significant resources to achieve daily computations that will provide de minimis benefits to customers.
- Permit Use of Prior Day’s Calculation for Early Closures and Exigencies: The Commission should make clear that firms can notify their designated examining authority (“DEA”) if they cannot perform their computation due to an exigent circumstance and that business days for purposes of the reserve account computation do not include days on which an early closure occurs or banks or exchanges are closed for business. If firms cannot make a computation on a particular day for such a reason, they should be permitted to use the prior day’s computation. In addition, given that different banks open for business at different times in different places, the Commission should make clear that reserve deposits are due by 10:00 A.M. in the place of the firm’s main address.
- Adopt an Optional Alternative to the Daily Calculation for Firms that are Not Principally Carrying Firms: The Commission should allow firms whose principal business is entering into delivery-versus-payment or receive-versus-payment (“DVP/RVP”) transactions with customers to comply with an alternative compliance mechanism under which a firm would calculate its free credit balances on a daily basis, and sweep into a Sweep Program or deposit into Special Reserve Bank Accounts an amount at least equal to any increase in such free credit balances over those in their most recent weekly customer reserve requirement calculation.
- Set Forth a Reasonable Implementation Timeline: In light of the complicated adjustments that must be made to firm operations to implement daily calculations and the strains on operational resources arising from the many other regulatory mandates that are underway, the Commission should commence counting the 12-month average for the Threshold one year after the adoption of any final rule. A lead time of one year is necessary to allow firms to implement daily computation in a safe and responsible manner, and to allow firms to adjust their operations if they do not wish to fall within scope of any final rule.
1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit https://www.sifma.org.
2 See 88 Fed. Reg. 45863 (July 18, 2023).