SEC Commissioner Hester M. Peirce: "I support proposing to amend Exchange Act rule 15c3-3 to decrease the likelihood of customer losses in the event of a broker-dealer failure."

"I support proposing to amend Exchange Act rule 15c3-3 to decrease the likelihood of customer losses in the event of a broker-dealer failure. Rule 15c3-3 effectively segregates customer activity from a broker-dealer’s proprietary activity."

https://www.sec.gov/news/statement/peirce-proposed-amendments-exchange-act-rule-07-12-2023

Thank you, Mr. Chair.  I support proposing to amend Exchange Act rule 15c3-3 to decrease the likelihood of customer losses in the event of a broker-dealer failure.  Rule 15c3-3 effectively segregates customer activity from a broker-dealer’s proprietary activity.  It helps ensure that the broker-dealer has set aside sufficient funds to facilitate self-liquidation and to satisfy customer claims in the event that the broker-dealer fails.[1]  If the rule functions properly, it protects not only broker-dealer customers, but the Securities Investor Protection Corporation (SIPC) fund that assists in making customers of a failed broker-dealer whole.[2]  Today’s amendments are narrowly tailored to address the risk that a mismatch may develop and persist between the net cash large broker-dealers owe to their customers and the amount on deposit in a bank account established to hold these funds.  The data presented in the recommendation suggest that requiring the largest firms to perform the required calculation—and make any necessary deposits—daily instead of weekly could reduce the amount of this mismatch.  Reducing the mismatch would, in turn, reduce the risk of a disorderly liquidation and of unnecessary withdrawals from the SIPC fund.

I hope that commenters will help us determine whether the threshold for determining whether a firm needs to perform these calculations daily is set at the appropriate level.  I also hope they will address whether the threshold should be measured on a rolling basis, as proposed, or once a calendar year.  It also would be helpful to hear from firms that are likely to be required to perform these daily calculations whether their own data show that the rule is likely to reduce the frequency and size of mismatches and, if so, how significant those reductions are likely to be. Finally, I hope commenters will respond to the release’s urging to alert us of any unexpected interactions between the proposed Rule 15c3-3 amendments and last year’s proposal regarding Treasury clearing.[3]

I do have two questions for the staff:

1. Although the release urges commenters to review the Treasury clearing proposal to determine whether it is relevant to their comments on this release, why are we not reopening the comment period on that earlier proposal? Do we think that the proposed changes in this release are not likely to have an effect on that proposal?
2. If we adopt this rule, how much time do you recommend allowing affected broker-dealers to come into compliance with the new calculation cadence?

I would like to express my appreciation to the staff in Trading and Markets and DERA who produced a refreshingly succinct release and worked to answer my office’s questions about it.

Proposed Rule:

Source: https://www.sec.gov/rules/proposed/2023/34-97877.pdf

Summary:

The Securities and Exchange Commission (SEC) is proposing a change to the broker-dealer customer protection rule.

• The proposed amendment would require certain broker-dealers to perform their customer and broker-dealer reserve computations and make any required deposits into their reserve bank accounts on a daily basis, instead of weekly.
• This means that these broker-dealers would need to calculate and set aside funds to cover their obligations to customers every day.

The SEC is also seeking public comments on whether similar daily reserve computation requirements should be applied to broker-dealers and security-based swap dealers for their security-based swap customers.

• Security-based swaps are a type of derivative that can be used for hedging or speculation, and they're based on the price of a security or a group of securities, an interest rate, a currency, or some other asset or event.
• The deadline for comments is 30 days after the proposal's publication in the Federal Register, or September 11, 2023, whichever is later.

Fact Sheet: https://www.sec.gov/files/34-97877-fact-sheet.pdf

Wut mean?

• The Securities and Exchange Commission (SEC) is proposing changes to Rule 15c3-3, also known as the Customer Protection Rule. This rule is crucial for broker-dealers who maintain custody of customer securities and cash.

1. Why This Matters: The rule requires broker-dealers to have a special reserve account at a bank. This account must hold cash and/or qualified securities in an amount determined by a computation of the net cash owed to the broker-dealer’s customers. Currently, these computations and deposits are required to be done weekly. However, large cash inflows that aren't immediately used for customers can create a mismatch between the value in the reserve accounts and the net cash owed to customers. This mismatch can pose a risk if the broker-dealer fails financially, as they may not be able to return all of the securities and cash owed to the customers. The proposed changes aim to address this risk.
2. How This Rule Would Apply: The proposal would require broker-dealers with large total credits (generally the amount of cash owed to customers) to increase the frequency of their customer reserve computations from weekly to daily. Specifically, broker-dealers with average total credits equal to or greater than $250 million would be required to make these computations daily. These broker-dealers would then be required to make deposits no later than one hour after the opening of banking business on the following business day.

How to comment:

1. Electronic Comments: You can submit your comments electronically in two ways:

• Use the Commission’s internet comment form available at https://www.sec.gov/rules/submitcomments.htm
• Send an email to [email protected]. Make sure to include File Number S7-11-23 in the subject line.

1. Paper Comments: If you prefer to send your comments by mail, you can send them to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. Again, remember to refer to File Number S7-11-23.

• Please note, do not include personal identifiable information in your submissions as you should only submit information that you wish to make publicly available.
• The SEC may redact or withhold from publication any submitted material that is obscene or subject to copyright protection.

Press Release: https://www.sec.gov/news/press-release/2023-130

The Securities and Exchange Commission today proposed amendments to Rule 15c3-3 (the Customer Protection Rule) to require certain broker-dealers to increase the frequency with which they perform computations of the net cash they owe to customers and other broker-dealers (known as PAB account holders) from weekly to daily. Net cash owed to customers and PAB account holders must be held in a special reserve bank account.
“I am pleased to support this proposal because, if adopted, it would help protect customers in the event that a broker-dealer fails,” said SEC Chair Gary Gensler. “A key tenet of our securities laws is the segregation of customers’ cash and securities from a broker-dealer’s own account. Given the speed, scale, and volume of today’s market activity, I believe customers would benefit if broker-dealers carrying large credit balances made daily reserve account calculations and deposits. This frequency would better align with the inflows, swings, and balances that broker-dealers experience in today’s markets.”
Broker-dealers occasionally may have substantial deposit requirements as a result of customer and PAB reserve computations. The proposal would require broker-dealers with average total credits (the amount of cash they owe customers and PAB account holders) equal to or greater than $250 million to make the computations necessary to determine the amounts required to be deposited in the customer and PAB reserve bank accounts daily, as of the close of the previous business day. By reducing the timeframe between computations, the proposal would assist broker-dealers in more dynamically matching the net amount of cash owed to customers and PAB account holders with the amount on deposit in the broker-dealer’s customer and PAB reserve bank accounts. The daily customer and PAB reserve computations would safeguard customers and PAB account holders by lessening the potential for large mismatches to build over time, thereby increasing the likelihood that they are made whole even if a broker-dealer fails.
The proposing release will be published in the Federal Register. The public comment period will remain open for 60 days following publication of the proposing release on the SEC website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

TLDRS:

• Even Hester support this: "I support proposing to amend Exchange Act rule 15c3-3 to decrease the likelihood of customer losses in the event of a broker-dealer failure. Rule 15c3-3 effectively segregates customer activity from a broker-dealer’s proprietary activity."

The Securities and Exchange Commission (SEC) is proposing a change to the broker-dealer customer protection rule.

• The proposed amendment would require certain broker-dealers to perform their customer and broker-dealer reserve computations and make any required deposits into their reserve bank accounts on a daily basis, instead of weekly.
• This means that these broker-dealers would need to calculate and set aside funds to cover their obligations to customers every day.

The SEC is also seeking public comments on whether similar daily reserve computation requirements should be applied to broker-dealers and security-based swap dealers for their security-based swap customers.

• Security-based swaps are a type of derivative that can be used for hedging or speculation, and they're based on the price of a security or a group of securities, an interest rate, a currency, or some other asset or event.
• The deadline for comments is 30 days after the proposal's publication in the Federal Register, or September 11, 2023, whichever is later.

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