The U.S. Securities and Trade Fee (SEC) took a serious step towards streamlining digital asset securities settlement by compressing the earlier four-step process into three in a bid to scale back operational danger for broker-dealers.
The SEC issued a no-action letter on Sept. 25, stating it won’t penalize any broker-dealer working another buying and selling system (ATS) that trades digital asset securities — in the event that they adhere to the brand new pointers.
In accordance with the regulator, a number of ATS wish to observe a streamlined mannequin in instances the place there is no such thing as a custody over the belongings traded. Most ATS observe a four-step process: first, the customer and vendor ship orders to the ATS, second, the ATS matches the orders, third, the ATS notifies the customer and vendor concerning the matched commerce, and lastly, the transaction is settled bilaterally, both with one another or by way of their custodians.
However the Monetary Trade Regulatory Authority (FINRA) requested extra readability on this process in instances during which the broker-dealer might not take bodily custody of the asset.
Some broker-dealers felt this four-step mannequin uncovered them to an excessive amount of danger. The ATSs requested that they be allowed to streamline the process. In accordance with the no-action letter, this process would contain:
Step 1 – the customer and vendor ship their respective orders to the ATS, notify their respective custodians of their respective orders submitted to the ATS, and instruct their respective custodians to settle transactions in accordance with the phrases of their orders when the ATS notifies the custodians of a match on the ATS;
Step 2 – the ATS matches the orders;
Step Three – the ATS notifies the customer and vendor and their respective custodians of the matched commerce and the custodians perform the conditional directions.
Dealer-dealers, beneath paragraph (b) of Rule 15c3-Three of the SEC (the Buyer Safety Rule) are required to “acquire and preserve bodily possession or management of all absolutely paid or extra margin securities carried by a broker-dealer for the account of shoppers.” The rule protects clients from losses or delays in accessing their safety in case the ATS fails. However this turns into troublesome when coping with digital belongings.
The SEC stated that broker-dealers that select the streamlined mannequin wouldn’t face any enforcement motion in reference to the Buyer Safety Rule. The letter notes that broker-dealers looking for to implement this process have addressed considerations over their custodial function by noting that they function with a minimal of $250,000 in capital, and that they clearly inform their clients that the broker-dealer operator can not assure or take accountability for settling trades. They’ve additionally defined that they guarantee they’ve procedures to evaluate safety tokens’ registration with the SEC and that the belongings adjust to federal regulation.
The regulator, nonetheless, made it clear that the no-action letter “solely addresses an ATS buying and selling digital asset securities beneath the circumstances set forth on this letter and doesn’t in any other case handle broker-dealer custody or management of digital asset securities.”
Though the letter expresses the SEC’s workers opinion on enforcement, and isn’t a authorized dedication, it’s nonetheless yet another indication that regulatory oversight of digital belongings is changing into extra refined and nuanced.
The SEC has been extra centered on regulating digital belongings prior to now few years and all through the tenure of chairman Jay Clayton.