SEC Division of Trading and Markets no-action letter: Securities Industry and Financial Markets Association

Accordingly, when a large ETF transaction does not settle as expected as of the computation date, as discussed in detail below, the broker-dealer may be required both to include the associated customer credits in its customer reserve computation and deposit these funds in a 4 See, e.g., A Return to Principles: Statement on ETF Share Class Relief (Statement of Commissioner Mark T. Uyeda, Sept. 29, 2025), available at https://www.sec.gov/newsroom/speeches-statements/uyeda￾statement-etf-share-class-relief-092925. 5 See 17 CFR 240.15c3-3(e)(3)(i). See also 17 CFR 240.15c3-3a - Formula for determination of customer and PAB account reserve requirements of brokers and dealers under § 240.15c3-3. 6 See 17 CFR 240.15c3-3(g).

special reserve bank account,
7 as well as maintain sufficient additional liquidity to satisfy its settlement obligations to NSCC upon delivery of the ETF shares. Unlike traditional equity securities with a fixed public float, ETF shares are issued and redeemed on a continuous basis in response to market demand through the creation and redemption process. Accordingly, settlement delays and the resulting liquidity burdens described in this request are not indicative of heightened counterparty or credit risk but instead reflect structural features of the ETF market – operating in part pursuant to existing Commission rules and NSCC processes that expressly permit flexibility in the timing of share creation, allocation, and delivery. These delays therefore arise from factors beyond the broker-dealer’s control, including:

• Existing fails-to-deliver and NSCC’s Continuous Net Settlement allocation
  prioritization. NSCC allocates securities to broker-dealers based on its standard prioritization algorithms, which can result in a broker-dealer receiving no allocation of ETF shares, or only a partial allocation, on the scheduled settlement date where other fails-to-deliver exist for the same security.
• Bona fide market maker close-outs of fails can be up to T+4. Transactions
  involving bona fide market making activity allow additional time to close-out fails to deliver that occur after the standard T+1 settlement cycle. Under Exchange Act Rule 203 of Regulation SHO, which applies to all broker-dealers, broker-dealers that are engaged in bona fide market making activities may sell ETF shares short without first locating the securities and, under Exchange Act Rule 204, have until T+4 to close-out any resulting fail to deliver if settlement does not occur on T+1.8 The Commission provided this additional time for closing out fails to deliver for bona fide market making activities because it recognized there may be processing delays and that broker-dealers engaged in bona fide market making activities needed flexibility, such as during times when they are responding to high demand. This flexibility has allowed broker-dealers engaged in bona fide market making activity to respond to the enormous demand for ETFs. As a result, the extended close-out period applicable to bona fide market making transactions can lead to a mismatch under Rule 15c3-3 which can cause the liquidity impact described in this letter.
• Foreign ETFs and settlement mismatches. For ETFs holding foreign securities,
  settlement cycles for underlying instruments may not align with U.S. trading or creation timelines, resulting in delays in the creation and delivery of ETF shares, even where funds are fully available. Rule 15c3-3 was designed to address risks associated with the custody and use of customer funds and securities, including counterparty and credit exposure. The settlement timing mismatches 7 The funds held by the broker-dealer to settle the failing ETF shares are treated as a credit item in the broker-dealer’s customer reserve computation. See 17 CFR 240.15c3-3a, Item 4 (“Customers’ securities failed to receive”). 8 See 17 CFR 242.203(b)(2)(iii).

described above, however, arise not from such risks, but from the operational mechanics of ETF issuance within an established regulatory framework. As a result, the application of Rule 15c3-3 in this context produces outcomes that are not aligned with the risks the rule was intended to mitigate. Accordingly, even when customer funds are fully available and the broker-dealer is prepared to settle ETF share transactions, delayed allocation and delivery outside the broker-dealer’s control trigger Rule 15c3-3 obligations to maintain funds in the special reserve bank account, while also necessitating separate liquidity to satisfy settlement obligations. This results in duplication of liquidity requirements without any additional customer protection. For a substantial transaction, such as a $1 billion ETF block trade, the broker-dealer may effectively be required to maintain up to $2 billion in liquidity – representing both the customer reserve requirement and the transaction amount. This duplication materially constrains broker-dealer capacity to facilitate large ETF transactions and, in turn, risks increasing costs for investors and diminishing the efficiency, flexibility, and cost-effectiveness that ETFs provide in portfolio implementation. Currently, most broker-dealers are required to perform a customer reserve computation weekly, as of the close of the last business day of the week, and make any required deposit no later than one hour after the opening of banking business on the second following business day.9 No later than June 30, 2026, certain carrying broker-dealers will be required to perform customer and PAB reserve computations daily as of the close of the previous business day, and make any required deposit no later than one hour after the opening of banking business on the second following business day.10 This shift from a weekly to a daily requirement will significantly reduce the ability of affected broker-dealers to manage the substantial liquidity demands imposed by large ETF transactions. These settlement dynamics take on greater significance during periods of market stress. Major market events can drive unusually large and rapid ETF trading flows, increasing the probability that structural settlement timing differences translate into short-term liquidity pressures. Under the current framework, money managers and broker-dealers are aware of the interaction between ETF settlement timing and the customer reserve computation and, as a result, may seek to time block trades to avoid trading events that could give rise to settlement timing mismatches impacting the computation period and resulting in duplicative liquidity constraints for broker￾dealers. Despite efforts to manage settlement timing, firms continue to experience settlement timing mismatches, and the expanding use of ETFs has further increased the frequency of large block trades and the size of ETF positions held through broker-dealers. With daily computation requirements,
however, such timing approaches will no longer mitigate these effects, as intraweek ETF block trading activity could repeatedly trigger additional required reserve obligations due to delayed delivery of ETF shares, requiring broker-dealers to segregate funds in 9 See supra note 5. 10 See Daily Computation of Customer and Broker-Dealer Reserve Requirements under the Broker￾Dealer Customer Protection Rule, Release No. 34-102022 (Dec. 20, 2024), 90 FR 2790 (Jan. 13, 2025) and Extension of Compliance Date for Required Daily Computation of Customer and Broker-Dealer Reserve Requirements under the Broker-Dealer Customer Protection Rule, Release No. 103320 (Jun. 25, 2025), 90 FR 27990 (Jul. 1, 2025).

a reserve bank account on a more frequent basis. As a result, affected broker-dealers may be compelled to limit or discontinue their facilitation of large ETF transactions, directly constraining the ability of money managers to implement model portfolios efficiently and potentially increasing costs for investors. Request for Temporary Relief Given the operational and liquidity challenges described above – arising from Rule 15c3-3 obligations, NSCC settlement processes, and the structural features of ETF markets – broker￾dealers face constraints in facilitating large ETF transactions that may ultimately limit money managers’ ability to execute client portfolios efficiently and increase costs for investors. To address these concerns while maintaining compliance with customer protection obligations, SIFMA respectfully requests that the Staff not recommend enforcement action under paragraph (g) of Rule 15c3-3, if a broker-dealer that performs a customer reserve computation under paragraph (e)(3) of Rule 15c3-3: (i) utilizes a separate special reserve bank account established exclusively to hold customer funds received in connection with settlement timing mismatches associated with ETF creation activity cleared through NSCC; and (ii) withdraws the funds from the account without performing a contemporaneous customer reserve computation otherwise required under paragraph (g) of Rule 15c3-3, subject to the following circumstances:

1. Establishment of the Separate Special Reserve Bank Account: The broker-dealer
   establishes a separate special reserve bank account (“Special Account”) utilized exclusively for the deposit of customer funds received in connection with settlement timing mismatches relating to ETF shares cleared through NSCC to be used to settle ETF share purchases.

2. Deposits Into the Special Account: The funds are deposited into the Special Account
   on the ETF settlement date.

3. Customer Reserve Computation Treatment: In performing its customer reserve
   computation, a broker-dealer will include the amounts on deposit in the Special Account both as credits in the formula and as cash deposited into a reserve account. The amount on deposit in the Special Account at all times must equal or exceed the credits under the customer reserve computation attributable to the related ETF share fails in customer accounts, less any amounts remitted to NSCC in satisfaction of payment obligations for such ETF shares. 11

4. Restricted Withdrawals: All deposits in the Special Account must be maintained in
   cash and may be withdrawn solely to be remitted to NSCC in satisfaction of payment obligations for ETF shares on a timely basis. 11 Any amounts deposited in a separate reserve bank account pursuant to this letter must be reported in FOCUS line item #210 (Cash segregated in compliance with federal and other regulations). Firms must also use the “memo” function within the eFOCUS Filing System to identify the portion of the total balance in this line item attributable to this letter.

5. Threshold for Availability of Relief: The settlement timing mismatch relates to ETF
   block trades cleared through NSCC that have an aggregate settlement value greater than $50 million on any business day which the broker-dealer performs a customer reserve computation as of the close of business that business day under paragraph (e)(3) of Rule 15c3-3.12

6. Recordkeeping: The broker-dealer must make and keep current books and records, in
   accordance with Rules 17a-3 and 17a-4 under the Exchange Act, that accurately reflect, in reasonable detail, the timing, amount, and movement of all funds deposited into and withdrawn from the Special Account, including sufficient documentation to demonstrate compliance with the circumstances set forth above. Conclusion The foregoing temporary relief (that would expire on June 30, 2027), which is consistent with prior relief the Staff granted in connection with paragraph (g) to Rule 15c3-3,13 would enable broker-dealers to comply with Rule 15c3-3 without incurring duplicative liquidity burdens during the relief period, thereby preserving their ability to facilitate large ETF transactions efficiently. In addition, the requested relief would advance the customer protection objectives of Rule 15c3-3 by requiring that customer funds associated with ETF settlement timing mismatches be deposited into a special reserve bank account on the ETF settlement date thereby ensuring protection and restrictions on the use of the funds. 12 For purposes of this circumstance, settlement timing mismatches that remain outstanding across consecutive business days shall continue to be included in aggregate settlement value. For example, a $30 million settlement timing mismatch outstanding on Monday that remains outstanding on Tuesday, together with an additional $30 million settlement timing mismatch on Tuesday, would result in an aggregate settlement value of $60 million and satisfy the $50 million threshold. 13 See Letter from Aase A. Berling, Staff Accountant, Division of Market Regulation, Commission, to Mr. James A. Francis, Vice President, The Ohio Company (March 21, 1985) (reserve computation not required – funds received and remitted by mutual fund sponsor), available at https://www.finra.org/sites/default/files/finop/sec-letter-to-the-ohio-company-march-21-1985.pdf, and Letter from Michael A. Macchiaroli, Assistant Director, Division of Market Regulation, Commission, to Mr. Fred W. Gerkins, Manager, Regulatory Reporting, Paine Webber Incorporated (reserve computation not required – IRA and ERISA contributions) (Apr. 17, 1986), available at https://www.finra.org/sites/default/files/finop/sec-letter-to-painewebber-incorporated-april-17-1986.pdf.

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We welcome the opportunity to discuss our views on this request further or to provide any additional information that you may require. Please feel free to contact me at 202-962-7386 or our counsel, Mark Attar of Stradley Ronon Stevens & Young, LLP, who assisted in the preparation of this letter, at 202-419-8406, should you have any questions. Regards, Kevin Zambrowicz Deputy General Counsel & Managing Director, SIFMA Cc: Michael A. Macchiaroli, SEC Sheila D. Swartz, SEC James P. Wintering, SEC Kathryn Mahoney, FINRA Mark M. Attar, Stradley Ronon Stevens & Young, LLP