The US Securities and Exchange Commission (SEC) will simplify digital securities settlements for broker-dealers to reduce their operational risks.
According to the September 25 SEC letter , broker-dealers and alternative trading systems (ATS) dealing with digital securities will not be subject to penalties or penalties if the new rules are followed. Most ATS work model in four stages: the buyer and seller send orders to the ATS, then the ATS matches these orders, notifies the buyer and seller of the agreed transaction, and then the transaction is carried out – bilaterally or with the involvement of custodians.
According to the SEC, many ATSs want to follow the simplified model due to the lack of the ability to hold traded assets, and the above four-stage model puts them at too much risk. ATS asked regulators to simplify this process, and the Financial Institutions Regulatory Agency (FINRA) demanded more information when broker-dealer is not allowed to hold assets.
According to the SEC document, now the process of ATS’s work with digital securities will be carried out as follows.
Step 1: Buyer and Seller submit their orders to ATS, inform their custodians and provide them with the necessary instructions to complete the transaction.
Step 2: ATS matches orders.
Step 3: ATS notifies the buyer, seller and custodian of the agreed transaction, after which the custodian services follow the agreed instructions.
Under the SEC’s client protection rules, broker-dealers are required to hold and monitor all fully paid securities or over-margin securities transferred by the broker-dealer to clients’ accounts. This will protect clients from losses and delays in accessing their securities in the event of ATS rejection. However, this is difficult to implement when dealing with digital assets.
The SEC said that there will be no enforcement of Client Protection Rule enforcement on broker-dealers who choose the optimized model. The commission also noted that broker-dealers are wary of taking on the role of custodian of digital assets, since they operate with a minimum capital of $ 250,000 and initially inform their clients that they do not take responsibility for conducting transactions.
However, broker-dealers reported that they apply special procedures for the valuation of share tokens and check whether such share tokens are registered with the SEC and whether they comply with federal laws. The SEC document is not a legal definition, but it does serve as evidence that regulatory oversight of digital assets in the US is becoming clearer.
As a reminder, this month the tZERO share token trading platform received FINRA approval to launch the retail broker-dealer tZERO Markets.