US SEC issues no-action letter on the process for compressed digital properties. In an attempt to minimise operating risk for broker-dealers, the U.S. Securities and Exchange Commission (SEC) took a significant move towards streamlining the settlement of digital asset securities by compressing the previous four-step process into three.
The SEC issued a no-action letter on Sept. 25, stating it will not penalize any broker-dealer operating an alternative trading system (ATS) that trades digital asset securities — if they adhere to the new guidelines.
According to the regulator, several ATS want to follow a streamlined model in cases where there is no custody over the assets traded. Most ATS follow a four-step process: first, the buyer and seller send orders to the ATS, second, the ATS matches the orders, third, the ATS notifies the buyer and seller about the matched trade, and lastly, the transaction is settled bilaterally, either with each other or through their custodians.
However, the Financial Industry Regulatory Authority (FINRA) requested more clarity on this process in cases in which the broker-dealer may not take physical custody of the asset.
Some broker-dealers thought they were exposed to too much danger by this four-step model. The ATSs demanded that they be permitted to streamline the procedure. This procedure will require, according to the no-action letter:
Step 1 – the buyer and seller send 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 terms of their orders when the ATS notifies the custodians of a match on the ATS;
Step 2 – the ATS matches the orders;
Step 3 – the ATS notifies the buyer and seller and their respective custodians of the matched trade and the custodians carry out the conditional instructions.
The SEC said that broker-dealers that choose the streamlined model would not face any enforcement action in connection with the Customer Protection Rule. The letter notes that broker-dealers seeking to implement this process have addressed concerns over their custodial role by noting that they operate with a minimum of $250,000 in capital, and that they clearly inform their customers that the broker-dealer operator cannot guarantee or take responsibility for settling trades.
They have also explained that they ensure they have procedures to assess security tokens’ registration with the SEC and that the assets comply with federal law.
[image: Renan Kamikoga]