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petitioner’s books and records and to deliver the securities.
The securities clearance and settlement system is exposed to
several sources of risk including market risk, participant or
credit risk, and external risk, such as a domestic or
international event. A reduction of the time between trade
execution and settlement can make the settlement cycle safer, but
such reduction is not without obstacles, which would require
changing established settlement practices and educating retail
and institutional investors.4
Mistakes can occur in placing the customer order, such as
trading the wrong security or quantity of securities, selling the
security when instructed to buy and vice versa, or performing
figuration incorrectly. Petitioner determines if the error is a
representative error or a customer error by reviewing a tape
recording of the telephone order, if available.
4The SEC adopted a new rule under the Securities Exchange
Act of 1934, ch. 404, 48 Stat. 881, which establishes a 3-
business-day settlement period for broker-dealer trades,
effective June 1, 1995. 17 C.F.R. sec. 240.15c6-1 (1996). The
new rule is designed to: (i) Reduce settlement risk, the risk to
clearing corporations, their members, and public investors
inherent in settling securities transactions by reducing the
number of unsettled trades in the clearance and settlement system
at any given time; (ii) reduce the liquidity risk among the
derivative and cash markets and reduce financing costs by
allowing investors that participate in both markets to obtain the
proceeds of securities transactions sooner; and (iii) facilitate
risk reduction by achieving closer conformity between the
corporate securities markets and Government securities and
derivative securities markets that currently settle in fewer than
5 days. 58 Fed. Reg. 52891 (Oct. 13, 1993).
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