SEC Division of Market Regulation Issues Interpretive
Guidance Regarding Regulation SHO Close-Out
Requirements; Effective Date: May 1, 2006
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SUGGESTED ROUTING
APRIL 2006 GUIDANCE
KEY TOPICS
Short Sales
SEC Division of Market Regulation Issues Interpretive
Guidance Regarding Regulation SHO Close-Out
Requirements; Effective Date: May 1, 2006
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Executive Summary
NASD is issuing this Notice to highlight recent guidance published
by the Securities and Exchange Commission (SEC) relating to the
“close-out” requirements under Regulation SHO. Regulation SHO,
among other things, imposes uniform delivery requirements on
broker-dealers for certain securities that have a substantial level
of failures to deliver at a registered clearing agency, referred to as
“threshold securities.” Regulation SHO requires broker-dealers that
are participants of a registered clearing agency (clearing agency
participants) to take action to “close-out” failure-to-deliver positions
in threshold securities that have persisted for 13 consecutive
settlement days by purchasing securities of like kind and quantity.
On March 17, 2006, the SEC Division of Market Regulation published
Question and Answer (Q&A) 5.8 providing interpretive guidance
relating to the method by which clearing agency participants may
apply any reductions to their end-of-day fail-to-deliver positions
at the National Securities Clearing Corporation (NSCC) that occur
during the applicable 13 consecutive settlement day period.
Specifically, the SEC stated that clearing agency participants that
choose to apply reductions to their close-out requirements prior to
the 13th consecutive settlement day must first apply any reduction
to the most recent increase in its fail to deliver position reflected
at NSCC. NASD expects that all members will fully implement the
methodology set forth in Q&A 5.8 by May 1, 2006.
Questions/Further Information
Questions regarding this Notice may be directed to the Legal
Section, Market Regulation, at (240) 386-5126; or the Office of
General Counsel, Regulatory Policy and Oversight, at (202) 728-8071.
Close-Out Requirements
SEC Regulation SHO
SEC Rule 203(b)(3)
Short Sales
Notice to Members
NASD NTM APRIL 2006 1 06-18
NASD NTM APRIL 2006 2 06-18
©2006. NASD. All rights reserved. Notices to Members attempt to present information to readers in a format that is
easily understandable. However, please be aware that, in case of any misunderstanding, the rule language prevails.
1 See Exchange Act Release No. 50103 (July 28,
2004), 69 FR 48008 (August 6, 2004).
2 See Division of Market Regulation: Responses
to Frequently asked Questions Concerning
Regulation SHO, Question and Answer 5.8
(March 17, 2006).
Discussion
As further detailed in Notices to Members 04-93 (December 2004) and 05-33
(April 2005), on June 23, 2004, the SEC adopted certain provisions of a new short
sale regulation, designated Regulation SHO.1 Regulation SHO includes several new
provisions relating to short sales, one of which imposes delivery requirements on
broker-dealers for certain securities that have a substantial level of failures to deliver
at a registered clearing agency, referred to as “threshold securities.” Specifically, Rule
203(b)(3) of Regulation SHO requires broker-dealers that are participants of a registered
clearing agency to take action to “close-out” failure-to-deliver positions in threshold
securities that have persisted for 13 consecutive settlement days by purchasing
securities of like kind and quantity. If the fail-to-deliver position is not closed out in
the requisite time period, the broker-dealer and any broker-dealer for which it clears
transactions are prohibited from effecting further short sales in that threshold security
without borrowing or entering into a bona fide agreement to borrow the security.
On March 17, 2006, the staff of the SEC Division of Market Regulation published on its
Web site interpretive guidance regarding the close-out requirements under Regulation
SHO. Specifically, Q&A 5.8 provides guidance on the method by which clearing agency
participants may apply any reductions in their end-of-day fail-to-deliver positions at
NSCC that occur during the applicable 13 consecutive settlement day period for
purposes of compliance with the Regulation SHO close-out requirements.2 In this
interpretive guidance, the SEC provides that, if prior to the 13th consecutive settlement
day, the participant chooses to reduce its open fail-to-deliver position and such
reduction is reflected in the participant’s end-of-day net fail-to-deliver position at NSCC,
the participant must first apply the reduction to the most recent increase in its fail-todeliver
position reflected at NSCC and then to any increase in its fails position that
existed at NSCC on the day preceding that day and so forth until the entire amount of
the reduction has been applied. The SEC guidance also provides specific examples to
illustrate how to apply such reductions in accordance with the required methodology.
A copy of the interpretive guidance is available on the SEC's Web site at
www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm. NASD encourages members
and other interested parties to review the interpretive guidance, as NASD expects that
all members will fully implement the methodology set forth in Q&A 5.8 by May 1, 2006.
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