Floorless Preferred Stock/Debenture Message Board

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Strategies & Market Trends : Floorless Preferred Stock/Debenture

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To: Mama Bear who wrote (89)	10/4/1998 8:14:00 PM
From: Biomaven	Read Replies (1) of 1438

Barbara: "I'm not sure how these folks find their shares, but they do. Some suggest that they have arrangements with market makers and the shares are sold naked. Some suggest that it is done off shore, out of the purview of the SEC. Shorting naked would not be as risky as it seems, since the share creation to cover a short is guaranteed." I looked at the legality of this, and it looks to me (although I'm no expert in this area) that if you have a fully hedged position, you are exempt from the normal buy-in after 10 days if there is a "fail-to-deliver." Here is an extract from SEC Release 93-53: New Section 71 of the UPC requires the short seller's broker/dealer to close out a short sale of specific securities 10 days after the normal settlement date if delivery of securities has not occurred and the transaction is not exempt. Securities subject to the close-out requirement are those with an aggregate “clearing” short position of 10,000 shares or more that equals or exceeds one half of one percent of the total shares outstanding. The NASD will identify these securities daily based on data from the National Securities Clearing Corporation (NSCC) and will compile a “restricted list.”2 Any subsequent short-sale transaction in a security on the list that is not completed by delivery of shares within the prescribed time frames will be subject to mandatory close-out if a “fail-to-deliver” situation exists 10 days after normal settlement date. The rule applies to customer and proprietary short sales, but exempts “bona fide” market-making activities and short sales that result in a “bona fide” fully hedged or arbitraged position3. (Excerpted from the NASD Manual, which is available on the web: nasdr.com So it looks to me that it's legal for the convertible holders to short "naked" without borrowing the shares. I don't know how the resulting imbalance would be cleared, though. Peter

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