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U.S. Securities and Exchange Commission

Regulation SHO FAQ Regarding Hurricane Sandy

The response to this frequently asked question (“FAQ”) was prepared by and represents the views of the staff of the Division of Trading and Markets. This FAQ is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”). Further, the Commission has neither approved nor disapproved this interpretive answer.

For Further Information Contact: Any of the following attorneys in the Office of Trading Practices, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, N. E., Washington, D.C. 20549-1001, at 202-551-5777: Brian Bussey, Associate Director, Josephine Tao, Assistant Director and Christian Sabella, Branch Chief.

Q: With U.S. equity markets closed as a result of Hurricane Sandy, but registered clearing agencies remaining open, may broker-dealers delay closing out fail to deliver positions in sales of equity securities that have become due until the markets re-open?

A: Rule 204 of Regulation SHO generally requires that participants of a registered clearing agency close out fail to deliver positions in short sales by no later than the beginning of trading on the next settlement day after a fail resulting from a short sale (t+4), and no later than the beginning of trading on the third settlement day after a fail resulting from a long sale or a sale resulting from bona-fide market making activities at the time of the sale (t+6). A close-out may be effected by purchasing or borrowing shares of like kind and quantity.

The term ‘‘settlement day’’ is defined in Rule 203(c)(5) of Regulation SHO as: ‘‘* * * any business day on which deliveries of securities and payments of money may be made through the facilities of a registered clearing agency.’’ 17 CFR 242.203(c)(5).

Generally, if U.S. equity markets are closed for trading, but registered clearing agencies remain open for clearance and settlement, a “settlement day” would be in effect notwithstanding the fact that broker-dealers may not be able to engage in trading to effect purchases to close out fail to deliver positions. For example, this has occurred on certain federal holidays. In those circumstances, market participants were aware of the fact that U.S. equity markets would be closed sufficiently in advance to take appropriate steps to address close-outs that fell on such days.

However, due to the unique circumstances of Hurricane Sandy, participants of registered clearing agencies, or broker-dealers that have been allocated a fail to deliver position by a participant of a registered clearing agency pursuant to Rule 204, may delay closing out fail to deliver positions that have become due on a day major U.S. equity exchanges are closed as a result of Hurricane Sandy until no later than the beginning of trading on the day that major U.S. equity exchanges re-open.

Further, a participant of a registered clearing agency would not count the days that major U.S. equity exchanges are closed as a result of Hurricane Sandy (even if the registered clearing agencies are open) for purposes of determining the relevant time period for its close-out obligations.

For example, a participant submitted a short sale on Wednesday, October 24, 2012, for clearance and settlement with an original expected settlement date of Monday, October 29, 2012.  The major U.S. equity exchanges are closed on Monday, October 29, 2012, and re-open on Tuesday, October 30, 2012.  The registered clearing agency would consider any fail to deliver position to occur on the evening of Monday, October 29, 2012 (t+3).  In this limited instance, if the fail position resulted from a short sale and the participant was not engaged in bona fide market making at the time of the short sale, the participant must close out by no later than the beginning of trading on Wednesday, October 31, 2012 (i.e., October 31, 2012 becomes t+4). If the fail position resulted from a long sale or the participant was engaged in bona fide market making at the time of the settlement fail, the participant must close out the fail position by purchasing or borrowing securities of like kind and quantity by no later than the beginning of trading on Friday (i.e., November 2, 2012 becomes t+6).

Moreover, for securities that have a settlement day on a day on which the major U.S. equity exchanges are closed, a participant may count settlements that occur (and are reflected in the participant’s NSCC notification regarding its securities delivery and payment obligations) between the original expected delivery date and the beginning of trading on the day that the major U.S. equity exchanges re-open. In the example above, for instance, a participant may count settlements reflected between Monday, October 29, 2012 and the beginning of trading on Tuesday, October 30, 2012 in determining its close-out obligation due on Wednesday, October 31, 2012, or Friday November 2, 2012, whichever is applicable.

 

http://www.sec.gov/divisions/marketreg/regulation-sho-faq-regarding-hurricane-sandy.htm


Modified: 10/29/2012