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OK, so we all know about the SHO list and failure to deliver but for kicks here is the explanation.
quote: Regulation SHO took effect January 3, 2005, and provides a new regulatory framework governing short selling of securities. It was designed with the objective of simplifying and modernizing short sale regulation and providing controls where they are most needed. At the conclusion of each settlement day, data is provided on securities in which: 1) there are at least 10,000 shares in aggregate failed deliveries for the security for five consecutive settlement days, and 2) these failures constitute at least 0.5% of the issuer's total shares outstanding. Regulation SHO mandates that, if a clearing agent has had a fail-to-deliver position for 13 consecutive settlement days, that clearing agent, and the broker/dealer it clears for, must purchase securities to close out its fail to deliver position.
My question by what mechanism does the SEC force clearing agents to close positions?
Does it happen automatically or do they restrict the clearing agent somehow until the positions are closed?
The Bigfoot
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Never Mind.
I answered my own question by looking around.
quote:*dtcc: What causes a fail to deliver in a trade? Is it all naked short selling?
Thompson: There can be any number of reasons for a “fail to deliver,” many of them the result of investor actions. An investor can get a physical certificate to his broker too late for settlement. An investor might not have signed the certificate, or signed in the wrong place. There may have been human error, in that the wrong stock (or CUSIP) was sold, so the delivery can’t be made. Last year, 1.7 million physical certificates were lost, and sometimes that isn’t discovered until after an investor puts in an order to sell the security. There are literally dozens of reasons for a “fail to deliver,” and most of them are legal. Reg SHO also allows market makers to legally “naked short” shares in the course of their market making responsibilities, and those obviously result in fails. We can’t do anything about them but what we are doing: that is, report all fails of more than 10,000 shares in any issue to the marketplaces and the SEC for their action.
*dtcc: What happens then?
Thompson: The markets check to see if the amount of fails to deliver is more than 1/2 of 1% of the total outstanding shares in that security. If it is, then it goes on a “Threshold List.” If it is then on the Threshold List for 13 consecutive settlement days, restrictions on short selling then apply. The “close-out” requirement forces a participant of a registered clearing agency to close out any “fail to deliver” position in a threshold security that has remained for 13 consecutive settlement days by purchasing securities of like kind and quantity. ***If the participant does not take action to close out the open fail to deliver position, the participant is prohibited from making further short sales in that security without first borrowing or arranging to borrow the security. Even market makers are not exempt from this requirement.
*dtcc: So Reg SHO doesn’t force them to close out the position, but if they don’t, they are prohibited from making any additional short sales without borrowing the shares first?
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"dtcc: So Reg SHO doesn’t force them to close out the position, but if they don’t, they are prohibited from making any additional short sales without borrowing the shares first?
Thompson: That’s right."
That is VERY interesting. So they have no incentive to cover, they just can't short any more.
glassman
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quote:Originally posted by PCola77: "dtcc: So Reg SHO doesn’t force them to close out the position, but if they don’t, they are prohibited from making any additional short sales without borrowing the shares first?
Thompson: That’s right."
That is VERY interesting. So they have no incentive to cover, they just can't short any more.
which is why we see so many stocks get slammed hard and fast...
also? my interpretations of this: if the participant does not take action to close out the open fail to deliver position, the participant is prohibited from making further short sales in that security without first borrowing or arranging to borrow the security. Even market makers are not exempt from this requirement. is that another "entity" can still short without borrowing.. so they can basically take turns beating down the stock...
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