Does the close-out requirement apply to delivery failures that do not occur at a registered clearing agency?
We interpret the close-out requirement to apply only to fail to deliver positions at a registered clearing agency. Our interpretation is based on our understanding that transactions conducted outside the Continuous Net Settlement System (“CNS”) operated by the National Securities Clearing Corporation (“NSCC”) are rare. If this historical pattern changes and a significant level of fails are not included in CNS, we will reconsider this position. Question 5.4: When entering into an arrangement to pre-borrow a threshold security, must a firm clean up the entire amount of the fail before accepting additional orders to sell short such threshold security? Or, may the firm effect short sale orders up to the amount of shares of the threshold security that is pre-borrowed? Answer: Under Rule 203(b)(3), when a participant of a registered clearing agency has a net settlement failure in a threshold security for 13 consecutive settlement days, two consequences follow: (1) the participant must immedi
