What is Regulation SHO ?
Regulation SHO replaces Rules 3b-3 and 10a-2, as well as certain self-regulatory organization (SRO) rules governing short sales, and modifies Rule 10a-1. Specifically, Rule Regulation SHO requires short sellers in all equity securities to locate securities to borrow before selling, and also imposes strict delivery requirements in order to settle short sales. The regulation further includes a temporary rule that establishes procedures by which the SEC may temporarily suspend, on a pilot basis, the current tick test and the short sale price test of any exchange or national securities association for specified securities. Regulation SHO also defines ownership of securities, permits the establishment of aggregation units (thereby avoiding firm-wide determination of net long and short positions) subject to certain requirements, and requires broker-dealers to mark sales in all equity securities long, short, or short exempt. Finally, the SEC voted to eliminate the shelf offering exception in
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. Or, if you’re going to bet them, you better hold them.
