SEC Rule 204: Enhancing Delivery Requirements for Equity Securities
Regulation SHO (Short Sale Regulation) aims to prevent abusive short-selling practices and promote market stability. Rule 204 of Regulation SHO plays a crucial role in ensuring the timely delivery of securities in equity transactions. This article explores the key provisions and implications of Rule 204, drawing upon the provided references.
**Delivery Requirement**
Rule 204 mandates that participants of registered clearing agencies deliver securities for clearance and settlement on both long and short sales in equity securities by the settlement date. This requirement ensures that buyers receive the securities they purchase, while sellers deliver the securities they sold.
**Close-out Actions**
If a participant fails to deliver on a settlement date, they must take immediate action to close out the fail-to-deliver position by purchasing or borrowing securities of like kind and quantity. This action must be completed by the beginning of regular trading hours on the following business day (T+1).
**Exceptions**
Rule 204 provides several exceptions to the close-out requirement:
Key Facts
- Delivery Requirement: Rule 204 requires firms that clear and settle trades to deliver securities to a registered clearing agency for clearance and settlement on a long or short sale in any equity security by the settlement date.
- Close-out Actions: If a participant of a registered clearing agency has a fail to deliver position in any equity security, they must take immediate action to close out the position by borrowing or purchasing securities of like kind and quantity.
- Long Sale Exception: If a fail to deliver position resulted from a long sale, the participant must close out the position by purchasing or borrowing securities of like kind and quantity by the beginning of regular trading hours on the third consecutive settlement day following the settlement date.
- Restricted Delivery Exception: If a fail to deliver position is attributable to a sale of a security that a person is deemed to own and intends to deliver as soon as all restrictions on delivery have been removed, the participant must close out the position by the beginning of regular trading hours on the thirty-fifth consecutive calendar day following the trade date for the transaction.
- Market Making Exception: If a fail to deliver position is attributable to bona fide market making activities by a registered market maker, options market maker, or other market maker obligated to quote in the over-the-counter market, the participant must close out the position by the beginning of regular trading hours on the third consecutive settlement day following the settlement date.
- Consequences of Non-Compliance: If a participant fails to close out a fail to deliver position, they and any broker or dealer from which they receive trades for clearance and settlement may not accept a short sale order in the equity security from another person until the fail to deliver position is closed out.
- Long Sale Exception: If the fail-to-deliver position results from a long sale, the participant has until the third consecutive settlement day (T+3) to close out the position.
- Restricted Delivery Exception: If the fail-to-deliver position is due to restrictions on delivery, the participant has until the thirty-fifth consecutive calendar day following the trade date to close out the position.
- Market Making Exception: If the fail-to-deliver position is attributable to bona fide market making activities, the participant has until T+3 to close out the position.
**Consequences of Non-Compliance**
Participants who fail to close out fail-to-deliver positions in accordance with Rule 204 face consequences:
- They may not accept short sale orders in the equity security from other persons.
- They may not effect short sales in the equity security for their own account.
- Brokers and dealers that clear trades for non-compliant participants are also subject to these restrictions.
**Conclusion**
SEC Rule 204 plays a vital role in ensuring the timely delivery of securities in equity transactions. By requiring participants to close out fail-to-deliver positions promptly, Rule 204 helps to prevent settlement failures, promote market stability, and protect investors.
References
- Key Points About Regulation SHO
- 17 CFR § 242.204 – Close-out requirement.
- Rule 204 of Regulation SHO – Credit Suisse
FAQs
What is SEC Rule 204?
Rule 204 is a regulation that requires participants of registered clearing agencies to deliver securities for clearance and settlement on both long and short sales in equity securities by the settlement date.
What is the purpose of Rule 204?
Rule 204 aims to prevent abusive short-selling practices, promote market stability, and ensure the timely delivery of securities in equity transactions.
What are the key provisions of Rule 204?
Rule 204 requires participants to close out fail-to-deliver positions promptly, typically by the following business day (T+1). Exceptions are provided for long sales (T+3), restricted deliveries (35 calendar days), and bona fide market making activities (T+3).
What are the consequences of non-compliance with Rule 204?
Participants who fail to close out fail-to-deliver positions in accordance with Rule 204 may be prohibited from accepting short sale orders in the equity security and from effecting short sales in the equity security for their own account.
Who is subject to Rule 204?
Rule 204 applies to participants of registered clearing agencies, including broker-dealers and other financial institutions that clear and settle trades in equity securities.
What is a fail-to-deliver position?
A fail-to-deliver position occurs when a seller fails to deliver the securities sold by the settlement date.
What are the exceptions to the close-out requirement in Rule 204?
Exceptions are provided for long sales, restricted deliveries, and bona fide market making activities.
How does Rule 204 help to prevent abusive short-selling practices?
By requiring participants to close out fail-to-deliver positions promptly, Rule 204 helps to prevent the accumulation of large fail-to-deliver positions, which can be used to manipulate stock prices.