Series 14: 2.7.5. Close-Outs Of Uncompleted Exchange Trades

2.7.5. Close-Outs of Uncompleted Exchange Trades

Even with exchange-traded securities, there is still the possibility of a fail-to-deliver. (Recall that a fail-to-deliver occurs when the seller does not deliver the securities by T + 2.) The SEC’s rules for how close-outs must be performed in such cases are given in Regulation SHO. Regulation SHO was originally adopted to curb abusive practices with regard to short selling (hence the name), but it has since been expanded to include close-out rules for both short and long sales.

Note: Close-outs conducted under Regulation SHO aren’t divided into buy-ins and sell-outs. They are always conducted by a seller who has failed to deliver securities on time to a buyer. The risk of a buyer improperly rejecting delivery is eliminated by the exchange’s use of a registered clearing agency to verify good delivery. The buyer’s ability to pay is addressed by other rules (such as the Federal Reserve’s Regulation T, discussed in Ch