Securities and Exchange Commission § 242.200

(c) A person shall be deemed to own securities only to the extent that he has a net long position in such securities. (d) A broker or dealer shall be deemed to own a security, even if it is not net long, if: (1) The broker or dealer acquired that security while acting in the capacity of a block positioner; and (2) If and to the extent that the broker or dealer’s short position in the security is the subject of offsetting positions created in the course of bona fide arbitrage, risk arbitrage, or bona fide hedge activities. (e) A broker-dealer shall be deemed to own a security even if it is not net

long, if:

(1) The broker-dealer is unwinding index arbitrage position involving a long basket of stock and one or more short index futures traded on a board of trade or one or more standardized REGULATION SHO—REGULATION OF options contracts as defined in 17 CFR SHORT SALES 240.9b–1(a)(4); and § 242.200 Definition of ‘‘short sale’’ and (2) If and to the extent that the marking requirements. broker-dealer’s short position in the se- (a) The term short sale shall mean curity is the subject of offsetting posi- any sale of a security which the seller tions created and maintained in the does not own or any sale which is con- course of bona-fide arbitrage, risk arbi- summated by the delivery of a security trage, or bona fide hedge activities; and borrowed by, or for the account of, the (3) The sale does not occur during a seller. period commencing at the time that (b) A person shall be deemed to own the NYSE Composite Index has de- a security if: clined by two percent or more from its (1) The person or his agent has title closing value on the previous day and to it; or terminating upon the end of the trad- (2) The person has purchased, or has ing day. The two percent shall be cal- entered into an unconditional contract, culated at the beginning of each cal- binding on both parties thereto, to pur- endar quarter and shall be two percent, chase it, but has not yet received it; or rounded down to the nearest 10 points, (3) The person owns a security con- of the average closing value of the vertible into or exchangeable for it and NYSE Composite Index for the last has tendered such security for conver- month of the previous quarter. sion or exchange; or (f) In order to determine its net posi- (4) The person has an option to pur- tion, a broker or dealer shall aggregate chase or acquire it and has exercised all of its positions in a security unless such option; or it qualifies for independent trading (5) The person has rights or warrants unit aggregation, in which case each to subscribe to it and has exercised independent trading unit shall aggre- such rights or warrants; or gate all of its positions in a security to (6) The person holds a security fu- determine its net position. Independent tures contract to purchase it and has trading unit aggregation is available received notice that the position will only if: be physically settled and is irrevocably (1) The broker or dealer has a written bound to receive the underlying secu- plan of organization that identifies rity. each aggregation unit, specifies its

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trading objective(s), and supports its transaction reporting plan for the cov- independent identity; ered security. (2) Each aggregation unit within the (4) The term national best bid shall firm determines, at the time of each have the same meaning as in sale, its net position for every security § 242.600(b)(42). that it trades; (5) The term odd lot shall have the (3) All traders in an aggregation unit same meaning as in § 242.600(b)(49). pursue only the particular trading ob- (6) The term plan processor shall have jective(s) or strategy(s) of that aggre- the same meaning as in § 242.600(b)(55). gation unit and do not coordinate that (7) The term regular trading hours strategy with any other aggregation shall have the same meaning as in unit; and § 242.600(b)(64). (4) Individual traders are assigned to (8) The term riskless principal shall only one aggregation unit at any time. mean a transaction in which a broker (g) A broker or dealer must mark all or dealer, after having received an sell orders of any equity security as order to buy a security, purchases the ‘‘long,’’ ‘‘short,’’ or ‘‘short exempt.’’ (1) An order to sell shall be marked security as principal at the same price ‘‘long’’ only if the seller is deemed to to satisfy the order to buy, exclusive of own the security being sold pursuant any explicitly disclosed markup or to paragraphs (a) through (f) of this markdown, commission equivalent, or section and either: other fee, or, after having received an (i) The security to be delivered is in order to sell, sells the security as prin- the physical possession or control of cipal at the same price to satisfy the the broker or dealer; or order to sell, exclusive of any explic- (ii) It is reasonably expected that the itly disclosed markup or markdown, security will be in the physical posses- commission equivalent, or other fee. sion or control of the broker or dealer (9) The term trading center shall have no later than the settlement of the the same meaning as in § 242.600(b)(78). transaction. (b)(1) A trading center shall estab- (2) A sale order shall be marked lish, maintain, and enforce written ‘‘short exempt’’ only if the provisions policies and procedures reasonably de- of § 242.201(c) or (d) are met. signed to: (h) Upon written application or upon (i) Prevent the execution or display its own motion, the Commission may of a short sale order of a covered secu- grant an exemption from the provi- rity at a price that is less than or equal sions of this section, either uncondi- to the current national best bid if the tionally or on specified terms and con- price of that covered security decreases ditions, to any transaction or class of by 10% or more from the covered secu- transactions, or to any security or rity’s closing price as determined by class of securities, or to any person or the listing market for the covered se- class of persons. curity as of the end of regular trading hours on the prior day; and [69 FR 48029, Aug. 6, 2004, as amended at 72 FR 36359, July 3, 2007; 72 FR 45557, Aug. 14, (ii) Impose the requirements of para- 2007; 75 FR 11323, Mar. 10, 2010] graph (b)(1)(i) of this section for the re- mainder of the day and the following § 242.201 Circuit breaker. day when a national best bid for the (a) Definitions. For the purposes of covered security is calculated and dis- this section: seminated on a current and continuing (1) The term covered security shall basis by a plan processor pursuant to mean any NMS stock as defined in an effective national market system § 242.600(b)(47). plan. (2) The term effective transaction re- (iii) Provided, however, that the poli- porting plan for a covered security shall cies and procedures must be reasonably have the same meaning as in designed to permit: § 242.600(b)(22). (A) The execution of a displayed (3) The term listing market shall have short sale order of a covered security the same meaning as the term ‘‘listing by a trading center if, at the time of market’’ as defined in the effective initial display of the short sale order,

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the order was at a price above the cur- (b)(3) of this section with respect to a rent national best bid; and covered security, a broker or dealer (B) The execution or display of a may mark a short sale order of a cov- short sale order of a covered security ered security ‘‘short exempt’’ if the marked ‘‘short exempt’’ without regard broker or dealer has a reasonable basis to whether the order is at a price that to believe that: is less than or equal to the current na- (1) The short sale order of a covered tional best bid. security is by a person that is deemed (2) A trading center shall regularly to own the covered security pursuant surveil to ascertain the effectiveness of to § 242.200, provided that the person in- the policies and procedures required by tends to deliver the security as soon as paragraph (b)(1) of this section and all restrictions on delivery have been shall take prompt action to remedy de- removed. ficiencies in such policies and proce- (2) The short sale order of a covered dures. security is by a market maker to offset (3) The determination regarding customer odd-lot orders or to liquidate whether the price of a covered security an odd-lot position that changes such has decreased by 10% or more from the broker’s or dealer’s position by no covered security’s closing price as de- more than a unit of trading. termined by the listing market for the (3) The short sale order of a covered covered security as of the end of reg- security is for a good faith account of ular trading hours on the prior day a person who then owns another secu- shall be made by the listing market for rity by virtue of which he is, or pres- the covered security and, if such de- ently will be, entitled to acquire an crease has occurred, the listing market equivalent number of securities of the shall immediately notify the single same class as the securities sold; pro- plan processor responsible for consoli- vided such sale, or the purchase which dation of information for the covered such sale offsets, is effected for the security pursuant to § 242.603(b). The bona fide purpose of profiting from a single plan processor must then dis- seminate this information. current difference between the price of (c) Following any determination and the security sold and the security notification pursuant to paragraph owned and that such right of acquisi- (b)(3) of this section with respect to a tion was originally attached to or rep- covered security, a broker or dealer resented by another security or was submitting a short sale order of the issued to all the holders of any such se- covered security in question to a trad- curities of the issuer. ing center may mark the order ‘‘short (4) The short sale order of a covered exempt’’ if the broker or dealer identi- security is for a good faith account and fies the order as being at a price above submitted to profit from a current the current national best bid at the price difference between a security on time of submission; provided, however: a foreign securities market and a secu- (1) The broker or dealer that identi- rity on a securities market subject to fies a short sale order of a covered se- the jurisdiction of the United States, curity as ‘‘short exempt’’ in accordance provided that the short seller has an with this paragraph (c) must establish, offer to buy on a foreign market that maintain, and enforce written policies allows the seller to immediately cover and procedures reasonably designed to the short sale at the time it was made. prevent incorrect identification of or- For the purposes of this paragraph ders for purposes of this paragraph; and (d)(4), a depository receipt of a security (2) The broker or dealer shall regu- shall be deemed to be the same secu- larly surveil to ascertain the effective- rity as the security represented by ness of the policies and procedures re- such receipt. quired by paragraph (c)(1) of this sec- (5)(i) The short sale order of a cov- tion and shall take prompt action to ered security is by an underwriter or remedy deficiencies in such policies member of a syndicate or group par- and procedures. ticipating in the distribution of a secu- (d) Following any determination and rity in connection with an over-allot- notification pursuant to paragraph ment of securities; or

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(ii) The short sale order of a covered (iv) The transaction is not effected security is for purposes of a lay-off sale for the purpose of creating actual, or by an underwriter or member of a syn- apparent, active trading in or other- dicate or group in connection with a wise affecting the price of any security. distribution of securities through a (v) A broker or dealer shall be per- rights or standby underwriting committed to act as principal on the mitment. contra-side to fill customer short sale (6) The short sale order of a covered orders only if the broker’s or dealer’s security is by a broker or dealer effect- position in the covered security, as ing the execution of a customer pur- committed by the broker or dealer dur- chase or the execution of a customer ing the pre-opening period of a trading ‘‘long’’ sale on a riskless principal day and aggregated across all of its basis. In addition, for purposes of this customers who propose to sell short paragraph (d)(6), a broker or dealer the same security on a VWAP basis, must have written policies and proce- does not exceed 10% of the covered se- dures in place to assure that, at a min- curity’s relevant average daily trading imum: volume. (i) The customer order was received (e) No self-regulatory organization prior to the offsetting transaction; shall have any rule that is not in con- (ii) The offsetting transaction is allo- formity with, or conflicts with, this cated to a riskless principal or cus- section. tomer account within 60 seconds of exe- (f) Upon written application or upon cution; and its own motion, the Commission may (iii) The broker or dealer has super- grant an exemption from the provi- visory systems in place to produce sions of this section, either uncondi- records that enable the broker or deal- tionally or on specified terms and con- er to accurately and readily recon- ditions, to any person or class of per- struct, in a time-sequenced manner, all sons, to any transaction or class of orders on which a broker or dealer re- transactions, or to any security or lies pursuant to this exception. class of securities to the extent that (7) The short sale order is for the sale such exemption is necessary or appro- of a covered security at the volume priate, in the public interest, and is weighted average price (VWAP) that consistent with the protection of inves- meets the following criteria: tors. (i) The VWAP for the covered secu- [75 FR 11323, Mar. 10, 2010] rity is calculated by: (A) Calculating the values for every § 242.203 Borrowing and delivery re- regular way trade reported in the con- quirements. solidated system for the security dur- (a) Long sales. (1) If a broker or dealer ing the regular trading session, by mul- knows or has reasonable grounds to be- tiplying each such price by the total lieve that the sale of an equity security number of shares traded at that price; was or will be effected pursuant to an (B) Compiling an aggregate sum of order marked ‘‘long,’’ such broker or all values; and dealer shall not lend or arrange for the (C) Dividing the aggregate sum by loan of any security for delivery to the the total number of reported shares for purchaser’s broker after the sale, or that day in the security. fail to deliver a security on the date (ii) The transactions are reported delivery is due. using a special VWAP trade modifier. (2) The provisions of paragraph (a)(1) (iii) The VWAP matched security: of this section shall not apply: (A) Qualifies as an ‘‘actively-traded (i) To the loan of any security by a security’’ pursuant to § 242.101 and broker or dealer through the medium § 242.102; or of a loan to another broker or dealer; (B) The proposed short sale trans- (ii) If the broker or dealer knows, or action is being conducted as part of a has been reasonably informed by the basket transaction of twenty or more seller, that the seller owns the secu- securities in which the subject security rity, and that the seller would deliver does not comprise more than 5% of the the security to the broker or dealer value of the basket traded. prior to the scheduled settlement of

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the transaction, but the seller failed to must borrow securities or close out the do so; or short position by purchasing securities (iii) If, prior to any loan or arrange- of like kind and quantity; ment to loan any security for delivery, (iii) Short sales effected by a market or failure to deliver, a national securi- maker in connection with bona-fide ties exchange, in the case of a sale ef- market making activities in the secu- fected thereon, or a national securities rity for which this exception is association, in the case of a sale not ef- claimed; and fected on an exchange, finds: (iv) Transactions in security futures. (A) That such sale resulted from a (3) If a participant of a registered mistake made in good faith; clearing agency has a fail to deliver po- (B) That due diligence was used to as- sition at a registered clearing agency certain that the circumstances speci- in a threshold security for thirteen fied in § 242.200(g) existed; and consecutive settlement days, the par- (C) Either that the condition of the ticipant shall immediately thereafter market at the time the mistake was close out the fail to deliver position by discovered was such that undue hard- purchasing securities of like kind and ship would result from covering the quantity: transaction by a ‘‘purchase for cash’’ (i) Provided, however, that a partici- or that the mistake was made by the pant of a registered clearing agency seller’s broker and the sale was at a that has a fail to deliver position at a permissible price under any applicable registered clearing agency in a thresh- short sale price test. old security on the effective date of (b) Short sales. (1) A broker or dealer this amendment and which, prior to may not accept a short sale order in an the effective date of this amendment, equity security from another person, or had been previously grandfathered effect a short sale in an equity security from the close-out requirement in this for its own account, unless the broker paragraph (b)(3) (i.e., because the par- or dealer has: ticipant of a registered clearing agency (i) Borrowed the security, or entered had a fail to deliver position at a reg- into a bona-fide arrangement to borrow istered clearing agency on the settle- the security; or ment day preceding the day that the (ii) Reasonable grounds to believe security became a threshold security), that the security can be borrowed so shall close out that fail to deliver posi- that it can be delivered on the date de- tion within thirty-five consecutive set- livery is due; and tlement days of the effective date of (iii) Documented compliance with this amendment by purchasing securi- this paragraph (b)(1). ties of like kind and quantity; (2) The provisions of paragraph (b)(1) (ii) Provided, however, that if a partic- of this section shall not apply to: ipant of a registered clearing agency (i) A broker or dealer that has ac- has a fail to deliver position at a reg- cepted a short sale order from another istered clearing agency in a threshold registered broker or dealer that is re- security that was sold pursuant to quired to comply with paragraph (b)(1) § 230.144 of this chapter for thirty-five of this section, unless the broker or consecutive settlement days, the par- dealer relying on this exception con- ticipant shall immediately thereafter tractually undertook responsibility for close out the fail to deliver position in compliance with paragraph (b)(1) of the security by purchasing securities of this section; like kind and quantity; (ii) Any sale of a security that a per- (iii) Provided, however, that a partici- son is deemed to own pursuant to pant of a registered clearing agency § 242.200, provided that the broker or that has a fail to deliver position at a dealer has been reasonably informed registered clearing agency in a thresh- that the person intends to deliver such old security on the effective date of security as soon as all restrictions on this amendment and which, prior to delivery have been removed. If the per- the effective date of this amendment, son has not delivered such security had been previously excepted from the within 35 days after the trade date, the close-out requirement in paragraph broker-dealer that effected the sale (b)(3) of this section (i.e., because the

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participant of a registered clearing (vi) If a participant of a registered agency had a fail to deliver position in clearing agency reasonably allocates a the threshold security that is attrib- portion of a fail to deliver position to uted to short sales effected by a reg- another registered broker or dealer for istered options market maker to estab- which it clears trades or for which it is lish or maintain a hedge on options po- responsible for settlement, based on sitions that were created before the se- such broker or dealer’s short position, curity became a threshold security), then the provisions of this paragraph shall immediately close out that fail to (b)(3) relating to such fail to deliver po- deliver position, including any adjust- sition shall apply to the portion of ments to the fail to deliver position, such registered broker or dealer that within 35 consecutive settlement days was allocated the fail to deliver posi- of the effective date of this amendment tion, and not to the participant; and by purchasing securities of like kind (vii) A participant of a registered and quantity; clearing agency shall not be deemed to (iv) If a participant of a registered have fulfilled the requirements of this clearing agency has a fail to deliver po- paragraph (b)(3) where the participant sition at a registered clearing agency enters into an arrangement with an- in a threshold security for thirteen other person to purchase securities as consecutive settlement days, the par- required by this paragraph (b)(3), and ticipant and any broker or dealer for the participant knows or has reason to which it clears transactions, including know that the other person will not de- any market maker that would other- liver securities in settlement of the wise be entitled to rely on the excep- purchase. tion provided in paragraph (b)(2)(iii) of (c) Definitions. (1) For purposes of this this section, may not accept a short section, the term market maker has the sale order in the threshold security same meaning as in section 3(a)(38) of from another person, or effect a short the Securities Exchange Act of 1934 sale in the threshold security for its (‘‘Exchange Act’’) (15 U.S.C. 78c(a)(38)). own account, without borrowing the (2) For purposes of this section, the security or entering into a bona-fide term participant has the same meaning arrangement to borrow the security, as in section 3(a)(24) of the Exchange until the participant closes out the fail Act (15 U.S.C. 78c(a)(24)). to deliver position by purchasing secu- (3) For purposes of this section, the rities of like kind and quantity; term registered clearing agency means a (v) If a participant of a registered clearing agency, as defined in section clearing agency entitled to rely on the 3(a)(23)(A) of the Exchange Act (15 35 consecutive settlement day close-out U.S.C. 78c(a)(23)(A)), that is registered requirement contained in paragraph with the Commission pursuant to sec- (b)(3)(i), (b)(3)(ii), or (b)(3)(iii) of this tion 17A of the Exchange Act (15 U.S.C. section has a fail to deliver position at 78q–1). a registered clearing agency in the (4) For purposes of this section, the threshold security for 35 consecutive term security future has the same mean- settlement days, the participant and ing as in section 3(a)(55) of the Ex- any broker or dealer for which it clears change Act (15 U.S.C. 78c(a)(55)). transactions, including any market (5) For purposes of this section, the maker, that would otherwise be enti- term settlement day means any business tled to rely on the exception provided day on which deliveries of securities in paragraph (b)(2)(ii) of this section, and payments of money may be made may not accept a short sale order in through the facilities of a registered the threshold security from another clearing agency. person, or effect a short sale in the (6) For purposes of this section, the threshold security for its own account, term threshold security means any eq- without borrowing the security or en- uity security of an issuer that is reg- tering into a bona fide arrangement to istered pursuant to section 12 of the borrow the security, until the partici- Exchange Act (15 U.S.C. 78l) or for pant closes out the fail to deliver posi- which the issuer is required to file re- tion by purchasing securities of like ports pursuant to section 15(d) of the kind and quantity; Exchange Act (15 U.S.C. 78o(d)):

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(i) For which there is an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more, and that is equal to at least 0.5% of the issue’s total shares outstanding; (ii) Is included on a list disseminated to its members by a self-regulatory organization; and (iii) Provided, however, that a security shall cease to be a threshold security if the aggregate fail to deliver position at

a registered clearing agency does not

exceed the level specified in paragraph

(c)(6)(i) of this section for five consecutive settlement days. (d) Exemptive authority. Upon written application or upon its own motion, the Commission may grant an exemption from the provisions of this section, either unconditionally or on specified terms and conditions, to any transaction or class of transactions, or to any security or class of securities, or to any person or class of persons.

[69 FR 48029, Aug. 6, 2004, as amended at 72 FR 45557, Aug. 14, 2007; 73 FR 61706, Oct. 17, 2008]

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