NASD Notice to Members 06-18 - April 2006

SEC Division of Market Regulation Issues Interpretive Guidance Regarding Regulation SHO Close-Out Requirements; Effective Date: May 1, 2006

Executive Summary

NASD is issuing this Notice to highlight recent guidance published by the Securities and Exchange Commission (SEC) relating to the “close-out” requirements under Regulation SHO. Regulation SHO, among other things, imposes uniform delivery requirements on broker-dealers for certain securities that have a substantial level of failures to deliver at a registered clearing agency, referred to as “threshold securities.” Regulation SHO requires broker-dealers that are participants of a registered clearing agency (clearing agency participants) to take action to “close-out” failure-to-deliver positions in threshold securities that have persisted for 13 consecutive settlement days by purchasing securities of like kind and quantity.

 

On March 17, 2006, the SEC Division of Market Regulation published Question and Answer (Q&A) 5.8 providing interpretive guidance relating to the method by which clearing agency participants may apply any reductions to their end-of-day fail-to-deliver positions at the National Securities Clearing Corporation (NSCC) that occur during the applicable 13 consecutive settlement day period. Specifically, the SEC stated that clearing agency participants that choose to apply reductions to their close-out requirements prior to the 13th consecutive settlement day must first apply any reduction to the most recent increase in its fail to deliver position reflected at NSCC. NASD expects that all members will fully implement the methodology set forth in Q&A 5.8 by May 1, 2006.

 

Questions regarding this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; or the Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071.