2.8.4.1.2. Locate and Delivery Requirements for Short Sales
Rule 203 states that before a broker-dealer can execute a short sale, it must locate the securities that will be borrowed to cover the short sale. In this context, “locate” means:
•The securities have already been borrowed or there is a bona fide agreement to borrow the securities.
•The broker-dealer has “reasonable grounds” to believe that the security can be borrowed by the settlement date.
•The broker-dealer has documented these locate requirements.
A broker-dealer can presume to have reasonable grounds that a security is available for borrowing if the security is documented on a firm’s “Easy to Borrow” list. In order for a broker-dealer to rely on such a list, however, the information it contains must be no more than 24 hours old, and the listed securities must be readily available such that it would be unlikely for a fail to deliver to occur.
The locate requirement applies generally to equity securities, not bonds, though it does apply to convertible bonds.
In addition, this rule regulates the short sales of threshold securities. Threshold securities are equity securities that have a fail-to-deliver position of 10,000 shares or more at a registered clearing agency for five consecutive settlement days with the level of fails exceeding 0.5% of the issuer’s total outstanding shares. If a broker-dealer that is