Series 52: 9.2.7.1. Close-Out By Purchaser

Taken from our Series 52 Top Off Online Guide

9.2.7.1. Close-Out by Purchaser

If the purchaser elects to close out a transaction, it must begin by notifying the seller of its intention to do so, using the clearing agency’s inter-dealer communication system. The earliest that a purchaser may send such a notice is one business day after settlement was supposed to occur. So with regular way settlement, notice of a close-out cannot be sent until T + 3, and with same-day settlement, it cannot be sent until T + 1. The notice will demand that the transaction be completed by a specified date and time or it will be closed out. The date specified must be no earlier than 5:15 p.m. E.T. of the third business day after the notice.

Once the seller receives a notice it is required to use its best efforts to locate the securities referenced in the notice. The date specified must be no earlier than third business day after the notice. If the seller delivers the securities during this time, the transaction is completed and the close-out is avoided.

If the seller cannot do so, the purchaser has a window of time to execute the close-out, as discussed later. This window of time starts the day after the deadline given in the close-out notice—if the purchaser gave the earliest possible date of the third business day after the notice, then it can begin executing the close-out on the fourth business day. The window of time for execution typically lasts until the seventh business day after the notice.

Sample Question

Jones Co. broker-dealer wants to close out a transaction that traded on Monday, June 1, because its securities were not delivered by the settlement date, Wednesday, June 3. What is the earliest date on which Jones Co. can notify the seller that it wishes to close out the transaction?

Answer: Thursday, June 4. The earliest date that Jones Co. can notify the seller of its intention to close out the transaction is one business day after the settlement date. Assuming regular way settlement since

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