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- 23 يوليو 2003
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NASD Asks SEC To OK Tougher Short Sale Rules
By Carol S. Remond
A Dow Jones Newswires Column (03-18-04)
NEW YORK (Dow Jones)--The NASD is taking steps to further tighten short selling rules for its members.
NASD has asked the Securities and Exchange Commission to approve a new rule that would require clearing firms to make delivery, or take affirmative steps to make delivery, within 10 business days after settlement date for all short sale transactions with no exemption.
Under current NASD rules, bona fide market making activities and arbitraged positions are exempt from the 10-days delivery
requirement. Under the new rule proposed by NASD, market making activities and arbitraged positions will no longer be exempt.
NASD said the new delivery rule is needed to address abusive short selling activities, including naked short selling or short selling without first borrowing securities to make delivery.
A short seller typically borrows stock from a broker to sell it into the market, betting that the share price will fall so that he can buy the stock back at a lower price and pocket the difference.
NASD said that naked short selling "can result in long-term failures to deliver, including aggregate failures to deliver that exceed the total float of a security." NASD said it believes that such "extended failure to deliver can have a negative effect on the market."
"Existing NASD rules are designed to address the settlement of short sales transactions, but NASD has concluded that these rules need to be revised and updated to address directly the current problems occurring in the marketplace," NASD said.
The move by NASD to tighten delivery rules follows the approval by the SEC late last year of a more aggressive NASD affirmative determination rule that closed a loophole that allowed non-NASD members, mostly foreign brokerage firms, to short stocks without first borrowing shares.
NASD's affirmative determination rule stipulates that brokers and dealers engaged in a short sale transaction must make sure that shares can be delivered by settlement time, three days later. Market makers engaged in bona fide market-making activities will continue to be exempt from affirmative determination under NASD's tougher rule which is scheduled to take effect on April 1.
To address concerns that the non-exemption of market making activities could lead to a lack of liquidity, NASD said that clearing firms will be able to request two five-days extensions if they fail to deliver stock within 10-days.
"If delivery is not made within the requisite time period, the
following trading restriction will apply until delivery is effected:
the account which has failed to deliver against its sale, or any
other accounts held at the clearing firm by the legal or beneficial owner of such account, would be restricted from selling short the same security to which the failure to deliver pertains," according to the new NASD delivery rule.
NASD said that the proposed rule change will reduce the amount of extended failures to deliver in securities and will enhance the integrity of the market and the clearance and settlement system. This is the first time that NASD acknowledges problems and mounting failures to deliver stock necessary to settle transactions.
Although separate from it, the amended NASD affirmative determination rule and its new delivery rule fit tightly within new short selling regulations, known as Regulation SHO, being put forward by the SEC. Regulation SHO is currently under review by the SEC staff after a period during which market participants were invited to comment on it.
As it stands, SHO will make it easier to short large-cap stocks since they would do away with the "uptick" rule, which bans short selling on a stock when the price is falling. But it when it comes to the small-cap markets, where it's often impossible to borrow stock, the impact of SHO will be the opposite, making it harder to short sell stock.
Under SHO, a broker or an investor that fails to deliver within two days after the settlement date will effectively be unable to short sell that stock for 90 days. The new SEC rule sets a predetermined level of so-called clearing fails, cases in which a broker or investor cannot deliver stock within two days after settlement, which will trigger the 90-day blackout during which that customer will not be allowed to short sell that security. That 90-day exemption would also affect
trading of U.S. securities outside the U.S.
NASD said it will announce the effective date for its new delivery rule to members "no later than 60 days following (SEC) approval. The effective date will be 90 days following publication of the Notice to Members announcing (SEC) approval."
(Carol S. Remond is one of four "In The Money" columnists who take a sophisticated look at the value of companies and their securities and explore unique trading strategies.)
-By Carol S. Remond; Dow Jones Newswires; 201 938 2074;
carol.remond@dowjones.com
(END) Dow Jones Newswires
By Carol S. Remond
A Dow Jones Newswires Column (03-18-04)
NEW YORK (Dow Jones)--The NASD is taking steps to further tighten short selling rules for its members.
NASD has asked the Securities and Exchange Commission to approve a new rule that would require clearing firms to make delivery, or take affirmative steps to make delivery, within 10 business days after settlement date for all short sale transactions with no exemption.
Under current NASD rules, bona fide market making activities and arbitraged positions are exempt from the 10-days delivery
requirement. Under the new rule proposed by NASD, market making activities and arbitraged positions will no longer be exempt.
NASD said the new delivery rule is needed to address abusive short selling activities, including naked short selling or short selling without first borrowing securities to make delivery.
A short seller typically borrows stock from a broker to sell it into the market, betting that the share price will fall so that he can buy the stock back at a lower price and pocket the difference.
NASD said that naked short selling "can result in long-term failures to deliver, including aggregate failures to deliver that exceed the total float of a security." NASD said it believes that such "extended failure to deliver can have a negative effect on the market."
"Existing NASD rules are designed to address the settlement of short sales transactions, but NASD has concluded that these rules need to be revised and updated to address directly the current problems occurring in the marketplace," NASD said.
The move by NASD to tighten delivery rules follows the approval by the SEC late last year of a more aggressive NASD affirmative determination rule that closed a loophole that allowed non-NASD members, mostly foreign brokerage firms, to short stocks without first borrowing shares.
NASD's affirmative determination rule stipulates that brokers and dealers engaged in a short sale transaction must make sure that shares can be delivered by settlement time, three days later. Market makers engaged in bona fide market-making activities will continue to be exempt from affirmative determination under NASD's tougher rule which is scheduled to take effect on April 1.
To address concerns that the non-exemption of market making activities could lead to a lack of liquidity, NASD said that clearing firms will be able to request two five-days extensions if they fail to deliver stock within 10-days.
"If delivery is not made within the requisite time period, the
following trading restriction will apply until delivery is effected:
the account which has failed to deliver against its sale, or any
other accounts held at the clearing firm by the legal or beneficial owner of such account, would be restricted from selling short the same security to which the failure to deliver pertains," according to the new NASD delivery rule.
NASD said that the proposed rule change will reduce the amount of extended failures to deliver in securities and will enhance the integrity of the market and the clearance and settlement system. This is the first time that NASD acknowledges problems and mounting failures to deliver stock necessary to settle transactions.
Although separate from it, the amended NASD affirmative determination rule and its new delivery rule fit tightly within new short selling regulations, known as Regulation SHO, being put forward by the SEC. Regulation SHO is currently under review by the SEC staff after a period during which market participants were invited to comment on it.
As it stands, SHO will make it easier to short large-cap stocks since they would do away with the "uptick" rule, which bans short selling on a stock when the price is falling. But it when it comes to the small-cap markets, where it's often impossible to borrow stock, the impact of SHO will be the opposite, making it harder to short sell stock.
Under SHO, a broker or an investor that fails to deliver within two days after the settlement date will effectively be unable to short sell that stock for 90 days. The new SEC rule sets a predetermined level of so-called clearing fails, cases in which a broker or investor cannot deliver stock within two days after settlement, which will trigger the 90-day blackout during which that customer will not be allowed to short sell that security. That 90-day exemption would also affect
trading of U.S. securities outside the U.S.
NASD said it will announce the effective date for its new delivery rule to members "no later than 60 days following (SEC) approval. The effective date will be 90 days following publication of the Notice to Members announcing (SEC) approval."
(Carol S. Remond is one of four "In The Money" columnists who take a sophisticated look at the value of companies and their securities and explore unique trading strategies.)
-By Carol S. Remond; Dow Jones Newswires; 201 938 2074;
carol.remond@dowjones.com
(END) Dow Jones Newswires
