Options Trading Risk Alert Released by SEC to Avert Evasions of Short-Sale Rule

The Securities and Exchange Commission (SEC)‘s Office of Compliance Inspections and Examinations (OCIE) recently published a Risk Alert that aims to combat market abuses that elude an SEC short-sale rule for options trading. The Alert, issued in the first week of August 2013, details certain evasive “options trading strategies” that OCIE examiners have detected in the marketplace where some “customers, broker-dealers and clearing firms” have sought to avoid certain short-sale rule requirements. The rule, known as Regulation SHO, was instituted in 2005 by the SEC in an effort to further revise previous regulations for short sales of borrowed securities. This included a “close-out requirement,” a provision which stated that short sellers who “fail to deliver securities after the settlement date” must “close out” their position right away, except in the case that they “qualify as bona fide market makers for a limited amount of extra time to close-out.” The conflict that the Alert addresses arise with options trading strategies masking close-out violations to OCIE, where “sham close-outs” simulate, but in reality dodge, the close-out requirements are continually perpetuated.

In describing these evasions, the Alert also specifies practices that can be used to identify and deter abuses to Regulation SHO, as well as enforcement procedures that can be taken in the case of the discovery of false “close-outs”. Some of the signs that a violation of the “close-out requirement” of Regulation SHO is taking place include large or continuous failures in delivering positions in an account; the implementation of buy-writes or married puts to satisfy the requirement; and trading solely in “hard-to-borrow” or “threshold list” securities.

For more information on this topic, or for assistance on other compliance topics, please contact us at (619) 278-0020 to schedule a consultation.

Leave a Reply

Your email address will not be published. Required fields are marked *