AIMA

US Short Selling Regulation

In July 2007, the Securities and Exchange Commission (SEC) eliminated the short sale price test restrictions, however the SEC has reconsidered its position following the significant market volatility that existed during the financial crisis.

On 24 February 2010, the SEC adopted a new targeted short sale price test restriction, Rule 201, commonly referred to as the ‘alternative uptick rule’. Rule 201 seeks to prevent short-selling from driving down the price of a stock that has already dropped significantly over the course of a particular trading day. Short selling is permitted until the stock has fallen by 10% compared to the previous day’s closing price, however, beyond this, no more short selling is permitted unless the sale price is above the current national best bid. Rule 201, once engaged, applies to a particular security until the close of trading the following day. By halting the acquisition of new short positions at a sale price below or equal to the current national best bid, the circuit breaker is intended to enable long sellers to sell first and to prevent an artificially accelerated and potentially abusive collapse in price in a particular security. The Rule, therefore, seeks to maintain market stability and investor confidence during times of substantial uncertainty.

To address potentially abusive ‘naked’ short selling and reduce ‘fails to deliver’, the SEC has also made permanent an amended version of its temporary Rule 204T of Regulation SHO on close-out requirements for failures to deliver securities resulting from sales of any equity security. Notably the SEC has maintained the requirement that securities are purchased or borrowed to ‘close-out’ any fail to deliver position resulting from a short sale of a security by no later than the beginning of trading on the settlement day following the date on which the fail to deliver occurred. A similar ‘close-out’ rule applies for the settlement of long sale transactions.

In addition, the SEC has sought to increase the transparency and reporting of short positions. During Q1 2011 it carried out a public consultation, as required by the Dodd-Frank Act, regarding the feasibility, benefits and costs of requiring short position reporting of publicly listed securities. This consultation also considered a pilot program for having short sales marked and reported through the Consolidated Tape.
 

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Key legislative documents

Regulation SHO

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Relevant consultations

SEC Request for Comment - Short Sale Reporting Study (May 2011)

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AIMA documents

Response to SEC Short Sale Reporting Study (June 2011)