On October 17, 2008, the Securities and Exchange Commission adopted interim final temporary Rule 204T, which requires that CNS participants such as Jefferies close out any failed settlement that exists on the settlement date for an equity security (the third business day after trade date, or "T+3"). If the close-out does not take place at or before the opening of trading on T+4 (in the case of short sales) and T+6, respectively (in the case of long sales), Rule 204T imposes restrictions on Jefferies' ability to effect future short sales in that security. The SEC also adopted Rule 10b-21, an anti-fraud provision designed to deter "naked" short selling. Jefferies has prepared this summary for your convenience. It is not intended to be legal advice or to be conclusive. You should consult your own counsel to assess the impact of Rule 204T on you.
Some of the essential elements of Rule 204T are set forth below.
- Rule 204T is an interim final temporary rule, expiring at 11:59 on July 31, 2009. The SEC intends to make the rule permanent.
- Rule 204T applies to all equity securities.
- Rule 204T requires that Jefferies track all fail to deliver positions (unsettled trades) resulting from both long and short sales and then borrow or buy-in sufficient securities to close out those fails at the beginning of regular trading on T+4 (in the case of short sales) and T+6 (in the case of long sales).
- If Jefferies does not close out the position within that time period, it may be temporarily prohibited from effecting short sales in that security for any client unless it pre-borrows that security1.
- Jefferies will generally attempt to close out fail to deliver positions (unsettled trades) by borrowing securities. However, Jefferies will buy-in open fails when necessary.
- You should expect to be bought in without notification from Jefferies if you fail to deliver securities (unsettled trades) by the close of business on T+3 (T+5 in the case of long sales) and Jefferies is unable to borrow sufficient securities to close out the fail. Jefferies will commence buy-ins of failed securities at the beginning of regular trading on T+4 (T+6 in the case of long sales).
- In some cases, though you may purchase securities to close out a short position prior to or on settlement date, the SEC specifically prohibits Jefferies from reducing your short position by the amount of shares purchased. Therefore, in those cases, Jefferies may still be required to buy-in the entire amount of the short position. This may result in a net long position for your account.
- There are additional Firm costs associated with pre-borrowing. These additional costs may be passed on to you. Please contact your Jefferies Account Executive or Relationship Manager directly to discuss the impact this may have on you.
- The close out requirements will not apply to securities sold pursuant to Rule 144.
- The SEC also adopted an antifraud rule, Rule 10b-21, aimed at short sellers who deceive specified persons, such as a broker or dealer, about their intention or ability to deliver securities in time for settlement and that fail to deliver securities by settlement date. Among other things, Rule 10b-21 will target short sellers who deceive their broker-dealers about their source of borrowable shares for purposes of complying with Regulation SHO's "locate" requirement. Rule 10b-21 will also apply to sellers who misrepresent to their broker-dealers that they own the shares being sold.
The interim final temporary rule adopting release for temporary rule 204T may be found on the SEC's website at http://www.sec.gov/rules/final/2008/34-58773.pdf.
