Kestrel Reg SHO Locate Policy and Fail-to-Deliver Close-Out Procedures

**Owner:** Operations — Stock Loan Desk, with Compliance oversight **Applies to:** Equities Trading Desk, Stock Loan Desk, Operations, and Compliance.

1. Scope

This Policy implements Kestrel Securities' obligations under 17 CFR 242.200-204 (Regulation SHO) for short-sale orders in equity securities, the close-out of fail-to-deliver positions, and related recordkeeping. Kestrel self-clears and is therefore its own participant for Rule 204 purposes.

2. Short-sale order marking — 17 CFR 242.200(g)

The OMS assigns each sell order one of three short-sale marks based on the selling aggregation unit's net position:

- **Long** — where the unit is deemed to own the security under 17 CFR 242.200(a)–(f); - **Short** — where the unit is not deemed to own the security; or - **Short exempt** — where an exception to Rule 201 applies (e.g., bona fide market making within the definition of 17 CFR 242.201(d)).

2.1 Aggregation units

Kestrel operates two aggregation units within the meaning of 17 CFR 242.200(f):

- **Retail AU** — retail customer flow, aggregated for net-position purposes. - **Market-Making AU** — Kestrel's market-making activity in a defined set of OTC equity securities.

Each aggregation unit has a distinct trading objective, maintains positions separately, is supervised by independent personnel, and is documented in the Aggregation Unit Charter maintained by the CRO.

3. Long-sale documentation — 17 CFR 242.200(g)(1)

Before executing a sale marked "long," Kestrel confirms either:

1. The security is in Kestrel's possession or control — i.e., held at DTC in a free position for the selling customer or aggregation unit; or 2. The security can reasonably be expected to be in the selling party's possession or control by settlement date, on the basis of a documented arrangement (e.g., a pending delivery from a counterparty confirmed by Operations).

The documentation lives in the Long-Sale Documentation record, retained under 17 CFR 240.17a-4.

4. Locate — 17 CFR 242.203(b)

4.1 The locate requirement

Kestrel may not accept a short-sale order from a customer or effect a short sale for its own account unless it has borrowed the security, entered into a bona fide arrangement to borrow the security, or has reasonable grounds to believe that the security can be borrowed so that delivery can be made by settlement date — and has documented the locate.

4.2 Easy-to-borrow list (ETB)

The Stock Loan Desk maintains an Easy-to-Borrow List based on the availability of shares across Kestrel's primary stock-loan counterparties. The ETB is:

- Updated no less than twice per trading day (morning and mid-day) and additionally whenever counterparty availability materially changes; - Distributed to KTG for pre-trade enforcement; and - Preserved as a point-in-time record daily.

A short-sale order in an ETB security does not require an order-by- order locate; the ETB entry itself supports the "reasonable grounds" determination under 17 CFR 242.203(b)(1)(ii).

4.3 Order-by-order locate

A short-sale order in a security not on the ETB requires an order-by-order locate, which the Stock Loan Desk documents in the Locate Log. The Locate Log captures:

- Order ID (or the identity of the aggregation unit, for proprietary shorts); - Security symbol; - Number of shares requested; - Identity of the lender providing the locate; - Time of the locate; and - Number of shares located (which must equal or exceed the shares requested).

4.4 Exceptions — bona fide market making

Short sales effected by the Market-Making AU in connection with its bona fide market-making activity in an OTC equity security are exempt from the locate requirement under 17 CFR 242.203(b)(2). The scope of bona fide market making is documented in the Aggregation Unit Charter and reviewed annually by the CCO. "Ostensible" market making — activity that does not reflect a regular and continuous intent to provide two-sided liquidity — is not bona fide and is not exempt.

5. Settlement and close-out — 17 CFR 242.204

5.1 Daily fail monitoring

Operations runs a daily fail-to-deliver report at the close of each settlement day. The report identifies open FTD positions and their days-aged.

5.2 Close-out obligation

Kestrel, as a participant of a registered clearing agency, must close out a fail-to-deliver position by the beginning of regular trading hours on the settlement day following the settlement date on which the FTD arose. The close-out deadline is extended:

- For FTDs resulting from a long sale, or from bona fide market making, to the beginning of regular trading hours on the third consecutive settlement day following settlement (see 17 CFR 242.204(a)(1)–(2)).

Close-out is executed by borrowing or purchasing shares sufficient to cover the FTD position. The Stock Loan Desk coordinates the close-out and documents the action taken.

5.3 Pre-borrow requirement

If Kestrel fails to close out a fail position by the applicable deadline, the affected security is flagged in the OMS as "pre-borrow required." No further short sales in that security may be effected by Kestrel or any customer absent a confirmed pre-borrow and associated documentation. The flag is lifted only when the close-out is completed and reconciled.

6. Threshold-security monitoring

Kestrel subscribes to the daily threshold-security list feeds published by the primary listing markets. Each morning, Operations reviews the firm's open fail positions against the threshold list and escalates any concentrations to the Head of Operations and the CCO. Although Rule 204 applies the close-out framework to all equity securities, the threshold designation remains a useful indicator of settlement stress in a name.

7. Recordkeeping

All records required by this Policy — including the ETB point-in-time snapshots, Locate Log entries, Long-Sale Documentation records, fail-to-deliver reports, close-out actions, and pre-borrow flags — are preserved under 17 CFR 240.17a-4.

8. Training

All Stock Loan Desk personnel, Equities Trading Desk personnel, and relevant Operations personnel complete annual Reg SHO training. New hires complete training within 30 days of registration.

9. References

- 17 CFR 242.200-204 (`17 CFR 242.200-204`) - 17 CFR 240.17a-4 (`17 CFR 240.17a-3, 240.17a-4, 240.15c3-5`) - 17 CFR 240.15c3-5 (`17 CFR 240.17a-3, 240.17a-4, 240.15c3-5`) - Kestrel-WSP-Equities - Kestrel-Market-Access-Controls