§ 242.204 — Close-out requirement.

(a) Close-out requirement.

A participant of a registered clearing agency must deliver to the registered clearing agency, for clearance and settlement on a long or short sale in any equity security, by settlement date, securities sufficient to cover each order submitted by or on behalf of the participant. If a participant has a fail-to-deliver position at a registered clearing agency in any equity security for a long or short sale, the participant shall, by no later than the beginning of regular trading hours on the settlement day following the settlement date on which the participant had a fail-to-deliver position, immediately close out the fail-to-deliver position by borrowing or purchasing securities of like kind and quantity.

Exceptions and extended-coverage provisions:

1. For a fail-to-deliver position resulting from a long sale, or a fail that is attributable to bona-fide market-making activity, the close-out deadline is extended to the beginning of regular trading hours on the third consecutive settlement day following the settlement date. 2. Closed-out positions continue to be reported until the close-out is actually completed.

(b) Pre-borrow requirement on further short sales.

If a participant has a fail-to-deliver position in an equity security and does not close out the position by the applicable close-out deadline, the participant, and any broker-dealer for which it clears transactions, including any broker-dealer that was allocated a portion of such fail to deliver, may not accept a short sale order in the equity security from another person, or effect a short sale in the equity security for the participant's own account, without first borrowing such security, or entering into a bona-fide arrangement to borrow such security, until the fail-to-deliver position is closed out.

(c) Notification.

A participant that is subject to the pre-borrow requirement under paragraph (b) must notify any broker-dealer for which it clears transactions, and any broker-dealer from which it receives trades for clearance and settlement, of the pre-borrow requirement and of the specific securities to which the requirement applies. Broker-dealers may not effect short sales in the affected securities on behalf of the participant without complying with the pre-borrow condition.

(d) Preservation of records.

Records sufficient to document compliance with this section — including records identifying fail-to-deliver positions, close-out actions, and pre-borrow compliance — must be preserved in accordance with § 240.17a-4.

---

Threshold securities

A "threshold security" is an equity security of an issuer for which, for five consecutive settlement days, there are aggregate fail-to-deliver positions at a registered clearing agency of 10,000 shares or more; and that is equal to at least 0.5% of the issuer's total shares outstanding. Exchanges and FINRA each publish daily threshold lists.

Under the former Rule 203(b)(3) — since consolidated into Rule 204's generally applicable close-out framework — participants with continuing fail positions in threshold securities were subject to mandatory close-out. The 2009 amendments that adopted Rule 204 applied the close-out requirement to all equity securities, not just threshold securities. Threshold-security designation remains informationally significant, however, as a market indicator of settlement stress.