What is the 'Regulation SHO'

A regulation implemented on January 3, 2005 that seeks to update legislations concerning short sale practices. Regulation SHO established "locate" and "close-out" standards that are primarily aimed at preventing the opportunity for unethical traders to engage in naked short selling practices.

BREAKING DOWN 'Regulation SHO'

The "locate" requirement requires that a broker has reasonable belief that the equity to be short sold can be borrowed and delivered to a short seller on a specific date before short selling can occur.

The "close-out" requirement represents the increased amount of delivery requirements imposed upon securities that have many extended delivery failures at a clearing agency.

This regulation represents the first time that short sale regulations were updated since 1938.

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