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.