Locate Requirement
Regulation SHO
The locate requirement is a regulatory rule (Regulation SHO in the US) mandating that brokers must have reasonable grounds to believe that a security can be borrowed before effecting a short sale.
Adopted in 2005, Regulation SHO was designed to address failures to deliver (FTD) and abusive naked short selling. The rule requires that a broker-dealer cannot accept a short sale order unless it has: 1. Borrowed the security, or 2. Entered into an arrangement to borrow it, or 3. Has reasonable grounds to believe the security can be borrowed for delivery by the settlement date.
Key Takeaways
- Enforced by the SEC (Rule 203(b)(1)).
- Prevents "Naked Short Selling".
- Must be documented *before* the trade is executed.
- Brokers use "Easy-to-Borrow" lists for compliance.
- Market Makers are exempt during bona fide market making.
Consequences of Failure
If a broker fails to get a locate and then fails to deliver the shares at settlement (T+1), they face mandatory "Close-Out" requirements. They must buy back the shares in the open market to close the position, regardless of the price (a "Buy-In").
FAQs
A stock with limited float or high short interest. Brokers cannot rely on standard lists for these; they must perform a manual locate, often charging a fee.
No. Electronic trading platforms will reject a short order instantly if their system does not have a locate code attached to it.
The Bottom Line
The locate requirement is the primary firewall against market manipulation via naked shorting. It ensures that every short position is backed by real shares.
Related Terms
More in Market Oversight
At a Glance
Key Takeaways
- Enforced by the SEC (Rule 203(b)(1)).
- Prevents "Naked Short Selling".
- Must be documented *before* the trade is executed.
- Brokers use "Easy-to-Borrow" lists for compliance.