On October 27, the Securities and Exchange Commission’s Division of Trading and Markets (Division) issued no-action relief to Goldman Sachs Execution & Clearing (GSEC) relating to the close-out requirements of Rule 204. In general, in order for a broker-dealer to satisfy its close-out requirements under Rule 204, it must purchase or borrow sufficient shares to satisfy its fails to deliver in full and must have a net flat or net long position on its books and records as of the end of the applicable close-out date. This latter requirement was problematic for GSEC because some of its clearing clients typically engaged in so-called “subsequent activity” (e.g., effected transactions away from GSEC at or near the end of the trading day).
The Division stated it would not recommend enforcement action against GSEC under Rule 204 regarding subsequent activity if, with respect to clients to whom GSEC is not permitted to delegate close-out responsibility under Rule 204 (such as market makers), GSEC: (1) identified the clients that caused or contributed to its net fail to deliver position and determined the number of shares attributable to each such client using a reasonably designed and consistently applied method, and (2) required these clients to end the close-out date as a “net purchaser” of the relevant number of shares. If the clients fail to take this step, GSEC must, on the day after the close-out date, buy in the client for the amount of shares that, when added to the client’s net trading activity on the applicable close-out date, would have made the client a “net purchaser” of the relevant shares on the close-out date. In connection with this relief, GSEC agreed that it would not list securities in which it had a close-out obligation on its easy-to-borrow list.
The letter to GSEC and accompanying request for relief by GSEC are available here.