Digital Brand Media and Marketing Group Inc (DBMM)

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The Basic Rules and Mechanics of Short Sales in Canada

Every short sale on a Canadian marketplace must be marked “short” unless the sale is from a certain type of account (generally described as directionally neutral accounts), in which case it must be marked “SME” (short-marking exempt).[4] An order marked with the SME designation can be a short or a long sale. Beyond these requirements, a short seller is generally not restricted from selling shares it does not own.[5] UMIR does not impose general pre-borrow or locate requirements (although IIROC can impose specific pre-borrow requirements for specific securities).[6] A short sale can be made by a seller who does not have an existing ability to settle the trade, so long as the seller has a “reasonable expectation” that it will be able to settle the trade.[7] The “reasonable expectation” requirement in the policies accompanying UMIR 2.2, however, does not require that prior to making the sale the short seller actually locate and arrange to have the shares available for delivery on settlement. Rather, a “reasonable expectation” exists so long as the short seller does not know that it cannot borrow the shares and takes reasonable steps to locate them.

If the short sale cannot be settled within two trading days of the order (T+2), it is a failed trade.[8] However, the short seller has 10 trading days (T+12) to locate and deliver the shares before the failed trade must be reported to IIROC as an extended failed trade.[9] There are no regulatory consequences for an extended failed trade, although an extended failed trade may prevent further short sales (either by the client or non-client with any ongoing extended failed trade in any security, or by the broker on its own account in the same security).[10] Trades settled through CDS Clearing and Depository Services Inc. (“CDS”) are subject to CDS’ own settlement rules for failed trades. CDS imposes a daily fee for a failure to deliver shares to settle an outstanding settlement position in its continuous net settlement system and provides a buy-in process which allows a buyer who has not received the purchased shares to force settlement. However, these fees and buy-in requirements carry no regulatory sanction.

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