Replies to post #1547 on The Real DTCC Discussion

[BigBake1]

Yeah a lot of people are not aware of settlement nor the SEC rule 203 exception used:

Rule 203(b)(2)(ii) provides an exception from the uniform locate requirement for situations in which a broker-dealer effects a sale on behalf of a customer that is deemed to “own” the security although, through no fault of the customer or the broker-dealer, it is not reasonably expected that the security will be in the physical possession or control of the broker-dealer by the settlement date. The Adopting Release states that such circumstances could include the situation where a convertible security, option, or warrant has been tendered for conversion or exchange, but the underlying security is not reasonably expected to be received by the settlement date. (69 FR at 48015). In such situation, delivery should be made on the sale as soon as all restrictions on delivery have been removed, and in any event within 35 days after trade date. If delivery is not made within 35 days after the trade date, the broker-dealer that sold on behalf of the person must either borrow securities or close out the open position by purchasing securities of like kind and quantity.

This often results in FTDs and occasionally Reg SHO Flags since there is an open position waiting on settlement. You often see such Reg SHO Flag touted as a short squeeze opportunity. Unfortunately it rarely if ever is because it is simply a conversion issue waiting on settlement.