The Securities Regulation Code provides that the Securities and Exchange Commission (SEC) may, motu proprio or upon recommendation of the Exchange, prohibit short selling in the Exchange indefinitely or for such period as it may deem proper for the protection of the investors. The SEC may also prohibit short selling in any Exchange as an emergency measure or whenever such short selling is necessary or appropriate in the public interest.
[See Securities Borrowing and Lending (SBL) and Short Selling: Implementing Guidelines]
Under the SRC and its IRR, the term “short sale” means any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller with the commitment of the seller or securities borrower to return or deliver said securities or their equivalent to the lender on a determined or determinable future date.
A person shall be deemed to own a security if:
- (1) he or his agent has title to it;
- (2) he has purchased, or has entered into an unconditional contract, binding on both parties thereto, to purchase it and has not yet received it;
- (3) he owns a security convertible into or exchangeable for it and has tendered such security for conversion or exchange;
- (4) he has an option to purchase or acquire it and has exercised such option; or
- (5) he has rights or warrants to subscribe to it and has exercised such rights or warrants provided, however, that a person shall be deemed to own securities only to the extent he has a net long position in such securities.
DETERMINATION OF GOOD DELIVERY
No Broker or Dealer shall accept a long sale order from a customer unless he has made a determination that the customer owns the security and will deliver in good deliverable form within the settlement period provided by exchange or clearing agency, or as may be prescribed by the SEC.
The determination must include a notation on the order ticket at the time the order is taken which reflects the conversation with the customer regarding the present location of the securities, whether they are in good deliverable form, and the customer’s ability to make delivery.
ORDER FOR SHORT SALE
Upon receiving an order to sell short a qualified security, the order should be indicated on the selling order and throughout all the records pertinent to the sale.
Prior to acceptance of any short sale order, the broker dealer shall make a determination that the customer has already borrowed the security and such will be delivered in good deliverable form within the prescribed settlement period.
QUALIFIED SECURITY
For purposes of this rule, the term qualified security shall mean a listed security that is eligible for short selling in accordance with the following standards: (1) market capitalization; (2) tradability; (3) liquidity; and (4) with other applicable guidelines as may be prescribed by the SEC. [See also Eligible securities]
UPTICK RULE
No broker or dealer shall use any facility of a securities exchange to effect a short sale of any security unless: (1) at a price higher than the last sale; or (2) at the price of the sale if that price is above the next preceding different sale price on such day.
Unless otherwise provided by the SEC, this price requirement shall not apply to a sale due to a bona fide market-making or arbitrage activity executed by a broker dealer authorized to engage in such activities.
FAILURE TO DELIVER
No person shall, directly or indirectly, by the use of any facility of a securities exchange, effect a short sale in a security registered or listed on any securities exchange, where the seller does not intend or is unable to make delivery of the securities within the prescribed settlement period.
Failure on the part of the seller to make delivery on such date will be construed by the SEC as prima facie evidence of the lack of intention on his part to make such delivery.
MANDATORY CLOSE OUT
A contract involving a short sale which has not resulted in a delivery by the Broker Dealer within the settlement period must be closed by the Broker Dealer either by purchasing for cash or guaranteed delivery, securities of like kind and quantity on the next business day after settlement date, unless such purchase cannot be effected within said period for justifiable reasons in which case, notification in writing shall be made with the Exchange and the SEC, or in accordance with rules of the clearing agency that shall clear and settle the transactions.
DIRECTORS, OFFICERS, PRINCIPAL STOCKHOLDERS
No director, officer or principal stockholder of a corporation shall make a short sale in securities of the corporation in which he is a director, officer or principal stockholder.
RECORD KEEPING
A Broker Dealer who engages in short selling activities is required to maintain and keep up-to-date ledgers, whether in manual or preferably in electronic form, to record the complete details of all short selling transactions whether for its account or for the account of its customers. Such ledgers shall be kept in accordance with the Records Retention Rule and be made available to the SEC.
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