Guidance on Participant Obligations to have Reasonable Expectation to Settle any Trade Resulting from the Entry of a Short Sale Order

1. Definition of Short Sale

A short sale is generally defined to mean the sale of a security which the seller does not own either directly or through an agent or trustee. For additional clarity, among other things, a seller is not considered to own a security (and any sale of such securities would be considered a short sale) where:

• the security held by the seller is subject to any restrictions on sale imposed by applicable securities legislation or by an Exchange as a condition of the listing of the security, or
• the settlement date or issuance date pursuant to:
  • an unconditional contract to purchase,
  • a tender of a security for conversion or exchange,
  • an exercise of an option, or
  • an exercise of a right or warrant

would, in the ordinary course, be after the date for settlement of the sale.

2. Manipulative and Deceptive Activities

Part 2 of Policy 2.2 enumerates a series of activities that may constitute a violation of UMIR 2.2(2) 1. One of these activities is entering an order for the sale of a security without, at the time of entering the order, having the reasonable expectation of settling any trade that would result from the execution of the order. This includes short sale orders.

IIROC expects that prior to the entry of a short sale order a Participant has reasonable certainty that it can access sufficient securities for it to settle any resulting trade on settlement date, which generally is two days following the trade date. If the Participant knows or ought reasonably to know that it is unlikely that sufficient securities will be available and accessible to deliver on settlement date, the order is not permitted to be entered. For example, a Participant may not be able to demonstrate a reasonable expectation that sufficient shares would be available on settlement date in cases where:

• the person on behalf of whom the short sale order is entered has previously executed trades where shares were not available to deliver on settlement date, or
• the securities being sold short are difficult to borrow.

For added clarity, where a client expects to receive securities after the settlement date of a short sale trade, the Participant is not permitted to rely on those securities to establish a “reasonable expectation” to settle because the securities would not be available to deliver on the settlement date of the short sale trade.

Frequently Asked Questions

1. I own securities that are subject to statutory resale restrictions that expire in 30 days. Can I rely on these securities to establish a “reasonable expectation” to settle a short sale where the settlement date will take place in two days?

No. The definition of “short sale” considers a person who owns securities subject to statutory resale restrictions to be a short seller where the settlement date of a short sale takes place before the resale restrictions expire. Securities subject to a statutory restriction are not in an acceptable form to settle a short sale trade. Because the securities subject to a statutory hold will not be available to settle any resulting short sale trade on the settlement trade, this would not support a reasonable expectation to settle. In all instances, a Participant must have a reasonable expectation, prior to the entry of an order, that sufficient shares would be available and accessible to settle any resulting trade on settlement date. This may include arranging to borrow securities as appropriate.

2. I have a client who subscribed to purchase shares of a secondary financing, but the financing has not yet closed. Can I rely on the client’s commitment to purchase shares off the financing as “reasonable expectation” to settle a short sale despite the closing date of the financing occurring after the settlement date of the short sale trade?

No. Prior to the entry of a short sale order, a Participant must have a “reasonable expectation” that sufficient shares will be available to settle any resulting trade on settlement date. Because the financing will not have closed when the short sale trade is scheduled to settle, those shares will not be available on settlement date of the short sale trade.

• 1UMIR 2.2 (2) - A Participant or Access Person shall not, directly or indirectly, enter an order or execute a trade on a marketplace if the Participant or Access Person knows or ought reasonably to know that the entry of the order or the execution of the trade will create or could reasonably be expected to create:
  1. a false or misleading appearance of trading activity in or interest in the purchase or sale of the security; or
  2. an artificial ask price, bid price or sale price for the security or a related security.