The SEC Division of Trading and Markets provided no-action relief allowing a broker-dealer to treat exchange-traded fund ("ETF") creation and redemption requests for certain "covered" ETFs in the same manner generally as purchases or sales of ETF shares in the secondary market. The no-action letter extends prior relief that permits a broker-dealer to accrue partial credit toward its Rule 204 closeout requirement for a fail-to-deliver position over multiple days before the closeout date under Rule 204 of Regulation SHO.
Reg. SHO Rule 204 generally requires clearing broker-dealers to close out a "fail-to-deliver" position for short sales by the start of trading on the settlement day after the settlement date, or for fail-to-deliver positions resulting from long sales or attributable to bona fide market-marking activities by the start of trading on the third settlement day after the settlement date. The no-action letter permits a firm to close out a fail-to-deliver position for ETF shares by submitting an irrevocable creation order directly to an authorized participant "no later than the beginning of regular trading hours on the applicable close-out date."
Commentary / Patrick A. Calves
Whether a creation request should be treated the same as a secondary market purchase for ETF shares has been an open question under Reg. SHO. As a matter of both policy and economics, a creation request is equivalent to a purchase. The SEC no-action letter resolves the question and provides a good outcome for market participants.
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