Close-Out: Buy-Ins, Sell-Outs, and COD Orders

Close-out is the final step in the Uniform Practice Code framework: when delivery breaks down, who closes the trade out and on what timeline. The principal must understand the buy-in (buyer's remedy for seller fail), the sell-out (seller's remedy for buyer fail), the reclamation windows, and the COD / delivery versus payment (DVP) / receive versus payment (RVP) order requirements.

Buy-In Procedures

When a seller fails to deliver securities by settlement date, the buyer may close out the contract by purchasing securities of like kind and quantity in the open market at the seller's risk.

Notice Requirement

The written buy-in notice must be delivered:

• No later than 12:00 p.m. ET, AND
• At least two business days before the buy-in execution

The two-business-day window gives the failing seller time to source the securities or arrange substitute delivery. A buy-in notice that arrives the morning of execution (no notice period) is invalid.

The buy-in itself may not be executed sooner than the third business day following the date delivery was due. Both the notice timing and this minimum-wait must be met before the buyer can close the contract out.

Risk and Cost Allocation

The buy-in is for the account and risk of the defaulting (selling) broker-dealer. That means:

• The buyer purchases substitute securities in the open market
• The defaulting seller pays the buy-in price
• If the buy-in price is higher than the original contract price, the seller owes the difference
• If the buy-in price is lower, the seller still pays (the contract is closed out at the buy-in price)

In practice, buy-ins almost always close at a price unfavorable to the defaulting seller, because the buy-in pressure is well known to the market.

Operational Requirements

Members must maintain a buy-in section/desk that is adequately staffed to:

• Process and research buy-in notices within the rule's time frames
• Issue buy-in notices on time
• Coordinate with stock-loan and trading desks to source substitute securities

A firm without an operational buy-in capability has not satisfied the rule's expectations.

Notice After Execution

The buyer that executes the buy-in must notify the seller of the quantity purchased and the price paid immediately upon execution, and no later than 6:00 p.m. ET that day, in written or electronic form with immediate-receipt capability. A formal confirmation follows by 9:30 a.m. ET the next business day.

Retransmitted Notices

Buy-in notices may be retransmitted in some cases when the failing seller is itself awaiting delivery from another counterparty. The retransmission moves the buy-in pressure up the chain to the original failing party.

Exam Tip: Gotchas

• Buy-in notice must be delivered by 12:00 p.m. ET at least TWO BUSINESS DAYS before execution. Not "the next day," not "as soon as the fail occurs."
• The buy-in is for the account and risk of the DEFAULTING SELLER. The buyer is the executor; the seller bears the cost.
• A buy-in is the BUYER's remedy for SELLER's failure to deliver. The exam will reverse this in fact patterns; map "who failed" to "who closes out."
• Members must maintain a buy-in desk capable of meeting the rule's time frames. Not having operational capability is a structural violation.

Selling-Out

When the buyer fails to accept delivery in accordance with the contract and has not delivered a properly executed Uniform Reclamation Form, the seller may, without notice, "sell out" the securities in the best available market at the account and risk of the defaulting buyer.

Key Differences from a Buy-In

Why No Notice for Sell-Outs

The sell-out is symmetric to the buy-in but does not require advance notice. The asymmetry exists because:

• A failing seller (no delivery) has the burden of finding the security to deliver
• A failing buyer (no acceptance of delivery) has already received the goods or refused them; the seller has no remedy other than disposing of the held securities

The seller's recourse is immediate: sell the securities and pursue the difference from the buyer.

Notification Form

The seller must notify the buyer as promptly as possible on the day of execution, and no later than 6:00 p.m. ET, in writing or electronic form with immediate-receipt capability, including the quantity and price. A formal confirmation follows as promptly as possible.

Exam Tip: Gotchas

• Sell-outs require NO advance notice. The seller can sell out the same day the buyer fails to accept.
• Sell-out notification is due as promptly as possible on the day of execution, and no later than 6:00 p.m. ET. Not the next morning; 6:00 p.m. is the outer limit, not the target.
• A sell-out is the SELLER's remedy for BUYER's failure to accept delivery. Mirror image of the buy-in.

Reclamation

A reclamation is the right to return improperly delivered securities. The reclamation rules set the windows by category:

What Happens Without a Proper Reclamation Form

A security returned without a properly executed Uniform Reclamation Form may be sold out by the receiving broker, no later than 3 business days after receipt.

The Uniform Reclamation Form is the procedural document that supports a return. A return without the form is treated as an improper delivery; the receiver can sell out the held securities and pursue the difference.

Why the 30-Month Window for Lost/Stolen

The 30-month window for lost, stolen, or confiscated securities is unusually long. The reason: these certificate problems often surface only when the buyer attempts to sell or transfer the security and the transfer agent flags it. The 30-month window covers the typical interval between original purchase and discovery.

Exam Tip: Gotchas

• Minor/currency irregularities = 15-day reclamation. Foreign securities = 45 days. Lost/stolen/confiscated = 30 MONTHS. Memorize the three windows.
• A return without a Uniform Reclamation Form can be SOLD OUT by the receiver within 3 business days. No reclamation form = no proper return.
• The 30-month window is FROM SETTLEMENT, not from discovery of the defect. A defect discovered 31 months later is outside the reclamation window.

Rights and Warrants

Special close-out rules apply to fails involving rights and warrants because of their short exercise windows. Close-outs must be timed before expiration of the exercise period, or the value evaporates.

If a fail involves rights or warrants, the standard buy-in is not the only route. The receiving firm may issue a Liability Notice as an alternative, or, if it does not, buy in without prior notice on the expiration date. A buy-in completed after the exercise window has lost the underlying value, so the close-out is tied to the expiration date.

Exam Tip: Gotchas

• Rights and warrants close-outs must be TIMED before expiration of the exercise period. A late close-out destroys the value.
• Expiring rights and warrants have a carve-out from the ordinary buy-in notice. The receiving firm may issue a Liability Notice as an alternative to the standard close-out, or, if it does not, buy in without prior notice on the expiration date. The 12:00 p.m. ET, two-business-day notice is not the only route.

COD / DVP-RVP Orders

A COD (Collect on Delivery) or POD (Payment on Delivery) order is a customer order where settlement happens through the customer's agent or custodian (DVP/RVP arrangement). The COD/POD settlement rule sets the procedural requirements.

Marking the Order

Each order accepted under a COD or POD arrangement must be marked as such. The marking flags the operational pathway; orders are routed to the customer's custodian for settlement, not to the firm's own customer account.

Before Accepting a COD/DVP Order

Before accepting a COD/DVP order, the member must obtain from the customer:

• Name and address of the customer's agent/custodian
• Customer's account number at that agent
• Institution number (where appropriate)

Without this information, the firm cannot route the trade for settlement; the rule requires the data up front.

Confirmation Delivery

The member must deliver to the customer a confirmation (or all relevant data customarily on a confirmation) by end of the trade date. This is a same-day requirement, parallel to the same-day affirmation framework.

Same-Day Affirmation Linkage

The member must have entered into the written agreement OR maintained written policies and procedures required by the same-day-allocation rule for the resulting transaction. COD/DVP orders are precisely the post-trade-allocation case that the same-day affirmation framework was designed to support.

Exam Tip: Gotchas

• Before accepting a COD/DVP order, the firm must collect agent/custodian name, address, account number, and institution number. Pre-acceptance, not post.
• COD/DVP confirmations must be delivered to the customer by END OF TRADE DATE. Not T+1, not "promptly"; trade date.
• The COD/POD settlement rule ties to the same-day affirmation framework: the firm must have either a written agreement or written supervisory procedures (WSPs) for same-day allocation. The two rules operate together.

How the Close-Out Pieces Connect

The close-out framework operates as a structured framework for resolving fails:

The principal supervising operations must:

• Verify WSPs cover each close-out type
• Verify the firm has operational capability to issue notices on time
• Verify recordkeeping captures every close-out (buy-in notice, execution, defaulting party billing)
• Verify the COD/DVP pre-acceptance and confirmation requirements are met for every COD/DVP order

Exam Tip: Gotchas

• Buy-in = buyer closes out seller's failure to deliver. Sell-out = seller closes out buyer's failure to accept. Map "who failed" to "who closes out."
• Buy-in notice deadline: 12:00 p.m. ET, TWO business days before execution. Sell-out: NO advance notice. Different rules for different directions before execution; after execution, both the buy-in and the sell-out require a same-day notice by 6:00 p.m. ET.
• Reclamation windows: 15 days minor, 45 days foreign, 30 MONTHS lost/stolen/confiscated. Three distinct windows; the exam tests this.
• COD/DVP orders require pre-acceptance customer/agent info, end-of-trade-date confirmation, and same-day-allocation procedures. All three pieces.

What Should You Check on Exam Day?

• Can you state the buy-in notice deadline, 12:00 p.m. ET, at least two business days before execution, and who bears the risk?
• Do you know a sell-out requires no advance notice, but the seller must notify the buyer by 6:00 p.m. ET the same day?
• Can you state the three reclamation windows: 15 days for minor irregularities, 45 days foreign, 30 months lost or stolen?
• Do you know what information a firm must collect before accepting a COD or DVP order, and when confirmation is due?