Quick Answer
A buy-in closes a seller's uncompleted contract. The standard path needs written notice before execution, but a cash or guaranteed-delivery contract allows execution without notice. A customer buyer's path follows a clearing corporation's failure under a buy-in notice. A Regulation SHO close-out is purchase-only for deemed-owned delivery-restriction fails.
The two regimes can involve a securities purchase, but they assign different obligations to different parties.
How Do the Two Fail Regimes Differ?
| Procedure or regime | Actor and trigger | Required timing and action |
|---|---|---|
| Cash or guaranteed-delivery buy-in | A contract is made for cash or made or amended for guaranteed delivery on a specified date. | The buyer may execute without notice during normal trading hours on the day after delivery was due. The buyer must still send notice of the executed buy-in. |
| Customer-buyer procedure | The buyer is a customer other than another member, and a clearing corporation fails to deliver under a buy-in notice. | The contract must be closed by a cash purchase in the best available market or, at the buyer's option, by a purchase for guaranteed delivery. The purchase is for the account and liability of the party in default. |
| Regulation SHO close-out | A registered clearing-agency participant has an equity-security fail to deliver at the clearing agency from a long or short sale. | The participant must use the method required for that fail category. General and documented long-sale categories permit purchase or borrowing. So do fails from bona fide market-making activities by a registered market maker, options market maker, or another market maker required to quote over the counter. A deemed-owned delivery-restriction fail requires a purchase. |
A buy-in does not define a firm's Regulation SHO deadline. Regulation SHO does not replace the buyer and seller roles in the buy-in procedure.
Exam Tip: Gotchas
- Scope and execution conditions limit a buy-in. If the seller requests proof, the buyer cannot execute without delivering it before the effective date. If the seller gives timely notice that at least one trading unit is in its physical possession and will be promptly delivered, the buyer cannot execute for those securities.
- Special timing paths remain separate. Cash or guaranteed-delivery contracts allow a next-day buy-in without notice.
- A customer buyer has a required purchase path. If a clearing corporation fails to deliver under a buy-in notice, the contract must close through a cash purchase in the best available market or a purchase for guaranteed delivery.
- Regulation SHO imposes the participant's own mandatory obligation. Identify a registered clearing-agency participant and a fail at that clearing agency before applying its deadlines.
When May a Buyer Execute a Buy-In?
For a contract within scope, the standard timing and execution conditions apply as follows.
The buyer may close the seller's uncompleted contract no sooner than the third business day following the date delivery was due. This is the earliest permitted execution date, not a deadline that forces the buyer to act.
Before the proposed buy-in, the buyer delivers written notice to the seller.
Cash and guaranteed-delivery contracts follow a special timing path. A contract made for cash, or made or amended for guaranteed delivery on a specified date, may be bought in without notice during normal trading hours on the day after delivery was due. The buyer must still send notice after execution.
The procedure also covers transactions in which the buyer is a customer other than another member. If a clearing corporation fails to deliver under a buy-in notice, the contract must close through a cash purchase in the best available market or, at the buyer's option, a purchase for guaranteed delivery. The purchase is for the account and liability of the party in default.
Exam Tip: Gotchas
- The third business day is a standard earliest execution date. The buyer may act no sooner than the third business day following the date delivery was due under the standard procedure.
- Acceptance, proof, and physical possession control execution. If the seller requests proof of the fail obligation, the buyer cannot execute to the extent it fails to deliver that proof before the effective date. If the seller gives timely notice that at least one trading unit is in its physical possession and will be promptly delivered, the buyer cannot execute for those securities.
- The standard procedure requires written notice before the proposed buy-in. The buyer may not execute without first delivering that notice to the seller.
- Cash and guaranteed-delivery contracts use special timing. These contracts may be bought in without notice during normal trading hours on the day after delivery was due. Executed buy-in notice remains required.
- A customer buyer has a separate purchase requirement. If a clearing corporation fails to deliver under a buy-in notice, the contract must close through a cash purchase in the best available market or a purchase for guaranteed delivery.
When Must the Regulation SHO Fail Be Closed Out?
First identify why the participant has the equity-security fail. The source of the fail determines the deadline and whether borrowing can satisfy the obligation.
| Fail category | Close-out deadline | Required method |
|---|---|---|
| All other covered long- or short-sale fails | No later than the beginning of regular trading hours on the settlement day following the settlement date. | Purchase or borrow securities of like kind and quantity. |
Exam Tip: Gotchas
- The deadline depends on the source of the fail. Use the settlement day following the settlement date for other covered fails. Use the third consecutive settlement day following the settlement date for documented long-sale fails and fails attributable to bona fide market-making activities by a registered market maker, options market maker, or another market maker required to quote in the over-the-counter market.
- The deemed-owned delivery-restriction clock is different. A fail from a sale of a deemed-owned security that the seller intends to deliver as soon as all restrictions end is due on the 35th consecutive calendar day following the trade date. This is not a blanket deadline for every restricted security.
- The deemed-owned delivery-restriction fail requires a purchase. General and documented long-sale fails permit purchase or borrowing. So do fails attributable to bona fide market-making activities by a registered market maker, options market maker, or another market maker required to quote in the over-the-counter market. Every method uses securities of like kind and quantity.
What Should You Check on Exam Day?
- For a contract within scope, use no sooner than the third business day following the date delivery was due as the standard earliest execution date, not a mandatory deadline.
- For cash or guaranteed-delivery contracts, permit a buy-in without notice during normal trading hours on the day after delivery was due. Send notice after execution.
- Under Regulation SHO, use the beginning of regular trading hours on the settlement day following the settlement date for all other covered fails.
- Use the third consecutive settlement day following the settlement date for documented long-sale fails and fails attributable to bona fide market-making by a registered market maker, options market maker, or another market maker required to quote in the over-the-counter market.
- Use the 35th consecutive calendar day following the trade date only for a sale of a deemed-owned security that the seller intends to deliver as soon as all delivery restrictions end. Require a purchase of like kind and quantity.