CBOE reminds market participants - TPH's and Clearing TPH's of certain aspects of Regulation SHO in response to questions received by the Exchange.  The Division of Regulatory Services reminds all clearing firms of their obligation under Rule 204 of Reg. SHO to immediately close-out fail to deliver positions by borrowing or purchasing securities of like kind and quantity by no later than the applicable deadline. The quantity of securities borrowed or purchased by the beginning of regular trading hours on the applicable close-out date must be for the same quantity (or more) and of the same security as the fail to deliver position at the registered clearing agency. A participant may not offset the amount of its fail to deliver position with shares that the participant receives or will receive during the applicable close-out date.2 Further, the amount of securities that must be borrowed or purchased to close out the fail to deliver position may not be reduced by an incremental borrow or net purchase, effected on the first, second and/or third settlement days following the trade date. However, a participant may qualify for pre-fail credit in lieu of becoming subject to the close-out requirement by purchasing or borrowing on any single day after trade date, but by no later than the end of regular trading hours on settlement date for the transaction, a quantity of securities sufficient to cover the entire amount of that broker-dealer’s fail to deliver position at a registered clearing agency in accordance with all of the requirements  set forth under Rule 204(e), the prefail credit provision. Specifically, Rule 204(e) provides that a broker or dealer shall not be subject to the requirements of paragraph (a) or (b) of Rule 204 if the broker or dealer purchases or borrows the securities, and if: (1) the purchase or borrow is bona-fide; (2) the purchase or borrow is executed after trade date but by no later than the end of regular trading hours on settlement date for the transaction; (3) the purchase or borrow is of a quantity of securities sufficient to cover the entire amount of that broker’s or dealer’s fail to deliver position at a registered clearing agency in that security; and (4) the broker or dealer can demonstrate that it has a net flat or net long position on its books and records on the day of the purchase or borrow. This reminder also applies to other broker-dealers in that, if a clearing firm reasonably allocates, pursuant to Rule 204(d), a portion of a fail to deliver position at a registered clearing agency to another registered broker-dealer for which it clears trades or from which it receives trades for settlement, based on such broker-dealer’s short position, the requirement to close-out such fail to deliver position at a registered clearing agency is the responsibility of such broker-dealer that was allocated the fail to deliver position and not the clearing firm. Further, the information provided in this circular is, in all cases, subject to the “anti-sham” provisions of Rule 204(f) and Rule 203(b)(3)(vii) of Regulation SHO, pursuant to which a clearing firm, or a broker-dealer to whom a fail to deliver position has been allocated, is not deemed to have fulfilled its close out obligation under Regulation SHO where the clearing firm or brokerdealer enters into an arrangement with another person to purchase or borrow securities and the clearing firm or broker-dealer knows, or has reason to know, that the other person will not deliver securities in settlement of the purchase or borrow. This circular is not intended to, and does not provide any relief from or exception to the “anti-sham” provisions of Regulation SHO. Moreover, where a clearing firm, or a broker-dealer to whom a fail to deliver position has been allocated, purchases or borrows securities on the applicable close-out date and pairs that activity with entering into one or more short-term option positions that can be used to re-establish or otherwise extend the participant’s fail position, and for which the participant is unable to demonstrate a legitimate economic purpose, the participant will not be deemed to have satisfied the close-out requirement. For further details, go to:  [CBOE RegCirc 12-22, 1/30/12].