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Office of Economic Analysis Provides Data on Fails to Deliver

The SEC's Office of Economic Analysis has issued a memorandum summarizing the failures to deliver shares on trade settlement dates since the adoption of Regulation SHO. Regulation SHO, which governs the short sales of securities, became effective on January 3, 2005. The data was provided by the National Securities Clearing Corp. and covers all failures to deliver 10,000 shares or more.

OEA reported that the average daily aggregate fails to deliver declined by 34% after the effective date of Regulation SHO. The average daily number of securities with aggregate fails of at least 10,000 shares declined by 6.5% and the average daily number of fails to deliver positions declined by 15.3%. The average age of a fail position declined by 13.4%.

The average daily number of threshold securities, those with a substantial amount of fails to deliver, declined by 38.2% from the period of April 1, 2004 --December 31, 2004, to the post-rule period of January 1, 2005 --May 31, 2006. A threshold security is defined as an equity security of an issuer that is registered pursuant to 1934 Act section 12 or for which the issuer is required to file reports pursuant to 1934 Act section 15(d) for which there is an aggregate fail to deliver position for five consecutive days at a registered clearing agency of 10,000 shares or more and that is equal to at least .5% of the outstanding issue.

The SEC has proposed amendments to Regulation SHO to further reduce the number of persistent fails to deliver in certain equity securities by eliminating the grandfather provision and narrowing the options market maker exception. The grandfathered status applies to fail positions occurring before January 3, 2005 and those that were established on or after January 3, 2005 but prior to the security appearing on the threshold securities list which is disseminated to members by self-regulatory organizations. The comment period on the proposed amendments closes September 19, 2006.