FINRA Proposes Changes to Short Interest Reporting Requirements

FINRA proposed rule changes to (i) expand the positions counted as short interest, (ii) require that short interest reporting be done weekly rather than bimonthly, and (iii) require clearing firms to submit monthly reports of their daily allocations of fail-to-deliver positions to correspondent firms.

The proposal would expand FINRA Rule 4560 ("Short-Interest Reporting") to require members to report as short interest any position in a customer account resulting from a securities loan obligation tied to a customer's borrowing of a security from a domestic or foreign affiliate of the member. FINRA said that such "arranged financing" positions currently fall outside Rule 4560 because they are not themselves the result of a short sale, but FINRA said they are economically equivalent to short interest because the borrower remains obligated to purchase shares to satisfy the loan.

The proposal would change the way members report to a weekly schedule rather than bimonthly, and the reporting turnaround would drop from two business days to one. Public dissemination of aggregate short interest would shift from seven business days after the reporting settlement date to five. When a security's symbol is no longer in effect on a reporting settlement date, new Supplementary Material .01 would require members to report gross short positions as of the last settlement date for which the symbol existed. FINRA clarified that the proposed rule covers OTC Equity Securities and exchange-listed securities, thereby aligning the rule text with current system limits without changing member practice.

Separately, the proposal would adopt new FINRA Rule 4321 ("Allocations of Fail to Deliver Positions") requiring member clearing firms to submit a monthly report of their daily allocations of fail-to-deliver positions to correspondent firms under SEC Regulation SHO Rule 204 ("Close Out Requirements"). Under Rule 204, a clearing firm may reasonably allocate a fail-to-deliver position to a correspondent firm based on that firm's activity; if it does, the correspondent firm - not the clearing firm - must comply with Rule 204, including the pre-borrow requirement. FINRA said it is currently unaware of which member bears responsibility for a given close-out obligation when a clearing firm has allocated a fail, and must request that information case-by-case.

Under proposed Rule 4321, clearing firms would report the security name and symbol, the correspondent firm identity, the number of shares allocated, the settlement date on which the allocated fail developed, the allocation date, and other information specified by FINRA. Reports would be due 10 business days after the end of each month, would be used solely for regulatory purposes, and would not be publicly disseminated.