What changed
Previously, notional short sales from HFT were allowed only if the security was held under AFS/HTM. Now, banks can also short a security from HFT even when they hold a long position in the same security within HFT, subject to covering the short without using those HFT holdings for delivery.
What it means for you
This gives banks more flexibility to manage odd lots, client auction allotments, or securities placed as margin without being forced to sell physical holdings. It allows expressing a negative view on a security while retaining existing long positions, but requires careful tracking to avoid using HFT inventory for delivery.
What you must do
- Update internal HFT short sale policies to reflect the new notional short sale allowance.
- Ensure systems can flag simultaneous long and short positions in the same security within HFT.
- Train treasury teams on covering short positions via outright purchase or reverse repo, not existing HFT holdings.
- Review odd lot and margin securities for potential short sale opportunities under the new rules.
Who it affects
Banks with HFT portfolios, Primary Dealers handling client auction bids, Treasury desks managing G-Sec positions
Can we use securities already in HFT to deliver against a notional short sale?
No, the circular explicitly prohibits using securities already held in the HFT portfolio for delivery against the short sale. You must cover the short via outright purchase or reverse repo.
Does this circular replace the earlier December 2011 guidelines?
No, it only amends them. All other terms and conditions from the December 28, 2011 circular and the January 31, 2007 circular remain unchanged.