Final answer:
REG. SHO mandates that a security must be located or have reasonable grounds to be locatable before being sold short, to prevent short selling and reduce fails to deliver, ensuring settlement within two business days.
Step-by-step explanation:
REG. SHO requires a security to be located before it is sold short. This means that a broker must have borrowed the shares, or have reasonable grounds to believe that the shares can be borrowed, so they can be delivered to the buyer within the standard settlement period, which is typically two business days (T+2) after the trade date (T).
This regulation is part of the SEC's efforts to reduce failures to deliver and to prevent short selling. It is important to ensure that there's actual possession or control of the security, or a reasonable expectation thereof when making short sales, thereby discouraging fraudulent trading practices that can lead to market instability.
REG. SHO is a regulation established by the U.S. Securities and Exchange Commission (SEC) to prevent abusive short selling practices. When short selling a security, the seller is required to deliver the borrowed shares of the security to the buyer before the sale can be completed. This is known as the 'locate requirement.' The purpose of this requirement is to ensure that the shares are available to be delivered, preventing short selling and potential market manipulation.