A trader buys 10,000 call contracts at $0.40 in the morning and sells all 10,000 at $0.55 before the close. The premium that changed hands is $400,000 on the way in and $550,000 on the way out, $950,000 in total. That is 4.75 percent of the $20 million daily dollar level in the SEC’s large trader rule. Read through the rule’s other daily measure, the same round trip is 2,000,000 shares, which is exactly the level. One day of trading sits far below the threshold and precisely on it, depending on which half of one sentence is applied. The split comes from three documents: Rule 13h-1 itself, a 2015 Commission exemptive order that changed how equity options are valued in dollars, and a footnote inside that order that left the share count where it was. The trader in the example becomes a large trader that day, and the reason sits in the footnote. This journal followed a similar unit switch when it mapped a hundred shares into a notional size bucket . One Threshold, Four Tests...
Counting Thirty-Five Days Two Ways: Rule 204 Measures Calendar, FINRA 4320 Measures Settlement
A desk unwinding a restricted-stock sale hears the same figure quoted out of two different rulebooks. SEC Rule 204 allows thirty-five days to close out a fail to deliver arising from the sale of a security the seller is deemed to own. FINRA Rule 4320 allows thirty-five days to close out a fail in a non-reporting threshold security sold under Rule 144. Both texts print the same number. Neither counts the same unit. Rule 204 counts calendar days and starts at trade date. FINRA Rule 4320 counts settlement days without naming day one. Push one trade through both and the deadlines land 15 calendar days apart. What follows tracks that figure through both texts and through the settlement-date definition that decides which binds.
Two Rulebooks, One Figure
Start with the broader of the two. The close-out requirement in Regulation SHO sits at eCFR, 17 CFR 242.204 (Regulation SHO close-out requirement). Its third branch covers the restricted-stock case. The fail must arise, in the text's words, “resulting from a sale of a security that a person is deemed to own pursuant to § 242.200 and that such person intends to deliver as soon as all restrictions on delivery have been removed”. For that fail, the clearing-agency participant must close out “by no later than the begining [sic] of regular trading hours on the thirty-fifth consecutive calendar day following the trade date for the transaction”.
Two features of that sentence do the work. The unit is the calendar day, so weekends and exchange holidays consume the allowance rather than pausing it. The anchor is the trade date. Every other deadline in the section runs off the settlement date, which is why this one behaves differently under any change to the settlement cycle.
Now the narrower of the two. FINRA Rule 4320 (Short Sale Delivery Requirements) covers securities that Regulation SHO's threshold-security machinery leaves out. Its general deadline reads: where a participant “has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive settlement days, the participant shall immediately thereafter close out the fail to deliver position by purchasing securities of like kind and quantity”. Then comes the proviso that holds the second thirty-five. Where a participant “has a fail to deliver position at a registered clearing agency for thirty-five consecutive settlement days in a non-reporting threshold security that was sold pursuant to SEC Rule 144, the participant shall immediately thereafter close out the fail to deliver position in the security by purchasing securities of like kind and quantity”.
Same figure, different unit. A settlement day is a business day on which deliveries and payments can move through a clearing agency, so weekends and holidays do not consume the allowance; they extend it. The two thirty-fives are not variants of one deadline but two deadlines sharing a numeral, and they bite on the same kind of trade: a resale of restricted stock waiting on a legend removal.
Rule 204 Carries Four Deadlines
Before comparing the two thirty-fives, count the branches inside Rule 204. The opening clause of paragraph (a) sets the default: the participant must close out “by no later than the beginning of regular trading hours on the settlement day following the settlement date”. That sentence ends in a proviso, and the proviso holds three alternatives.
The first alternative is the long-sale fail, and it carries an evidentiary condition rather than a free pass. It applies where “the participant can demonstrate on its books and records that such fail to deliver position resulted from a long sale”. Where that showing is made, the deadline moves to the third consecutive settlement day following the settlement date. The second alternative is the deemed-owned branch already quoted, with its calendar-day count from trade date. The third covers fails “attributable to bona fide market making activities by a registered market maker, options market maker, or other market maker obligated to quote in the over-the-counter market”, and it lands on the same third consecutive settlement day as the long-sale branch.
So the section holds four deadlines: a default plus three alternatives. Three of the four run off the settlement date. One runs off the trade date. Reading the section as a single thirty-five-day allowance drops the branch that governs the trade in front of the desk.
The Anchor Is the Contract's Settlement Date
Three of the four deadlines are keyed to a term the section defines for itself. Paragraph (g)(1) states that “the term settlement date shall mean the business day on which delivery of a security and payment of money is to be made through the facilities of a registered clearing agency in connection with the sale of a security”. That is a per-contract fact, not a market-wide constant. Whatever settlement day the contract provides for is the day the three settlement-date branches count from.
The default settlement day comes from eCFR, 17 CFR 240.15c6-1 (settlement cycle), and that section has four paragraphs worth counting. Paragraph (a) reaches securities other than exempted, government and municipal securities, commercial paper, bankers' acceptances and commercial bills, and prohibits a contract “that provides for payment of funds and delivery of securities later than the first business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the transaction”. Note the closing clause: the one-business-day standard is a default that the parties can displace at the moment of trading.
Paragraph (b) lifts paragraph (a) off three categories: unlisted and unquoted limited partnership interests, security-based swaps, and contracts the Commission exempts by order. Paragraph (c) carves out late-priced firm commitment offerings, and it substitutes a different number rather than removing the limit. For securities priced after 4:30 p.m. Eastern Time and sold by an issuer to an underwriter in a registered firm commitment offering, the proviso requires that a broker or dealer “shall not effect or enter into a contract for the purchase or sale of such securities that provides for payment of funds and delivery of securities later than the second business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the transaction”. Paragraph (d) then deems the parties to a firm commitment offering to have expressly agreed to the managing underwriter's date.
Put the two sections together. A trade in the paragraph (c) bucket settles one business day later, so each of the three settlement-date branches in Rule 204 shifts one business day later for that trade. The deemed-owned branch holds still, because 35 calendar days from the trade date is indifferent to where the contract puts settlement. A close-out calendar hard-coded to a market-wide convention rather than to each contract's settlement date will mis-date the first three branches.
Why Three Clocks Moved and One Stayed
Take a concrete trade. Trade date Monday, November 2, 2026, in an NMS equity, with Thanksgiving on Thursday, November 26, 2026 as the only exchange holiday inside the window.
Under the current one-business-day standard the settlement date is Tuesday, November 3. The default branch then requires close-out at the opening of regular trading hours on the settlement day following that date, which is Wednesday, November 4. The long-sale and market-making branches require close-out on the third consecutive settlement day following the settlement date, which is Friday, November 6. The deemed-owned branch requires close-out by the opening of regular trading hours on the 35th consecutive calendar day following the trade date, which is Monday, December 7.
Now run the same trade under the two-business-day standard that preceded the current one. The settlement date becomes Wednesday, November 4. The default close-out becomes Thursday, November 5. The third consecutive settlement day becomes Monday, November 9. The deemed-owned deadline stays Monday, December 7, because nothing in its sentence refers to the settlement date at all.
Three deadlines moved one settlement day earlier when the cycle shortened. In calendar terms the movement was uneven: November 5 to November 4 is a one-day shift, while November 9 to November 6 is a three-day shift, because a weekend sits inside the second interval. The same single-settlement-day change reads as one day or three days depending on where the week falls. The fourth deadline did not move. The SEC Office of Investor Education and Advocacy, Key Points About Regulation SHO page states the same split, giving a firm up to “35 calendar days following the trade date to close out” the deemed-owned fail while describing the other deadlines by reference to the settlement date.
One more detail belongs here, because it can make the whole calendar moot. Paragraph (e) relieves a broker or dealer of paragraphs (a) and (b) where it buys or borrows the shares and, among other conditions, where “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”. That window is one day wide and it moved when the cycle shortened. Treating the close-out date as the operative deadline loses the cheaper remedy before the counting starts.
Thirty-Five Settlement Days Runs Fifteen Days Longer
Return to the pair of thirty-fives with the same November 2 trade. The Rule 204 branch lands Monday, December 7. 35 calendar days is exactly five weeks, so the deadline falls on the same weekday as the trade. In business-day terms the run is 24 days, because 25 weekdays minus Thanksgiving leaves 24.
The FINRA Rule 4320 branch counts settlement days instead. Reading the count as starting on the settlement date on which the fail first exists, the 35th settlement day is Tuesday, December 22, 2026. That is 50 calendar days after the trade date, and 15 calendar days after the Rule 204 deadline. The holiday is the reason the gap is 15 days rather than 14: a weekday the calendar-day count simply absorbed is a day the settlement-day count refuses to spend.
The gap matters for risk, not only paperwork. Rule 204 paragraph (b) carries the teeth. Where a fail is not closed out in accordance with paragraph (a), the participant and the brokers clearing through it may not accept or effect short sales in that security “without first borrowing the security, or entering into a bona fide arrangement to borrow the security, until the participant closes out the fail to deliver position by purchasing securities of like kind and quantity and that purchase has cleared and settled at a registered clearing agency”. That reaches firms with no part in the original fail, subject to a carve-out for a broker that timely certifies either that it has no settlement-date fail in the security or that it complies with paragraph (e). Mis-dating by 15 days mis-dates a pre-borrow regime, not a filing.
Which Universe the Security Sits In
The last step is deciding which thirty-five applies. The SEC staff page states the boundary: “Under Regulation SHO, threshold securities only include issuers registered or required to file reports with the Commission (‘reporting companies’).” The same page describes a threshold security as one carrying an aggregate fail to deliver position for five consecutive settlement days that totals 10,000 shares or more and equals at least 0.5 percent of the issuer's total shares outstanding.
FINRA Rule 4320 covers what that definition leaves outside. Its subject is the non-reporting threshold security, and its Rule 144 proviso addresses the same economic event as Rule 204(a)(2): a resale of restricted stock where delivery waits on removal of a transfer restriction. Reporting status does not switch Rule 204 off: paragraph (a) reaches a fail in “any equity security”. What that status decides is whether the Reg SHO threshold machinery reaches the security, and paragraph (e)(2) of the FINRA rule demands the fail tests and list inclusion besides. Both counts can run on one fail, and the earlier date binds.
Concrete Framework
Four questions settle which date goes on the blotter.
First, does the security qualify as a non-reporting threshold security under paragraph (e)(2)? If it does, the FINRA count runs alongside Rule 204 rather than instead of it.
Second, which branch of Rule 204 fits the fail? Write down the evidence the branch requires, not the label the desk prefers. The long-sale branch needs books and records demonstrating a long sale; the market-making branch needs a fail attributable to bona fide market making by a market maker obligated to quote. A branch claimed without its evidentiary predicate collapses back to the default next-settlement-day deadline, the earliest of the four.
Third, what settlement date does the contract provide for? Read it off the contract, as paragraph (g)(1) directs, not off a market convention. For an ordinary trade that is the first business day after the trade; for a late-priced firm commitment offering the second business day is permitted, and the three settlement-date branches move with it.
Fourth, is the paragraph (e) window still open? A bona fide purchase or borrow executed after trade date and no later than the end of regular trading hours on settlement date, covering the whole fail, with a net flat or net long position on the books that day, takes the desk out of paragraphs (a) and (b). It closes before any of the four deadlines arrives, so check it first.
The weakest link is the start of the FINRA count, which is why the December 22 date is presented as a reading rather than a fact. The transcribed text of FINRA Rule 4320 paragraph (a) and its proviso fixes the length of the count in consecutive settlement days while leaving the first day of the count to be supplied from elsewhere in the rule and from FINRA guidance. This piece treated the settlement date on which the fail first exists as settlement day one. If FINRA's convention instead begins on the first settlement day after the fail arises, December 22 moves one settlement day later and the gap widens by a day. The direction of the conclusion holds either way; the exact date does not.
Three further items were not confirmed at the publisher inside this piece's research budget. Paragraphs (c), (d) and (f) of Rule 204 were read in summary rather than transcribed, so any interaction between the allocation mechanism in paragraph (d) and the deemed-owned branch sits outside what has been verified. FINRA Rule 4320 paragraphs (b) through (e) were read only for the definition of settlement day and the existence of the pre-borrow restriction, so the certification and allocation mechanics there may not mirror Rule 204 paragraph (b). And the holiday calendar for late 2026 was taken as containing Thanksgiving on November 26 and no other closure between November 2 and December 22; each unscheduled closure inside that window extends the settlement-day count by a day and leaves the calendar-day count alone.
Finally, the arithmetic assumes a position that stays open rather than one that partially delivers. A partial delivery changes the size of the fail without resetting the clock on the remainder, and the texts quoted here speak to the position rather than to the trade. Records that track trades rather than positions will apply these day counts to the wrong object, and that error survives every correct reading of the rule.
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