UMIR 3.3 (Short Sale Locate): Definition + Case Study

UMIR 3.3 (Short Sale Locate)

Pre-borrow requirement: a dealer must have reasonable grounds to believe a short-sold security can be borrowed before entering the order.

Definition

UMIR 3.3 prohibits entering a short sale order unless the dealer has a reasonable expectation that the security can be borrowed for delivery on settlement date. In practice, this means completing a locate - a confirmation from a securities lender (prime broker, custodian, or securities lending desk) that the shares are available to borrow. The locate must be obtained before the short order is entered, not after execution. Failure to locate is a UMIR violation regardless of whether settlement ultimately fails. Hard-to-borrow securities require formal locate confirmation; easy-to-borrow securities on a pre-approved list may qualify under standing arrangements.

Source

UMIR 3.3; CIRO guidance on short selling

Where this shows up on the CIRE

Outcome 7.5

Test yourself

Two real CIRE-bank questions on this exact outcome. Click to reveal the answer and the rule citation.

1
A client is comparing two bonds: Bond A has a modified duration of 8 years and Bond B has a modified duration of 3 years. Both are investment-grade corporate bonds with the same credit rating. If interest rates rise by 100 basis points, which bond is expected to experience the larger price decline?
Outcome 7.5 · click for answer
A.Bond A, because duration measures price sensitivity to interest rate changes; a bond with higher duration experiences a larger percentage price decline for a given increase in rates.Correct
B.Bond B, because shorter-duration bonds have higher convexity.
C.Neither bond declines because investment-grade ratings guarantee price stability.
D.Both bonds decline by the same percentage because they have the same credit rating.
Modified duration measures the approximate percentage price change in a bond for a 1% (100 basis point) parallel shift in interest rates. Bond A with a modified duration of 8 would fall approximately 8% in price for a 100 bps rate rise, while Bond B with a duration of 3 would fall approximately 3%. Credit rating determines the risk of default (credit risk) but does not affect price sensitivity to interest rate movements (interest rate risk, measured by duration). Higher duration implies longer maturity or lower coupon or both.
2
Under National Instrument 81-101, a mutual fund must provide a Fund Facts document to a retail investor purchasing the fund. When must the Fund Facts be delivered?
Outcome 7.5 · click for answer
A.Annually on the fund's fiscal year-end date.
B.Before the investor is bound by the purchase; that is, before or at the point of sale; unless the investor waives pre-sale delivery in writing.Correct
C.Within 10 business days after the purchase is confirmed.
D.Only upon written request from the investor.
Under NI 81-101, the Fund Facts must be delivered to the investor before or at the point of sale; that is, before the investor is bound by the purchase. This pre-sale delivery obligation replaced the simplified prospectus delivery requirement. The investor may waive pre-sale delivery and opt for delivery as soon as practicable after the trade, but the default is pre-sale. Annual delivery and post-purchase delivery within 10 business days are not the prescribed timing.

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