Relative to maintaining a margin account with you through the facilities of your correspondent clearing agent (the “Clearing Agent”) whereupon the Clearing Agent may extend credit to the undersigned, the undersigned understands and concurs with the provisions of this Agreement.
THE UNDERSIGNED CLEARLY UNDERSTANDS THAT, NOTWITHSTANDING ANY GENERAL POLICY TO GIVE NOTICE OF A MAINTENANCE MARGIN DEFICIENCY, THERE IS NO OBLIGATION TO REQUEST ADDITIONAL MARGIN IN THE EVENT THE UNDERSIGNED’S ACCOUNT FALLS BELOW THE MINIMUM MARGIN REQUIREMENTS. MORE IMPORTANTLY, THERE MAY WELL BE CIRCUMSTANCES WHERE THE CLEARING AGENT MAY LIQUIDATE SECURITIES AND OTHER PROPERTY IN THE ACCOUNT OF THE UNDERSIGNED WITHOUT NOTICE TO THE UNDERSIGNED IN ORDER TO SATISFY THE CLEARING AGENT’S MAINTENANCE REQUIREMENTS.
A short sale is a margin transaction subject to the same risks of using margin along with additional risks. When you execute a short sale, you sell a security that you do not own. The Clearing Agent borrows the security on your behalf for delivery to the purchaser. The price of covering your short position may be higher than the price at which you sold short; therefore, you may sustain a loss on that transaction. You are liable for commissions and other costs of short sale transactions and for any debit balance that remains after the Clearing Agent covers or closes out a short position. When the Clearing Agent borrows securities for you in any account, it is obligated to return the securities to the lender on demand. If you are unable to cover a short position (either through delivery of the security or through the Clearing Agent’s “buying in” your position) in enough time for the Clearing Agent to deliver the security to its lender, you agree to pay the Clearing Agent for the losses it sustains as a result of the failure to deliver. Short selling may involve the Clearing Agent borrowing the securities at a negative interest rate and certain minimums on low priced securities. The negative interest rate can vary daily, sometimes significantly, and you agree to these charges without notification.
In some circumstances, the Clearing Agent may incur additional charges from outside lenders in connection with borrowing the security(ies) on your behalf. These unallocated borrow costs are computed separately from the interest charges on short transactions. The Clearing Agent will allocate these additional costs to your account until the original borrow is closed out. Below is a description of additional costs that may be charges to you by the Clearing Agent in connection with any short sale executed on your account:
1) Continuous Net Settlement (“CNS”) Fail to Receive: Most U.S. equity trades are cleared and settled through the Continuous Net Settlement (“CNS”) system. If, for any reason, after purchasing shares to cover your short sale, the trade does not settle or the Clearing Agent does not receive the shares to close out the original borrow, the borrow still remains open until the Clearing Agent is able to receive the shares to deliver to the lender and close out the original borrow. If this occurs, the Clearing Agent will allocate the additional borrow cost to your account until the original borrow is closed out.
2) Buy-To-Cover/Broker Fail: When you purchase to cover a short position, it can occasionally be dropped from the standard CNS process and results in a “Broker Fail to Receive.” It could take several days to receive shares from a contra-broker, especially for hard-to-borrow securities. If this occurs, the original borrow remains open, and the Clearing Agent will allocate the additional borrow cost to your account until the original borrow is closed out.
3) Borrow Return: In the securities finance market, once shares are borrowed, they can be returned by 11:00 AM Eastern Time. This borrow return cutoff time could cause additional cost to the Clearing Agent when shares are received after the return cutoff time from the counterparty. The Clearing Agent is charged borrow costs for one extra day as the shares are not returned until the next morning. If this occurs, the Clearing Agent will allocate the extra day of borrow cost to your account.
4) Prime Broker Settlement: Prime Brokers act as intermediaries between short sellers and counterparties. When Prime Broker trades are not booked and matched correctly with information on record with the executing broker, the trade cannot be matched and settlement fails or is delayed. It is therefore critical that you provide accurate settlement instructions that match those of the executing broker. If the Clearing Agent is charged additional borrow costs in connection with the Prime Broker’s inability or delayed ability to book and match a trade, the Clearing Agent will allocate the additional borrow cost to your account until the original borrow is closed out.
5) Free Receive of Deposit/Withdrawal at Custodian (“DWAC”): There are instances when the original borrow is not closed out for a day because shares are delivered either free-of-payment or through DWAC. These shares can be used to close out a borrow the next day. If the Clearing Agent is charged additional borrow costs in connection with Free Receive or DWAC settlements, the Clearing Agent will allocate the additional borrow cost to your account until the borrow is closed out.
6) Round Lot: A security is always borrowed in round lots while short positions may not always be available in round lots. The Clearing Agent is charged for additional borrowed shares of the round lots beyond your short position. In such event, the Clearing Agent will allocate the additional borrow cost to your account.
BY SIGNING THE ACCOUNT AGREEMENT, TAXPAYER CERTIFICATION AND BENEFICIAL OWNERSHIP ELECTION FORMS (THE “AGREEMENT”) YOU AGREE, AND BY ESTABLISHING AN ACCOUNT FOR YOU, WE AND OUR CLEARING FIRM AGREE THAT ALL CONTROVERSIES WHICH MAY ARISE BETWEEN YOU AND OUR FIRM AND/OR OUR CLEARING AGENT (OR ANY OF OUR/THEIR OFFICERS, EMPLOYEES OR AGENTS OR ASSIGNEES) CONCERNING ANY TRANSACTION OR THE CONSTRUCTION, PERFORMANCE OR BREACH OF THIS OR ANY OTHER AGREEMENT BETWEEN YOU AND OUR FIRM AND/OR OUR CLEARING AGENT, SHALL BE DETERMINED BY ARBITRATION IN ACCORDANCE WITH THE RULES, THEN IN EFFECT, OF THE FINANCIAL INDUSTRY REGULATORY AUTHORITY, THE NEW YORK STOCK EXCHANGE OR ANY OTHER EXCHANGE OR FORUM OF WHICH OUR FIRM AND/OR OUR CLEARING AGENT IS A MEMBER, AS YOU MAY ELECT. IF YOU DO NOT MAKE SUCH ELECTION BY REGISTERED MAIL SENT TO OUR FIRM AT ITS MAIN OFFICE WITHIN TEN (10) DAYS AFTER THE RECEIPT OF NOTIFICATION FROM OUR FIRM AND/OR OUR CLEARING AGENT REQUESTING SUCH AN ELECTION, THEN YOU AUTHORIZE US TO MAKE SUCH ELECTION ON YOUR BEHALF.
FURTHERMORE, YOU AGREE AND ACKNOWLEDGE, AND OUR FIRM AND OUR CLEARING AGENT AGREE AND ACKNOWLEDGE, THAT NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION, NOR SEEK TO ENFORCE ANY PREDISPUTE ARBITRATION AGREEMENT AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION; OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS NOT OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (I) THE CLASS CERTIFICATION IS DENIED; OR (II) THE CLASS IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.