The US rule that a broker must identify a source of borrowable shares before accepting a short sale order.
Rule 203(b)(1) of Regulation SHO requires a broker-dealer to have borrowed the security, arranged to borrow it, or have reasonable grounds to believe it can be borrowed in time for delivery, before effecting a short sale. It is the mechanism that keeps most US short selling covered, and it is why hard-to-borrow stocks carry high borrowing fees.
Related terms
Naked short selling: Selling shares short without first borrowing them or arranging to borrow them; restricted in the US by Regulation SHO's locate requirement and banned outright in the EU and UK.
Regulation SHO: The SEC's rulebook for short sales in the US: the locate requirement, close-out obligations for fails to deliver, and the threshold securities lists.
Educational only; nothing here is investment advice. Every term: glossary.