Endogenous small interfering RNAs (siRNAs) contribute to heterochromatin formation at repetitive DNA loci, but the control mechanisms that prevent spurious silencing of additional loci are unclear. Using Schizosaccharomyces pombe, Yu et al. identified pervasive bidirectional transcription across various heterochromatic and euchromatic loci that can potentially generate double-stranded RNAs as precursors of siRNAs. However, the heterochromatic loci were selectively colocalized with Dicer 1 at the nuclear periphery to favour the processing of heterochromatic transcripts into siRNAs. Furthermore, signals in the 3′ untranslated regions of euchromatic genes were found to inhibit siRNA-mediated heterochromatin formation.