Definition
A “Fail to Deliver” (FTD) situation arises when a broker-dealer who has sold securities fails to deliver them to the purchasing broker-dealer on the settlement date. This can occur for several reasons, but it is usually because the broker-dealer did not receive the securities from its selling customer in time. An FTD may have significant ramifications in the financial markets, including trading restrictions, financial penalties, and market disruptions.
Examples
Late Transfer of Shares: For example, if Broker A sells 100 shares of Company XYZ to Broker B but fails to ensure that the shares are transferred from the seller’s account to Broker A in time for settlement, Broker A will fail to deliver the shares to Broker B.
Margin Call Situations: Another example could be a trader who sells securities they own on margin. If their broker fails to obtain the securities sold, perhaps due to a margin call or other financial impediment, this results in a fail to deliver.
Frequently Asked Questions (FAQs)
What happens if there is a fail to deliver?
In the event of a fail to deliver, the situation must be rectified quickly, usually by acquiring the required securities and delivering them to the buyer. Financial penalties might apply, and the broker-dealer might face regulatory scrutiny.
How is a fail to deliver different from a fail to receive?
A fail to receive (FTR) is the counterpart situation where a broker-dealer does not receive the securities they were expecting from a counterparty. Both FTD and FTR can create settlement issues in the market.
Why do fail to deliver situations occur?
Fail to deliver situations can arise due to clerical errors, insufficient securities in the seller’s account, or operational inefficiencies in the transferring process. Other causes include financial distress of the selling party or regulatory interventions.
How are fail to deliver situations resolved?
These situations are typically resolved by purchasing the securities in the open market and delivering them to fulfill the contract or executing a “buy-in” where the purchasing broker-dealer forcibly buys the securities to cover the short.
Related Terms
Fail to Receive
A fail to receive happens when a broker-dealer does not receive the securities that were supposed to be delivered to them. This situation often involves the same set of securities as a fail to deliver.
Buy-In
A buy-in is a procedure used by the purchasing broker-dealer to obtain securities in the open market when the selling broker-dealer has failed to deliver on time.
Settlement Date
The settlement date is the date on which the transfer of cash or securities must be completed between parties.
Margin Call
A margin call occurs when a broker demands additional funds or securities from a client to cover potential losses.
Online References
Suggested Books for Further Studies
- “Securities Operations: A Guide to Trade and Position Management” by Michael Simmons and George Handjinicolaou
- “Settlement and Custody: The Core Functions and Responsibilities” by Gianluca Corradi and Sara Gazzano
- “Market Risk Management for Hedge Funds: Foundations of the Style and Implications for Performance” by Francois Ducķevoy
Fundamentals of Fail to Deliver: Financial Markets Basics Quiz
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