A “Fail to Deliver” (FTD) occurs in financial markets when the broker-dealer representing the seller in a securities transaction does not deliver the requisite securities to the broker-dealer representing the buyer within the specified settlement period. This discrepancy often arises when the selling customer fails to provide the necessary securities for delivery.
Causes of Fail to Deliver
Broker Actions
- Lack of Securities: The most common cause is the failure of the selling customer to procure the securities.
- Administrative Errors: Mistakes in paperwork or electronic systems can also result in FTDs.
Market Conditions
- High Demand: During periods of high demand, certain securities may become scarce, resulting in a failure to deliver.
- Short Selling: FTDs frequently occur in short-selling scenarios where the securities have not been borrowed before sale.
Implications of Fail to Deliver
A Fail to Deliver can have several implications:
- Settlement Delays: The failure to deliver securities can result in delays in the settlement of the trade.
- Market Manipulation: Persistent FTDs can be indicative of and contribute to market manipulation schemes such as naked short selling.
- Regulatory Actions: Regulatory bodies may investigate and impose penalties for repeated FTD occurrences.
Examples of Fail to Deliver
Case Study
Suppose an investor sells shares of Company X but doesn’t own those shares at the time of the sale (short selling). The investor expects to obtain those shares before the settlement date but fails to do so. As a result, the broker-dealer cannot deliver the shares to the buyer’s broker-dealer, thus leading to a Fail to Deliver.
Historical Context
Fail to Deliver became a notable issue during the financial crisis of 2008, where significant levels of FTDs were linked to market instability and manipulation, prompting calls for stricter regulations.
Related Terms
- Fail to Receive: A situation mirroring FTD, where the broker-dealer on the buy side of the contract does not receive the securities as scheduled.
- Short Selling: Selling securities that the seller does not own, often leading to scenarios causing FTDs.
- Naked Short Selling: Selling short without first borrowing the underlying security, significantly increasing the risk of FTD.
FAQs
What happens if a fail to deliver occurs?
How do regulations address fail to deliver?
Can fail to deliver be avoided?
Summary
Fail to Deliver is a critical concept in the trading realm, reflecting the instance where the selling party in a securities transaction fails to deliver the securities to the buying party. These situations can arise due to several factors, including short selling and market conditions, and have substantial implications, including delays in settlement and regulatory scrutiny. Understanding the causes, implications, and regulatory framework surrounding FTD is essential for market participants to navigate and mitigate its impact effectively.
References
- Securities Exchange Act of 1934
- Regulation SHO, U.S. Securities and Exchange Commission (SEC)
- “The Impact of Fail to Deliver on Market Stability”, Journal of Financial Markets
By understanding and mitigating Fail to Deliver instances, traders and broker-dealers can uphold the integrity of the financial markets and ensure smoother settlement processes.
This comprehensive definition and overview should provide readers with a clear understanding of the concept, its importance, and the context within which it operates.
