Fail to Receive: An Overview

An in-depth look at the situation where the broker-dealer on the buy side of a contract has not received delivery of securities from the broker-dealer on the sell side.

Fail to Receive (FTR) is a situation in the securities market where the broker-dealer on the buy side of a contract does not receive the securities from the broker-dealer on the sell side. This situation can significantly impact the settlement process and the broader financial market.

Causes of Fail to Receive

• Administrative Errors: Mismanagement of trade documents and incorrect settlement instructions.
• Short Selling: Selling securities that the seller does not own, causing delays.
• Market Conditions: High volatility and liquidity issues could lead to delivery delays.
• Regulatory Constraints: Global regulations might affect the timing and completion of securities transfer.

Implications of Fail to Receive

• Settlement Delays: Delays in settlement can cause a ripple effect impacting other transactions.
• Credit Risk: Increased credit risk for the broker-dealer involved.
• Market Confidence: A high number of FTR incidents can erode market confidence.
• Financial Penalties: Some jurisdictions may impose penalties for frequent failures to settle trades timely.

Associative Term: Fail to Deliver

When a broker-dealer on the sell side has not delivered the security as agreed, it leads to a counterpart term known as Fail to Deliver (FTD). Both FTR and FTD typically occur simultaneously.

Regulatory Considerations

Various global regulatory bodies have implemented measures to reduce FTR occurrences. For instance, the U.S. Securities and Exchange Commission (SEC) has implemented SEC Rule 204, which compels broker-dealers to take steps to close out FTD and FTR positions.

Examples

Example 1: Administrative Error

Broker-dealer A purchases 100 shares of Company XYZ but fails to receive them due to an administrative error at broker-dealer B’s end. Broker-dealer A does not make payment until receiving the correct delivery.

Example 2: Short Selling

Broker-dealer C sells 200 shares of Company ABC that it does not own. Upon the settlement date, broker-dealer C fails to deliver, causing broker-dealer D, the buyer, to fail to receive.

FAQs

What are the consequences of a Fail to Receive?

The buyer refuses to make payment unless the securities are delivered, which can lead to settlement delays, increased credit risk, and possible financial penalties.

How can FTRs be mitigated?

FTRs can be mitigated through proper trade management, regulatory compliance, avoiding excessive short selling, and improving communication between broker-dealers.

Related Terms

• Settlement Date: The agreed date by which the buyer must pay for the securities and the seller must deliver them.
• Securities Lending: A practice that can sometimes inadvertently contribute to FTR if not managed properly.
• Clearing House: A financial institution that ensures the smooth transfer of securities and funds between trade participants.

Summary

Fail to Receive is a crucial concept in trading that affects the settlement process. The implications include delays, financial risk, and regulatory issues. Proper management and adherence to regulatory guidelines are key to mitigating the risks associated with a Fail to Receive situation.

References

1. U.S. Securities and Exchange Commission. (2023). “Regulation SHO.” SEC.
2. Financial Industry Regulatory Authority. (2023). “Trade Settlement Guidelines.” FINRA.

By understanding Fail to Receive, participants in the securities market can ensure smoother transaction processes and enhanced market stability.