What Is Failure To Deliver (FTD)?
Key takeaways
– Failure to deliver (FTD) happens when one party to a trade does not exchange the required cash or securities by the settlement date.
– FTDs can arise from buyers lacking funds, sellers (including short sellers) not possessing or borrowing the underlying asset, or technical/processing problems at intermediaries.
– FTDs can create “phantom” or unsettled positions, amplify price movements, and propagate risk through markets or supply chains.
– Regulators and market infrastructure (clearinghouses, buy‑in/close‑out rules, borrowing markets) provide tools to limit and remediate FTDs, but risks still exist—especially with naked short selling.
– Investors, brokers, and corporates can take concrete steps to detect, avoid, and respond to FTDs.
What an FTD is (plain language)
When two parties execute a trade they contractually agree that, by the settlement date, one side will deliver securities (or other assets) and the other side will deliver payment. An FTD exists when one side fails to make that delivery on time. Practically this can mean:
– A buyer doesn’t have sufficient cleared funds to pay the seller at settlement, or
– A seller (including someone who has sold short) can’t deliver the securities because they don’t own them and haven’t borrowed them, or
– A technical, operational, or clearinghouse error interrupts settlement.
Why FTDs matter
– Market integrity: Unsettled positions can imply that more shares are “owned on paper” than actually exist (so‑called phantom shares), potentially distorting supply/demand signals.
– Price impact: Persistent fails may depress or distort prices, particularly in small, illiquid, or heavily shorted stocks.
– Counterparty and operational risk: One participant’s failure can force others to scramble to buy or borrow assets, creating liquidity stress and losses.
– Business effects: In commodity or forward markets, a failure to deliver physical goods can disrupt operations for buyers who rely on timely delivery.
Common causes of FTDs
– Naked short selling: Selling shares without borrowing or having reasonable assurance of being able to borrow the shares for settlement.
– Insufficient funds: Buyer’s payment not available or not properly settled by settlement day.
– Missed or late shipments in supply chains (physical goods), leading sellers to be unable to provide contracted items.
– Operational/technical failures at brokers, custodians, or clearinghouses.
– Complex trades across multiple venues and intermediaries where matching and allocation fail.
How FTDs create chain reactions
– Borrowing scramble: A failed seller may try to borrow shares in the open market to make delivery; if many participants do this simultaneously, the price can spike.
– Knock‑on fails: An FTD at one node in the settlement chain can propagate downstream, causing additional fails and liquidity pressure.
– Business interruption: In forward/commodity contracts, buyers who need the goods for production may be disrupted, leading to replacement purchases at higher prices or lost production.
Regulatory and market safeguards (overview)
– Settlement cycles: Shorter settlement cycles (e.g., T+1 in many U.S. equity markets as of 2024) reduce the window for failures to occur.
– Clearinghouses/central counterparties (CCPs): CCPs novate trades and manage counterparty credit and settlement risk through margining and default procedures.
– Borrowing/locate requirements: Brokers generally must locate shares before permitting short sales; Regulation SHO in the U.S. addresses locate and close‑out requirements for fails in threshold securities.
– Buy‑in/close‑out procedures: Exchanges and rules allow forced buy‑ins or close‑outs to eliminate persistent fails.
– Reporting and surveillance: Regulators collect and publish fail‑to‑deliver data and monitor for abusive naked shorting or market manipulation.
How to detect FTDs
– Broker notifications: Your broker statements or trade confirmations may indicate unsettled trades or fails.
– Public data: Regulators such as the U.S. Securities and Exchange Commission publish aggregate fails‑to‑deliver statistics for equities (monthly).
– Market behavior: Unexpected price moves, unusual short interest changes, or liquidity stress in a security can be indirect signals.
Practical steps: what different participants should do
For retail investors
– Use settled funds for transactions when you must hold through settlement (or understand margin/settlement implications).
– Prefer reputable custodial brokers with transparent settlement practices.
– Check trade confirmations and account statements promptly; raise settlement problems with your broker immediately.
– Report suspected abusive practices (e.g., naked shorting) to your broker and, if unresolved, to the regulator (e.g., SEC or FINRA in the U.S.).
– Consider limit orders and avoid trading around critical corporate events (dividends, corporate actions) if you’re worried about settlement risk.
For short sellers and brokers
– Comply with locate requirements: ensure you have located or can borrow shares before shorting.
– Monitor borrow availability and fees; when borrow becomes scarce, reduce exposure.
– Use proper margin and risk controls to avoid forced liquidations.
– If a fail occurs, coordinate quickly with counterparties or the lending desk to borrow and deliver, or effect a buy‑in where required by rules.
For institutional investors and clearing firms
– Maintain robust settlement operations, reconciliation, and exception‑handling procedures.
– Stress‑test for systemic settlement shocks and concentration in borrow markets.
– Engage with central counterparties and custodians to ensure adequate margin, pre‑funding, and contingency plans.
For corporate issuers and businesses (physical goods)
– Avoid “pre‑selling” inventory you don’t have unless supply is secured; include strong supplier remediation clauses.
– Keep contingency suppliers or inventory buffers where timely delivery is critical.
– If a supplier’s late delivery causes an FTD, document losses and pursue contractual remedies; consider market replacement purchases to mitigate immediate damage.
Remediation steps if you’re affected by an FTD
– Contact your broker or counterparty immediately to understand cause and expected cure.
– Ask your broker for documentation showing efforts to borrow or settle the position, and whether a buy‑in is planned.
– For retail investors who paid but didn’t receive securities, request a delivery or refund and escalate to regulatory authorities (e.g., SEC or FINRA) if unresolved.
– For businesses, document direct losses and mitigation costs; seek replacement sourcing and pursue contractual remedies.
Regulatory remedies and enforcement
Regulators have tools to reduce and punish abusive practices (e.g., naked shorting). Rules vary across jurisdictions but commonly include:
– Close‑out or buy‑in requirements for persistent fails, especially in “threshold” securities.
– Surveillance and sanctions against entities that recklessly create or exploit FTDs.
– Public reporting of fail statistics to enhance transparency and monitoring.
Historical context
FTDs increased during the 2008 financial crisis when settlement strains and liquidity pressures caused many sellers to delay deliveries—comparable to how check‑kiting allows temporary overdrafts. This history highlights how settlement stress can align with market stress to amplify problems.
Practical checklist: reduce your exposure to FTD risk
For investors:
– Confirm broker’s settlement and custodial practices before opening an account.
– Use settled cash for purchases when required or understand margin rules.
– Review trade confirmations and settlement status; escalate any anomalies.
– Limit speculative naked short activity; rely on regulated borrow markets.
For brokers and trading desks:
– Enforce strict locate and borrow policies; track hard‑to‑borrow inventories.
– Automate fails monitoring and enforce timely close‑outs.
– Coordinate with clearinghouses and counterparties for rapid resolution.
For corporates and commodity buyers:
– Avoid overcommitting inventory; include supplier penalty and replacement clauses.
– Maintain visibility into supplier timelines and logistics to anticipate delivery risk.
Where to learn more (primary references)
– Investopedia — Failure to Deliver (FTD): https://www.investopedia.com/terms/f/failuretodeliver.asp
– U.S. Securities and Exchange Commission (SEC) — information on settlement, Regulation SHO, and fails‑to‑deliver data (see SEC website for current pages and monthly statistics)
– Depository Trust & Clearing Corporation (DTCC) — overview of clearing and settlement processes
– Financial Industry Regulatory Authority (FINRA) — rules and guidance for broker conduct and trade settlement
Bottom line
FTDs are the operational breakdowns that occur when one side of a trade fails to deliver the contracted asset or payment by settlement. While market infrastructure and rules mitigate many of these issues, FTDs still create short‑term market distortions and, in extreme cases, wider systemic or business disruptions. Awareness, good operational controls, and prompt remediation—whether you’re an investor, broker, or corporate buyer—are the best practical defenses.
If you want, I can:
– Summarize the applicable U.S. regulation (Regulation SHO and related SEC rules) and the current settlement cycle (T+1) with exact citation links; or
– Provide step‑by‑step template language to use when contacting your broker or a regulator about a suspected fail. Which would you prefer?