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Failure to Deliver (Fails to Deliver)

Moneyzine Editor
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Moneyzine Editor
1 mins
January 17th, 2024
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Failure to Deliver (Fails to Deliver)

Definition

The term failure to deliver refers to a transaction involving the exchange of assets, wherein one party does not deliver their asset. Failure to deliver typically refers to the inability of one party to provide securities to their broker.

Explanation

When two or more parties agree to trade assets, the agreement will typically include a settlement date. The transaction can only be settled if all parties deliver the assets included in the agreement. If any of the parties does not provide the asset outlined in the agreement by the settlement date, there is a failure to deliver.

The most common failures to deliver scenarios involve a buyer with insufficient funds (cash) to finance a transaction, or a trader shorting an asset and not owning the underlying securities. These scenarios can occur in both the derivatives market as well as the stock market. For example, when shorting a stock, a trader is entering into an agreement to sell shares at a given price, and on a pre-established date. With a naked short, the trader enters into such an agreement; however, they do not own the underlying asset.

Under the Securities and Exchange Commission Regulation SHO, all stocks purchased and sold must be settled in three days or less. If the buyer does not deliver cash, or the seller stock, a failure to deliver occurs.

Related Terms

  • The term Regulation SHO refers to legislation that updated and strengthened the laws concerning short sales of securities. Regulation SHO established trading standards intended to lower the opportunity for traders to engage in unethical naked short selling practices.
    Moneyzine Editor
    Moneyzine Editor
    September 21st, 2023
  • Aged Fail
    The term aged fail refers to a transaction between two brokers that remains open 30 days or more after the settlement date. Aged fails can occur when a party that agreed to sell securities does not deliver them to their broker.
    Moneyzine Editor
    Moneyzine Editor
    January 4th, 2024

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