Definition
In finance, a failure to deliver is the inability of a party to deliver a tradable asset, or meet a contractual obligation. A typical example is the failure to deliver shares as part of a short transaction. The Securities and Exchange Commission publishes “fails-to-deliver” data regarding transactions in the United States.
Failure To Deliver
What is ‘Failure To Deliver’
An outcome in a transaction where one of the counterparties in the transaction fails to meet their respective obligations. When failure to deliver occurs, either the party with the long position does not have enough money to pay for the transaction, or the party in the short position does not own the underlying assets that are to be delivered. Failure to deliver can occur in both equity and derivatives markets.
Explaining ‘Failure To Deliver’
Whenever a trade is made, both parties in the transaction will have to transfer the cash and assets before the settlement date. Subsequently, if the transaction is not settled, one side of the transaction has failed to deliver. Failure to deliver also can occur if there is a technical problem in the settlement process carried out by the respective clearing house.
For forward contracts, a party with the short position’s failure to deliver can cause significant problems for the party with the long position, because these contracts often involve significant volumes of commodities that are pertinent to long position’s business operations.
Failure to deliver is also important when discussing naked short selling. When naked short selling occurs an individual agrees to sell a stock that they neither own nor have borrowed. Subsequently, the failure to deliver creates what are called “phantom shares” in the market which may dilute the price of the underlying stock.
Further Reading
- Value destruction and financial reporting decisions – www.tandfonline.com [PDF]
- Medicines for pediatric oncology: can we overcome the failure to deliver? – www.tandfonline.com [PDF]
- Fails-to-deliver, short selling, and market quality – www.sciencedirect.com [PDF]
- Modernizing the Australian education workplace: A case of failure to deliver for teachers of young disadvantaged adolescents – www.tandfonline.com [PDF]
- Failure is an option: Impediments to short selling and options prices – academic.oup.com [PDF]
- A Failure to Deliver: Municipal Poverty and the Provision of Public Services in Imperial São Paulo, Brazil 1822–1889 – journals.sagepub.com [PDF]
- State failure, economic failure, and predatory organized crime: A comparative analysis – journals.sagepub.com [PDF]
