What Is Failure To Deliver (FTD)?
Let me explain what failure to deliver, or FTD, really means. It's a situation in trading where one party in a contract—whether that's for shares, futures, options, or forward contracts—simply doesn't fulfill their end of the deal. This happens when you, as the buyer with a long position, don't have the cash ready to pay and take delivery at settlement.
On the flip side, if you're the seller with a short position, FTD occurs because you don't own the underlying assets needed at settlement, so you can't make the delivery.
Key Takeaways
- Failure to deliver (FTD) means not meeting your trading obligations.
- For buyers, it's about not having the cash; for sellers, it's not having the goods.
- These obligations are settled at the trade settlement date.
- FTD can happen in derivatives contracts or with naked short selling.
Understanding Failure To Deliver
Every time you make a trade, both parties are contractually bound to transfer cash or assets by the settlement date. If that doesn't happen, one side has failed to deliver. You should know that FTD can also stem from technical glitches in the clearinghouse's settlement process.
This is especially important when we're talking about naked short selling. In naked short selling, someone agrees to sell a stock they don't own, and neither do they or their broker have access to it. Most average traders can't pull this off, but a proprietary trader risking their own capital at a firm might. Even though it's illegal, some might try it betting a company will fail, hoping to profit without consequences.
When this leads to a pending FTD, it creates 'phantom shares' in the market, which can dilute the stock's price. Essentially, the buyer ends up with shares on paper that don't actually exist.
Chain Reactions of Failure to Deliver Events
Several issues arise when trades fail to settle due to FTD, and this affects both equity and derivative markets.
In forward contracts, if the short position fails to deliver, it creates big problems for the long position, especially since these often involve large volumes critical to business operations.
Think about it in business terms: a seller might pre-sell something they don't have yet, maybe because of a delayed supplier shipment. When delivery time comes, they can't fulfill it, leading to canceled orders, lost sales, useless inventory, and supplier disputes. The buyer is left without what they need, and the seller might have to buy the goods elsewhere at higher prices.
This same logic applies to financial and commodity instruments—FTD in one link of the chain can ripple out to affect many others down the line.
During the 2008 financial crisis, FTD cases spiked. It was like check kiting, where sellers didn't deliver securities on time, delaying to buy them cheaper later.
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