Fail

Failure to Deliver (FTD): Definition, Causes, and Effects

Failure to deliver (FTD) occurs when one party to a trade or contract does not fulfill the obligation to transfer cash or the agreed asset by settlement. This can happen in equity trades, futures, forwards, and other contracts. Causes include insufficient funds, lack of the underlying asset, or technical problems in the clearing and settlement process.

Key takeaways

• FTD happens when a buyer or seller fails to meet settlement obligations.
• Buyers fail to deliver when they lack the cash; sellers fail when they lack the asset.
• FTDs can create “phantom shares” that distort market supply and price.
• Naked short selling — selling shares one does not own and cannot borrow — is an illegal practice that often leads to FTDs.
• FTDs can trigger chain reactions that harm counterparties and downstream participants.

How FTDs occur

• Settlement mismatch: Trades require both payment and delivery by a specified date. If either side cannot deliver, an FTD is recorded.
• Operational or technical failures: Clearinghouse or settlement-system problems can prevent timely delivery.
• Short-selling issues: When a seller cannot borrow the securities they sold short, they may fail to deliver at settlement.

Phantom shares and naked short selling

When sellers fail to deliver shares they were supposed to provide, the market can show more “owned” shares on paper than actually exist. These phantom shares can dilute price discovery and misrepresent true supply. Naked short selling — selling shares without borrowing them or confirming availability — increases the risk of FTD and is typically prohibited by market rules.

Ripple effects across markets

FTDs can have broad consequences:
* Counterparty risk: The party expecting delivery (long position or buyer) may face operational or business disruptions.
* Supply-chain and commercial parallels: In goods markets, a seller who pre-sold unavailable inventory may lose the sale, incur extra costs buying replacement goods at higher prices, or damage customer relationships.
* Market distortion: Persistent FTDs can interfere with accurate pricing, liquidity, and investor confidence.
* Systemic spikes: During periods of stress (for example, market turmoil), FTDs have historically increased as participants delay delivery to attempt cheaper replenishment.

Remedies and mitigation

Common responses to FTDs include:
* Buying the missing asset in the open market to fulfill delivery (which can raise costs).
* Contractual remedies such as cancellation, penalties, or buy-in procedures specified by exchanges or clearinghouses.
* Operational improvements in settlement systems and regulatory measures aimed at preventing abusive naked short selling.

Conclusion

Failure to deliver is a settlement breakdown with operational, legal, and market-quality implications. Preventing and correcting FTDs relies on robust settlement infrastructure, clear contract terms, and enforcement of rules against abusive short-selling practices.