Definition
Failure to Deliver (FTD) is a financial term that refers to the inability of one party in a trading contract—be it related to shares, futures, options, or forward contracts—to fulfill its delivery obligations upon settlement. This failure can happen for various reasons: buyers might not have cash available, while sellers (especially those short-selling) might not own the underlying assets intended for delivery.
The concept of FTD primarily emphasizes:
- The seller’s obligations when they do not possess the necessary assets.
- The buyer’s obligations when they lack the necessary funds.
The judgment day for these obligations comes at trade settlement, where deals should be wrapped up with a neat little bow—or not, as the case may be.
FTD vs Non-FTD Comparison Table
| Aspect | Failure to Deliver (FTD) | Non-Failure to Deliver |
|---|---|---|
| Definition | Inability to meet delivery obligations | Fulfillment of delivery obligations |
| Party Affecting | Could be the buyer or seller | Typically involves a willing seller and buyer |
| Context | Can occur in stocks, derivatives, etc. | Usually in orderly trades without hiccups |
| Impact | Potential financial and legal penalties | Smoother transaction process |
| Example | Seller fails to deliver shares shorted | Buyer receives purchased shares on time |
Examples
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Example of Buyer FTD: Bob entered into a contract to purchase 100 shares of XYZ Inc. However, due to unforeseen circumstances, he runs out of cash by settlement time and, voila, is slapped with an FTD.
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Example of Seller FTD: Jane shorts 100 shares of ABC Corp without owning any shares. At settlement, she realizes she’s in the red (and not in a fun way) because she can’t deliver the shares she promised.
Related Terms
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Derivatives: Contracts whose values depend on underlying assets. They can often lead to FTD if obligations aren’t met.
- Humorous Insight: Derivatives are the drama queens of finance—always dependent on someone else!
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Short Selling: The practice of selling securities you do not own, with the intention of buying them back later at a lower price.
- Fun Fact: Short selling is like borrowing someone’s lunch money, eating it, and hoping they don’t notice before you can pay them back!
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Settlement: The process of transferring ownership of securities and cash.
- Wise Quotation: “Settlement is the peace treaty of trade!” – (Anonymous trader)
Frequently Asked Questions
Q1: What causes Failure to Deliver?
A1: It typically arises due to insufficient cash or missing assets at the time of settlement.
Q2: What are the repercussions of FTD?
A2: Parties can incur financial penalties, regulatory scrutiny, and damage to their trading reputation.
Q3: Can FTD happen in all types of securities?
A3: Yes, FTD can occur in stocks, options, futures, and other derivatives.
Fun Fact, Insight and Historical Anecdote
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Fun Fact: On average, it’s estimated that the likelihood of a FTD can range up to 10% in more volatile segments of the market—be careful with those spicy stocks! 🌶️
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Historical Insight: The rise in FTD cases during major market downturns has led to increased scrutiny and regulations like the SEC’s Regulation SHO established in 2005, meant to curb naked short selling.
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Humorous Quotation: “Trading without capital is like bringing a rubber knife to a gunfight.” – (Traders’ Manual of the Underbelly)
Online Resources & Books for Further Study
- Investopedia: Failure to Deliver
- “A Beginner’s Guide to Stocks” by Matthew R. Kratter
- “Options Trading Crash Course” by Frank J. Fabozzi
Test Your Knowledge: Failure to Deliver Quiz!
Remember, in trading as in life—it’s always better to have your ducks in a row than to miss the train! 🦆🚉
