Failure to Deliver
A failure to deliver (FTD) occurs when one party to a securities transaction does not deliver the required securities or cash by the settlement date, creating an open obligation that must be resolved under rules established by the SEC and the broker-dealer community.
U.S. equity transactions settle on a T+1 basis — that is, the transfer of securities and payment between buyer and seller must be completed one business day after the trade date, per SEC Rule 15c6-1. When the selling party fails to deliver the securities to the buyer by that date, an FTD is created. The buyer has paid or committed to pay for securities that have not arrived, creating a financial and operational risk for the clearinghouse and the counterparty.
FTDs arise from several sources. Short sellers who cannot source a locate in time, clerical or operational errors in the settlement process, corporate actions that create delivery complications, and in some cases deliberate or negligent failure to obtain securities before selling can all result in FTDs. Securities that experience persistent, elevated FTDs may be placed on the Regulation SHO threshold securities list, published by exchanges and accessible publicly, which signals that the security has had aggregate fails exceeding 0.5 percent of total shares outstanding for five consecutive settlement days.
NSCC (National Securities Clearing Corporation), a subsidiary of DTCC, serves as the central counterparty for most U.S. equity trades and manages FTD situations within the clearinghouse framework. When a participant fails to deliver, NSCC may use its stock borrow program to lend shares to the receiving party on a temporary basis, curing the fail while the delivering party resolves its delivery obligation. Persistent participants with elevated FTDs may face enhanced margin requirements, restrictions on new short sales, or mandatory buy-in procedures.
For investors, FTD data (published weekly by the SEC) is sometimes used as a supplementary indicator in analyzing heavily shorted stocks, as elevated and rising FTDs may signal difficulty in borrowing shares. However, interpreting FTD data requires care — not all FTDs relate to short selling, and the presence of FTDs does not by itself indicate regulatory violation or manipulative activity. Market participants should consult official SEC and exchange resources to understand FTD reporting nuances.