Overview
Fail to Receive is a term used in the financial markets to describe a condition where the broker-dealer on the buy side of a contract has not received the delivery of securities from the broker-dealer on the sell side. This non-receipt means that the buyer will not make payment for the securities until they are actually received.
Examples
- Equity Markets: An investor buys 100 shares of Company X through Broker-Dealer A. However, Broker-Dealer B, which is supposed to deliver these shares, fails to do so within the stipulated settlement period. This results in a fail to receive for Broker-Dealer A.
- Bond Markets: A fund manager purchases $1 million worth of corporate bonds through their broker-dealer. The bonds are not delivered by the counterparty, leading to a fail to receive situation.
Frequently Asked Questions
Q: What are the common causes of a fail to receive?
A: Fails to receive can be caused by administrative errors, discrepancies in the trading records, short sales where the securities were not borrowed in time, or other logistical errors.
Q: How does a fail to receive affect the settlement process?
A: A fail to receive disrupts the settlement process, delaying the finalization of the trade. This can lead to further trading inefficiencies and potential financial penalties.
Q: What can be done to resolve a fail to receive?
A: To resolve a fail to receive, the involved broker-dealers must rectify the discrepancies, complete the necessary administrative adjustments, and ensure the securities are delivered as soon as possible.
Q: Is there a financial penalty for a broker-dealer involved in a fail to receive?
A: Yes, broker-dealers may face financial penalties, interest charges, or other sanctions from exchanges or regulatory bodies if they are responsible for repeated or unresolved fails to receive.
Q: Can a fail to receive occur in electronic trading?
A: Yes, despite automated systems, fails to receive can still occur due to various technical glitches, administrative errors, or discrepancies in data matching.
- Fail to Deliver: A scenario where the broker-dealer on the sell side fails to deliver the securities to the broker-dealer on the buy side within the stipulated settlement period.
- Settlement Period: The time between the trade date and the final settlement date, during which securities and cash must be exchanged.
- Counterparty Risk: The risk associated with the possibility that one of the parties involved in a trade will default on their contractual obligations.
Online References
Suggested Books for Further Studies
- “Securities Operations: A Guide to Trade and Position Management” by Michael Simmons
- “The Fundamentals of Municipal Bonds” by The Bond Market Association
- “Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions” by Joshua Rosenbaum and Joshua Pearl
Fundamentals of Fail to Receive: Financial Markets Basics Quiz
### What is a "fail to receive" in the context of financial markets?
- [ ] It means the buyer failed to pay for the purchased securities.
- [x] It refers to the broker-dealer on the buy side not receiving securities from the broker-dealer on the sell side.
- [ ] It means the trade was cancelled due to market fluctuation.
- [ ] It means the buyer received defective securities.
> **Explanation:** A "fail to receive" occurs when the broker-dealer on the buy side of a transaction does not receive the securities from the seller's broker-dealer, leading them to withhold payment.
### What could cause a fail to receive?
- [ ] The buyer changing their mind about the purchase.
- [x] Administrative errors or short sales without borrowing.
- [ ] The stock splitting suddenly.
- [ ] Global economic crisis.
> **Explanation:** Administrative errors, discrepancies in trading records, short sales where securities were not borrowed in time, or other logistical errors can cause a fail to receive.
### Who imposes sanctions for unresolved fail to receive instances?
- [ ] The Internal Revenue Service (IRS)
- [ ] Local banks
- [x] Exchanges or regulatory bodies
- [ ] The companies whose securities are being traded
> **Explanation:** Exchanges or regulatory bodies may impose financial penalties, interest charges, or other sanctions on broker-dealers responsible for unresolved fails to receive.
### Can fails to receive occur in fully automated electronic trading systems?
- [x] Yes, although less common, they can still occur.
- [ ] No, electronic trading systems eliminate all fails.
- [ ] Only manual trading processes face fails to receive.
- [ ] It depends on the type of security traded.
> **Explanation:** Fails to receive can still happen in electronic trading due to technical glitches, administrative errors, or data matching discrepancies.
### What is the effect of a fail to receive on the settlement process?
- [ ] It expediates the process.
- [ ] It voids the entire trade.
- [ ] It has no effect on the settlement process.
- [x] It disrupts and delays the settlement process.
> **Explanation:** A fail to receive disrupts and delays the settlement process since the exchange of securities and payment cannot be completed.
### How can a fail to receive be resolved?
- [ ] Cancel the entire trade.
- [x] Rectify discrepancies and complete administrative adjustments.
- [ ] File a complaint with the SEC.
- [ ] Issue a public apology.
> **Explanation:** To resolve a fail to receive, involved broker-dealers must rectify discrepancies, complete necessary administrative adjustments, and ensure securities delivery.
### What risk is the buyer exposed to in a fail to receive situation?
- [x] Counterparty risk
- [ ] Inflation risk
- [ ] Interest rate risk
- [ ] Forex risk
> **Explanation:** The buyer is exposed to counterparty risk, which is the risk that the opposing party in the trade will default on their obligations.
### What is a settlement period?
- [ ] The time between the conception of a trade idea and its execution.
- [ ] The immediate exchange of assets post-trade.
- [ ] The evaluation time by regulatory bodies before a trade is finalized.
- [x] The time between the trade date and the final settlement date.
> **Explanation:** The settlement period is the time between the trade date and the final settlement date, in which securities and cash must be exchanged.
### Are broker-dealers obliged to pay for securities in a fail to receive situation?
- [ ] Yes, payment is mandatory regardless of delivery.
- [x] No, payment is withheld until the securities are received.
- [ ] Payment depends on the sector of trade.
- [ ] Payment is made in advance.
> **Explanation:** Broker-dealers on the buy side withhold payment for securities until they are actually received in a fail to receive scenario.
### Which term is related and often occurs concurrently with "fail to receive"?
- [ ] Short squeeze
- [ ] Dividend cut
- [x] Fail to deliver
- [ ] Yield inversion
> **Explanation:** "Fail to deliver" is a related term that often occurs concurrently with "fail to receive," as it refers to the situation where the sell-side broker-dealer fails to deliver the securities.
Thank you for exploring the intricacies of “Fail to Receive” in financial markets. Continue to expand your knowledge for greater success in finance!
