Fail
Candlefocus EditorFailure to deliver (FTD) is a common problem in the financial markets. It occurs when a trader does not have the necessary cash or goods available to fulfill their obligations for a trade. In the case of buyers, FTD refers to the inability to pay for a transaction, while for sellers it is when goods are not provided or delivered. FTD can arise from various causes, from market disruptions to credit risks, and can have severe consequences if it is not addressed adequately.
When a FTD is detected, the affected exchange or broker must take action to settle the trade. This can involve the delivery of cash or goods to the counterparty and the assessment of penalties to the party that failed to deliver, such as a fee or a forced sale of the goods. The severity of the penalties depends on the regulatory framework of the related financial market.
The risk of FTD is especially prevalent in derivatives markets and when trading short naked, as they both involve taking short positions and a high risk of default in case of market disruption. In derivatives markets, traders must enter into margining agreements and post collateral as extra security. Short sellers must also provide extra security in the form of a margin account, as well as report their transactions to the regulator.
FTD is a major problem for financial market participants, as it can lead to significant financial losses and legal issues. As such, it is important for market participants to understand the key risks associated with FTD, how to mitigate them and how to institutionalise FTD management procedures within their organisations. monitoring platforms, such as the Global Trade Repository and the Derivatives Clearing Organizations, can also be used to support the management of FTD risks.