Failure to Deliver (FTD)

A failure to deliver (FTD) occurs when a seller in a securities transaction cannot hand over the shares or assets to the buyer by the settlement date. Under current U.S. rules, equity trades must settle by T+1, meaning the seller must deliver shares the business day after the trade executes. If that delivery does not happen, the trade registers as an FTD in the National Securities Clearing Corporation's Continuous Net Settlement system.

Think of an FTD like a check that bounced: the transaction appeared to complete but the underlying asset never changed hands.

How FTDs Occur

FTDs can result from both short sales and long sales. Naked short selling, where the seller does not borrow or arrange to borrow shares before selling them, is a common contributor. But FTDs also arise when a legitimate seller simply fails to transfer shares on time due to operational issues, counterparty failures, or administrative errors.

In a naked short sale, the seller bets that the stock price will fall and plans to buy shares later at a lower price to cover the position. If the shares are never located and delivered by settlement, the trade becomes an FTD. This practice can create artificial selling pressure on a stock and, in extreme cases, more shares sold short than actually exist in the float.

The Regulatory Framework: Regulation SHO

The SEC introduced Regulation SHO in 2005 specifically to address failures to deliver. The regulation includes two key rules that remain in force today.

Rule 203 requires broker-dealers to have a reasonable belief that they can borrow or locate the shares before executing a short sale. This is the "locate" requirement. Rule 204 requires broker-dealers to close out FTD positions within a defined timeframe: by the start of trading on the third consecutive settlement day after the FTD first appears for most securities.

In March 2025, investors filed a petition with the SEC requesting amendments to Regulation SHO, citing structural weaknesses in the current framework that have allowed persistent FTDs to grow significantly in dollar value.

The Scale of the FTD Problem

FTD data from the SEC shows that the notional value of failures to deliver has grown dramatically. In the first half of July 2009, the total notional value of FTDs was approximately $1.2 billion. In the first half of January 2025, that figure reached approximately $36.7 billion, a roughly 30-fold increase even after adjusting for inflation and GDP growth. The SEC publishes FTD data publicly, listing every security with open failure positions along with the share count and price.

The persistence of high FTD values reflects what petitioners have called structural weaknesses in the Regulation SHO framework, including limited enforcement of the close-out requirement and the difficulty of distinguishing legitimate settlement delays from strategic non-delivery.

What Happens After an FTD Occurs

When an FTD appears in the Continuous Net Settlement system, the National Securities Clearing Corporation allocates it to a different broker-dealer using a random distribution process. The broker-dealer that does not receive securities because of this allocation carries a net fail-to-receive position in their account. Under Regulation SHO Rule 204, the broker-dealer responsible for the FTD must close it out by purchasing or borrowing shares within the required timeframe.

If the broker-dealer fails to close out on time, it is placed on the Regulation SHO threshold list, which is a publicly available list of securities with FTD positions that have persisted for five or more consecutive settlement days. Securities on the threshold list are subject to stricter close-out requirements.

ETFs and Failures to Deliver

Exchange-traded funds generate a disproportionate share of FTD activity. ETF shares can be continuously created and redeemed through an in-kind creation mechanism, which makes it relatively easy to create new shares to resolve a delivery failure. Between 2010 and 2020, the top 20 equity securities by total FTD dollar value were all ETFs, with major index funds like the SPDR S&P 500 ETF Trust and the Invesco QQQ Trust appearing consistently.

Regulators have debated whether ETF FTDs carry the same systemic risks as equity FTDs, given the creation and redemption mechanism. No consensus has been reached, and ETF FTDs remain a regular feature of the SEC's published data.

Consequences of Persistent FTDs

FTDs affect market participants in concrete ways. Buyers who were supposed to receive shares may see their accounts show a credit without holding the underlying securities, which limits their ability to vote in corporate elections or lend those shares. Persistent FTDs in a single stock can suppress the price by creating artificial selling volume.

For investors, FTDs raise questions about whether the reported short interest in a stock accurately reflects the actual number of shares that have been legitimately sold short. If more shares are sold short than borrowed, the reported short interest may undercount the real exposure.

International Comparisons

Other major markets handle settlement failures differently. The European Union's Central Securities Depositories Regulation, which took full effect in 2022, introduced a mandatory buy-in mechanism: if a seller fails to deliver by a set date, the buyer can force the purchase of shares from the market at the seller's expense. The United States does not have a mandatory buy-in requirement equivalent to the European standard, which critics argue contributes to the persistence of FTDs.

Sources:
https://www.sec.gov/files/rules/petitions/2025/petn4-848.pdf
https://www.sec.gov/files/rules/petitions/2025/petn4-873.pdf
https://www.sec.gov/investor/pubs/regsho.htm