Fails & Buy-ins
Fails
A fail is a delayed delivery or non-delivery of securities or cash on value date. Fails will happen because of:
- Fragmented global settlement infrastructure
- Errors caused by operational procedures (trading or back-office related)
- Non-availability of specific securities (chain in the repo or cash market)
- Not enough cash liquidity
There are four possible scenarios:
failure to deliver securities or cash at start date of a repo transaction:
- by lender
- by borrower
failure to deliver securities or cash at end date of a repo transaction:
- by lender
- by borrower
Fails are tackled case-by-case depending on the type of repo agreement that the two counterparties have signed. To find out what these different agreements stipulate about fails, please see Legal Issues.
In order to minimise the number of fails in the repo market, there is a need for consolidation between different settlement procedures and more efficient back-office systems. New regulations on short selling may also ease the problem.
Regulations regarding fails include discussions about any consequential loss clauses,
buy-in regulations (where the non-defaulting counterparty can buy the undelivered securities at the market price and compel the defaulting counterparty to account for the market prices paid) and replacement transactions. Buy-in procedures for cash bond fails and repo fails differ.
