What is an Aged Fail?
An aged fail is a transaction between two broker-dealers that has not been settled within 30 days of the trade date. Settlement is required for both parties to get and receive what they agreed to, making the trade complete.
- A failure to settle occurs if the trade isn't settled by the settlement date.
- An aged fail is a fail that has still not been settled 30 days after the trade date.
- Trade failures can have a domino effect, with one leading to others.
Understanding an Aged Fail
In financial markets, if a seller does not deliver stock or a buyer does not pay owed funds by the settlement date—which in the US is the trade date plus two days (T+2)—then the transaction is said to fail. Fails turn into aged fails when the trade still has not settled 30 days after the trade date.
Settlement periods vary by market. Stocks are T+2, while options settle T+1. Many bonds settle in two days, while government bonds settle the next day (T+1). Certificates of deposit (CDs) settle the same day, as does commercial paper. Spot foreign exchange (forex) transactions settle T+2, although in this market many retail traders rollover their position each day in order to avoid settlement.
Aged fails typically occur when a security is not delivered because the selling client fails to deliver the security to his or her broker. As a result, the broker is unable to deliver the security to the buying broker. This typically results in the receiving firm having to adjust its books accordingly, to account for the asset not being received.
If the seller fails to deliver the security, it is called a short fail. If the buyer fails to pay the funds for the security, it is called a long fail.
Parties failing to deliver cash or securities to settle a transaction in a timely fashion are subject to specific charges by the U.S. Securities and Exchange Commission (SEC), to cover counterparty risk. Dealers have to maintain additional capital for fails-to-deliver five or more business days old and for fails-to-receive more than thirty calendar days old, under SEC Rule 15c3-1, often called the uniform net capital rule.
Essentially 15c3-1 requires that brokers have liquidity to cover a certain percentage of their total obligations, in case some of those transactions fail.
Example of Where to Find Age Fail and Failed Trades
SEC data can be used to monitor trades where there was a failure to deliver. The Fails-to-Deliver data provides the trade date, security identifier (CUSIP), ticker symbol, quantity of failed shares, company name, and stock price as of the previous close. The data is released twice a month.
The lists also contain a running total of failed to deliver shares.
Trade failures can also be monitored in other markets. DTCC, for example, provides total US Treasury and Agency fails. The chart below shows the amount of trade fails in US Treasury securities over a 3-month period in late 2019 and early 2020.
Trade failures can have a domino effect. For example, the buyer of a security may use those securities for another transaction. If the original trade fails, the buyer doesn't have those securities to pledge to the next transaction, so that transaction also fails.