Fail To Receive

A principal is training a new associate on settlement terminology and is asked to explain the difference between a "fail to deliver" and a "fail to receive," and which party may initiate a buy-in procedure. What is the correct explanation?

1. A.A fail to deliver and a fail to receive describe the identical situation from two different firms' perspectives, and either party may initiate a buy-in.Wrong. While the two terms describe the same underlying settlement failure from each side, only the party owed delivery may generally initiate the buy-in.
2. B.A fail to receive occurs when the selling firm does not deliver securities, and the seller may initiate a buy-in against itself.Wrong. A fail to receive is the buying firm's failure to receive, not the selling firm's failure to deliver, and a firm doesn't buy in against itself.
3. C.A fail to deliver is the selling firm's failure to deliver; a fail to receive is the buying firm's resulting failure to receive, and it is generally the buyer who may initiate the buy-in.Correct. The buyer facing a fail to receive is generally the party who may initiate a buy-in against the non-delivering seller.
4. D.Only a clearing corporation, and never either firm directly, may ever initiate a buy-in procedure.Wrong. The party owed delivery may itself initiate a buy-in; it is not limited exclusively to a clearing corporation.

Why: A fail to deliver occurs when the selling firm does not deliver securities it sold; a fail to receive occurs when the buying firm does not receive securities it purchased. It is generally the party owed delivery — the buyer facing a fail to receive — that may initiate a buy-in against the party that failed to deliver.

A firm has not received securities it purchased and, believing enough time has passed, has a trader execute a buy-in of the position without first sending the required notice to the contra-side broker-dealer. A principal reviewing the transaction questions this. What is the concern?

1. A.There is no concern, since sufficient time passing is itself enough to justify executing a buy-in without notice.Wrong. Time passing alone doesn't substitute for the required notice to the contra-side broker-dealer before a buy-in.
2. B.The concern only applies if the contra-side broker-dealer later disputes having received notice.Wrong. The requirement to give notice applies regardless of whether the contra party later disputes anything.
3. C.The buy-in required prior notice to the contra-side broker-dealer, which was not given before the buy-in was executed.Correct. Required notice to the contra party must precede execution of a buy-in.
4. D.The concern is resolved as long as the firm documents internally that enough time had passed before acting.Wrong. Internal documentation of elapsed time doesn't substitute for actually giving the required notice to the contra party.

Why: Before executing a buy-in to resolve a fail to receive, the firm must provide the required notice to the contra-side broker-dealer; executing a buy-in without first giving that notice denies the contra party the opportunity to deliver or otherwise respond before the buy-in is completed.