Legal Definitions - backwardation

Backwardation, in the context of financial securities, refers to a specific fee that a seller pays to a buyer. This fee is paid when the seller is unable to deliver the agreed-upon securities by the original, specified delivery date and requests the buyer to accept a delayed delivery instead. Essentially, it's a payment from the seller to compensate the buyer for the inconvenience or potential opportunity cost of receiving the securities later than planned.

• Example 1: Futures Contract Delay

  Imagine "AgriCorp," a large agricultural firm, sells futures contracts for 5,000 metric tons of wheat to "GrainBuyers Inc." The contract stipulates that the wheat must be delivered by November 1st. However, due to an unexpected early frost, AgriCorp's harvest is delayed, making it impossible to gather and deliver the full quantity of wheat by the agreed date.

  To avoid defaulting on the contract, AgriCorp approaches GrainBuyers Inc. and offers to pay a backwardation fee. This fee compensates GrainBuyers Inc. for the delay, and in return, GrainBuyers Inc. agrees to accept delivery of the wheat on November 15th instead of November 1st.

  This illustrates backwardation because AgriCorp, the seller, pays a fee to GrainBuyers Inc., the buyer, to allow for a delayed delivery of the commodity (wheat futures) beyond the original contractual date.

• Example 2: Corporate Bond Issuance Hold-up

  "InnovateTech Solutions" issues new corporate bonds to raise capital, and a major institutional investor, "CapitalGrowth Fund," purchases a significant portion. The bond prospectus states that the bonds will be officially transferred and delivered to investors' accounts by April 10th. However, a last-minute regulatory review causes an unforeseen administrative hold-up, preventing InnovateTech from completing the transfer on time.

  To ensure the transaction proceeds smoothly and to compensate CapitalGrowth Fund for the delay, InnovateTech Solutions offers to pay a backwardation fee. This payment persuades CapitalGrowth Fund to accept delivery of their bonds on April 17th, a week later than initially planned.

  Here, InnovateTech Solutions, as the seller of the bonds, pays a backwardation fee to CapitalGrowth Fund, the buyer, to secure their agreement to a delayed delivery of the securities.

• Example 3: Share Transfer Complication

  An investment bank, "Global Wealth Partners," has agreed to sell a substantial block of shares in "GreenEnergy Ventures" to a hedge fund, "Momentum Capital," with a settlement date set for July 5th. Just before the deadline, an internal system error at Global Wealth Partners prevents the immediate electronic transfer of these specific shares to Momentum Capital's account.

  To resolve the issue without incurring penalties for non-delivery, Global Wealth Partners contacts Momentum Capital and offers to pay a backwardation fee. This fee compensates Momentum Capital for any potential losses or inconvenience due to the delay, and Momentum Capital agrees to accept the shares on July 8th.

  In this scenario, Global Wealth Partners, the seller, pays a backwardation fee to Momentum Capital, the buyer, to obtain permission for a delayed delivery of the GreenEnergy Ventures shares beyond the initial settlement date.