Legal Definitions - fail position

A fail position occurs in the financial markets when a brokerage firm, after all its transactions for a specific security (such as a stock or bond) have been balanced out, finds itself obligated to deliver more of that security to other firms than it is scheduled to receive from them. Essentially, the broker has a temporary shortfall and cannot fulfill its delivery commitments for that particular security on time.

• Example 1: Stock Trading Shortfall
  Imagine Brokerage Firm A processes numerous trades for shares of "Tech Innovations Inc." throughout a trading day. By the end of the day, after netting out all its buy and sell orders, Firm A is scheduled to receive 1,500 shares of Tech Innovations Inc. from various other brokers. However, due to a series of client sales and inter-broker agreements, Firm A is obligated to deliver 2,000 shares of Tech Innovations Inc. to different counterparties. This creates a deficit of 500 shares (2,000 shares owed - 1,500 shares incoming). Firm A is now in a fail position for 500 shares of Tech Innovations Inc., meaning it cannot deliver all the shares it promised on the settlement date.

• Example 2: Government Bond Delivery Issue
  Consider a specialized broker-dealer, Firm B, that primarily trades U.S. Treasury bonds. On a particular settlement day, Firm B is due to receive $10 million in face value of a specific series of Treasury bonds from several institutional clients and other dealers. However, due to its own sales to other market participants, Firm B has committed to deliver $12 million in face value of the exact same series of Treasury bonds. Firm B faces a $2 million shortfall ($12 million owed - $10 million incoming). This situation puts Firm B in a fail position for $2 million of those Treasury bonds, indicating it cannot meet its delivery obligations for that specific bond series.

• Example 3: Corporate Debt Security Imbalance
  A broker, Firm C, facilitates trades for corporate bonds issued by "Global Manufacturing Co." On a given day, Firm C has incoming deliveries of $500,000 in face value of these corporate bonds from various sellers. Simultaneously, Firm C has commitments to deliver $650,000 in face value of the same Global Manufacturing Co. bonds to different buyers. After netting these transactions, Firm C has a deficit of $150,000 ($650,000 owed - $500,000 incoming). Firm C is therefore in a fail position for $150,000 of the Global Manufacturing Co. corporate bonds, as it does not have enough bonds to fulfill all its delivery obligations.