Aged Fail: What It Is, How It Works, Example

What Is an Aged Fail?

An aged fail is a financial transaction that does not settle between two parties for a period beyond the settlement date, typically 30 days. A deal fails if the seller does not deliver the asset or the buyer doesn't pay the promised amount on the settlement date. Settlement is required for both parties to get and receive what they agreed to, making the trade complete. Broker-dealers must make adjustments to their books to account for aged fails.

Understanding Aged Fails

If a seller does not deliver stock or a buyer does not pay owed funds by the settlement date, the transaction is said to fail. A fail becomes an aged fail when the trade still has not settled 30 days after the transaction or trade date.

Aged fails typically occur when a security is not delivered because the selling client fails to deliver the security to their broker. If the seller fails to deliver the security, it is called a short fail. As a result, the broker can't deliver the security to the buying broker. As such, the receiving firm must adjust its books to account for the asset not being received.

If the buyer fails to pay the funds for the security, it is called a long fail. Parties who fail 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. This rule essentially requires that brokers have the liquidity to cover a certain percentage of their total obligations, some of which may fail.

Special Considerations

Settlement dates fall on a certain number of days after a financial transaction is initiated. These dates are denoted in the financial markets by abbreviations for the transaction date (T) and the number of days that follow (+number of days), such as T+1 and T+2.

The settlement date depends entirely on the type of security involved. In the United States:

• The settlement date for stocks, government securities, and options is T+1 or one business day after the transaction is initiated.
• For spot foreign exchange transactions, the settlement date is T+2 or two business days after the trade date, although in this market many retail traders roll over their position each day to avoid settlement.
• Certain financial transactions settle on the same day. This includes the settlement of certificates of deposit (CDs) and commercial paper. Spot foreign exchange (forex) transactions settle T+2,

It's important to note that a T+1 transaction will settle on the next business day if the settlement date falls on a weekend or holiday. So if the transaction is initiated on a Friday, it will settle on the following Monday. If it is initiated on a Saturday, the trade will take place on Monday and will settle on Tuesday. The same rule applies for a T+2 transaction, except that the transaction will settle two business days after the trade is initiated.

Example of Aged Fail

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 and these lists also contain a running total of failed-to-deliver shares.

Trade failures can also be monitored in other markets. For example, DTCC provides U.S. Treasury and fails. The chart below shows how many trade fails occurred in US Treasury securities over a three-month period in early 2021.

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.

The Bottom Line

Financial transactions have set times by which they must settle. When you initiate a stock trade, that transaction must close within one business day. Foreign exchange transactions typically close two business days after the trade is ordered. These transactions may fail if they don't settle by the settlement date. This means one party wasn't able to deliver their end of the bargain. They're considered aged fails if the transaction remains unsettled 30 days after the trade is initiated.