Good Delivery: What It is, How It Works, Criteria

What Is Good Delivery?

Good delivery refers to the unhindered transfer of ownership of a security from a seller to a buyer, with all necessary requirements having been met. This used to be a rather complex process, although nowadays, thanks to electronic exchanges that facilitate the digital transfer and clearing of many securities, good delivery has become automated and generally much more straightforward.

Understanding Good Delivery

Good delivery occurs when a security's transfer is unimpeded by restrictions or other issues that would prevent its physical or virtual delivery to the buyer. Nowadays, good delivery is, usually, determined by computers. However, in the past, securities were inspected by a transfer agent to ensure that individual paper certificates were authenticated and registration requirements were met in order for the buyer to take the delivery.

Historically, good delivery of securities from a seller to a buyer had been an issue in financial markets. The buyer needed to know for sure that they would receive the correct stock certificates, that the certificates were indeed authentic, and that they would actually get physical delivery after paying the seller for them. Regulated stock exchanges and clearing houses sprang up as trusted third parties to facilitate trading and standardize the requirements for making good delivery.

Today, with electronic exchanges, computerized settlement, and clearing facilities, these issues are largely a thing of the past. However, the presence of share transfer restrictions can still hurt the possibility of a stock's good delivery.

For example, insider stock, such as that issued directly to a company's executives, may have certain restrictions that disallow sale outside the company without first having offered the shares for sale to existing shareholders. Rule 144 can allow for the sale of some restricted securities if they meet certain conditions.

Good Delivery Criteria

The criteria for what constitutes good delivery varies from market to market or from security to security, but it is a prerequisite to settling a transaction. Many stock markets today allow for easy trading in odd lots or even fractional shares. But, for stock markets that enforce round lots, there may be restrictions on how to deliver those lots. Because the most commonly traded unit of stock has traditionally been 100 shares (a round lot), stock certificates should be denominated in one of the following:

• Multiples of 100 shares—100, 200, 300, etc.
• Divisors of 100 shares—1, 2, 4, 5, 10, 20, 25, 50, or 100
• Units that add up to 100 shares—40 + 60, 91 + 9, 80 + 15 + 5, etc.

For bond markets, good delivery should be made using multiples of $1,000 (or sometimes $5,000) par value, sometimes with a maximum par value of $100,000. For an unregistered bearer bond to be in good delivery form, it must be delivered with all unpaid coupons still attached.

For commodities markets, good delivery criteria are spelled out by the exchange and incorporated explicitly into futures contracts specifications. For example, the London Bullion Market Association (LBMA) specified good delivery in physical gold as:   

• Fineness: Minimum of 995.0 parts per thousand fine gold
• Marks: Serial number, refiner's hallmark, fineness, year of manufacture
• Weight: 350–430 troy ounces (11–13 kg)
• Recommended Dimensions: Length (top): 250 mm +/- 40 mm, width (top): 70 mm +/- 15 mm, height: 35 mm +/- 10 mm. For the length and width, a degree of slope, known as the undercut, is permitted from 5º to 25º