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Key Takeaways
- A fail-to-deliver is an outstanding securities-delivery obligation after settlement date.
- Rule 204 gives a clearing participant until the start of regular trading on the next settlement day to close out a standard short-sale fail.
- With standard T+1 settlement, a Monday short sale settles Tuesday and the standard close-out deadline is the start of regular trading Wednesday.
- A reporting company’s stock becomes a threshold security after five consecutive settlement days of aggregate fails at 10,000 shares or more and at least 0.5% of shares outstanding, once an SRO lists it.
- Compare the reported fail balance with share count, short interest and borrow conditions when researching a ticker.
What is a fail-to-deliver?
A fail-to-deliver is an outstanding obligation to deliver securities after settlement date. Clearing participants net their delivery positions, and the SEC’s public file reports each security’s aggregate outstanding balance across NSCC members. Rule 204 of Regulation SHO sets the deadlines by which a participant must close out a fail.
That balance includes remaining earlier fails, new fails and deliveries completed that day. Use it as a settlement-position measure when researching the security.
Rule 204 close-out deadlines for fails to deliver
The worked short sale trades Monday and fails to deliver 60,000 shares at Tuesday’s standard T+1 settlement. Under the ordinary Rule 204 short-sale provision, the close-out deadline is the beginning of regular trading Wednesday.
The bona fide purchase executes at 9:29 a.m. Wednesday. With standard T+1 terms, that purchase settles Thursday. The deadline applies to the purchase, so a Wednesday pre-open buy that settles Thursday meets it.
Documented long-sale and bona fide market-making fails use the third settlement day after settlement. Rule 204 also specifies separate treatment for qualifying deemed-owned sales. Apply the category attached to the position when reading the deadline.
Formula
Threshold security when aggregate fail position ≥ 10,000 shares AND aggregate fail position ≥ 0.5% × shares outstanding, on five consecutive settlement days- Apply both share tests to the aggregate fail balance for the security at the registered clearing agency.
- A stock that passes both tests is a threshold security under Rule 203 when it also belongs to a reporting issuer and appears on an SRO’s published list.
- Each participant’s fail feeds the security-wide aggregate, and the threshold test reads only the aggregate.
How the Regulation SHO threshold security test works
In a holiday-free week, a Monday short sale produces a 60,000-share delivery fail at a clearing participant on Tuesday’s standard T+1 settlement date. The ordinary short-sale close-out deadline applies. XYZ has 40 million shares outstanding. For a separate threshold comparison, the security-wide aggregate fail balance is 250,000 shares.
- Participant’s ordinary short-sale close-out deadline: beginning of regular trading on Wednesday
- Close-out: a bona fide 60,000-share purchase executes at 9:29 a.m. Wednesday and settles Thursday on the standard T+1 cycle
- Threshold percentage level = 40,000,000 × 0.5% = 200,000 shares
- The participant’s 60,000 shares equal 0.15% of shares outstanding
- The security-wide 250,000 shares equal 0.63% and exceed both numerical threshold levels
The 9:29 a.m. Wednesday purchase meets the start-of-trading deadline and settles Thursday. The separate 250,000-share aggregate clears both share levels, and XYZ becomes a threshold security once that holds for five consecutive settlement days, the issuer files SEC reports and an SRO lists the stock.
The separate security-wide aggregate is 250,000 shares, or 0.63%. That exceeds both the 10,000-share and 0.5% numerical levels. The complete threshold definition also uses five consecutive settlement days, the issuer’s reporting status and the SRO’s published list.
Rule 204 sets each participant’s close-out clock, while the threshold list follows the security-wide aggregate across five consecutive settlement days.
How traders research fails to deliver
Compare aggregate fails with shares outstanding, short interest, trading volume and the broker’s borrow terms. Rising fails beside heavy short interest and expensive borrow point to a crowded short, the setup short squeeze traders hunt for. Let price and volume confirm the squeeze before you trade it.
When the squeeze confirms, build the call or call spread in the options profit calculator and read its breakeven, maximum loss and payoff at your target before you commit premium.
Limitations of fail-to-deliver data
- The SEC file gives one aggregate per security across NSCC members, with no participant, customer or reason attached, so read it as the stock's delivery backlog.
- Long sales and bona fide market making produce fails too, each with its own close-out deadline. Read a fail spike as aggressive shorting only when short interest and borrow cost climb with it.
- A day’s change in the balance nets earlier fails still open, new fails and completed deliveries. Read the trend across several settlement dates, since one day’s change is a net of all three.
- Keep fails and short interest in separate columns. A fail counts shares not delivered at settlement; short interest counts open short positions.
- Threshold status takes five consecutive settlement days at both share levels, a reporting issuer and an SRO listing. Check the published list itself before trading on it.
Bottom line
A fail-to-deliver is a delivery obligation still open after settlement date, and Regulation SHO sets how quickly it must be closed out. Read the SEC's aggregate balance as a settlement measure, compare it with shares outstanding, short interest and borrow conditions, and apply the correct Rule 204 category before reading any deadline.
Clear answers
Frequently Asked Questions
Sources and Further Reading
- SEC: Key Points About Regulation SHO
- SEC: Amendment to Regulation SHO to Adopt Exchange Act Rule 204, Small Entity Compliance Guide
- SEC: Fails-to-Deliver Data
- SEC OCIE Risk Alert: Options Trading Used to Reset Reg SHO Close-out Obligations
- SEC Division of Trading and Markets: Responses to Frequently Asked Questions Concerning Regulation SHO
How entries are sourced, calculated and updated: editorial methodology.