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Stock "Settlement Imbalances / fails" - What does this mean?

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  1. #1

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    Stock "Settlement Imbalances / fails" - What does this mean?

    Am unfamiliar with this term or what the underlying reasons of these imbalances and more importantly the consequences of this might mean.

    Listening to a shareholder call of a micro cap, this was mentioned.

    Analysis suggests there are sizable and persistent settlement fails and imbalances in XYZ's stock.

    We have identified a handful of banks, broker dealers and *** (not sure what was said here) participants that feature the most persistent and significant settlement imbalances and have begun a communications strategy to alert these firms and request explanations.
    Cannot seem to find anything on investopedia which is usually spot on with answers when I search for "settlement imbalances".

    Searching for "settlement fails" shows this result.

    https://www.investopedia.com/terms/f...etodeliver.asp

    Failure to deliver is critical when discussing naked short selling. When naked short selling occurs, an individual agrees to sell a stock that neither they nor their associated broker possess, and the individual has no way to substantiate their access to such shares.

    The average individual is incapable of doing this kind of trade. However, an individual working as a proprietary trader for a trading firm and risking their own capital may be able.
    Any pointers?
    Last edited by shri; 17-05-2022 at 02:20 PM.

  2. #2

    I assume this is for HK?

    Under CCASS (Central Clearing and Settlement System), when a CCASS participant such as a broker enters a trade, HKSCC (HK Securities Clearing Company) will transfer shares from the seller to the buyer. If the seller (or transferor) does not have enough securities in their CCASS account for delivery there is said to be a securities shortfall.

    It's been a few years since I had to look into this in detail but IIRC, HKSCC can either borrow or buy any securities for which there is a shortfall and then chase the defaulting broker/participant.

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  3. #3

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    Not HK .. US markets.


  4. #4
    Quote Originally Posted by shri:
    Not HK .. US markets.
    In which case my answer is (as usual) totally off topic ....
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    without reading the article, but from experience, its the shorting of shares without borrowing.. they are technically not allowed to do this but due to cumblesome settlement system some brokers continue to breach the guidelines.. ended up selling shares that they did not have and unable to settle the sales.

    imbalances because the number in-out versus their holding of shares mismatch.. and it leads to failure in settlement.

    i think singapore and hk the penalty is alot stricter so i doubt brokers dare to do it.. in hk if you do short selling you have to flag it, and you have to make sure you borrowed. in SGX if you short without scrip you are liable to be fined SGD 1k for every 1000 shares settlement failed.

    Last edited by freeier; 17-05-2022 at 03:33 PM.
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  6. #6

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    Yeah it has to do with stock loans and naked shorting so to say. This creates all kinds of strange effects.

    Say a company has 1000 shares in issuance. A functioning stock loan would be that someone that holds 100 shares lends them out to someone who sells them in the market to go short. The buyer of those 100 shares now owns 10% of the company, so for example in the case of the AGM where you can vote on who should be Board Chairman etc thats important. The guy that lent out the shares can't vote if he doesn't recall back his shares, which would reverse the whole flow.

    Now say someone sold 100 shares naked, meaning he did not borrow it from anyone. The buyer then again has 100 shares he can go and vote with, but now because of this naked short, there is 1100 shares in total long the company. So what happens at the AGM when everyone votes?

    It becomes a mess..

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  7. #7

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    Quote Originally Posted by RobRoy:
    It becomes a mess..
    this is where blockchain actually becomes very useful... if one use it for practical purposes instead of speculations...
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  8. #8

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    Quote Originally Posted by freeier:
    this is where blockchain actually becomes very useful... if one use it for practical purposes instead of speculations...
    Does this mean that digitally stocks don't have unique ID / serial numbers that are maintained in some sort of register?

    Would have thought it would be a very fundamental part of tracking transactions.

  9. #9

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    Not sure if shareholder call was about this but I read the call summary to mean settlement fails from back office pov - when standard stock trades are cleared and settled in the system (DTCC in U.S. or CCASS in HK) between system participants (banks, brokerages, custodians etc). These would be done on a volume netted basis at the end of the day (or specific batch runs within a day) so e.g. on settlement day, Broker A net short position due to deliver [XYZ shares] to Broker B net long position for [$]. But come settlement day, Broker A doesn't have enough XYZ shares in its stock account to settle so it either rolls over to next day or the clearing counterparty (NSCC / HKSCC) will buy-in from market to cover shortfall with A bearing costs / penalties or vice versa, draw down liquidity if it is B who has insufficient cash to settle.

    Could have genuine reasons for shortfall (settlement batch timing mismatch, front office admin cock-up etc). If persistent and significant imbalances, probably to do with poor governance/sloppy management or potentially individual trades not complying with short selling req / settlement deadlines.





  10. #10

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    Seek answer at <bogleheads.org>. They have never failed me.


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