A failed delivery, a dividend and a buy-in
On 24 June, a UK broker buys 250,000 shares in Torsa Energy plc at 145p for a client. The trade is due to settle on 26 June (T+2) in CREST. The selling broker fails to deliver the shares. Torsa goes ex-dividend on 27 June with a dividend of 3.2p per share payable on 15 August. The buyer's broker starts a buy-in on 1 July and buys the shares at 152p. The original seller delivers the shares on 3 July. The client asks: 'Do I keep the dividend? Can I keep the extra 7p a share profit from the buy-in, and who pays for the failed settlement?' The broker's stock borrow costs are 0.8% per annum and the buy-in fee is £2,500. The client's account is a custody account with no stock lending.
1. Explain what happens to the dividend and the buy-in purchase.
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The client is not the registered holder until the shares are delivered into CREST. If the record date falls before delivery, the seller receives the dividend from the company, even though the buyer has paid for the shares. The buyer's broker should therefore make a manufactured dividend or market claim against the selling broker for 250,000 × 3.2p = £8,000. The buy-in is a replacement purchase: the broker buys 250,000 shares at 152p because the seller failed to deliver. The client should not keep both the original 145p bargain and the 152p buy-in as a profit. The original trade is closed out and the buy-in becomes the effective purchase, or the seller must compensate for the difference. The later delivery on 3 July may be used to settle the buy-in, but the client's economic position should be made whole, not improved. The client cannot claim the dividend twice or keep a windfall from the default.
2. Who bears the costs, and what should the broker do?
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The defaulting seller should bear the reasonable costs caused by the failure: the 7p per share difference on the buy-in (£17,500), the £2,500 buy-in fee, and any stock borrow cost incurred to cover the position. The borrow cost on £362,500 at 0.8% a year for the relevant days is modest but claimable if it was actually incurred. The broker should issue the buy-in notice promptly, keep records, and claim against the seller under the market's settlement rules. It should credit the client with the £8,000 dividend claim when received, and explain that the claim is against the seller, not the company. The client should receive a clear statement showing the original trade, the buy-in, the dividend claim and the net cost. The broker must not use the client's other assets to cover the seller's failure. If the seller disputes the claim, the broker should follow the market's dispute procedure.
3. What risk controls should the broker review?
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The broker should review counterparty and settlement risk: whether the selling broker has a history of fails, whether credit limits and delivery-versus-payment controls are adequate, and whether the buy-in was started within the market's timetable. It should also check stock borrow arrangements and the cost of cover, and ensure that client entitlements such as dividends are claimed automatically. Operationally, the firm should reconcile CREST positions daily, monitor aged fails, and have a clear escalation path before a buy-in. It should also check that contract notes and client communications explain the difference between the trade price and the buy-in price. Finally, the firm should consider whether the client's custody account was used for any stock lending; on the facts it was not, so no manufactured dividend from lending arises.