Final answer:
If a customer fails to deliver securities they sold, it can lead to legal actions, financial repercussions, or bankruptcy. Investors who have agreed to take on certain losses will absorb these, and the specific outcomes depend on pre-agreed conditions and the type of security involved.
Step-by-step explanation:
When a customer has failed to deliver securities that were previously sold, a process similar to that which occurs with bond issuers may unfold. For bonds, if an issuer fails to make the promised payments, bondholders have the right to push the company towards bankruptcy, at which point its assets are sold off to repay as much debt as possible. In the context of securities like mortgage-backed securities, if losses occur, certain investors have pre-agreed to absorb a defined percentage of the loss; for example, the first 5% or the next 5%, and so on.
However, if an investor has sold securities but cannot deliver them, possibly due to financial difficulties, bankruptcy could ensue if they cannot settle the failure to deliver. In stock market terms, issues like the decrease in stock prices, which can induce a bear market, have similar ramifications. Investors may end up owing more than the value of their investment, particularly if they've borrowed money to invest (purchased on margin).
Therefore, what happens when a customer fails to deliver securities largely depends on the type of security and the specific circumstances around the failure to deliver. There could be legal actions, financial repercussions like bankruptcy, or other negotiated outcomes between the involved parties.