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Novation, the clearing house, margin, T+1, and settlement failure.
3 questions in Capital Markets.
Nothing settles, because delivery versus payment moves both legs or neither, and the trade stays open and is re-attempted rather than cancelled. You then choose between partial delivery, borrowing to cover and being bought in, while entitlements arising during the fail belong to the buyer through a market claim.
Novation tears up the bilateral contract and replaces it with two contracts facing the clearing house, which then guarantees performance and charges for that guarantee in initial and variation margin. A missed margin call is a default; a seller who cannot deliver leaves the obligation open.
Because shortening the cycle removes the window that netting depends on. Settle each trade on its own and gross obligations replace net ones, so cash and stock must be in place trade by trade, sequencing starts to matter, and settlement risk is traded for intraday liquidity risk.