Firm commitment
Capital MarketsAn underwriting in which the banks buy the whole issue themselves, as opposed to a best efforts deal where they only agree to try to place it.
Also written: best efforts
Under a firm commitment the syndicate purchases the securities from the issuer and resells them at the offer price. The issuer knows exactly what it will receive, and unsold stock is the banks' problem.
Under a best efforts arrangement the bank acts as agent. It markets the deal and takes a fee on what it places, but it never owns the securities and the issuer bears the risk that the offering is not fully taken up.
Essentially every IPO of any size is firm commitment, because certainty of proceeds is the main thing the issuer is buying. Best efforts appears in small or speculative offerings where no bank will take the book risk.
The distinction decides who is exposed if the market moves between pricing and settlement, which is why the underwriting agreement carries a market out clause letting the banks withdraw in genuinely disorderly conditions.