The financial crisis has resulted in an unusually high number of persistent settlement fails in U.S. Treasury securities. The increase in fails has been exacerbated by low interest rates which impose only a small cost on market participants who fail to deliver under repurchase agreements. The Treasury Market Practices Group (TMPG), comprised of leading participants in the U.S. Treasury market from both the sell-side and the buy-side and sponsored by the Federal Reserve Bank of New York, announced a number of recommended measures to address the problem.

  1. Establishing a penalty of up to 3% on failed trades to give market participants the incentive to settle transactions in a timely fashion or to find alternative solutions if they cannot obtain securities necessary for delivery. TPMG will make recommendations to address the operation and legal issues raised by the penalty by January 5, 2009. 
  2. Posting of margin on failed trades to reduce the inherent counterparty risk. TMPG will look to make recommendations on margining by January 5, 2009. 
  3. Outstanding failed trades of at least five days should be settled quickly by parties to the trade through bilateral cash settlement.
  4. Clearing entities should develop multilateral netting arrangement to reduce the number of fails and their impact on the market. 
  5. As a long-term goal, the U.S. Treasury should create a facility to provide securities on a temporary basis to ease persistent settlement fails. A penalty rate would be charged for use of the facility.

TMPG’s goal in making these recommendations is to reduce settlement fails and the resulting credit risk to market participants.