This week, the Treasury Market Practices Group (TMPG), comprised of leading participants in the U.S. Treasury market from both the sell-side and buy-side and sponsored by the Federal Reserve Bank of New York, announced additional details regarding its progress on establishing measures to remediate widespread Treasury settlement fails. This announcement follows up on and further refines the TMPG’s November 12, 2008 recommendations, and to the extent that discrepancies exist, the details of the current announcement supersede those noted on November 12. The TMPG provided additional details with respect to the envisioned timeline for the implementation of the following measures:

  1. Financial penalty for fails: The TMPG will publish by January 15, 2009, legal documents and market conventions permitting counterparties to agree that a buyer of U.S. Treasuries who fails to receive such securities from a seller on the originally scheduled settlement date may submit a claim against the seller. The first accrual date for fail penalties will be May 1, 2009, and buyers must file claims by June 12, 2009, for the May settlement fails. Payment or notice of a rejected claim will be due on June 30, 2009.
  2. Posting margin on failed trades: Protocols and implementation timelines related to this recommendation to reduce counterparty risk will be made by the TMPG by the end of the second quarter of this year.
  3. Bilateral cash settlement of fails after 5 business days: In cooperation with the Securities Industry and Financial Market Association (SIFMA), the TMPG is working to develop a protocol with recommended standard practices and expects to provide further guidance in the first quarter of this year.
  4. Support development for multilateral netting solutions: The TMPG has established a working group, which is involved in discussions with the Depository Trust and Clearing Corporation (DTCC), to develop solutions for a standing multilateral netting settlement arrangement to reduce the number of fails and their impact on the market. The TMPG and DTCC will report their progress by mid-year of 2009.

The Treasury Department has indicated its support of the initiatives announced by the TMPG, as a means of “further enhance[ing] the depth and liquidity of the United States Treasury market.”