"Here’s an interesting datapoint Fred Sommers, of the Basis Point Group, on Monday.
As we’ve written before, Sommers is among a number of back office specialists who have become increasingly concerned about a growing lack of discipline in trade settlements since 2008.
Most of the data Sommers works with comes from the United States — though, that’s mostly because the United States is the only Western market which actively publishes anything close to running settlement failure figures. Data for European markets, for example, is simply impossible to come by.
Which brings us to the latest US data releases. Something extremely interesting seems to be afoot in Treasuries settlements.
As Sommers noted to FT Alphaville (our emphasis):
The key point is that since May 2009 the Treasuries Market Practice Group (TMPG) has been dishing out a 3 per cent (minus the Fed Funds rate) penalty to market participants for failing to deliver Treasuries.
This was specifically implemented to crush the incentive to fail on deliveries when it potentially cost more to obtain highly sought after Treasury securities in the marketplace than to suffer the credibility issue associated with failing (usually because Treasuries were trading at a negative interest rate, meaning participants would have to pay over par value to obtain it). Since there was no real penalty in place back in 2008, low short-term interest rates resulted in a substantial increase in widespread and persistent settlement fails in US Treasury securities.
As the NY Fed noted at the time, this was not good for market dynamics, and was even beginning to pose a credit issue:
As we’ve written before, Sommers is among a number of back office specialists who have become increasingly concerned about a growing lack of discipline in trade settlements since 2008.
Most of the data Sommers works with comes from the United States — though, that’s mostly because the United States is the only Western market which actively publishes anything close to running settlement failure figures. Data for European markets, for example, is simply impossible to come by.
Which brings us to the latest US data releases. Something extremely interesting seems to be afoot in Treasuries settlements.
As Sommers noted to FT Alphaville (our emphasis):
DTCC fails-to-deliver data indicates that UST fails surged the first 2 days of September over the month of August values; by approximately 8.0X or approximately 90 bps (attached). The data is for the market not just the US Primary Dealers; the average per day fails (assume 5 day week the Fed reports weekly total fails data) for the US Primary Dealers is about 60 to 80% of the DTCC values. The last 1 day surge to this level at $63 billion was June 2 2011. The last 2 day (over weekend) surge to this level was to $68 billion on December 12 2010 and to $90 billion on December 13 2011.
The key point is that since May 2009 the Treasuries Market Practice Group (TMPG) has been dishing out a 3 per cent (minus the Fed Funds rate) penalty to market participants for failing to deliver Treasuries.
This was specifically implemented to crush the incentive to fail on deliveries when it potentially cost more to obtain highly sought after Treasury securities in the marketplace than to suffer the credibility issue associated with failing (usually because Treasuries were trading at a negative interest rate, meaning participants would have to pay over par value to obtain it). Since there was no real penalty in place back in 2008, low short-term interest rates resulted in a substantial increase in widespread and persistent settlement fails in US Treasury securities.
As the NY Fed noted at the time, this was not good for market dynamics, and was even beginning to pose a credit issue:
While some settlement fails are inevitable, these widespread and persistent fails prevent efficient market clearing and impose credit risk on market participants, and are therefore damaging to overall market liquidity..."at http://ftalphaville.ft.com/blog/2011/09/05/668726/some-extremely-special-treasuries/
