Discussion Paper

Failure Is No Longer a (Free) Option for Agency Debt and Mortgage-Backed Securities

Abstract: A recommended charge on settlement fails for agency debt and agency mortgage-backed securities (MBS) took effect on February 1, 2012. This follows the successful introduction of a charge on settlement fails for U.S. Treasury securities in 2009. With a fails charge, a seller of securities that doesn’t deliver on time must pay a charge to the buyer. The practice is meant to ensure that sellers have adequate incentive to deliver securities without undue delay and thereby reduce the level of settlement fails. In this post, I discuss how and why the fails charge was implemented.

Keywords: settlement fails; Treasury Market Practices Group; mortgage-backed security; fails charge;

JEL Classification: G1;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2012-03-19

Number: 20120319