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Journal Article
The introduction of the TMPG fails charge for U.S. Treasury securities
The TMPG fails charge for U.S. Treasury securities provides that a buyer of Treasury securities can claim monetary compensation from the seller if the seller fails to deliver the securities on a timely basis. The charge was introduced in May 2009 and replaced an existing market convention of simply postponing?without any explicit penalty and at an unchanged invoice price?a seller?s obligation to deliver Treasury securities if the seller fails to deliver the securities on a scheduled settlement date. This article explains how a proliferation of settlement fails following the insolvency of ...
Discussion Paper
Unlocking the Treasury Market through TRACE
This joint FEDS Note and Liberty Street Economics blog post from staff at the Board of Governors and Federal Reserve Bank of New York aims to share initial insights on the Treasury cash transactions data reported to Financial Industry Regulatory Authority (FINRA)'s Trade Reporting and Compliance Engine (TRACE).
Discussion Paper
Primary Dealer Participation in the Secondary U.S. Treasury Market
The recent Joint Staff Report on October 15, 2014, exploring an episode of unprecedented volatility in the U.S. Treasury market, revealed that primary dealers no longer account for most trading volume on the interdealer brokerage (IDB) platforms. This shift is noteworthy because dealers contribute to long-term liquidity provision via their willingness to hold positions across days. However, a large share of Treasury security trading occurs elsewhere, in the dealer-to-customer (DtC) market. In this post, we show that primary dealers maintain a majority share of secondary market trading volume ...
Report
Securities lending
This paper, originally released in August 1989 as part of a Federal Reserve Bank of New York series on the U.S. securities markets, examines loans of Treasury and agency securities in the domestic market. It highlights some important institutional characteristics of securities loan transactions, in particular the common use of agents to arrange the terms of the loans. While we note that this characteristic sets securities lending apart from most repurchase agreement (repo) transactions, which occur bilaterally between a borrower and a lender, we observe that repo and securities loan ...
Discussion Paper
What’s behind the March Spike in Treasury Fails?
U.S. Treasury security settlement fails—whereby market participants are unable to make delivery of securities to complete transactions—spiked in March 2016 to their highest level since the financial crisis. As noted in this post, fails delay the settlement of transactions and can therefore lead to illiquidity, create operational risk, and increase counterparty credit risk. Fails in the Treasury market attract particular attention because of the market’s key role for global investors as a pricing benchmark, hedging instrument, and reserve asset. So what drove the March spike? In this ...
Report
Expected repo specialness costs and the Treasury auction cycle
Repo rates for the most recently issued or "on-the-run" securities often diverge from general repo rates. The purpose of this study is to convey that relatively sizable divergences in repo rates for on-the-run issues are normal repeating events for the Treasury market, rather than evidence of abnormal circumstances. The costs associated with these repo market premia are small for short holding periods and are sometimes offset by gains from declining cash market premia for longer holding periods. Moreover, repo specialness costs seem small when considered against the alternative of not ...
Discussion Paper
The Treasury Market Practices Group: A Consequential First Decade
The Treasury Market Practices Group (TMPG) was formed in February 2007 in response to the appearance of some questionable trading practices in the secondary market for U.S. Treasury securities. (A history of the origins of the TMPG is available here.) Left unaddressed, the practices threatened to harm the efficiency and integrity of an essential global benchmark market. The Group responded by identifying and publicizing “best practices” in trading Treasury securities—a statement of behavioral norms intended to maintain a level and competitive playing field for all market participants. ...
Discussion Paper
Do You Know How Your Treasury Trades Are Cleared and Settled?
The Treasury Market Practices Group (TMPG) recently released a consultative white paper on clearing and settlement processes for secondary market trades of U.S. Treasury securities. The paper describes in detail the many ways Treasury trades are cleared and settled? information that may not be readily available to all market participants?and identifies potential risk and resiliency issues. The work is designed to facilitate discussion as to whether current practices have room for improvement. In this post, we summarize the current state of clearing and settlement for secondary market Treasury ...
Journal Article
Securities loans collateralized by cash: reinvestment risk, run risk, and incentive issues
Securities loans collateralized by cash are by far the most popular form of securities-lending transaction. But when the cash collateral associated with these transactions is actively reinvested by a lender?s agent, potential risks emerge. This study argues that the standard compensation scheme for securities-lending agents, which typically provides for agents to share in gains but not losses, creates incentives for them to take excessive risk. It also highlights the need for greater scrutiny and understanding of cash reinvestment practices?especially in light of the AIG experience, which ...
Journal Article
Mortgage refinancing and the concentration of mortgage coupons
Because of the concentrated distribution of interest rates on outstanding mortgages, modest interest rate declines in 1997 and 1998 made refinancing a smart choice for a record number of homeowners. In addition, the strong economy and the age of mortgage loans likely contributed to the surge in refinancing activity.