For those of you who are particularly active in the Agency MBS sector, I’m sure you’re well aware that the TMPG (Treasury Market Practices Group) has decided to begin charging anytime there’s a failure to deliver securities. From the TMPG:
For fails in Treasury and agency debt securities, the TMPG recommends that a settlement fails charge be calculated each day based on the greater of (a) 3 percent per annum minus the TMPG reference rate* at 5:00 p.m. New York time on the preceding business day, and (b) zero. When the TMPG reference rate is greater than or equal to 3 percent under the current formula, there will be no explicit financial charge for failing, and under this formulation the fails charge will be capped at 3 percent per annum.
This new fails charge goes into effect for all transactions taking place after Feb 1, 2012 and will apply to any securities that remain unsettled after this date. Here’s a look at where we are in terms of fails for the Agency market based on the most recent NYFRPD Primary Dealer report
It will be interesting to see in the coming months ahead of the effective rule to see how people begin to respond to this, for some hint as to how this may play out, let’s look at US Treasury fails since the fails charge was enacted on May 1, 2009 in that market:
You can read the full TMPG announcement for the Agency Fails Charge at this link