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

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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.

Suggested Citation

  • Michael J. Fleming, 2012. "Failure Is No Longer a (Free) Option for Agency Debt and Mortgage-Backed Securities," Liberty Street Economics 20120319, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:86794
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    Keywords

    settlement fails; Treasury Market Practices Group; mortgage-backed security; fails charge;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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