Michael Fleming and Kenneth Garbade of the Federal Reserve Bank of New York detail the policy issues arising from the high level of settlement fails in the US treasury securities market after 9/11.
Following the September 11 attacks, many sellers of treasury securities failed to meet their obligation to deliver the securities on the scheduled date. Settlement 'fails' jumped from $1.7 billion a day in the week ending 5 September to $190 billion a day in the week ending 19 September.
Fails rose initially because of the destruction of trade records and communication facilities. However, they remained high because the method typically used to avert or remedy a fail — borrowing a security through a special collateral repurchase agreement — proved as costly as failing to deliver the security.
The US Treasury responded to the fails problem by reopening the on-the-run ten-year note. The increased supply made borrowing the note more attractive than failing.
Such re-openings are unlikely to become a recurrent debt management tool. The authors instead posit alternative solutions to chronic fails, including the creation of a Treasury facility that could lend specific securities on a temporary basis and the institution of a penalty fee for fails.
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