US Treasury, Agency Debt and Agency Mortgage-Backed Securities Fails Charge Calculator


 

The Federal Reserve Bank of New York's (FRBNY) Treasury Market Practices Group's (TMPG) recommendations to impose a financial penalty on fails in US Treasury securities have been effective in reversing the trend of 'widespread and persistent' settlement fails. The TMPG similarly recommended a fails charge be applied to Agency Debt (debentures issued by Fannie Mae, Freddie Mac, or the Federal Home Loan Bank) and Agency Mortgage-Backed Securities, with the objective of reducing the incidence of fails in those markets as well. Details of TMPG's recommendations for best practices and FAQs are available at www.newyorkfed.org/tmpg.

On interdealer trades in US Treasuries and Agency Debt, FICC automatically performs a calculation of debits and credits on failed settlement obligations to be accrued and applied to GSD members monthly bills.

For fails on trades in US Treasuries or Agency Debt where non-members of FICC are involved, or on any trades in Agency Mortgage-Backed Securities that fail to settle on contractual settlement date, a buyer who does not receive securities from a seller on the agreed settlement date is strongly encouraged by TMPG to submit a claim to the seller for fails penalty charges. The recommended threshold for collection is aggregated cumulative fails charges in amounts greater than $500, between two legal entities that are counterparties to one another for a given month.

For US Treasuries and Agency Debt Securities, the rate at which penalty charges will accrue is equal to the greater of: a) 0 percent, and b) 3 percent per annum, minus the fed funds target rate. For Agency Mortgage-Backed Securities, the rate is equal to the greater of: a) 0 percent, and b) 2 percent per annum, minus the fed funds target rate.

The fed funds target rate used in the calculation is the Federal Open Market Committee (FOMC) target federal funds rate, or the lower limit of the target band. Current and historical rates are published on the Federal Reserve Bank of New York's website.

Click here to access Jordan & Jordan's Fails Charge Calculator to assist in validating your computations for claims on fails in US Treasury Securities, Agency Debt, and Agency Mortgage-Backed Securities. To use the Fails Charge Calculator, follow these simple instructions.

To calculate 'C', the claim amount in dollars:

  1. Indicate the type of security for which you are calculating a fails charge; that is, US Treasury, Agency Debt, or Agency Mortgage-Backed Security.
  2. Enter 'n', where n = the number of calendar days from and including the failed settlement date, up to but not including the actual date when delivery was made.
  3. Enter 'R', where R = the TMPG reference rate at the close of business on the business day preceding the fail, in percent per annum. Should the reference rate change during the fail period, separate calculations must be made for the respective periods. (Currently the TMPG reference rate is the target federal funds rate specified by the Federal Open Market Committee ('FOMC'), or the lower limit of a target band if specified by the FOMC; e.g. R = 0.25 where the target band is 0.25-0.50. In cases where a target rate or band has not been specified by the FOMC, the TMPG will recommend some other readily observable short term interest rate.)
  4. Enter 'P', where P = total proceeds due from the buyer, in dollars.

Our industry experts with years of experience in US government and mortgage-backed securities operations can help mitigate fails with adjustments to operational procedures and trading strategies. And, we can recommend procedures to better manage Cross Border collateral movements to minimize fails costs and possible fines. Jordan & Jordan can also help develop customized tracking and reporting programs to monitor fails and manage claims processing. Contact Jordan & Jordan to discuss how your firm's approach to handling fails can be improved.