Financial Risk Management
Trade Settlement Failures in the US Bond Markets

Article Details
Pub. Date : Dec, 2021
Product Name : The IUP Journal of Financial Risk Management
Product Type : Article
Product Code : IJFRM11221
Author Name : Susanne Trimbath*
Availability : YES
Subject/Domain : Finance Management
Download Format : PDF Format
No. of Pages : 16



In the original study, initiated in 2007 and published 10 years ago (Trimbath, 2011), we estimated the total value of trade settlement failures in the US bond markets at about $600 bn (as of April 2008), a fail rate of nearly 9%. The fail rate dropped to an average of 5.7% in 2020, although the peak was over 12% (March 18, 2020) with a value of $866 bn -a 44% increase in value from the April 2008 figure (10.5% in real dollar terms). While the total value of government debt issued increased, only 2.2% of the increase in settlement fails can be attributed to increases in total government debt. In the 2011 paper, we debunked reasons commonly given by market participants and accepted by regulators for trade settlement failures. In this update, we delve into the "how" of settlement failures and explain the way that payments in lieu of interest could be distributed by brokers that "failed-to-receive" bonds at settlement for their customers. We also provide an update on systemic regulatory issues. In this regard, we find it necessary to introduce a discussion that goes beyond the US: the passage and implementation of a settlement discipline regime in the European Union.


The subject of trade settlement failures (Failure-to-Deliver or FTD)1 in equity markets began to receive increasing attention from the Securities and Exchange Commission (SEC) with the implementation of Regulation SHO in 2005 and subsequent revisions in 2007 and 2008. According to data and staff research available from the Federal Reserve Bank of New York (FRB-NY), settlement failures have long been prevalent in the market for US Treasury bonds (including bills and notes) and corporate bonds. In a 2014 update to their earlier work, FRB-NY researchers noted peaks in Treasury market FTDs "after September 11 (2001), in the summer of 2003 and after the failure of Lehman Brothers" (2008) (Fleming et al., 2014a).Trades in Treasury bonds for which the FRB-NY is not a party (neither buyer nor seller) may be settled at a privately run clearing corporation, such as the Fixed Income Clearing Corporation (FICC), a subsidiary of the Depository Trust and Clearing Corporation (DTCC).