The Treasury Market Pratice Group (TMPG) published it's proposed fails charge for agency MBS and debt set to take effect early next year. The trade group is taking comments on the proposal until June 10.
TMPG proposed that for the agency debt market, the proposed fails charge would accrue each calendar day a fail is outstanding. It will also have a $500 minimum claim as a threshold, which is like the recommended Treasury market fails charge. Fannie Mae, Freddie Mac and the Federal Home Loan Banks debentures would fall under this charge.
For agency MBS, the proposed fails charge will accrue each calendar day a fail is outstanding, although the fail would not be subject to a charge if delivery happens on either of the two business days after the contractual settlement date, which is called the resolution period.
Meanwhile, the charges for fails settled in a given calendar month would be aggregated between legal counterparties, and a claim will be made if the aggregate charges for the month exceed $500. Agency MBS issued or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae would fall under this charge.
The TMPG suggested the two-day resolution period so that market players can resolve operational fails. It also recognizes the nature of clearing and settlement in the agency MBS market. The TMPG may actually look at a shorter resolution period or even the complete removal of the resolution period if circumstances warrant it.
According to a release from the trade group, the historically elevated levels of fails in these markets create inefficiencies, increase credit risk as well as heighten overall systemic risk.
The release added that by duplicating incentives in a higher-rate environment to deliver securities in a timely manner, the proposed fails charges should reduce fails. Introducing these charges supports the efficiency and liquidity of the agency debt and agency MBS markets.
BNP Paribas research said that more than $6 million in principal would mean a one-day fail charge of less than $500 at a fed funds rate of 0%. Analysts reiterated their belief that because of Treasury selling its MBS portfolio it gave the agency a 'moral' basis to go ahead with a fails charge.
According to Barclays Capital analysts, even though there could be some changes in the resolution period's length (this is for dealing with operation fails), they mostly expect a final fails charge to be implemented along the lines indicated by TMPG.
Barclays analysts believe that the effect on the market from today's TMPG announcement should only be modest.
On the margin, they said, it is positive for the basis, applying to up-in-coupon trades and rolls. Meanwhile, it will be negative for specified pool pay ups. The market, analysts said, has been well aware of the likelihood of a fails charge for some time and has already priced those charges into the market.