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GESTANTES

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Fails


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Finally, we show that the May 2009 implementation of a three percent fails charge for Treasury securities marginally improved the situation: the dealer-specific pass-through from fails to receive to fails to deliver Treasuries is reduces from 90% to about 83%. This decline seems not to be due to a market-wide improvement, since in the same time frame the pass-through for GSE MBS fails increases.


Form C reports settlement fails, at principal value. Both fails to deliver or receive securities are broken down by security class (Treasuries, Agency Debt, Agency MBS, and Corporate Securities). Fails are reported on a cumulative basis within the reporting period, which ends every Wednesday at close of business: "[f]ailed transactions that are outstanding two days or more should be summed each day they are outstanding during the reporting period". Moreover, fails include the principal value of the securities that were not delivered (received) for outright sales (purchases) and the amount that was to be paid or received as part of a financing transactions. In the start leg of a repo, the dealer sends securities out and in the end leg it receives securities back; a dealer may fail to receive securities back in the end leg of the repo, in which case it does not return the cash and essentially starts borrowing at zero percent until it receives the securities back. Conversely, in the start leg of a reverse repo the dealer receives securities, and in the end leg it sends securities back; a dealer's failure to deliver securities can occur in the end leg, at which point the dealer essentially starts lending at zero percent until it delivers the securities back. In May 2009 a three percent fails charge was applied to Treasuries settlement fails, and in February 2012 to Agency Debt and Agency MBS fails. For more details on settlement fails see Fleming, Garbade (2005).


A daisy chain is started, whereby failing to receive a security translates into failing to deliver the same security to another player. If collateral re-hypothecation is widespread the chain of fails can cause a market-wide deterioration of liquidity for that security: agents who are supposed to receive such security are unable to obtain it within the agreed upon timeline.


$$$$ \beginalign\Delta FTD_i,t &= ( \alpha_0 \Delta FTR_i,t + \beta_0 \Delta Net\ Pos_i,t ) * PreBear_t + ( \alpha_1 \Delta FTR_i,t + \beta_1 \Delta Net\ Pos_i,t ) * \\ &* PostBear_t + ( \alpha_2 \Delta FTR_i,t + \beta_2 \Delta Net\ Pos_i,t ) * PostLehman_t + \mu_t + \varepsilon_i,t \endalign$$$$ where $$\Delta FTD$$ is the first difference in the dollar value of securities that a dealer fails to deliver, and $$\Delta FTR$$ is the analogous for fails to receive. $$\Delta Net\ Pos$$ is the weekly change in the dollar value of net positions. Each regression focuses on a certain class of securities that are not received and delivered, from Treasuries to corporate securities. Net positions match the asset class related to the settlement fail.


Robust standard errors in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01. FTD stands for fails to deliver, FTR for fails to receive. FTR and Net Position both refer to the same asset class of the FTD.


Table 1 shows that settlement fails are indeed systemic events: the dealer-specific pass-through from fails to receive to fails to deliver is around 90% to 100% across collateral types and time periods. Moreover, it seems that the average dealer does not buy securities outright (it does not expand net positions in that asset class) to cure the chain of settlement fails. In unreported results, we also control for the weekly change in securities in for the same collateral, and results are unchanged: the average dealer does not borrow securities to cure the chain of fails.


Robust standard errors in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01. FTD stands for fails to deliver, FTR for fails to receive. Net Bills and Net Coupons refer to net positions in Treasury bills a




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