Treasury Market Practices Group
Fails Charge Market Practice
Asset Management and Custodian Industry Procedures
The proposed industry procedures in this paper are subject to review by all market participants.
Written comments are welcome and should be sent to Elisa Nuottajarvi ([email protected])
of the Asset Management Group/SIFMA staff.
April 23, 2009
Asset Management and Custodian Industry Procedures
The Treasury Market Practices Group (TMPG) has recommended a new market practice for claiming a
fails charge for a settlement fail in U.S. Treasury securities. The goal of this new practice is to enhance
efficient functioning of the U.S. Treasury market. TMPG states: the cost to the party failing to deliver
securities will provide a compelling incentive to resolve fails promptly. The fails charge market practice
will take effect on May 1, 2009.
The Asset Management Group of SIFMA and The Asset Managers Forum formed a working group
composed of asset managers and global custodians to review the TMPG fails charge market practice and to
develop procedures to implement buy side processes in relation to claiming a fails charge. These processes
include, among other items, reporting, researching and tracking of fails, calculation of fail charges,
determining who is responsible for the claim, sending/receiving claims, accounting for claims.
A buyer who fails to receive Treasury securities on the originally scheduled settlement date of a
transaction will submit a claim for a “fails charge” from the failing seller.
The fails charge recommended by the TMPG applies to any delivery-versus-payment settlement in
Treasury securities (including Repo) that failed to settle as scheduled, regardless of the transaction that led
to the settlement obligation. The TMPG recommendation does not, however, cover “free deliveries,”
where a recipient is not obliged to make a payment upon receipt of Treasury securities.
The TMPG recommends that fails charges be:
(1) Accrued over the life of a delivery failure;
(2) Submitted by the tenth business day of the following month; and
(3) Either accepted or rejected by the last business day of the month in which they were submitted.
The plan for action includes target dates of:
•
May 1, 2009, for commencing accruals of fails charges for transactions entered into on or after
May 1, 2009;
•
June 12, 2009, for the first monthly submission of claims; and
•
June 30, 2009, for responding to the first monthly submission of claims.
The TMPG Fails Charge Formula:
The fails charge is equal to 3 percent per annum minus the lower limit of the fed funds target rate at the
close of business on the preceding business day, or zero, whichever is greater. When the fed funds target
rate is greater than or equal to 3 percent under the formula below, there will be no explicit financial charge
for failing, and under this formulation the fail charge will be capped at 3 percent per annum.
C = 1/360 *.01* max(3 − R, 0) * P
C = Claim amount, in dollars
R = TMPG reference rate at the close of business on the business day preceding the fail, in
percent per annum
P = Total proceeds due from buyer in dollars.
Under this formula, R = for each day, the TMPG reference rate at 5:00 p.m. New York time on the
preceding business day. This means that if there is a change in the TMPG reference rate in the middle of
the term of a delivery failure, "R" will be that new rate for subsequent days of the fail (assuming that the
TMPG reference rate does not again change during the remaining term of the delivery failure).
The current TMPG reference rate is the target federal funds rate specified by the Federal Open Market
Committee (FOMC) (if the Committee specifies a target rate) or the lower limit of the target band
specified by the FOMC (if the Committee specifies a target band in lieu of a target rate). In the event the
FOMC specifies neither a target rate nor a target band, the TMPG will recommend some other similar,
readily observable, short term interest rate.
Minimum Claim Threshold
The minimum claim threshold amount of $500.00 will be applied at the allocated trade level, on a tradeby-trade basis. The amounts will not be netted or aggregated for claim purposes, but may be aggregated
and netted by custodian to facilitate the wire transfer at the end of the period.
Accrual Method for Monthly Billing
TMPG fails charge claims will be generated on an actual settlement basis and billed during the monthly
period following the month in which the trade settles.
Workflow
• All claims should be sent to the asset manager who will determine who is responsible for the
claim, i.e. the asset manager, custodian or dealer. If the asset manager determines that custodian is
responsible, the claim will be sent to the custodian. This process will be aided by enhanced fail
reporting received from custodians and dealers.
• Asset managers will leverage the existing claims process to review penalty claims and work with
dealers and custodians to facilitate resolution and payments.
• Custodians will also leverage the existing claims process to compensate client accounts for
custodian errors, including custodian securities lending operations. For this scenario, we would
look to the custodian bank to cover the claim payment.
• A summary workflow, outlining responsible parties and reporting flows for fail penalties is
attached.
2
Custodian Bank Fail Reporting
• Custodian banks will provide asset managers a cumulative fail report, detailing all Treasury fails
during the period, by client account, by dealer. The cumulative report will be available on the first
business day of the next month, or as soon as possible thereafter. The recommendation is to
include the following data elements, including length of the fail and the calculated fail penalty
amount for each fail as part of the report detail. (See a sample template in Appendix 1.)
Account Number (Client Account Number at Custodian)
Account Name (Client Name)
Transaction Type (Buy/Sell)
Client Reference (Asset Manager’s Client Reference Number or acronym)
Security Identifier (CUSIP, SEDOL, ISIN, etc.)
Security Name (Security Description)
Quantity (Nominal Amount)
Settlement Amount (Net/Principal Amount)
Trade Date
Contractual Settlement Date
Actual Settlement Date
Number of Days Failing
Fail Reason Code (Brief Description of Fail)
C/P (Broker ID – DTCC Participant Number)
Counterparty Name
Penalty Amount
3
Dealer Fails Claims Reporting
• In order to process fails claim charges, dealers will report to asset managers their Treasury fails to
receive from the asset manager, custodian bank and/or client account. It is expected that to
process fails claims the dealers will need to incorporate many of the same data elements as the
custodian fails report noted above.
“Out of Box” Positions
• Several scenarios can cause an operational fail, which may generate a fail penalty for a client
account. The scenarios, such as securities lending and securities pledged as collateral for swaps,
futures or other deposit requirements, may be subject to claims and/or reimbursement to the client
account.
Partial Deliveries
• The asset manager may ask the dealer to accept partial deliveries if they are not able to deliver the
full amount. If the dealer is willing to take in partial deliveries, the claim charge would only
pertain to that portion that was not delivered. However, based on TMPG guidance, if the buyer
wants to receive the full delivery from the seller, and seller only delivers partials, the buyer is
entitled to claim on full amount of the underlying transaction.
Custodian Product Offering
• Service offerings differ across custodian banks. Each custodian will need to communicate their
approach to providing “actual” fail reporting for contractually settling accounts and clarify
whether or not they will provide fail penalty/claim management services for their client accounts.
In the absence of custodian claim management services, asset managers are expected to send and
receive claims leveraging their existing claims process.
Securities Lending
• The handling of fails charge claims resulting from securities lending transactions would follow the
existing claims process. Once the asset manager determines that they did not cause the fail, the
claim would be forwarded to custodian, which will work with either internal lending team to
resolve the claim or a third party lending agent.
Hedge Funds
• Since settlement and clearance services are typically performed through a prime brokerage
account, it is expected that fail charges will follow the dealer-to-dealer process. To the extent that
the hedge fund follows the “institutional custody account” workflow, it will follow the processes
outlined here.
TMPG Fails Charge Start Date
• The TMPG has recommended that the fails charge trading practice be implemented with respect
to transactions entered into on or after May 1, 2009. Thus, fails charge calculations start with a
contracted settlement date of May 1 or later. Open fails with a contracted settlement date prior
to May 1, would not be eligible.
4
Euroclear and Clearstream Settlements
• The TMPG fails charge market practice applies to any delivery-versus-payment settlement in
Treasury securities, including transactions settled in Euroclear or Clearstream.
$50 Million Fedwire Good Delivery Increments
• The Fedwire® Securities Service settlement limit for U.S. Treasury Securities is $50 million on
the par value of individual securities transfers. The TMPG fails charge claims will be handled on
that level, even though the actual trade amount may be larger. (E.g. a $55mm trade is delivered in
two pieces, $50mm and $5mm, each of which will be assigned a separate confirm and will settle
discreetly. If the entire $55mm trade fails, both the $50mm and $5mm will require a separate fails
charge claim.) Custodian Bank Reporting will reflect the transaction as it was instructed.
Dealer Time
• The TMPG has indicated that the broader topic is under discussion by the Group. For the
purposes of the fails charge market practice implementation, it is important that both asset
managers and custodians understand how to handle the cutoff times for purposes of fail penalty
calculation. Settlements during dealer time will be considered on a case-by-case basis and
discussed with dealer. Asset managers may consider settlements that occur during dealer time as a
failed trade for that business day, because asset managers/custodians cannot deliver securities back
out in order to satisfy “turned” trades, thus possibly causing a mismatched fail in the client
account. In this scenario, a delivery during dealer time would be considered as failing for that day
and would likely result in a penalty charge to the dealer, as determined on a case-by-case basis.
Accounting and Tax Treatment
• The accounting for the fails charge should be made at the fund level, under the assumption that
the fund would be the entity that is obligated to make any required payment to (or received from)
the counterparty even if the fund would be reimbursed by one of the agents acting on behalf of
the fund (i.e. asset manager or custodian), to the extent they were the actual party responsible for
the fail transaction. The accounting for the failed charge should occur at the time of the
transaction but in any case, as frequently as the entity is required to do financial reporting to the
extent the items are material. On daily NAV funds there is a presumption that the NAV is
computed on the basis of generally accepted accounting principles and therefore such amounts
should be recorded daily, if material. On monthly NAV accounts, the asset manager may
summarize the fails charges in aggregate and post to the accounts monthly. Some asset managers
may choose to accrue fails charges on a daily basis for all their funds regardless of the frequency
of the NAV computation. Since the charges relate to investment transactions, the fails charge
should be recorded in a gain or loss account as opposed to operating expense or investment
income account. In connection with tax treatment, asset managers and custodians are urged to
seek the advise of their in-house tax counsel.
Important Documents
• Frequently Asked Questions: Claiming a Fails Charge for a Settlement Fail (3/31/2009)
• U.S. Treasury Securities Fails Charge Trading Practice (3/31/2009)
• Treasury Market Best Practices Revised (3/31/2009)
• Claiming a Fails Charge for a Settlement Fail in U.S. Treasury Securities (1/5/2009)
5
Account
Name
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
Account
Name
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
ABC Fund
Account
Number
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
Account
Number
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
1234567
Trans
Type
DVP
DVP
DVP
DVP
DVP
DVP
DVP
DVP
DVP
DVP
DVP
DVP
DVP
Trans
Type
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
RVP
Client Ref
#
B82391
B8120
B2283
B3838
B7272
B2018
B3712
B9801
B9182
B77212
B2765
B2341
B83463
Client Ref
#
A70105
A712335
A754123
A75643
A756894
A75694
A1259
A45973
A36754
A1964
A12223
A75493
A1874
A32366
A327996
A19548
A11779
A45998
Sec Identifier
912795-S3-6
912828-HF-0
912803-CX-9
912828-JR-2
912828-JR-2
912828-EQ-9
912828-GR-5
912828-HM-5
912828-KB-5
912833-7Q-7
912828-HR-4
912795-Q7-9
912828-HR-4
Sec Identifier
912828-KD-1
912828-HR-4
912828-HF-0
912828-HM-5
912828-JR-2
912828-JR-2
912828-GR-5
912820-EM-5
912803-CX-9
912833-2D-1
912828-GL-8
912833-7Q-7
912828-HR-4
912795-Q7-9
912833-7Q-7
912828-KB-5
912795-S3-6
912828-EQ-9
Sec name
UST BILLS DUE 9/24/09
US TREAS NTS 3.625% 10/31/09
US TREAS PRIN STRIP 0% 2/15/36
US TREAS NTS 3.75% 11/15/18
US TREAS NTS 3.75% 11/15/18
US TREAS NTS 4.375% 12/15/10
US TREAS NTS 4.5% 05/15/10
US TREAS NTS 3.625% 12/31/12
US TREAS NTS 1.125% 01/15/12
US TREAS BD STRIPS 0% 11/15/31
US TREAS NTS 3.5% 02/15/18
US T Bill ZCB 06/04/09
US TREAS NTS 3.5% 02/15/18
Sec name
US TREAS NTS 2.75% 02/15/19
US TREAS NTS 3.5% 02/15/18
US TREAS NTS 3.625% 10/31/09
US TREAS NTS 3.625% 12/31/12
US TREAS NTS 3.75% 11/15/18
US TREAS NTS 3.75% 11/15/18
US TREAS NTS 4.5% 05/15/10
US TREAS PRIN STRIP 0% 2/15/10
US TREAS PRIN STRIP 0% 2/15/36
US TREASURY BILL 0% 4/15/09
US TREAS NTS 4.5% 03/31/09
US TREAS BD STRIPS 0% 11/15/31
US TREAS NTS 3.5% 02/15/18
US T Bill ZCB 06/04/09
US TREAS BD STRIPS 0% 11/15/31
US TREAS NTS 1.125% 01/15/12
UST BILLS DUE 9/24/09
US TREAS NTS 4.375% 12/15/10
Quantity
30,000,000
30,000,000
3,000,000
50,000,000
50,000,000
40,000,000
40,000,000
1,000,000
10,000,000
25,000,000
25,000,000
20,000,000
50,000,000
Quantity
46,000,000
11,800,000
41,000,000
10,000,000
50,000,000
50,000,000
36,000,000
1,206,000
4,365,000
1,305,000
14,000,000
50,000,000
50,000,000
41,000,000
50,000,000
16,000,000
20,000,000
50,000,000
Settlement Amount
$29,124,000.00
$32,544,000.00
$1,230,000.00
$54,244,000.00
$54,244,000.00
$43,166,000.00
$41,255,000.00
$1,131,000.00
$12,875,000.00
$11,244,000.00
$26,005,000.00
$17,364,000.00
$51,184,000.00
Settlement Amount
$47,369,000.00
$11,879,380.00
$44,200,000.00
$11,124,000.00
$54,236,000.00
$54,236,000.00
$36,875,000.00
$1,199,475.00
$1,791,000.00
$1,284,628.00
$14,717,500.00
$22,341,000.00
$51,125,000.00
$38,451,000.00
$22,546,000.00
$19,100,000.00
$19,354,000.00
$54,187,000.00
Contractual
Trade date Settlement Date
5/3/2009
5/3/2009
5/1/2009
5/1/2009
5/5/2009
5/6/2009
5/4/2009
5/4/2009
5/4/2009
5/4/2009
5/5/2009
5/5/2009
5/11/2009
5/11/2009
5/12/2009
5/12/2009
5/16/2009
5/17/2009
5/18/2009
5/19/2009
5/21/2009
5/22/2009
5/21/2009
5/22/2009
5/24/2009
5/24/2009
Trade date
5/1/2009
5/1/2009
5/1/2009
5/4/2009
5/1/2009
5/1/2009
5/4/2009
5/8/2009
5/11/2009
5/12/2009
5/13/2009
5/18/2009
5/21/2009
5/21/2009
5/25/2009
5/11/2009
5/27/2009
5/28/2009
Contractual
Settlement Date
5/4/2009
5/4/2009
5/4/2009
5/4/2009
5/4/2009
5/4/2009
5/4/2009
5/8/2009
5/14/2009
5/12/2009
5/13/2009
5/18/2009
5/22/2009
5/22/2009
5/25/2009
5/14/2009
5/27/2009
5/28/2009
Appendix 1
Actual Settlement
Date
5/4/2009
5/4/2009
5/7/2009
5/8/2009
5/8/2009
5/8/2009
5/14/2009
5/14/2009
5/18/2009
5/25/2009
5/25/2009
5/25/2009
5/26/2009
Actual Settlement
Date
5/5/2009
5/5/2009
5/6/2009
5/6/2009
5/8/2009
5/8/2009
5/8/2009
5/12/2009
5/15/2009
5/15/2009
5/15/2009
5/19/2009
5/25/2009
5/27/2009
5/27/2009
5/28/2009
5/28/2009
5/29/2009
# days
failing
1
3
1
4
4
3
3
2
1
6
3
3
2
# days
failing
1
1
2
2
4
4
4
4
1
3
2
1
3
5
2
14
1
1
Fail
Reason
Code
Fail
Reason
Code
C/P
9335
8397
274
573
573
5186
8397
274
901
9335
642
642
53
C/P
901
901
53
8397
274
274
642
573
53
53
9335
642
5186
9335
8397
9335
5186
573
Penalty
$2,427.00
$8,136.00
$102.50
$18,081.33
$18,081.33
$10,791.50
$10,313.75
$188.50
$1,072.92
$5,622.00
$6,501.25
$4,341.00
$8,530.67
$94,189.75
Total Claims to be Received
$128,763.85
Total Claims to be submitted
Counterparty Name
BZW Secs
Societe Generale
Citigroup Global Mkts Inc
Deutsche Bank Securities Inc
Deutsche Bank Securities Inc
Chase Securities Inc
Societe Generale
Citigroup Global Mkts Inc
Bank of NY
BZW Secs
UBS Securities Inc
UBS Securities Inc
BNP Paribas Securities Corp
Penalty
$3,947.42
$989.95
$7,366.67
$1,854.00
$18,078.67
$18,078.67
$12,291.67
$399.83
$149.25
$321.16
$2,452.92
$1,861.75
$12,781.25
$16,021.25
$3,757.67
$22,283.33
$1,612.83
$4,515.58
Counterparty Name
Bank of NY
Bank of NY
BNP Paribas Securities Corp
Societe Generale
Citigroup Global Mkts Inc
Citigroup Global Mkts Inc
UBS Securities Inc
Deutsche Bank Securities Inc
BNP Paribas Securities Corp
BNP Paribas Securities Corp
BZW Secs
UBS Securities Inc
Chase Securities Inc
BZW Secs
Societe Generale
BZW Secs
Chase Securities Inc
Deutsche Bank Securities Inc