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US treasury market and fails to deliver – The history: dealers have resisted improvements in their greed for profits

For years, efforts by the US Treasury itself to formally resolve the growing fails issue have been brushed aside by market participants as unnecessary.

Jeff Huther, the former director of the Office of Debt Management at the Treasury had battled for several years for a solution, getting as far as a White Paper produced in April 2006 suggesting stricter enforcement of delivery and penalties.

No need, responded the Bond Market Association. “The Association has worked with its members [bond traders and dealers] to address chronic fail issues with respect to risk, pricing and liquidity,” it asserted. “Indeed, the Association has focused its efforts on developing pre-emptive practices that would make it unlikely that a significant fails event would occur.”

That was in spite of warnings by Treasury Committee members themselves at the end of 2005 that the chronic fails had begun to affect the mortgage-backed and corporate bond markets. Trimbath believes that given that a blind eye was turned to fails in the treasuries markets, that in turn encouraged fails to deliver in the mortgage bond markets and to a lesser extent the corporate bond market. “In 2004 the failure to deliver rate for government agency MBS was 40%,” she says.

Significant fails in 2003 caused chaos for treasury market participants, but still no penalty was introduced.

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