To create an incentive to settle trades in federal government bond and T-bill transactions, a new framework to levy fees for failed trades will be undergoing a test period starting next month.
Beginning Sept. 8, a trial program will start to test the application of a fee for failed transactions in federal government securities — a measure designed to “create financial incentives for timely settlement, especially in a low interest rate environment.”
The trial was announced by an industry working group, the Collateral Infrastructure and Market Practices Advisory Group (CIMPA), and the Canadian Depository for Securities (CDS).
While the government bond market isn’t currently facing a problem with failed trades, the new fee is intended to serve as an insurance policy, the CIMPA noted in a paper outlining the program.
“It preserves an economic incentive to deliver securities in a zero/negative interest rate environment, when the incentive normally provided by the overnight rate vanishes,” it said.
In the initial trial period, which will run for 18 months, the fee won’t actually be collected — instead, the fees that would have been charged will be recorded and reported to firms, which will give industry firms a sense of how these fees will work in practice.
“During the first stage, fail rates will be publicly disseminated and an audit trail of failed transactions and indicative fail fee invoices will be provided to CDS participants,” it said.
After the results of the test period are analyzed, the CIMPA will make a recommendation to the Canadian Fixed-Income Forum (CFIF), which will determine whether to turn on the fail fee or not.
If the fee is adopted after that, it would initially be set at 50 basis points — although if “fails become elevated and persistent,” an added fee component would be activated, “increasing the total incentive to a maximum of 150 bps.”