Why does the TMPG recommend a financial charge on settlement fails?
Persistent elevated fail levels create market inefficiencies, increase credit risk for market participants and heighten overall systemic risk. In higher rate environments, the time value of money that is lost when delivery is not made as contracted provides an incentive to sellers to deliver bonds as agreed. Given that this incentive is smaller in low short-term rate environments, sellers are less sensitive to the timeliness of delivery. The TMPG recommends a financial charge to provide an incentive to sellers to deliver securities in a timely fashion and to therefore reduce overall fail levels.