Minutes of Money Markets Committee meeting – May 2022
Item 3 – Failed Trades: what can the code do to address reported increased levels? (Mike Jones and Christopher Mundy)
Mike Jones and Christopher Mundy gave a short presentation to the Committee highlighting the increase in fails in the gilt repo market against the backdrop of an increase in repo volumes. The temporary extension to the DVP window (up till 3.25pm) and proactively chasing counterparties seems to have led to a slight improvement in ‘fails’, however the level of ‘fails’ are still too high. The Committee felt that there was a need to investigate which type of counterparties are ‘failing’.
On the reasons for fails, these were listed as follows: (i) counterparties in a chain failing thus causing a ripple effect in the market; (ii) low liquidity; (iii) timing; (iv) operational friction and; (vii) the impact of COVID (in terms of staff turnover and the levels of inexperienced staff that this has caused and working from home). The Committee was eager to ‘get to the bottom’ of why fails have increased. Some of the potential solutions discussed were: (i) allowing partial settlement; (ii) encouraging investment in settlement efficiencies; (iii) auto-partialling; (iv) Euroclear’s autoborrow programme; (v) the introduction of fines, which did not receive overwhelming support from the Committee and (vi) monitoring settlement efficiencies.
With regards to partial settlement, the Committee discussed including some wording in the Code on this. The Committee further discussed amending the Explanatory Note of the Code to address the issues of fails in the gilt market.
The Committee also discussed: (i) gathering more information on the impact of auto-partialling; (ii) some evidence around how partialling is being used and; (iii) introducing a ‘Hot Topic section on fails when the Code is next updated.
The Bank noted that it was unhappy to see the current level of fails, particularly in the repo market, and urged all market participants to work together to rectify this. In the Bank’s view it reflected very poorly on the efficiency of the London market although it was noted that fails were also currently a significant problem in many international markets.
The Committee was informed that the settlement window is likely to be extended permanently very soon.
The full minutes are available at https://www.bankofengland.co.uk/minutes/2022/july/money-markets-committee-minutes-may-2022