When the Back Office Moved to the Front Burner: Settlement Fails in the Treasury Market after 9/11

[...]This article describes the institutional and economic settingof the fails problem and suggests why that problem led policymakers to depart so significantly from previous debtmanagement practices. The next section sets the stage byreviewing how investors establish beneficial ownership ofTreasury securities and how those securities are traded in thesecondary market. We then describe the machinery thatsupports the secondary market: the settlement process andrepurchase agreements (RPs) for financing long and shortpositions. A description of how settlement fails come about inthe normal course of trading is then offered, along with anexplanation of how fails are cured. Next, we review conditionsin the Treasury market following September 11, explain howthose conditions led to an extraordinary volume of fails, anddescribe the responses of the Federal Reserve and the Treasury.Alternative mechanisms for alleviating chronic fails are thenexamined.[...]