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What Drives Episodes of Settlement Fails in the Government of Canada Bond Market?

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  • Jean-Sébastien Fontaine
  • James Pinnington
  • Adrian Walton

Abstract

We study settlement fails for trades in the Government of Canada bond market. We find that settlement fails do not occur independently. Using a novel and comprehensive dataset, we examine three drivers of fails. First, we find that fails are more likely following the release of surprise macroeconomic news. Second, settlement fails are more likely for bonds with greater trading activity in the borrowing market. These findings suggest that the recirculation of bonds through long settlement chains is important for understanding fails. Third, fails are more likely when interest rates are low and when the cost for borrowing a bond is high, which is likely because of frictions acting as constraints on the price to borrow a bond. Together, the evidence suggests that improvements to the price mechanism in the borrowing market could improve the recirculation of scarce bonds and may improve the functioning of the bond market.

Suggested Citation

  • Jean-Sébastien Fontaine & James Pinnington & Adrian Walton, 2017. "What Drives Episodes of Settlement Fails in the Government of Canada Bond Market?," Staff Working Papers 17-54, Bank of Canada.
    • Handle: RePEc:bca:bocawp:17-54
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    References listed on IDEAS

    as
    1. Jean-Sébastien Fontaine & James Hately & Adrian Walton, 2017. "Repo Market Functioning when the Interest Rate Is Low or Negative," Discussion Papers 17-3, Bank of Canada.
    2. Richard B. Evans & Christopher C. Geczy & Adam V. Reed, 2009. "Failure Is an Option: Impediments to Short Selling and Options Prices," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1955-1980, May.
    3. Fotak, Veljko & Raman, Vikas & Yadav, Pradeep K., 2014. "Fails-to-deliver, short selling, and market quality," Journal of Financial Economics, Elsevier, vol. 114(3), pages 493-516.
    4. Narayan Bulusu & Sermin Gungor, 2017. "The Life Cycle of Government of Canada Bonds in Core Funding Markets," Bank of Canada Review, Bank of Canada, vol. 2017(Spring), pages 31-41.
    5. Duan, Naihua, et al, 1983. "A Comparison of Alternative Models for the Demand for Medical Care," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(2), pages 115-126, April.
    6. Boni, Leslie, 2006. "Strategic delivery failures in U.S. equity markets," Journal of Financial Markets, Elsevier, vol. 9(1), pages 1-26, February.
    7. Don M. Autore & Thomas J. Boulton & Marcus V. Braga-Alves, 2015. "Failures to Deliver, Short Sale Constraints, and Stock Overvaluation," The Financial Review, Eastern Finance Association, vol. 50(2), pages 143-172, May.
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    Cited by:

    1. Léanne Berger-Soucy & Jean-Sébastien Fontaine & Adrian Walton, 2019. "Prix plafonds sur les marchés canadiens des emprunts d’obligations," Staff Analytical Notes 2019-2-fr, Bank of Canada.
    2. Léanne Berger-Soucy & Jean-Sébastien Fontaine & Adrian Walton, 2019. "Price Caps in Canadian Bond Borrowing Markets," Staff Analytical Notes 2019-2, Bank of Canada.
    3. Léanne Berger-Soucy & Jean-Sébastien Fontaine & Adrian Walton, 2019. "Prix plafonds sur les marchés canadiens des emprunts d’obligations," Staff Analytical Notes 2019-2-fr, Bank of Canada.
    4. Jessica Lee & Jabir Sandhu & Adrian Walton, 2019. "Borrowing Costs for Government of Canada Treasury Bills," Staff Analytical Notes 2019-28, Bank of Canada.

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    More about this item

    Keywords

    Financial markets; Market structure and pricing; Payment clearing and settlement systems;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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