Canada’s Fail Fee Framework: The GoC Securities Trial Begins

ByRegReportingDesk

On 8 September 2026, the Canadian Depository for Securities (CDS) begins the first, dry-run stage of the fail fee framework for Government of Canada (GoC) securities. During this stage, CDS calculates indicative 50 basis point fees for chargeable seller-side DvP fails in GoC bills, nominal bonds, real return bonds and strips. CIMPA and CDS, on behalf of the Canadian Fixed-Income Forum (CFIF), confirmed the start in a market notice dated 13 August 2026. The first stage will run for a minimum of 18 months.

No fail-fee payments are charged or disbursed during that first stage. CDS publishes fail statistics and provides participants with reports on failed transactions and associated indicative fail-fee invoices. The point is to give CDS participants reports and indicative invoices they can vet for accuracy and use to prepare report extraction, warehousing, monitoring and any client pass-through processes before CFIF decides whether to activate payments.

Related reading: ESMA T+1 Settlement Allocations and Confirmations.

The fail fee framework trial calendar

The framework uses a two-stage trial governed through CIMPA, which makes recommendations to CFIF for approval; the CIMPA Fail Fee Subgroup (FFSG) monitors the trial and supports the activation recommendations. The operative dates are:

  • 13 August 2026: CIMPA and CDS announce the trial in a Bank of Canada market notice.
  • 8 September 2026: the first stage begins; CDS calculates fails and fees, publishes daily fail rates, and issues indicative monthly invoices, with no payments exchanged.
  • Minimum 18 months: the length of the first stage, so calculation-only running to at least early 2028.
  • After roughly 12 months: the Governance Group reviews the data and recommends to CFIF whether to move to fee exchange.
  • If CFIF approves a second-stage fee exchange during the trial, market participants will receive at least 6 months’ notice and live exchange will start no earlier than 18 months into the trial. If no second stage follows the dry run, however, a later activation in an environment of elevated fails could occur on very short notice without a further trial.
  • Second stage: 12 months of live fee exchange at the 50 basis point rate, no earlier than 18 months into the trial, if CFIF approves it.
  • Final review: following conclusion of the trial, the FFSG will make a recommendation to CIMPA and CFIF on whether to keep the fail fee activated or turn it off until conditions warrant reactivation.

What the fee charges, and where it stops

The fee applies to delivery-versus-payment (DvP) transactions that fail to settle in CDSX, the settlement system CDS operates. It covers GoC Treasury bills, nominal bonds, real return bonds and strips, across both cash and repo trades. The seller carries the fee when its securities position is insufficient to settle by the deadline.

Two boundaries catch teams that assume a fail is a fail. The framework targets the party short of non-fungible collateral, so a buyer’s cash shortfall (a shortfall of fungible funds) falls outside the fee’s scope. Transactions that settle delivery-versus-delivery or free-of-payment sit outside direct CDS fail-fee tracking. The 2024 framework states that approximately 120 billion dollars of GoC securities are on loan at any given time and that those loans are predominantly against securities collateral. Where an incoming DvD or FoP fail causes a downstream DvP fail, the downstream fee may be passed back through a bilateral claim where the relevant counterparty agreement permits; physically delivered GoC options, futures and forwards are also contemplated for bilateral claims rather than central tracking.

Amounts flow between counterparties rather than to the Bank of Canada or the issuer: the party that failed on a net basis pays, and the party failed-to on a net basis receives. CDS calculates each failed transaction daily and exchanges the net amount monthly. The framework applies separate CDSX assessment and allocation logic to bilaterally and centrally cleared trades. For current implementation details, participants should consult the accompanying CDS technical document linked from the CIMPA FAQ.

How the 50 basis point fail fee is calculated

The permanent component is a static floor of 50 basis points. The fee on a single failed trade is the fail fee rate multiplied by the proceeds due from the non-failing party, multiplied by the number of calendar days the trade is late, divided by 365.

The framework’s own worked example makes the size concrete. A three-day failure to deliver a 50 million dollar GoC bond against 49.8 million dollars of proceeds produces a fee of 2,046.58 dollars at the floor. First-stage indicative reporting uses the same 50 basis point calculation methodology. Participants should vet the CDS reports for accuracy, while any pass-through to an underlying client depends on the business relationship between that client and the CDSX participant. That apportionment is the real work of the trial: CDS resolves clerical and billing disputes but does not adjudicate who was at fault.

The dynamic component stays switched off during the trial

Above the floor sits a contingent dynamic component that can lift the total incentive to deliver as high as 150 basis points. It is calibrated to activate only when the Bank of Canada’s overnight rate target is below 1 percent, and only when fails are material and sustained. The 2024 framework uses a combined 10-day moving average of the daily GoC DvP fail rate across the cash and repo markets, with preliminary warning and activation thresholds of 4 percent and 5 percent. The August 2026 FAQ states that those thresholds are not yet fully finalised; the FFSG will review them using new CDS fails data and may adjust them before any permanent activation. It reverts to the floor once the Bank of Canada raises its target to 1 percent or higher.

Throughout both trial stages, the framework holds the dynamic component inactive; every indicative invoice from 8 September rests on the 50 basis point floor alone. For scale, the same three-day, 50 million dollar fail would cost 5,116.44 dollars if the dynamic component were live with the overnight target at 0.25 percent.

The data CDS publishes, and the invoices you cannot file away

The reporting output is where the trial bites for operations and finance teams. CDS publishes daily fail rates for public transparency and provides participants with daily .csv files of failed transactions and a monthly file of net fees payable or receivable. The accompanying CDS technical document linked from the CIMPA FAQ provides further implementation details.

That granularity exists so custodians, agent lenders and prime brokers can operationalise the pass-through or apportionment of fail-fee payments and receipts to clients as appropriate. A firm that cannot map a CDS role-level record to an internal account cannot apportion a live fee later without manual work. The 18-month stage is the window to test that mapping against real fail data, which is why the indicative invoices deserve the reconciliation discipline of a real one.

Why Canada chose a fee, not a mandatory buy-in

The August 2026 CIMPA FAQ states that the GoC market is not currently experiencing large and persistent fails. The framework describes itself as an insurance policy: in a low or negative rate environment, the overnight rate that normally rewards timely delivery shrinks toward zero and stops discouraging fails, and the fee restores that incentive. Canada has seen the problem before, with fails averaging around 3.9 billion dollars a day through the first three quarters of 2015 before falling back to about 1.2 billion dollars a day.

The design follows the United States rather than the European Union. It benchmarks against the Treasury Market Practices Group fails-charge practice for U.S. Treasuries; in 2018, the TMPG added a 1 percent annual floor to the existing fails-charge formula to maintain operational continuity as short-term interest rates changed. The steering group that built the framework judged a fee better suited to the Canadian market than the EU mandatory-buy-in model then contemplated. Under the current CSDR, cash penalties apply under Article 7, while Article 7a allows the Commission to activate mandatory buy-ins for specified financial instruments or transaction categories by implementing act only if the statutory conditions are met. Teams mapping GoC settlement risk against Europe’s move to T+1 settlement or its SFTR repo reporting should read the Canadian fee as a price on failure, closer to a settlement charge than to the obligations under MiFIR transaction reporting.

Frequently Asked Questions

If a securities lending fail causes my DvP delivery to fail, does the CDS fee cover it?

Securities-lending fails that settle DvD or FoP are not directly in scope of the CDS infrastructure build. However, if an incoming DvD or FoP fail causes a downstream DvP delivery to fail, the downstream DvP fail can attract the CDS fee; the participant may then pass that fee back to the upstream counterparty through a bilateral claim where the relevant agreement permits it.

The fee is calculated daily but I only see money monthly. What actually settles?

During the first stage, nothing settles: the monthly figure is indicative only. When exchange is live, CDS nets each participant’s fees across GoC securities over the month and debits or credits a single amount through its CDS cash ledger. A participant can be a net payer one month and a net receiver the next.

We hold GoC securities for non-Canadian clients. Are there tax consequences to a fee receipt?

The framework flags potential tax implications of fail fee payments to non-Canadian entities as an open item for the Governance Group, not a settled treatment. A firm receiving fees for foreign clients should treat the withholding and characterisation question as unresolved and raise it with tax advisers before live exchange.

Key Takeaways

  • Stage one of Canada’s fail fee framework begins 8 September 2026 and runs a minimum of 18 months: calculation and invoicing only, no money exchanged.
  • The static fee is 50 basis points, computed as the rate times proceeds due times calendar days late, divided by 365; a three-day fail on a 50 million dollar bond runs to 2,046.58 dollars.
  • Scope is chargeable seller-side DvP fails in GoC bills, nominal bonds, real return bonds and strips. DvP fails caused by insufficient buyer funds do not attract the fail fee, although the trial allows those fails to be monitored; DvD and free-of-payment securities-lending fails are not directly captured by the CDS fail-fee infrastructure and may instead give rise to bilateral claims where applicable.
  • The dynamic component stays inactive throughout the trial. The 2024 framework’s 4 percent warning and 5 percent activation thresholds are preliminary calibration points that the FFSG will review using new CDS fails data and may adjust before any permanent activation; the framework also provides that the dynamic component adds no incentive when the Bank of Canada’s overnight-rate target is 1 percent or higher.
  • CDS publishes daily fail rates and provides participants with an audit trail of failed transactions. Any second-stage activation during the trial is a CFIF decision following CIMPA’s recommendation and carries at least 6 months’ notice; if the second stage is postponed, a later activation under deteriorating conditions could occur on very short notice.

Sources and References

What to build before the meter turns on

The trial gives Canadian settlement operations 18 months of real fail data priced at a real rate, with no cash at stake. The work to finish is concrete: reconcile every indicative CDS invoice, map the role-level audit trail to internal accounts, and settle the custodian and agent-lender pass-through logic. The 2024 framework states that a review would occur after 12 months, with a recommendation to CFIF on when fail-fee exchange should go live; the August 2026 FAQ does not give that review a fixed calendar date. A firm that can reconcile the CDS reports and map any intended client pass-through by then will have completed important dry-run work, but live-exchange readiness can still depend on CDS payment processes, client arrangements and tax treatment.

Disclaimer: The information on RegReportingDesk.com is for educational and informational purposes only. It does not constitute legal, regulatory, tax, or compliance advice. Always consult your compliance officer, legal counsel, or the relevant supervisory authority for guidance specific to your institution.

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