The
NY Fed expects market participants in the tri-party repo market to reduce
reliance on intraday credit and make risk management practices more resilient
to a stress event in that market. In particular, broker-dealers and cash
investors affiliated with bank holding companies and foreign banking
organizations are expected to modify their business practices and processes in
order to adapt effectively to the coming infrastructure changes. Broker-dealers
are expected to reduce their reliance on short-term tri-party repo financing,
particularly for less liquid assets, to achieve the necessary reductions in the
usage of intraday clearing bank credit. Cash investors are expected to
make their credit risk and collateral management practices more robust to
stress events. While
market participants are subject to the oversight of various regulators
including the Fed and the SEC, the tri-party repo market is not regulated.
A
repurchase agreement or repo is a sale of a security coupled with an agreement
to repurchase the securities at a specified price at a later date. A tri-party
repo is a repo transaction where a third party, the tri-party agent, provides
operational services to the cash borrower and the cash lender. The tri-party
repo market is important because it is a key source of funding for large
securities dealers who depend on it for the bulk of their short-term funding.
Cash investors, such as money market mutual funds, rely on the tri-party repo
market to be a very safe, liquid short-term investment. The Fed believes that a
disruption to this market would be disruptive to the broader financial system.
Over the course of the next several months, the Fed,
working together with other regulators, will continue to closely monitor the
actions of market participants and use all the supervisory tools at its
disposal to encourage constructive and timely action to reduce sources of
instability in the tri-party market.
All
participants in the tri-party repo market are expected to provide for more
timely and accurate trade confirmations. While clearing banks have
implemented a three-way trade confirmation process as part of their 2011 reform
efforts, many market participants continue to send late or inaccurate
confirmations. Improving these practices is necessary to support a sharp
reduction in intraday credit usage.
Both clearing banks and the largest broker-dealer
affiliates of bank holding companies have been asked to submit execution plans
and timelines. The clearing banks have already submitted their plans,
noted the Fed, the largest broker-dealer affiliates of bank holding companies
are now in the process of drafting plans that reflect how they will adapt to
their clearing bank’s plans. The collective set of plans will be evaluated
by regulators this fall.
Earlier this year, the Tri-Party Repo
Infrastructure Reform Task Force issued its final report describing the status
of industry efforts to reform the tri-party repo market. The Task Force
indicated that additional time would be needed to reduce market reliance on
intraday credit extensions by clearing banks to broker-dealers. Federal
Reserve and SEC staff participated in meetings of the Task Force as observers
and technical advisors.
The
Task Force was formed to address potential systemic risk concerns associated
with the infrastructure supporting the tri-party repo market. In particular,
regulators are concerned with the market’s reliance on
large amounts of intraday credit made available to cash borrowers by the
clearing banks that provide the operational infrastructure for these
transactions. Also, the risk management practices of cash lenders and clearing
banks have been inadequate and prone to pro-cyclical pressures. In addition, there has been a lack of
effective plans by market participants for managing the tri-party collateral of
a large securities dealer in default without creating potentially destabilizing
effects on the rest of the financial system.