Bloomberg News

Tri-Party Repo Task Force to Take Diminished Reform Role

February 24, 2012

(Adds repurchase agreement rates in eighth paragraph.)

Feb. 15 (Bloomberg) -- A Federal Reserve-sponsored group working to improve efficiency in the market for borrowing and lending securities will take a diminished role in efforts to cut systemic risk in the market for dealer financing.

The Tri-Party Repo Infrastructure Reform Task Force formed in 2009 to spearhead the efforts will no longer hold scheduled meetings, according to people familiar with the matter. The industry’s two clearing banks, JPMorgan Chase & Co. and Bank of New York Mellon Corp., as well as the Fixed Income Clearing Corp., will continue to seek changes, said the people, who declined to be identified because they weren’t authorized to speak on the record. The task force will release a progress report today.

The group failed to meet a 2011 objective of the “practical elimination” of the extension of intraday credit to dealers from JPMorgan and Bank of New York Mellon. While many prerequisite operational changes were made last year, the final goal wasn’t accomplished in a market that is the biggest single source of financing for U.S. primary dealers, the 21 firms that act as counterparties for the central bank.

“The Task Force has made some progress; I wouldn’t call it good progress, I’d call it slow progress,” Darrell Duffie, a finance professor at Stanford University’s Graduate School of Business in Stanford, California, said in a telephone interview yesterday. “There is a lot they need to do in the near term to improve what they have, particularly more automation and also something more systematic in terms of broker-dealer default management.”

Short-Term Funding

Duffie co-authored a paper in July with New York Fed researchers Adam Copeland, Antoine Martin, and Susan McLaughlin titled “Policy Issues in the Design of the Tri-Party Repo Markets.”

Andrea Priest, a spokeswoman for the New York Fed, declined to comment on the task force.

Repos are transactions used by the bond dealers for short- term funding, typically involving the sale of U.S. government securities in exchange for cash, with the debt held as collateral for the loan. Dealers agree to repurchase the securities at a later date. In a tri-party arrangement, a third party, one of two clearing banks, functions as the agent for the transaction and holds the security as collateral. U.S. money market mutual funds are among the primary investors, lenders of cash, in the repo market.

Overnight general collateral Treasury repo rates opened today at 0.23 percent, after closing yesterday at 0.28 percent, according to data from ICAP Plc, the world’s largest inter- dealer broker. Tri-party repo opened at 0.26 percent.

Dudley’s View

The Fed is seeking to strengthen the tri-party repurchase agreement market, which almost collapsed in 2008 amid the demise of Bear Stearns Cos. and Lehman Brothers Holdings Inc., both of which served as primary dealers.

In September, Federal Reserve Bank of New York President William Dudley, in a speech at the Bretton Woods Committee’s International Council Meeting in Washington, expressed concern about the task force’s ability to achieve the goals.

“If the private sector falls short in this instance, public authorities may need to intervene and impose more forceful regulatory solutions,” Dudley said.

“We are really down to doing the re-engineering and client contract adjustments that will be needed to reduce reliance on the two clearing banks for intraday credit,” Kelly Mathieson, custody and clearance business executive at J.P. Morgan Worldwide Securities Services, said in an interview last month. “We all are very clear that this goal needs to get done. It is just a matter of getting down to executing something that is just a bit complex.”

Value Declines

Over $2.8 trillion in securities were being financed through tri-party repo on average daily during a peak in 2008, with the value falling to an average of $1.7 trillion in the first quarter of 2010, according to New York Fed calculations of Bank of New York Mellon and JPMorgan data as presented in a May 2010 Fed paper. In 2008, the largest dealer borrowing position exceeded $400 billion, and remains at more than $200 billion, Fed researches noted in the paper.

Clearing banks’ extension of intraday credit to dealers stems from the market’s convention that all repos, even those not maturing, were ”unwound” each morning, with clearing banks sending cash back to lenders and placing dealer securities back in their accounts. Later in the afternoon, the clearing banks ”rewound” all transactions given borrowers and lenders’ arrangements, and transferred cash back to dealers. During the time gap between those two events, clearing banks extend secured credit to the dealers so desired intraday trades could be done.

Transaction Rewind

Last year the task force, to narrow the gap of time when intraday credit may be extended, moved the daily unwind time to 3:30 p.m., cutting to just a few hours the delay until all final settlements and “rewinding” of transactions take place.

Also to improve efficiency and the clearing process, the task force implemented a morning three-way trade confirmation between borrower, lender and the clearing bank. It enabled all dealers to use “automated collateral substitution,” which allows them to easily swap one type of eligible debt collateral for another in a repo transactions during a given day.

Fed Chairman Ben S. Bernanke in March 2009 called for an overhaul of U.S. financial regulations, including “enhancing the resilience of the tri-party repurchase agreement market.” He added during the address to the Council on Foreign Relations in Washington that “it may be worthwhile considering the costs and benefits of a central clearing system for this market, given the magnitude of exposures generated and the vital importance of the market for dealers and investors.”

Among other emergency lending programs, the Fed in 2008 began the Primary Dealer Credit Facility to buttress dealer financing in wake of the fall of Bear Stearns, and expanded it after the failure of Lehman.

--With assistance from Caroline Salas Gage in New York. Editors: Dave Liedtka, Greg Storey

To contact the reporter on this story: Liz Capo McCormick in New York at

To contact the editor responsible for this story: David Liedtka at

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