A statement entitled, "New York Fed Releases White Paper on Tri-Party Repurchase Agreement (Repo) Reform," says, "The Federal Reserve Bank of New York today announced the publication of a white paper on the work of the Tri-Party Repurchase Agreement (Repo) Infrastructure Reform Task Force. The white paper highlights policy concerns over weaknesses in the infrastructure of the tri-party repo market and seeks public comment on the task force's recommendations to address these concerns."
It says, "The recommendations set forth by the task force in its final report, when implemented, should: dampen the potential for problems at one firm to spill over to others, clarify the credit and liquidity risks borne by market participants, and better equip them to manage these risks appropriately. Feedback on this paper received during the 30-day public comment period will help New York Fed staff, and others with regulatory and supervisory responsibilities, to assess the task force proposals and identify any additional or alternative measures that should be considered."
William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York, "We are grateful for the work of the task force and encourage all stakeholders to provide comments. The Federal Reserve is committed to initiating actions, as necessary, to promote strong risk management practices by all market participants and the stability and resilience of financial markets more broadly. The work of the task force represents an important step in this direction."
The statement continues, "The tri-party repo market and short-term funding markets will continue to evolve as broader regulatory reforms take shape, and enhancements to infrastructure, such as those proposed by the task force, are implemented. Going forward, it will be imperative to monitor the evolution of these markets closely. The New York Fed tasked the Payments Risk Committee (PRC), a private-sector group of senior U.S. bank officials sponsored by the New York Fed, to form a group of industry stakeholders to address tri-party repo market infrastructure weaknesses exposed during the financial crisis of 2008 and 2009. The PRC created the Tri-Party Repo Infrastructure Reform Task Force in 2009, and included tri-party repo market participants, service providers and representatives from industry groups. The task force met regularly since its creation to discuss enhancements to the policies, procedures and systems supporting the tri-party repo market. The final report of the task force was also issued today."
The 68-page "Tri-Party Repo Infrastructure Reform" white paper says, "A key focus of the recommendations is to reduce reliance by market participants on intraday credit provided by tri-party repo agents. Other complementary recommendations are designed to foster improvements to credit and liquidity risk management practices of market participants, enhance market transparency, and decrease the likelihood and mitigate the negative effect of default by a large cash borrower."
The paper explains, "Tri-party repos are the most prevalent form of repo contract in the United States. Broker dealers obtain a significant portion of financing for their own and their clients' securities inventories through the market. During first-quarter 2010, the value of securities financed by tri-party repos averaged $1.7 trillion. Federal Reserve Bank of New York calculations, based on data from The Bank of New York Mellon and JPMorgan Chase. The size of the market has declined notably since the peak of about $2.8 trillion in early 2008.... Activity in the tri-party repo market is highly concentrated: the top ten cash borrowers account for approximately 85 percent of the value of tri-party repo securities being financed, and the top ten cash investors provide about 65 percent of the funds invested."
To see the New York Fed white paper and task force report, visit: http://www.newyorkfed.org/banking/tpr_infr_reform.html. For the Tri-Party Repo Infrastructure Reform Task Force final report, visit: http://www.newyorkfed.org/prc.
