The Federal Reserve Bank of New York 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. The recommendations, 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.
The White Paper discusses several areas of concern with respect to the current design of the tri-party repo infrastructure. These include: (1) the market's reliance on large amounts of intraday credit made available to Dealers by the Clearing Banks that provide the operational infrastructure for these transactions; (2) the risk management practices of cash investors and Clearing Banks – practices that were, according to the New York Fed, clearly inadequate and vulnerable to procyclical pressures in hindsight; and (3) the lack of effective plans by market participants for managing tri-party collateral of a large securities dealer in default without creating potentially destabilizing effects on the broader financial system.
Click here to access the white paper.