Federal Reserve Bank of New York Releases Update on Tri-Party Repo Infrastructure Reform
The Federal Reserve Bank of New York ("NY Fed") released an update regarding the Tri-Party Repo Infrastructure Reform Task Force. The update highlighted recent progress, as well as unresolved areas that require additional work.
The NY Fed mentioned several areas of progress, including the completion of the final part of Bank of New York Mellon's new settlement process for three-party repurchase agreements ("tri-party repos"). The update stated that as a result, the share of tri-party repo volume that is financed with intraday credit from a clearing bank has dropped markedly.
The NY Fed stated that some areas of the Task Force's roadmap are still awaiting completion; specifically, the full alignment of the repo settlement of General Collateral Finance ("GCF") with the new tri-party settlement process. "[I]n a full-blown stress event, GCF repo usage, and the associated intraday credit needed to settle that GCF repo activity, could balloon suddenly and significantly, to levels that a clearing bank [may be] unwilling or unable to support through the provision of the necessary intraday credit." The NY Fed noted that the work required to align the settlement of these interbank GCF repo trades with the broader process will stretch beyond 2015.
In addition, the NY Fed mentioned another policy concern that hasn't been addressed by the Task Force's roadmap for reform: the risk of fire sales of collateral by a dealer that is losing access to repo financing (pre-default), or by creditors of the dealer once it has defaulted (post-default). Specifically, the update noted that even though substantial progress has been made with respect to pre-default fire sales, no mechanism exists to address the challenge of coordinating sales of collateral by creditors of a defaulted dealer in an orderly manner.