Author: Kenneth D. Garbade

• From the 1950s to the early 1980s, contracting conventions for repos were virtually unchanged.
  
  
• The early 1980s gave rise to a burgeoning repo market, new uses for repos, and previously unappreciated risks.
  
  
• Author Garbade explains that market participants, recognizing that their repo contracting conventions had become inadequate, were spurred to revise them dramatically.
  

• Garbade cites three pivotal developments in the evolution of repo contracting conventions during that decade:

• the recognition of accrued interest on repo securities,
  
  
• a revision to how federal bankruptcy law applied to repos, and
  
  
• the accelerated growth of tri-party repo, a new form of repo.
  

• According to the author, the emergence of tri-party repo reflected the efforts of individual market participants to find an operationally cheaper, more flexible alternative to conventional repos.
  
  
• Market participants acted together to bring about the recognition of accrued interest on repo securities and to petition Congress to amend federal bankruptcy law, observes Garbade. Collective action was necessary in both cases because uncoordinated, individual solutions would have been too costly.

Kenneth D. Garbade is a vice president at the Federal Reserve Bank of New York.

The views expressed in this summary are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.