Earlier this year, the Tri-Party Repo Infrastructure Reform Task Force issued its final report describing the status of industry efforts to reform the tri-party repo market. The Task Force indicated that additional time would be needed to reduce market reliance on intraday credit extensions by clearing banks to broker-dealers. Following the publication of the Task Force’s final report, the Federal Reserve Bank of New York announced that the Federal Reserve would intensify its supervisory oversight of key tri-party market participants’ efforts to implement the Task Force recommendations in a timely fashion.
Accordingly, the Federal Reserve expects market participants it supervises to reduce reliance on intraday credit and make risk management practices more resilient to a stress event in the tri-party repo market. In particular:
- All participants are expected to provide for more timely and accurate trade confirmations. While both clearing banks have implemented a three-way trade confirmation process as part of their 2011 reform efforts, many market participants continue to send late or inaccurate confirmations. Improving these practices is necessary to support a sharp reduction in intraday credit usage.
- Supervisors will measure progress on the timely confirmation based on the value of trades.
- Clearing banks must introduce changes to their technology, policies and procedures in order to achieve a more resilient infrastructure for the tri-party market.
- Broker-dealers and cash investors affiliated with bank holding companies and foreign banking organizations are expected to modify their business practices and processes soon in order to adapt effectively to the coming infrastructure changes.
- Broker-dealers are expected to reduce their reliance on short-term tri-party repo financing, particularly for less liquid assets, to achieve the necessary reductions in the usage of intraday clearing bank credit.
- Cash investors are expected to make their credit risk and collateral management practices more robust to stress events.
Both the clearing banks and the largest broker-dealer affiliates of bank holding companies have been asked to submit execution plans and timelines. The clearing banks have already submitted their plans; the largest broker-dealer affiliates of bank holding companies are now in the process of drafting plans that reflect how they will adapt to their clearing bank’s plans. The collective set of plans will be evaluated by supervisors this fall.
Over the course of the next several months, the Federal Reserve, working together with other regulators, will continue to closely monitor the actions of market participants and use all supervisory tools at its disposal to encourage constructive and timely action to reduce sources of instability in the tri-party market.
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