Recent Developments in Tri-Party Repo Reform
December 20, 2012

The Federal Reserve has intensified supervisory oversight of key tri-party market participants that it regulates to ensure a timely implementation of the recommendations of the Tri-party Repo Infrastructure Reform Task Force (Task Force). Since the July 18, 2012, statement by the Federal Reserve Bank of New York, there have been several noteworthy developments:

  • Last month, the clearing banks delivered two milestones that have begun to reduce the provision of intraday credit:
    • J.P. Morgan Chase (JPMC) has stopped the daily unwind of non-maturing term repo trades, eliminating its intraday credit exposure for these transactions. 

    • Bank of New York Mellon (BNYM) has rolled-out operational and technology changes that will ultimately eliminate the intraday credit that BNYM provides to dealers against privately-issued, nongovernment securities that settle through the Depository Trust Company (DTC). The current transition phase provides a period of accommodation for customers. In February 2013, BNYM dealers will be required to prefund all maturing tri-party repo transactions involving DTC-sourced collateral prior to settlement. This change will eliminate BNYM’s intraday credit exposure to DTC-eligible collateral.

  • Market participants have substantially improved the timeliness of trade matching over the past three months. Sustained progress is important to ensure the success of the changes in the tri-party market’s settlement processes currently being developed by the clearing banks.  Industry participants are working to establish best practices for three-way trade matching.

  • Over the past two months, the Federal Reserve has received and evaluated the plans of large broker-dealer affiliates of bank holding companies to adopt business process changes to reduce intraday credit risk. Supervisors will continue to monitor the progress of these broker-dealers with respect to readiness for the new settlement regimes being introduced by the clearing banks and in achieving incremental risk reduction.

JPMC and BNYM will be implementing key changes in their settlement processes through 2013 and 2014, respectively.  These changes are expected to continue to reduce intraday credit risk while improving the resiliency of the settlement process. The Federal Reserve has recently reiterated to the clearing banks its expectation that final settlement of tri-party repo transactions should be completed sufficiently in advance of the Fedwire® Funds close to provide time for successive funds transfers; 5:15 PM meets this target and is consistent with the Task Force’s recommended timeline. Clearing banks and other market participants should work toward establishing appropriate intervening deadlines to ensure timely settlement of tri-party repo transactions.

Dealers and investors will need to make the necessary changes to business practices to fully leverage process enhancements critical to achieving risk reduction and market resiliency. Commitment by dealers and investors to adopt new market practices and contingency plans will be essential to achieving reform goals. It is crucial that market participants sustain progress made to date, adopt the additional business practice and process changes that will be required to ensure the success of reform in this market, and enhance contingency planning for stress events to strengthen the overall stability of the tri-party repo infrastructure. 

The Federal Reserve will continue to collaborate with other supervisors and regulators in monitoring the consistent adoption of clearing bank changes and associated changes in market practices by both the dealer and investor participants in the tri-party repo market. The Federal Reserve views as an important priority the implementation of a tri-party market and infrastructure that will be more resilient under both routine and stressed conditions. 

For additional information visit these websites.

New York Fed Tri-Party Repo Infrastructure Reform »

Bank of New York Mellon Tri-Party Repo Infrastructure Reform offsite
J.P. Morgan Chase Tri-Party Repo Market Reforms - Resource Centeroffsite

Andrea Priest
(212) 720-6139

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