An industry task force sponsored by the U.S. Federal Reserve is working on a plan to scale back systemic risk in the repurchase market and to reduce trader dependence on JPMorgan Chase and Bank of New York Mellon, the Financial Times reports.
The changes are to be aimed at bringing greater automation to the $1.6 trillion tri-party repo market but could increase financing costs for other banks. The repo market is where banks pledge securities as collateral for short-term loans from money managers and other investors.
The task force and its activities raise questions “both about the ongoing vulnerability of the two so-called clearing banks in the market, J.P. Morgan and BNY Mellon, and their power over the Wall Street community in general,” the FT said. Many officials at the Fed believe that such a role may not be appropriate for private institutions and that a public sector body may be more appropriate. "The incentives are different for a private sector institution when under pressure,” said one senior Fed official. “There are conflicting objectives and when stresses rise, the banks may behave badly. The desire for security or collateral can be debilitating.”
In fact, “The repo market was at the heart of some of the darkest predictions of what could have happened in the fall of 2008,” Business Insider reports. “Had repo markets faltered, fundamental financial operations of large companies, such as meeting payroll and paying basic bills, would have been [thrown] into question.”
The new task force – made up of leading banks, including J.P, Morgan and BNY Mellon, and investors – met earlier this month to discuss additional reforms to prevent a repeat of the turmoil that characterized the repo market in 2008, the FT said, adding that a final report by the task force is expected to be published early next year.