The financial crisis revealed weaknesses in the design of the U.S. tri-party repo market that could potentially amplify and propagate systemic risk. Since that time, the New York Federal Reserve Bank has monitored closely the tri-party repo market, and its Treasury Markets Practice Group has explored practical ways to address the risks inherent in the U.S. tri-party repo system. In April, the New York Fed updated its statistics on the U.S. tri-party repo market, and the Treasury Markets Practice Group proposed an update to its best practices to support more timely trade confirmations.
The New York Fed's February
tri-party repo volume data revealed a decrease of $21 billion, or 1.1%, in the total collateral in the U.S. tri-party repo market for the month ending February 11, 2013. March
data showed a further decrease of $19 billion, or 1%, for the month ending March 11, 2013, with total collateral in the tri-party repo system standing at $1.83 trillion overall. Though most asset classes of collateral decreased, Strips increased in February and March by 6.4%, and agency debentures increased by 13.6%. Total collateral held in U.S. Treasuries (non-Strips) fell by 5% or $32 billion.
Identifying timeliness of tri-party repo settlements as an important issue, the New York Fed's Treasury Markets Practice Group (TMPG) issued a proposed addition to their November 2012 Best Practices for Treasury, Agency Debt, and Agency Mortgage-Backed Securities Markets
that would support prompt confirmation of tri-party repo trades.
In order to promote the integrity and efficiency ofthe tri-party repo market, the TMPG is proposing revisions to its market practice recommendations to state that by August 1, 2013, market participants should execute and confirm substantially all tri-party repo trades by 3:00 pm ET. This would ensure an orderly start to tri-party settlement processing at 3:30 p.m. ET. Specifically, market participants should ensure that:
- All tri-party repo trades should be matched and confirmed in a timely manner.
- All tri-party repo trades executed before 3:00 p.m. ET should be matched and confirmed by 3:00 p.m. ET.
- Any tri-party repo trades executed after 3:00 p.m. ET should be matched and confirmed within 15 minutes.
- Trade cancellations and corrections for tri-party repo transactions should be rare and occur only as a result of operational errors or other mistakes made in good faith.
- Trade cancellations and corrections should be routinely reviewed by senior desk management and compliance staff, with particular focus on any occurrences after 3:00 p.m. ET.
Tom Wipf, Chair of the TMPG understands that this proposal sets a high standard, but believes it is a necessary step in improving the tri-party repo market.
The sooner parties can confirm their trades, the sooner clearing banks can begin their settlement process. The TMPG is setting the bar high by recommending that market participants execute substantially all tri-party repo trades before 3:00 p.m. and that trades executed before 3:00 p.m. be matched and confirmed by 3:00 p.m. The Group strongly believes that this shift in behavior will help to further reduce risk in the tri-party repo market.
The TMPG has requested public comment on the proposed market practices by May 17, 2013