The displeasure from the Fed on the pace of the tri-party reforms is now well known. Its not all bad news though. The systemic risk embedded in the unwind/rewind hasn’t gone away, although the window is narrower. Clearing agents can look at 3-way confirmed trades to see if there are problems brewing. Lots of other good things came out of the Task Force’s work. But the Fed wants tri-party settlement to be an “operational moment”, in other words an instantaneous process. When given the task of spec’ing out how long that would take to get there, some IT timelines extended into 2016. NY Fed head Dudley was not pleased.
So the Fed is taking over the reform process. We applaud the Fed’s urgency to fix tri-party — a system that is susceptible to shocks that transmit systemic risk. Finadium wrote about tri-party reform last July (a link to the synopsis is here). Everyone knows this is complicated stuff and the Task Force, clearing banks, broker/dealers and cash investors worked their tails off and achieved much. But what is next? Is the Fed thinking about more than finishing what the Task Force started? Maybe the Fed will take a closer look at the European tri-party structure to see what can be borrowed? Could a complete re-work of the securities settlement process be on their radar? Be careful what you wish for.
Here are some quotes from the Fed release. You can almost feel the steam coming out of their ears.
“…. the amount of intraday credit provided by clearing banks has not yet been meaningfully reduced, and therefore, the systemic risk associated with this market remains unchanged….”
“…a multi-year effort will be required to achieve all of the changes needed to realize the Task Force’s vision for the entire tri-party repo market….”
“…Given the expanded timeline for the industry’s work to reduce reliance on intraday credit, and the fact that this work may not substantially strengthen market participants’ credit and liquidity risk management practices and mitigate the risk of fire sales of assets in the event of a large dealer’s default, the Federal Reserve is making two changes in its approach to tri-party repo reform going forward….First, the New York Fed will intensify its direct oversight of the infrastructure changes …. Second, the Federal Reserve is escalating its efforts to explore additional policy options to address the remaining sources of instability identified in the New York Fed’s May 2010 White Paper…”
“…dealers should be taking steps to reduce their reliance on short-term financing and investors should be taking actions to ensure their credit risk management policies and practices are robust to stress events…”
A link to the Task Force final report is here.
A link to the press release by the Task Force is here.
A link to the Federal Reserve press release is here.