Come mid-2018, the Bank of New York Mellon will be solely responsible for ensuring almost $2 trillion of securities financed by repurchase agreements are cleared and settled each and every day. With its lone longtime rival, J.P. Morgan, exiting the business, BNY Mellon began the process of moving over clients this summer.
The problem isn’t so much that BNY Mellon might abuse its position in what’s become a highly regulated, utility-like part of the repo market. After all, J.P. Morgan threw in the towel after post-crisis rules made the business costly and onerous. Instead, traders are worried that relying on a single bank for all clearing and settlement could mean big trouble if something goes wrong.
While the Federal Reserve has spearheaded efforts that have greatly reduced systemic risks in tri-party repo, having just one clearing bank has the potential to leave US markets more vulnerable to everything from natural disasters and computer glitches to terrorism and cyberattacks.