Successful efforts to address systemic risks in the U.S. repo market infrastructure could have applications in a European context, according to Brian Ruane, CEO of Broker-Dealer Services and Tri-Party Services at BNY Mellon.
In a presentation today to the ICMA’s European Repo Council in London, Ruane offered some early insights into a new study – The Future of Wholesale Funding Markets: A Focus on Repo Markets Post US Tri-Party Reform – written in conjunction with PwC and set to be published later this year.
The modernization initiative to address the systemic risks inherent in the U.S. repo market infrastructure arose from the 2009 recommendations issued by the Tri-party Repo Infrastructure Reform Task Force, sponsored by the Federal Reserve Bank of New York’s Payments Risk Committee.
The Task Force examined facets of the tri-party repo market infrastructure and set recommendations that included:
• the ‘practical elimination’ of intraday credit (defined as a 90% reduction of intra-day credit related to tri-party, amounting to approximately $1.4 trillion);
• operational improvements and enhanced efficiency;
• better dealer liquidity risk management (duration risk);
• improved management practices;
• contingency planning in case of dealer default;
• increased transparency, particularly around collateral quality.
The four-year collaboration that followed – involving BNY Mellon, its broker dealer clients, regulators and institutional investors – saw the goal of the ‘practical elimination’ of daylight risk met; in addition, it led to the creation of a new demand for committed tri-party credit facilities valued at $28bn.
“We believe there are many applicable aspects to the European market and global financial markets,” says Ruane. “The wholesale funding market in the US is taking on increased importance, and these reforms deriving from the United States may make their way to the European market over time. Intra-day credit in the US has been practically removed as part of the initiative to stabilize the system there, and regulators in Europe are likewise looking at how to stabilize the system in their region.”