“Over four years, we managed a 97% reduction in the amount of intraday secured credit, from about $1.4 trillion to around $28 billion.” - Brian Ruane
Reforming Tri-Party Repo
“The tri-party repo system might seem like an arcane business to outsiders, but it is at the heart of how the global banking system operates,” says Brian Ruane FCCA, chief executive of BNY Mellon’s broker-dealer and repo services business. For the past few years, Ruane and his team helped lead an effort to respond to the 2008 financial crisis by revising an internal processing system to reduce the amount of intraday credit that BNY Mellon as a processing bank provided.
“The tri-party repo market is the main way banks fund themselves, and it is also the principal collateralized investment opportunity for institutions that wish to lend short term,” Ruane explains. “As such, the steady functioning of this market is key to the safety and soundness of the banking system.”
BNY Mellon is at the center of this crucial part of the financial system, with a roughly 80 percent share of the market. In a tri-party repo transaction, broker-dealers and other financial institutions will pledge collateral — various securities — in return for short-term cash from mutual funds and other sources of cash. The deal is facilitated by a clearing bank, usually BNY Mellon or JPMorgan Chase, which values the securities being pledged and verifies that the securities are eligible for the transaction.
These deals were the subject of significant regulatory attention after the 2008 financial crisis exposed vulnerabilities. Tri-party funding dried up for the likes of Bear Stearns, Lehman and Countrywide, helping to seal their fate. After the dust settled, the Federal Reserve Bank convened the Tri-Party Repo Infrastructure Reform Task Force to ensure that the market would continue to function smoothly even under conditions of extreme stress. As a market leader, BNY Mellon was expected to take a leadership role.
Ruane and BNY Mellon faced technical as well as diplomatic challenges. “Forging a new process was going to entail significant costs and require change by everyone in the industry, including BNY Mellon,” says Ruane. “We needed to help find solutions for our clients and the market and take the lead in investing in the technology that would modernize repo and restore confidence in the market.”
To achieve this, Ruane led a multi-disciplinary team of technologists, business strategists, project managers and compliance officers around the world. At the core of BNY Mellon’s investment in this new process, which the company spent about $100 million developing, was a new technology infrastructure that fully automated clearing and settlement of repo transactions. This practically eliminated1 the need for intraday credit from the clearing banks — significantly reducing the credit risk in the market. “Over four years, we managed a 97 percent reduction in the amount of intraday secured credit, from about $1.4 trillion to around $28 billion,” says Ruane.
The industry overhaul that Ruane and his team helped achieve included various other fixes. Broker-dealers and other financial institutions were required to post higher-quality collateral — typically highly rated government bonds. The term structure of the repo market was also changed. Instead of being based largely on overnight loans, the tri-party repo market has shifted to deals with a 30-day commitment or longer.
Ruane believes the new tri-party framework has benefits that extend beyond Wall Street to the public as a whole: “It makes the banking system a safer, more transparent place overall.”
1 Defined as a 90% reduction in the need for intraday credit.
This article is adapted with permission from “Team Effort,” an article by Christopher Fitzgerald and Fernando Florez that appeared in the February 2016 issue of Accounting and Business magazine, published by ACCA the Association of Chartered and Certified Accountants.