NEW YORK – The Federal Reserve Bank of New York is providing the following summary of the 11 public comments it received in response to a recent white paper and to the recommendations of the Tri-party Repo Market Infrastructure Reform Task Force (the Task Force). All comments strongly supported the Task Force’s recommendations that address weaknesses in the U.S. tri-party repo market and contribute to broader financial market resiliency. Comments also suggested additional improvements to the tri-party repo market infrastructure.

The comments focused on the following key themes:

• Support for the Task Force’s recommendations to improve operational effectiveness and significantly reduce the level of intraday credit provided by the clearing banks by introducing three-way, real-time trade confirmation; shifting settlement times; automating collateral substitution; and eliminating the clearing banks’ daily unwind.
• Support for the Task Force’s recommendations to improve margining practices and increase transparency, although some comments cautioned that the recommendations could result in risk management behavior that might not be consistent with a counterparty’s creditworthiness.
• Recognition that despite these infrastructure improvements, the potential for a disorderly liquidation might still exist.

Several comments noted continuing concerns over the implementation timetables for the Task Force’s recommendations—being either too slow or too fast—and that the identified weaknesses would likely continue until the recommendations were fully implemented. A few comments suggested that although individual recommendations seem reasonable, the cumulative effect of all the Task Force’s recommendations could drive smaller cash lenders from the tri-party repo market.

Other comments suggested requiring a one-day notification of a participant’s intent to terminate a repo transaction; improving the level of detail in existing collateral schedules to support more refined risk management practices; and prohibiting collateral that could not be independently priced—all points that the Task Force either did not consider or did not recommend. Comments also noted the critical role of the two clearing banks and associated competitive and risk concerns, and suggested exploring the benefits and drawbacks of establishing a central counterparty, a central liquidity facility and/or a central liquidation agent.

About the White Paper
On May 17, the Federal Reserve Bank of New York issued a white paper to discuss its policy concerns regarding weaknesses in the infrastructure of the tri-party repo market and on the same day requested comment on the Task Force’s recommendations to address these concerns. The feedback helps Federal Reserve staff, the industry and the public assess the recommendations and identify additional or alternative measures. The Task Force is now reviewing all comments as part of its work to see that the recommendations are implemented.

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