Reuters: Regulatory News: UPDATE 1-NY Fed unveils reforms to stabilize repo market

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UPDATE 1-NY Fed unveils reforms to stabilize repo market Jul 18th 2012, 19:55 Wed Jul 18, 2012 3:55pm EDT By Karen Brettell NEW YORK, July 18 (Reuters) - The New York Federal Reserve on Wednesday unveiled reforms for the $1.8 trillion U.S. triparty repurchase agreement market that will force banks to reduce their reliance on such short-term loans to lessen the risks they pose to the financial system. The tri-party agreements, or repos, are a prime source of short-term bank funding and are backed by Treasuries or riskier collateral, including mortgage-backed debt. The Federal Reserve Bank of New York said it will require banks to reduce their reliance on the short-term loans, especially when they are backed by less-liquid assets, in order to reduce the credit risks associated with the trades. All participants in the market will also be expected to provide more timely and accurate trade confirmations, and improve risk management practices, the New York Fed said. At present many firms send late or inaccurate trade confirmations, which increases their reliance on the credit provided by the clearing banks during the day to facilitate trades, it said. The use of credit in repo was blamed for worsening the financial crisis. The Fed had to step in to facilitate the purchase of Bear Stearns by JPMorgan in 2008 after JPMorgan held back repo funding from the firm, which led to Bear Stearns's collapse and threatened a chain of defaults that could have spread to JPMorgan itself. Banks will also be required to modify business practices in order to adapt to changes in the market's infrastructure by the clearing banks, JPMorgan and BNY Mellon. These clearing banks will need to change their technology, policies and procedures to create a more resilient market infrastructure, the NY Fed said. The regional bank said in February it was considering new restrictions in repo after an industry committee formed to devise ways to reduce risks of the loans disbanded and said it had been unable to find ways to eliminate the use of intraday credit. The two clearing banks and large banks active in the market must now provide the New York Fed with plans and timelines to achieve the reforms, which the Fed said it plans to evaluate in the fall. The two clearing banks have already submitted plans while large banks are drafting their responses, the New York Fed said. Pressure by the New York Fed on the largest banks in the market to reduce their positions has been cited by some analysts as a factor that has helped push up the cost of repo borrowing in recent months. This is because increased activity by smaller, lower-rated banks in the market is thought to have pushed up the average borrowing cost. Link this Share this Digg this Email Reprints

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