NEW YORK (MNI) – The following is the text of the statement by the
New York Federal Reserve Bank Monday summarizing 11 public comments it
received — including from institutions such as Goldman Sachs and JP
Morgan — on recommendations of the Tri-party Repo Market Infrastructure
Reform Task Force to address weaknesses in the U.S. tri-party repo
market and contribute to broader financial market resiliency:

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 Forces 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.

** Market News International New York Bureau: 212-669-6430 **

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