System issues delayed repo settlement on Tuesday-traders

NEW YORK Wed Jan 30, 2013 12:14pm EST

NEW YORK Jan 30 (Reuters) - Operational issues in the $1.87 trillion tri-party repurchase agreement market delayed settlement of some trades on Tuesday by several hours, according to traders.

System problems required the New York Fed to keep its Fedwire Securities Service, which is used to settle the loans, open longer than usual. Many trades were not completed until 5 p.m. or later, compared with the normal 3 p.m. settlement time in the market, traders in the market said.

Jonathan Freed, spokesman at the New York Fed, declined to comment.

The repo market is widely used by firms to obtain short-term funding, which is backed by high-quality collateral including Treasuries.

In the triparty market two large custodian banks, Bank of New York Mellon Corp and JPMorgan Chase & Co arrange for the settlement of loans between lenders and borrowers, and manage collateral that is used to back the trades.

Demand for some Treasuries to back loans has surged in the past few weeks, creating a squeeze on the bonds and sending some repo rates backed by the debt into negative territory this week.

The expiration of the Fed's Operation Twist program has resulted in less short-term Treasuries available for purchase while there is also more cash being invested in money funds that are seeking out Treasuries.

A scarcity of seven-year notes in particular led dealers to borrow the most debt from the Federal Reserve this week since March.

Analysts said some of that supply issue may ease this week as the Treasury completes its auctions of $29 billion in seven-year notes on Wednesday, the third auction of $99 billion in new supply this week.

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