(Adds comments from strategist, banks)
By Elinor Comlay
NEW YORK Dec 22 A private sector task force
said on Tuesday it agreed to take steps to reduce risks in the
world's largest bank funding market, but has yet to tackle
larger issues related to the collapse of Lehman Brothers.
The task force, charged by the New York Federal Reserve in
September with making recommendations on fixing a funding
market that amplified the financial crisis last year, released
a progress report and said it plans to finish its work in the
The $4 trillion market for repurchase agreements, contracts
for the sale and future repurchase of a financial asset --
known as the tri-party repo market -- is a key part of the
financial system's plumbing.
The tri-party repo market, where clearing banks JPMorgan
Chase & Co (JPM.N) and Bank of New York Mellon Corp (BK.N)
facilitate trades between counterparties and hold collateral,
makes up a large portion of the repo market. The system was at
the center of Lehman Brothers' collapse last year after some
lenders lost confidence in its collateral on an overnight
The task force, whose members include banks, funds and
industry associations, aims to strengthen the market in order
to limit its role in any future financial crisis.
At the center of discussions has been the idea of
establishing a central clearing system -- which Fed Chairman
Ben Bernanke in March suggested considering -- or passing some
transactions currently conducted via tri-party repo to
utilities such as the Fixed Income Clearing Corporation.
The task force said these issues, among others, are still
under consideration and it is analyzing how various new
initiatives and proposals might hold up in stressed market
The task force said it is broadly in agreement on several
issues, including the need for strengthening collateral margin
practices, which could mean higher margin requirements for some
Among other draft recommendations, the task force said it
agreed to develop a plan to handle a dealer default, and it
agreed to do more to improve the transparency of securities
The group has also agreed to make operational improvements
that would cut the size of the total exposure taken on each day
by the two tri-party clearing banks, but it still needs to work
out details of these operational changes.
"The Fed wants to see intraday credit reduced because it's
a very large systemic risk and there seems to be broad
consensus on this," explained Joseph Abate, money market
strategist at Barclays Capital in New York.
The task force said it will also consider limiting the
securities that can be accepted in the tri-party repo market
and establishing an agent that would be responsible for
liquidating a dealer's collateral in the event the dealer
"There's less consensus over other issues that are still
under consideration, including what collateral would be
eligible in tri-party repo and how you would establish a
liquidation agent in the event of a dealer going out of
business," said Abate. "There are a lot more difficult
questions left to be answered," he added.
The repo market is on life support after the Federal
Reserve created an emergency lending facility to stabilize it.
That facility will end in February, and dealers are keen to fix
the tri-party repo market by then.
The task force said it plans to finish its work and issue
final recommendations by the end of the first quarter. The
Federal Reserve will then incorporate the results in a white
paper for public comment, the group said.
Spokesmen for BNY Mellon and JPMorgan declined comment.
(Reporting by Elinor Comlay; Editing by Kenneth Barry)