NEW YORK Feb 13 Market participants in a key
short-term funding market are not addressing the risk of
destabilizing "fire sales" of collateral in the event of a
default by one of the market's big players, and regulators may
be forced to step in to reduce that risk, the Federal Reserve
Bank of New York said on Thursday.
The so-called tri-party repurchase, or repo, market is at
particular risk of seizing up entirely, as it did in the 2008
financial crisis, because investors in the sector are "highly
vulnerable" to liquidity pressures and credit losses that could
force them to sell the collateral of a defaulted counterparty,
the New York Fed said.
The bank is one of 12 regional banks in the Federal Reserve
system and the one tasked with overseeing the Fed's open market
operations. It said no mechanism currently exists or is being
developed by the banks and institutional investors in that
market to ensure that investors will act collectively and in a
measured way in liquidating their collateral.
"As noted by Federal Reserve Bank of New York President
(William) Dudley in a recent speech, in the absence of a
market-based solution to this risk issue, regulators may be
forced to use the tools they have to take steps to reduce this
risk," the bank said in a statement.