Fed mulling revamp of repo market: report

U.S. Federal Reserve Chairman Ben Bernanke pictured on Capitol Hill in Washington, May 5, 2009. REUTERS/Mike Theiler

LONDON (Reuters) - The Federal Reserve is considering creating a utility to replace the Wall Street banks that handle U.S. repo market transactions, the Financial Times reported on Monday, citing people familiar with the matter.

The proposal is partly motivated by concerns that the structure of the U.S. overnight repurchase market may have exacerbated the financial turmoil that followed the collapse of Lehman Brothers in September.

Fed officials plan to meet next month with market participants to discuss reforms, the paper said.

The newspaper cited people familiar with the Fed’s thinking as saying the central bank is looking into the creation of a mechanism to replace the clearing banks -- the biggest of which are JPMorgan Chase and Bank of New York Mellon -- that serve as intermediaries between borrowers and lenders.

“The Fed is raising questions about whether the system really protects the interests of all participants,” said a person familiar with the Fed’s thinking quoted by the FT.

Fed officials fear existing arrangements put the clearing banks in a difficult position in a crisis, the paper said. As the value of the securities falls, clearing banks have an obligation to demand more collateral to avoid losses. But in doing so, they could destabilize a rival.

“The clearing banks fear the positions of the investment banks are so large that a default would be difficult for them to manage,” the person familiar with the Fed’s thinking said.

The Fed hopes to have a new repo system in place by October, when its credit facility for securities companies is to close, the paper said.

Editing by Mike Peacock