On February 13, 2014 the Federal Reserve Bank of New York ("NY Fed") issued an update on Tri-Party repo infrastructure reform. The update can be found here.
In its update the NY Fed commended the industry for the reduction of intraday credit provided by the tri-party clearing banks. It indicated that the amount of intraday credit provided was down to 20% of daily repo volume. The NY Fed expects that intraday credit usage will reach the Task Force's benchmark of 10% of daily tri-party repo volume by the end of 2014. The NY Fed indicated that in order to further reduce intra-day credit cash investors will need to fund their trades before 3:30 p.m. This may entail changes to the cash investor's cast netting arrangements. Cash investors should consider whether these changes will push the intraday credit to the investor's custodian. The NY Fed also noted progress on collateral optimization and allocation processes at the clearing banks.
The Update noted that industry participants are not addressing the risk of destabilizing sales of repo collateral by cash investors following a default by a repo dealer. The NY Fed notes that while fire sales are not unique to the repo market it is a "a particular concern in the tri-party repo market given the composition of its investor base." The NY Fed notes many tri-party repo investors are "highly vulnerable to liquidity pressures and credit losses that may cause them to liquidate the collateral of a defaulted counterparty very quickly, even if they must do so at a loss." This seems like a clear reference to money market mutual funds which are large players in the tri-party repo market. The NY Fed went on to indicate that fire sale risk "remains a critical policy concern" and in the "absence of a market-based solution" it may forced to use regulatory tools to reduce the risk of fire sales. No timetable was given on the proposed regulatory action.