Senators Jack Reed & Mike Crapo say it’s crucial to clarify which government regulatory agency has sole oversight authority of the tri-party repo market. The Chairman and Ranking Member of the Senate Banking Subcommittee on Securities, Insurance & Investment convened a hearing Thursday on the potential risks repos pose to the broader U.S. financial system.
In testimony, Matthew Eichner, the Federal Reserve’s Research and Statistics Division Deputy Director listed a few agencies but couldn’t name the lead oversight agency which concerned lawmakers. Eichner stressed that while the market has improved its risk management since the 2008 financial crisis, he believes vulnerabilities remain and need to be addressed. Representatives from two clearing banks, BNY Mellon ad Morgan Stanley, and an investors’ group also testified.
In the tri-party repo market, a third party called a clearing bank acts as an intermediary and alleviates the administrative burden between two parties engaging in a repo.
A Financial Times article notes that the market "has concerned regulators for years. The Federal Reserve Bank of New York has been working to reform the system."
According to the story, "regulators have 'great concern' that the industry is overly reliant on the provision of intraday credit from JPMorgan and BNY Mellon, that some market participants employ weak risk management practices and that there is no way to ensure an orderly liquidation of transactions should a large dealer default."