Bernanke discusses clearinghouses but not tri-party repo

Federal Reserve Chairman Ben Bernanke gave an important speech about systemic risk and the “plumbing” of the financial system April 4 and never mentioned the repurchase market.

He especially talked about clearinghouses and clearing systems and their importance in managing systemic risk, and he used the Dodd-Frank Act’s mandatory clearing of standardized derivatives as an example.

He never mentioned that the clearing system that was  his biggest concern in the financial crisis of 2007-2008 was the tri-party repurchase market which is cleared by JP Morgan and Bank of New York Mellon.

Bernanke was the keynote speaker at the Federal Reserve Bank of Atlanta’s 2011 Financial Markets Conference in Stone Mountain, Georgia. The topic of the conference was “Navigating the New Financial Landscape.”

From his speech:

Tonight I would like to discuss post-crisis reform as it relates to a prominent part of our financial market infrastructure–namely, clearinghouses for payments, securities, and derivatives transactions. This audience, I know, recognizes the importance of what is often called the “plumbing” of the financial system–a set of institutions that very safely and efficiently handles, under most circumstances, enormous volumes of financial transactions each day.

Title 8 of the Dodd-Frank Act calls for more effective and more frequent use of clearing structures, which it calls financial market utilities. It instructs the Fed to set standards for the financial market utilities that the Financial Stability Oversight Council says are or could become systemically important. This is widely expected to include tri-party repo.

The Act:
-Gives the Fed the authority to set standards for these utilities.
-Encourages more intensive supervision of clearinghouses, including annual examinations.
-Gives these utilities access to low-cost loans from the Fed’s discount window in times of crisis, a right usually reserved for commercial banks.

The Federal Reserve  published for comment March 30 the risk-management standards it proposes to set for the financial market utilities that would be supervised by the Board under title 8.

From Bernanke’s speech:

Increased reliance on clearinghouses to address problems in other parts of the system increases further the need to ensure the safety of clearinghouses themselves. As Mark Twain’s character Pudd’nhead Wilson once opined, if you put all your eggs in one basket, you better watch that basket. …

For more than a century, financial stability has depended on the resilience under stress of clearinghouses and other parts of the financial infrastructure. As we rely even more heavily on these institutions in the United States and around the world, we must do all that we can to ensure their resilience, even as our financial system continues to evolve rapidly and in ways that we cannot fully predict. In short, I think Pudd’nhead Wilson would agree that that is one important basket.

RepoWatch has asked the Federal Reserve’s public affairs staff why Bernanke did not mention tri-party repo. Their reply, if it comes, will be added here.



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