Trade press tackles tri-party repo

Freelance business journalist Katherine Heires of MediaKat LLC gives us a rare chance to hear directly from inside the changing world of tri-party repo in a Securities Technology Monitor report May 4.

Business is growing even as the interworkings of the market are being transformed, Bank of New York Mellon executive James Malgieri told Heires:

We saw the bottom of the market in the summer of last year but have seen steady increases in activity since September which we attribute to more trading activity, more position taking by large broker-dealers and new products in the marketplace.

Tri-party – which is thought to represent about one-fourth of U.S. repurchase transactions, with most of the rest being bilateral – is the corner of the repo market that gave top regulators the most heartburn during the financial crisis of 2007-2008.

JP Morgan Chase and Bank of New York Mellon act as clearing banks for tri-party repurchase transactions, and fear for their safety, as well as for the safety of the market where the Fed implements monetary policy, drove some of the Fed’s most dramatic actions during the crisis.

Tri-party is undergoing a critical restructuring, trying to implement 16 recommendations from a post-crisis task force formed by the New York Fed in 2009 to identify weaknesses exposed by the crisis and recommend changes.

As CEO of BNY Mellon’s broker-dealer services unit, where “at least 50 percent of what we do day in and day out” is tri-party related, Malgieri’s key focus is on eliminating operational risks in the handling of repurchase agreements. He said he is calling on technology to help him meet the task force goals.

“This task force is taking a business model of 25 years and rewriting it, and the only way you can effectively do that is through technology,” Malgieri told Heires.

The story by Heires is Securities Technology Monitor’s second this month to touch on the reforms underway in the tri-party repo market.

Editor’s Note:

I’m heartened to see the trade press tackle repo. Stories in trade journals, written by experts in a field, often alert general news reporters to an important topic and in that way news gets to the average American.

Because it’s so unusual to see the U.S. press writing about the repurchase market, and actually using the R-word (repo), I asked Heires how she got onto the topic.

She said she wanted to talk to Malgieri about tri-party repo because the press release announcing his appointment as CEO of broker-dealer services touted the fact that the unit is a “leading provider of tri-party collateral management services, servicing more than $1.5 trillion in tri-party balances worldwide.”

She said she was intrigued when she discovered that key online databases “underlined the great significance but ‘little known’ nature of the tri-party repo market, including a quote from Ben Bernanke that ‘We have been working with market participants to develop a contingency plan should there ever occur a loss of confidence in either of the two clearing banks that facilitate the settlement of tri-party repos.'”

She said she also was drawn to  the repo topic after reading a section in “All the Devils are Here” about Yale economist Gary Gorton’s observations on the risks of the repo market.

RepoWatch is indebted to all the reporters who are bringing the repurchase market to the attention of their readers.