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October 18, 2011

Just Released: Money and Payments Workshop Examines Repo Market Reform

Gara Afonso and Antoine Martin

We have just posted the proceedings of a workshop held on October 7, 2011, which gathered the very latest thinking by academics, central bankers, and practitioners on how the repo market should be reformed to help avoid a recurrence of the recent financial crisis. In this large and important market, securities dealers find short-term funding for a substantial portion of their own and their clients’ assets. The difficulties experienced by Bear Stearns and Lehman Brothers in 2008 clearly owed much to the precipitous declines in the funding that these firms had long obtained from the tri-party repo market.

    The agenda for the workshop began with four academic studies, continued with a session focused on policy issues, and closed with a panel of academics and practitioners discussing the policy issues. The papers and the slides of the presentations are all available online, through links on the agenda. Earlier posts on Liberty Street Economics contain more information about the tri-party repo market and about the current reforms.

Here is a quick walk through the proceedings:

    Two of the academic papers study the tri-party repo market during the recent crisis and document the type of stresses that were experienced in this market. A third paper investigates the effect of implicit guarantees on the risk-taking behavior of money market mutual funds, which make up a large class of investors in the tri-party repo market. The last paper looks at how banks tried to obtain liquidity after the freeze of the asset-backed commercial paper market in the fall of 2007.

    During the policy session, Susan McLaughlin (New York Fed) presented an overview of the current state of reforms in the tri-party repo market. Enrico Perotti (University of Amsterdam) argued that recent extensions of the “safe harbor privilege,” which gives favorable treatment to some financial contracts in bankruptcy, may have gone too far and could have contributed to financial instability. This theme was also present in the work presented by Mark Roe (Harvard University), who argued that safe harbor provisions weaken market discipline. Viral Acharya (New York University) discussed a proposal for a liquidation facility for the tri-party repo market, which could limit the risk of a fire sale in case of a large dealer’s default.

    For the closing panel—moderated by Lucinda Brickler (New York Fed)—two academics, Andrew Metrick (Yale University) and Suresh Sundaresan (Columbia University), and two members of the industry, Darryll Hendricks (UBS) and Thomas Wipf (Morgan Stanley), gave their views on the various presentations and proposals.

    The workshop generated a productive exchange of ideas among academics, central bankers, and practitioners. Exchanges of this kind will prove particularly important as the tri-party repo market reform effort tries to balance the need for financial stability with the goal of efficient financial markets.

The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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