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Systemic Risk and the Tri-Party Repo Clearing Banks
Press Release
Bruce Tuckman
Feb 3, 2010

The Center for Financial Stability (CFS) - a new think tank dedicated to the study of finance and markets - releases the attached paper, “Systemic Risk and the Tri-Party Repo Clearing Banks.” The paper shows how the system through which broker-dealers fund a sizeable portion of their assets has the potential to

wreck the financial health of a large clearing bank, or
lead to the demise of yet another broker-dealer.

The release of this paper coincides with a workshop sponsored by the Federal Reserve Bank of New York (FRBNY) this afternoon, for invited participants only, to discuss reforms of the Tri-party repo system. This workshop follows a preliminary report of an industry task force issued on December 22, 2009 and precedes the completion of a FRBNY "white paper" slated for release by the end of the first quarter of 2010.

While the work of the task force is not yet complete, it will probably recommend operational improvements to reduce the systemic risk of the tri-party repo system and might advocate the creation of an FDIC-like entity to backstop the system.

The CFS paper argues that changing capital requirements to include the hitherto ignored intra-day risks borne by the clearing banks in the current system will force market participants to reduce systemic risk and will spur competition and innovation in the secured funding market. Proposed operational improvements are directionally appropriate, but will not be as effective in stabilizing and strengthening the secured funding market. Furthermore, the creation of a backstop entity would only replace one set of too-big-to-fail problems with another.

For more information about the paper and the relevant issues, please contact Bruce Tuckman (Director of Financial Markets Research) at 212-626-2660 or btuckman@the-cfs.org. For information about the Center for Financial Stability, please contact Lawrence Goodman (President) at 212-626-2660 or lgoodman@the-cfs.org.

Read the Paper

Task force progress report

http://www.newyorkfed.org/prc/report_091222.pdf

Story of today's workshop

http://www.smartmoney.com/news/on/?story=ON-20100201-000424

About the Author
Bruce Tuckman
Director of Financial Markets Research

Bruce Tuckman is a financial economist with a career of over 20 years at top-tier investment banks and universities. His expertise spans fixed income markets, financing markets, prime brokerage, and front-office risk management. He has extensive experience managing internal research at investment banks and is a skilled writer and public speaker.

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