The Federal Reserve Bank of New York recently released a Staff Report entitled, "The Tri-Party Repo Market before the 2010 Reforms," written by Adam Copeland, Antoine Martin, and Michael Walker. The Abstract says, "This paper provides a descriptive and quantitative account of the tri-party repo market before the reforms proposed in 2010 by the Task Force on Tri-Party Repo Infrastructure (Task Force 2010). The NY Fed's Task Force on Tri-Party Repo Infrastructure - Payments Risk Committee was formed in September 2009 and issued its original report on May 17, 2010.

The new paper's Abstract continues, "We provide an extensive description of the mechanics of this market. We also use data from July 2008 to early 2010 to document quantitative features of the market. We find that both the level of haircuts and the amount of funding were surprisingly stable in this market. The stability of the margins is in contrast to evidence from other repo markets. Perhaps surprisingly, the data reveal relatively few signs of stress in the market for dealers other than Lehman Brothers, on which we provide some evidence. This suggests that runs in the tri-party repo market may occur precipitously, like traditional bank runs, rather than manifest themselves as large increases in margins."

The Introduction explains, "This paper aims to shed some light on the US tri-party repo market, an important funding market that played a role in some of the key events associated with the recent financial crisis. The Task Force on Tri-Party Repo Infrastructure (Task Force 2010) notes that 'At several points during the financial crisis of 2007-2009, the tri-party repo market took on particular importance in relation to the failures and near-failures of Countrywide Securities, Bear Stearns, and Lehman Brothers. The potential for the tri-party repo market to cease functioning, with impacts to securities firms, money market mutual funds, major banks involved in payment and settlements globally, and even to the liquidity of the U.S. Treasury and Agency securities, has been cited by policy makers as a key concern behind aggressive interventions to contain the financial crisis.'"

It continues, "[W]e describe in some detail the mechanics of this market and some of its vulnerabilities. We also use data collected by the Federal Reserve Bank of New York (FRBNY) to document quantitative features of this market. Our data covers the period from July 2008 to the beginning of 2010. The tri-party repo market is a large funding market in which dealers fund their portfolios of securities through repurchase agreements (repos). The largest cash providers in this market are money market mutual funds and securities lenders that seek a short-term investment for their available cash. Two tri-party clearing banks, JPMorgan Chase and the Bank of New York Mellon, provide intermediation services to the dealers and the cash investors."

The authors comment, "The vulnerabilities of the tri-party repo market are magnified by its size, the fact that the share of less liquid collateral was growing before the crisis, and the fact that the majority of funding was short term, usually overnight. The size of the market reached $2.8 trillion and the size of the largest portfolios financed by dealers exceeded $400 billion at the peak of the market. The share of less liquid collateral approached 30 percent of the collateral funded in the market at the peak and has decreased to less than 20 percent in 2010."

Copeland, Martin and Walker conclude, "We find that both the level of haircuts and the amount of funding were surprisingly stable in this market during the period for which we have data, from July 2008 to early 2010. The stability of the margins is in contrast to evidence from other repo markets. Of course, this apparent stability did not prevent the tri-party repo market from contributing to the problems experienced by Lehman Brothers, on which we provide some evidence. The available evidence suggests that runs in the tri-party repo market may occur precipitously, more like traditional bank runs, rather than manifest themselves in the form of large increases in margins."

Finally, they say, "The data shows quite stable relationships between cash investors and the dealers they perceive to be creditworthy. While the amount of funds provided by some large cash investors does fluctuate somewhat, dealers can generally count on the same set of counterparties providing a minimum amount of funding. In particular, we find few examples of interruptions in the relationship between a cash investor and a dealer. The total amount of collateral funded in the tri-party repo market decreased between July 2008 and early 2010, but anecdotal evidence suggests this could be due, in large part, to dealers's desire to reduce their leverage. While the market may have been stressed, it appears that most dealers were able to maintain stable funding in the tri-party repo market from July 2008 to early 2010.... It is a challenge to reconcile the apparent stability of the tri-party repo market with the dramatic events related to the failure of Lehman Brothers, to which the tri-party repo market seems to have contributed."

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