Fed on Securities Settlement
Federal Reserve Governor Jerome Powell spoke recently on "Opening Remarks on Government Securities Settlement. He says, "This panel will focus on the settlement infrastructure for U.S. government securities--a vital component of the Treasury market and one that is undergoing an important transition. This segment of the industry has been in a period of slow but steady consolidation for several decades now. Thirty years ago, there were six banks providing a full suite of settlement services for U.S. government securities. Due to mergers and exits, two firms, Bank of New York Mellon (BNYM) and J.P. Morgan Chase (JPMC), have been the two dominant providers of these services since the 1990s. And soon there will be just one, given JPMC's planned exit. Given the importance of these services, the official sector has had a long involvement as the market structure has evolved. After the terrorist attacks of September 11, 2001, the Federal Reserve convened the private-sector Working Group on Government Securities Clearance and Settlement to recommend steps to mitigate risks to the financial system from a disruption to these services. That work led to the "NewBank" proposal. Although the proposal was ultimately put aside, NewBank would have been a dormant financial institution that could spring into action in the event of potential disruptions from an exit from this business by either of the clearing banks. Some of today's panelists were actively involved in that work. Of course, at that time, the business was roughly evenly split between the two providers. Today's situation is very different--BNYM now has over 80 percent market share, due mainly to consolidation among end users. The Federal Reserve has been working closely with the Department of the Treasury to ensure a smooth transition as JPMC prepares to exit.... In the near term, this exit will leave BNYM as the sole provider of U.S. government securities settlement and triparty repo services for broker-dealers. We have been working intensively with BNYM in anticipation of this transition. We have long recognized that any disruptions to these critical market services could have serious consequences for financial stability, and have calibrated our supervisory expectations accordingly. To ensure financial stability, we expect the provision of U.S. government securities settlement services to be robust in nearly all contingencies.... BNYM is unique in that it also plays the dominant--and soon the sole--role in government securities settlement and in the triparty repo market. These activities are comparable in their importance to those of the financial market utilities that have been designated as systemically important by the FSOC. Thus, BNYM will continue to be held to the high standards to which all U.S. bank SIFIs are held. And it will also be expected to operate in a manner that provides confidence that it is as resilient and robust as a systemically important financial market utility (FMU)."
