J.P. Morgan implements US tri-party repo reforms
01 September 2011 New York
Image: Shutterstock
J.P. Morgan has announced the successful achievement of two major tri-party repo reform milestones: the implementation of three-way trade matching for US tri-party repo dealers and cash investors and the move of the daily unwind as part of reforms mandated by a Task Force (TF) sponsored by the New York Fed.
In advance of the TF deadline on 3 October, three-way trade matching took effect to improve market transparency for cash investors. Some 30 percent of all the tri-party repos booked through J.P. Morgan on that day utilised its proprietary functionality, which gives cash investors greater control by actively affirming trade instructions. J.P. Morgan also accepts trade instructions via a variety of different messaging types, SWIFT, or other third-party vendor services.
And the daily unwind has shifted from early morning to 3:30 p.m., a directive from the TF to reduce the reliance on intraday credit extended by the two major clearing banks, J.P. Morgan and BNY Mellon. Volumes and business have not been affected since the switch on 22 August, writes J.P. Morgan.
During the financial crisis, the daily unwind was particularly problematic for the tri-party repo market when it became uncertain whether dealers would be able to obtain financing through additional cash investors, writes BNY Mellon in a report.
“This has been a period of rapid change for our clients," said Kelly Mathieson, a global custody and clearance executive at J.P. Morgan Worldwide Securities Services. "When the daily unwind moved...we were able to cut our normal processing time for the unwind in half, returning cash to investors while allowing dealers to promptly reallocate their collateral.”
Cash lenders—primarily money market mutual funds, custodial banks investing cash collateral on behalf of their securities lending clients, and other asset managers— use tri-party repos as investments that offer liquidity maximisation, principal protection, and a small positive return, while cash borrowers rely on them as a major source of short-term funding.
The tri-party agent, which in the US market are government securities clearing banks like J.P. Morgan, facilitates transactions by providing operational services, such as custody of securities, settlement of cash and securities, valuation of collateral, and optimisation tools to allocate collateral efficiently.
In advance of the TF deadline on 3 October, three-way trade matching took effect to improve market transparency for cash investors. Some 30 percent of all the tri-party repos booked through J.P. Morgan on that day utilised its proprietary functionality, which gives cash investors greater control by actively affirming trade instructions. J.P. Morgan also accepts trade instructions via a variety of different messaging types, SWIFT, or other third-party vendor services.
And the daily unwind has shifted from early morning to 3:30 p.m., a directive from the TF to reduce the reliance on intraday credit extended by the two major clearing banks, J.P. Morgan and BNY Mellon. Volumes and business have not been affected since the switch on 22 August, writes J.P. Morgan.
During the financial crisis, the daily unwind was particularly problematic for the tri-party repo market when it became uncertain whether dealers would be able to obtain financing through additional cash investors, writes BNY Mellon in a report.
“This has been a period of rapid change for our clients," said Kelly Mathieson, a global custody and clearance executive at J.P. Morgan Worldwide Securities Services. "When the daily unwind moved...we were able to cut our normal processing time for the unwind in half, returning cash to investors while allowing dealers to promptly reallocate their collateral.”
Cash lenders—primarily money market mutual funds, custodial banks investing cash collateral on behalf of their securities lending clients, and other asset managers— use tri-party repos as investments that offer liquidity maximisation, principal protection, and a small positive return, while cash borrowers rely on them as a major source of short-term funding.
The tri-party agent, which in the US market are government securities clearing banks like J.P. Morgan, facilitates transactions by providing operational services, such as custody of securities, settlement of cash and securities, valuation of collateral, and optimisation tools to allocate collateral efficiently.
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