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More work needed to resolve repo fire sale risk, says NY Fed's Dudley


By Karen Brettell

NEW YORK (Reuters) - Participants in the $5 trillion repurchase agreement market need to work harder to develop solutions that reduce the risks the market poses to financial stability, or regulators may need to intervene, New York Federal Reserve Bank President William Dudley said on Friday.


"Significant work remains to be done" to reduce the risks of fire sales in repo, Dudley said.

In repurchase agreements lenders, such as money funds, make short-term loans to banks or other borrowers and receive collateral such as Treasuries or other bonds to back the loans. Banks then often make similar loans to leveraged investors such as hedge funds that money funds won't lend to, in what they term a "matched book."


Dudley said industry participants have "yet to fully embrace" their need to develop solutions, and warned that if they are unable to reduce the risks, regulators may have to use other tools to address the problem, a move that he noted could also have unintended consequences for the industry.

Federal Reserve governor Jeremy Stein, speaking at the same event, said that regulators have a number of tools they can employ to help shore up liquidity at individual companies including banks, including risk-based capital, liquidity and leverage requirements. He noted, however, that none are a comprehensive solution to the problem.

Stein added that reform of money funds is also key to reducing the risks of fire sales of repo collateral, saying that the funds may withdraw financing from banks that come under pressure, even if the collateral underlying the loan is stable.


In tri-party trades, JPMorgan Chase & Co or Bank of New York Mellon Corp act as intermediary banks for lenders and borrowers and arrange for the settlement of the loans and the collateral behind them.


(Additional reporting by Steven C. Johnson; Editing by Chizu Nomiyama)