JPMorgan Chase & Co., one of two banks that dominate clearing in the $1.8 trillion tri-party repurchase agreement market, said it curtailed daily credit risk that regulators blamed for fueling the 2008 financial crisis.
All clients have been moved to a system that includes rolling settlement, simultaneous exchange of cash and collateral and creation of a secured committed clearance advance facility, JPMorgan said today in a statement. Collectively, the changes provide the bank with more protection against losses while reducing the need of Wall Street dealers for intraday loans.
The Federal Reserve has been urging JPMorgan and Bank of New York Mellon Corp. to speed improvements in repo markets, which are used by the Fed’s primary dealers for short-term funding. The system neared collapse in 2008 amid the demise of Bear Stearns Cos. and Lehman Brothers Holdings Inc. Bankers had pledged to finish upgrades by 2016, prompting the Fed to say industry-led efforts were too slow.
“Every new piece of functionality introduced over the last four years has allowed us to reduce materially the systemic risk previously created by over-reliance on clearing-bank credit,” Michael Albanese, head of JPMorgan’s U.S. tri-party repo clearing and collateral management, said in the statement.
BNY Mellon, the industry leader, and JPMorgan act as middlemen to process repo transactions and keep charge of collateral. The role required the two New York-based banks to temporarily extend hundreds of billions of dollars in credit for several hours during the day, which puts their safety at risk if the market breaks down before the deals are unwound.
The Fed’s goal was to curb the need for the lenders to finance the deals, people familiar with the plans have said. The market is the biggest source of financing for primary dealers, the 22 firms that act as counterparties for the central bank.
BNY Mellon is “fully on track for practically eliminating intraday credit risk this year and enabling market participants to continue to efficiently and effectively fund their operations,” Kevin Heine, a spokesman for the company, said in an e-mailed statement. The lender, which handles about 80 percent of the transactions, expects to have the final pieces of its upgrade in place by the end of this year, according to the firm’s website.
Ben S. Bernanke, the Fed’s chairman during 2008, told the Financial Crisis Inquiry Commission that a breakdown of the tri-party market in 2008 almost created a “black hole” as financial firms lost access to cash for daily operations. The commission in a report cited structural flaws in the market as one of the biggest causes of the crisis.