JPMorgan has implemented the requirements of the Tri-Party Repo Market Infrastructure Fund, set-up in response to the problems caused by Lehman Brother’s collapse, and has successfully transitioned its clients to three-way trade matching.
JPMorgan’s tri-party repo clients have successfully transitioned to three-way trade matching as mandated by the Tri-Party Repo Market Infrastructure Reform Task Force.
Now 99% of all tri-party repos booked daily through JPMorgan are now confirmed by both counterparties.
According to JPMorgan the three-way trade confirmation increases market transparency for cash investors, a key Task Force objective.
“In the past, one party to the repo might have discovered very late in the day that its trade had failed due to mismatched instructions. Now, the level of both transparency and certainty is increased,” John Rivett, collateral management executive for JPMorgan Worldwide Securities Services told Global Investor/ISF.
In 2009, the New York Federal Reserve asked the Payments Risk Committee to form a task force to address the weaknesses that became visible over the course of the financial crisis. The resulting Tri-Party Repo Infrastructure Reform Task Force has since provided a number of recommendations to strengthen the infrastructure supporting this particular market, which are now being implemented by firms.
As well as the implementation of three-way trade matching for US Tri-Party Repo dealers and cash investors, JPMorgan has moved the daily unwind time to 3.30pm. The intention was to reduce the reliance on intraday credit extended by the two major clearing banks.
In the former model, the early morning unwind returned cash to the investor and let dealers use their securities during the trading day.
“This meant clearing banks were extending credit to the markets during the day. After 2008, this was identified as a systemic issue – one that misaligned the risk which should remain between the broker-dealer and the investor,” says Rivett.
As part of this change, the firm has implemented Auto Substitution technology, which minimises the impact on market liquidity by giving dealers access to their securities throughout the trading day.
“If the dealer has treasuries locked in a repo shell but wants to use them for something else, they have options. JPMorgan has created a function that allows either securities-for-securities or cash-for-securities substitution,” says Jason Paltrowitz, Americas market executive for banks and broker dealers, JPMorgan.
According to Rivett, institutions now have a much stronger focus on collateral management following the problems experienced after the collapse of Lehman Brothers.
Rivett says: “Some investors never really expected to have to take ownership of the collateral or sell it. But after September 2008, they realised it was possible, so we’ve seen a much more significant focus on understanding the assets being taken as collateral, and being sure that they could either hold or liquidate those assets in a timely manner.”