NY Fed Wants to Fortify $1.7 Trillion Repo Market. Just in Case.

This, at least to me, is a sign that the Fed is sick of serving as handmaiden and doesn't want to get any shit for being the only lender lender of last resort.


The New York Federal Reserve said on Monday an industry group's recommendations to fix a key bank funding market are not enough to protect the financial system from the failure of a major dealer.

A taskforce of banks and institutional investors backed by the New York Fed on Monday recommended steps to fortify the $1.7 trillion tri-party repurchase market that froze during the financial crisis.

In the tri-party repo market big investors, including money market funds, lend overnight cash to dealers via two clearing banks and it is a crucial part of the financial system's plumbing .

The taskforce's proposals seek to add transparency and improve risk management through liquidity contingency plans, and lessen the likelihood of spillover if a firm gets into trouble.

You see, the NY Fed is worried that under the taskforce's recommendations, troubled firms will actually experience a worse cash-tightening than otherwise, as you can't stop the bleeding once the wound has been exposed to investors.

"The recommendations will not materially alter the propensity of cash investors to run from a troubled dealer," the New York Fed said in the paper.

"In fact, they may withdraw funding from a troubled counterparty sooner because of increased awareness of the risk of having to accept collateral in lieu of cash in the event of a default."

Reminder: the Fed cannot prop up our system indefinitely and even they know that.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.