Posted by WARREN MOSLER on June 22nd, 2009
It is something they want but seems there is no viable plan yet.
It is harder than it sounds and what they do come up with if short of a government guaranteed market will have similar risks.
The ‘answer’ is the repo markets add no value to the real economy and therefore there is no public purpose behind creating a ‘better one.’
I would just let the banks continue to price risk for secured lending as they are doing and let the interest spreads (and disintermediation when borrowers and lenders find each other directly) fall where they may due to competitive pressures.
by Henny Sender and Michael Mackenzie
June 21 (FT) — The US Federal Reserve is considering dramatic changes to the giant repurchase â€“ or repo â€“ markets where banks around the world raise overnight dollar loans.
The plans include creating a utility to replace the Wall Street banks that handle transactions, people familiar with the matter say.
The Fedâ€™s deliberations are partly motivated by concerns that the structure of the US overnight repurchase market may have exacerbated the financial turmoil that accompanied the failure of Lehman Brothers in September last year.
Fed officials plan to meet next month with market participants to discuss reforms.
People familiar with the Fedâ€™s thinking say it is looking into the creation of a mechanism to replace the clearing banks â€“ the biggest of which are JPMorgan Chase and Bank of New York Mellon â€“ that serve as intermediaries between borrowers and lenders.
â€œThe Fed is raising questions about whether the system really protects the interests of all participants,â€ says one person familiar with the Fedâ€™s thinking.
In the repo markets, borrowers, such as banks, pledge collateral in return for overnight loans from lenders, such as money market funds.
The clearing banks stand between the parties, providing services such as valuing the collateral and advancing cash during the hours when trades are being made and unwound.
Fed officials fear this arrangement puts the clearing banks in a difficult position in a crisis. As the value of the securities falls, clearing banks have an obligation to demand more collateral to avoid losses. But in doing so, they could destabilise a rival.
â€œThe clearing banks fear the positions of the investment banks are so large that a default would be difficult for them to manage,â€ the person familiar with the Fedâ€™s thinking said.
â€œ[Everyone] is thinking about how to remove conflicts of interest of the clearing banks and the investment banks so that the investment banks arenâ€™t vulnerable to a sudden restriction of credit.â€
The systemâ€™s complications were evident during Lehmanâ€™s collapse. JPMorgan, one of Lehmanâ€™s biggest trading partners, acted as its clearing bank in the repo market and â€“ along with BoNY Mellon â€“ served as the clearing bank for the New York Federal Reserveâ€™s credit facility for securities Âcompanies.
Lawyers for the Lehman estate and for creditors have raised questions about whether JPMorgan acted too aggressively in seizing and marking down Lehmanâ€™s collateral.
Hedge funds have bought Lehman debt on the theory that the estate can claw back some of that collateral in court.
Citing confidentiality concerns, JPMorgan declined to comment.
The Fed hopes to have a new repo system in place by October, when its credit facility for securities companies is to close.