Pushing Shadow Banking into the Light: Reforming the U.S. Tri‐Party Repo Market

Abstract

The U.S. tri‐party repo market is one of the most active and liquid in global capital markets. Even more specialized than traditional repo, tri‐party repo has often operated in the shadows of global finance. The U.S. Federal Reserve, however, has helped make this market more transparent and less volatile than it has operated in the past. The U.S. tri-party market has approximately US$1.6 trillion outstanding of repos executed between large financial institutions. It became apparent, however, that the repo market had huge systemic risks due to the domination of two large custodians in the market. This domination resulted in huge amounts of inter-market interdependence. Recognizing the need for systemic changes, the U.S. Federal Reserve as a prudential regulator exercised enormous amounts of pressure on these institutions to reform the market. This reform process could also help serve as an important model for future reforms to other areas of shadow banking.

Keywords: Repo, repurchase agreement, tri-party repo, triparty repo, shadow banking

JEL Classification: K00, K19, K22, K39