The repurchase, or repo, market represents a liquid (currently sees a daily turnover of over $4 trillion), efficient, tested and generally secure way for firms to participate in short-term financing arrangements, providing funding for their day-to-day business functions. Repo agreements are a sale of financial assets combined with a promise to repurchase those assets in the future (in many cases, the repurchase is agreed for the following business day). These arrangements have the economic characteristics of a secured loan – cash in return for collateral – and are used by short-term institutional cash investors as a secured money market instrument and by dealers as a way to finance long positions in securities.
Tri-Party repo is a kind of repo that uses an agent (an intermediary, custodian/clearing bank) to maintain cash and securities accounts for both parties (repo seller and repo buyer), and this market represents a significant part of the entire U.S. repo market.
The financial crisis brought heightened scrutiny of the repo market, specifically the types of securities used as collateral in repo transactions. Worries arose that the massive scale of the repo market could be a systemic risk.
The New York Fed established a task force in September 2009 to re-examine facets of the current tri-party repo market infrastructure and to set recommendations for how to strengthen and improve this system. Final recommendations included operational improvements and efficiency, better dealer liquidity risk management to prevent overleverage in the system, better margining practices (for example, setting appropriate margins), contingency planning in case of dealer problems (such as default), and greater overall transparency.
A liquid and developed repo market allows market participants to act as market makers in fixed income securities and thus contribute to the highly liquid secondary markets in these securities. In particular, the active repo market allows market makers to finance an inventory of securities and to source securities that are not in inventory in order to meet secondary market, or investor, demand. This ability to finance and source securities in an efficient way contributes to lowering interest rates paid by the issuers, most notably the U.S. Treasury. This, in turn, lowers the debt-service cost borne by taxpayers.
In order to further the goals of the Task Force and to achieve full and consistent implementation of the Task Force’s recommendations, SIFMA is publishing best practices for U.S. tri-party repo market participants. In summary, SIFMA believes that these practices will assist all market participants in successfully confirming 90% of trades by 3:00 p.m. ET to ensure an orderly start to tri-party settlement processing at 3:30 p.m. For more please see SIFMA Tri-party Repo Best Practice Recommendations.