The Federal Reserve, seeking to cut risks in the financial system, is pushing Bank of New York Mellon to speed changes in a $1.8 trillion bond-lending market that helped fuel the 2008 crisis.
Bloomberg reports that BNY Mellon, which handles about 80 percent of loans in the so-called triparty repo market, will complete computer upgrades and projects aimed at bolstering the system by 2014, two years earlier than planned, according to a document on its website. The bank had pledged in February to finish the tasks by 2016, prompting the Fed to criticize industry-led reforms as too slow.
Since then, the Fed has used its supervisory powers to get quicker results, said three people with knowledge of the matter, who requested anonymity because the talks are confidential. JPMorgan Chase & Co. (JPM), which clears the rest of triparty repo trades, previously agreed to complete reforms before 2014. The upgrades would make the market less prone to the panics that destroyed Bear Stearns Cos. in 2008 and triggered a $148bn Fed bailout program to keep other brokerages from collapsing.
'The Fed continues to view repo as an outstanding risk', said Josh Galper, a former Merrill Lynch executive who’s now managing principal of Finadium LLC, a securities-lending consultant in Concord, Massachusetts. 'So they have made it clear that they want the process to move faster'.
The triparty repo market is used by Wall Street dealers including Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) to finance bond holdings. They borrow cash from money-market mutual funds, commercial banks and corporate treasurers, with the bonds pledged as collateral to secure the loans.
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