Policy Issues in the Design of Tri-Party Repo Markets

The U.S. tri-party repo market is used by major broker-dealers to finance their securities inventories. During the financial crisis of 2007-2009, particularly around the failures of Bear Stearns and Lehman Brothers, it became apparent that this market suffers from design weaknesses that can rapidly elevate and propagate systemic risk in a crisis. Following the crisis, an industry-led effort sponsored by the Federal Reserve Bank of New York’s Payments Risk Committee has been working on improvements to the tri-party repo market infrastructure, with the main goal of lowering systemic risk. The objective of this paper is to provide an overview of short-run and long-run policy issues facing the overhaul of this key financial-system infrastructure, including any lessons to be learned from a comparison with the tri-party repo market infrastructure used in Europe.