JPMorgan (NYSE:JPM), one of two large clearing banks in the tri-party repurchase agreement market, said on Monday that it had met targets to reduce risks of short-term loans of concern to the Federal Reserve Bank of New York and other regulators.
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New York Fed President William Dudley has warned that participants in the $5 trillion repo markets need to work harder to reduce risks, especially the potential for fire sales.
A reduction in intraday credit in tri-party repos has also been a concern, although Dudley has noted that more progress has been made to resolve this issue.
JPMorgan said on Monday that it had reduced the use of intraday credit in line with targets set with regulators. The issue came to the fore when the markets froze during the credit crisis of 2007-2009.
"Step by step, every new piece of functionality introduced over the last four years has allowed us to reduce materially the systemic risk previously created by overreliance on clearing bank credit," Michael Albanese, head of U.S. tri-party repo clearing and collateral management at JPMorgan, said in a release.
In tri-party trades, JPMorgan or Bank of New York Mellon Corp <BK.N> act as intermediary banks for lenders and borrowers, and arrange for the settlement of the loans and the collateral behind them.
JPMorgan and BNY Mellon have extended intraday credit to loan counterparties, which helped smooth the process. But that also meant that the two clearing banks were heavily exposed to the risk of a failure by a large counterparty and that the other participants in the market were also heavily exposed to their financial health.
JPMorgan said it no longer offered uncapped intraday credit, replacing it with a capped committed credit facility and the simultaneous exchange of cash and collateral.
Dudley has said he is still concerned about the risk of fire sales, where one market participant may come under pressure and dump assets, leading to a contagion of falling asset prices and further selloffs.
He warned in February that industry inaction on this problem might prompt regulators to introduce rules meant to contain the risk.