The U.S. tri-party repo market is one of the most important components of the financial system - that noone has ever heard of (though not ZH readers: Tri-party repo has been a core topic of several of our 2009 posts exploring the nuances of the Lehman collapse - initially here and here and then multiple times since as we discuss the backbone of the shadow banking system). The 2007-09 financial crisis exposed weaknesses in the design of the U.S. tri-party repo market that could rapidly elevate and propagate systemic risk. We have long-discussed the importance of the collateral and hypothecation markets and a recent study of the market identifies the collateral allocation and unwind processes as two key mechanics contributing to the market’s fragility. While the topic is relatively specialized, it is critical to understanding the reality behind the curtain and the paper below provides clarification of the bilateral and tri-party repo markets (The Fed, Bank of NY, and JPM - who in effect have first refusal on any collateral in the system), dealers' intervention, and its potential as a source of financial systemic risk.
The US Repo Market:
The $1.8tn Tri-Party Repo market: