Antoine Martin and Susan McLaughlin — Financial Innovation: Evolution of the Tri-Party Repo Arrangement

Second in a two-part series 

In our earlier post, we described how the tri-party repo arrangement was a clever way to reduce the costs and risks that individual firms faced when settling bilateral repos. In this post, we explain how the efficiencies created by this new arrangement facilitated the growth of the repo market by expanding the class of securities to be used as collateral. This expansion had benefits as well as costs. On the positive side, it led to lower interest costs for a wide variety of borrowers in the real economy. But on the negative side, tri-party repos backed by riskier assets increase the risk of fire sales, which can have negative spillovers on the broader financial system.

FRBNY — Liberty Street
Financial Innovation: Evolution of the Tri-Party Repo Arrangement

Antoine Martin, vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, and Susan McLaughlin, senior vice president in the Bank’s Markets Group