27 October 2016
New York
Reporter: Drew Nicol

Fed wants to invite more to the triparty

J.P. Morgan may have to delay its departure from the US government securities clearing market if the Federal Reserve deems BNY Mellon’s subsequent monopoly to be a risk to market stability.

In a speech at the Evolving Structure of the US Treasury Market: Second Annual Conference, Federal Reserve governor Jerome Powell stated: “J.P. Morgan Chase has said that it recognises the need for, and its own interest in, ensuring that its exit does not disrupt the market.”

“Indeed, J.P. Morgan Chase will itself need to rely on these services going forward. The timeline set for a gradual transition over the next two years should be sufficient to avoid significant dislocations; however, if unexpected complications arise, that timeline may need to be adjusted.”

J.P. Morgan confirmed in the summer that it is winding down its government securities settlement services with a view to exiting the business by the end of 2017.

Powell also used his speech to reassure all market participants that the Fed acknowledged the importance of maintaining the functionality of these markets and that BNY Mellon, as the soon-to-be exclusive triparty clearinghouse, would be under increased scrutiny as a result.

Powell explained: “We have long recognised that any disruptions to these critical market services could have serious consequences for financial stability, and have calibrated our supervisory expectations accordingly.”

“To ensure financial stability, we expect the provision of US government securities settlement services to be robust in nearly all contingencies.”

He continued: “As BNY Mellon becomes the sole provider, we will raise our expectations even higher. The bank has anticipated and welcomed this higher bar.”

Powell concluded his speech by hinting that BNY Mellon’s status as the only provider of clearing services in this market may not be a long-term feature.

“The industry as a whole should play an important role in shaping the evolution of the settlement infrastructure. Other firms may seek to enter this market.”

“There have also been discussions over time of a settlement utility, and the Depository Trust & Clearing Corporation is currently considering a new variant of such a model. Our focus is on the quality of the services offered—their safety, resilience, and support of the market—and not on the particular mechanism for offering them.”

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