It feels virtuous every so often to take glance over at the triparty repo market. You get a nice dose of horrified vertigo and then go back to your life and don’t think about it for a while and that always feels better. Now is a good time to get back to it, what with continued worrying about money-market funds – a core player in the market – and two interesting things this week about triparty repo: this testimony from Matthew Eichner of the Fed to a Senate subcommittee, and this report from Fitch.
Here is how I imagine triparty repo:
- A bunch of money market funds and other cash investors keep $1.8 billion of cash at JPMorgan and Bank of New York Mellon, the “clearing banks” in the triparty system.
- A bunch of securities dealers keep a pile of securities – worth, on a good day, more than $1.8bn – to JPM and BoNY Mellon.
- The dealers need money to fund those securities, because what are they going to do, pay for them themselves?
- Every afternoon, the cash investors and the securities dealers frantically negotiate which dealers swap their securities (at negotiated haircuts) for which cash investors’ cash.
- Every night, the cash sleeps in the (notional) arms of the securities dealers, while the securities (and a promise to buy them back in the morning) sleep in the (notional) arms of the cash investors.
- Every morning, the cash wakes up and springs from the dealers’ beds back into the waiting arms of the cash investors, and vice versa etc.
- Which means that the dealers need to borrow cash to be able to give it back to the investors. Where do they get the money?
- Well, from JPMorgan or BoNY.
- Where do JPM and BoNY get the money?
- Well, from deposits.
- Whose deposits?
- Well, the deposits of the cash investors.
More or less, right? Read more »
This doesn’t seem to be much of a story and hey deservedly not:
The Federal Reserve Board on Monday issued a consent cease and desist order and assessed a $6 million civil money penalty against the Bank of New York Mellon (BNYM), New York, New York, a state-chartered bank that is a member of the Federal Reserve System. The order addresses allegations that BNYM breached certain representations and warranties made to Federal Reserve Bank of Boston in connection with BNYM’s participation in the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF).
Boy is that boring. They breached certain reps and warranties! The actual story from the consent cease and desist order is maybe ever so slightly more scandalous but still pretty boring. BoNY participated in the AMLF,* which basically allowed banks to go buy asset-backed commercial paper from struggling money market funds and hand it to the Fed in exchange for cheap non-recourse loans against it. Cheap non-recourse funding is attractive especially if it is September 2008 and you are a bank, so BoNY did as much of that as it could, and also some that it couldn’t. The total of (1) what it could do plus (2) what it couldn’t do but did anyway was a little over $9bn – just for the first day of the AMLF (22-Sep-2008). The balance between (1) and (2) is not clear; the consent decree just says: Read more »
You may recall that the New York attorney general is suing Bank of New York Mellon for maybe ripping off its FX customers a little bit by doing things like telling them that they would get the “best price” of the day on transactions and then actually giving them the “worst price,” which you could totally see how they might confuse those two.*
I love this suit because, to my untrained ear, it all sounds pretty maximally shady but also weirdly normal, and kind of like BoNY isn’t doing anything illegal here. BoNY … kind of agrees with that, since they filed a motion to dismiss the case today:
“This lawsuit is wrong, both on the law and on the facts,” Kevin Heine, a BNY Mellon spokesman, said in a statement. “It is based on a fundamental misunderstanding of the role of custodian banks and the operation of the global foreign currency market.”
BNY Mellon argued in its filing that customers “had all the material information they needed to assess the trades.” The bank each day published rates and executed standing-instruction transactions at rates “no less favorable” to the client than the published rates.
The bank then provided clients with confirmations or account statements accurately reflecting the actual price BNY Mellon applied to each transaction, it said. The bank wasn’t legally obligated to disclose its pricing methodology or its profit margins.
So that’s a little silly – “we publish rates, and then we execute at no worse than the published rate” is just a little bit short of “we execute at the best rate.” (It’s closer to “we make up a rate, and then we execute at it.”) Read more »
The last few weeks have provided some good examples of the trend toward unbundling products and making hidden fees explicit – with mostly pretty angry results from customers and shareholders. Meanwhile, in another part of town, Bank of New York Mellon has been operating what seems like a pretty shady hidden fee setup, and that’s pissing people off too.
We’ve only really heard the prosecutors’ side, and BoNY is pretty adamant that those prosecutors are full of shit, but here’s the US Attorney’s explanation anyway:
Read more »
James Lazarus, head of the firm’s executive office in the UK claims “bullying, excessive workload and a chaotic approach to work at the bank contributed to his insomnia, stress and depression.” He complained to his boss about being stressed in September 2007, a few months later took two months of sick leave and then returned in December 2007, when his workload got even worse. Lazarus took another leave in July 2008, came back in January 2009, left a year later and is now seeking £1million. Also, he’s looking for a new gig, if anyone knows of anything. [Telegraph]