Hiding in Plain Sight

On May 8, 2023, the New York Fed’s Liberty Street Economics penned an article about the Treasury Markets Practices Group’s white paper “…On Clearing and Settlement in the Market for U.S. Treasury Secured Financing Transactions.” The gist of the paper is what is described as the “fragmented” nature of settlement and clearing methods in the marketplace.

The paper cautions that “A lack of visibility into some clearing and settlement processes prevents identifying, measuring their direct and indirect counterparty risks.” It also points out that participants may be under the false impression that because they are dealing in Treasurys, there is less risk. This is not the case however, as an atrophied stakeholder can gum up the works of the “market ecosystem” no matter the nature of the holdings.

Just like in 1982, when Drysdale Securities' off-the-reservation activities threatened the stability of the Treasury markets, here we have yet another cautionary tale. The more things change, the more they stay the same.

What is worthy of note here is how “repo” remains out of view. No mention of it in the Liberty Street Economics piece. Instead, they refer to Secured Financing Trades. Now look at the actual TMPG paper and its Table of Contents. I want people to know about repo and its attendant risks. I want “repo” to become a household word. I want “repo” to be understood as the delivery system for the myriad machinations that constitute our current economic system or shall I say, “ecosystem.”

To learn more about repo and shadow banking read my book, “Repo Madness: A Simpleton’s Guide to the Street’s Wicked Ways.” Available in ebook (on Amazon) and paperback: ?Amazon?and?Barnes & Noble.