Strategic Behavior in the Tri-Party Repo Market

R epo contracts are a kind of collateralized loan that has become predominant in the United States among large cash investors. There are several types of repo contracts, such as bilateral delivery-versuspayment repos, interdealer repos, and tri-party repos. A significant portion of repo transactions in the United States take the form of tri-party repos, where a third party (a clearing bank) provides collateral management and settlement services to the borrower and the lender. The tri-party segment of the U.S. repo market is the subject of this article. The tri-party repo market played a significant role during the 2007–2009 global financial crisis. Tri-party repos were, for example, a major source of secured funding for Bear Sterns prior to its demise. In March 2008, repo lenders in general, and tri-party repo counterparties in particular, lost confidence in their ability to recoup loans to Bear Stearns and, hence, refused to renew them, asking instead for immediate repayment (Bernanke 2008). To avoid a failure, the Federal Reserve facilitated the acquisition of Bear Stearns by the bank J.P. Morgan Chase. The withdrawal of tri-party repo funding also played a role in the collapse of Lehman Brothers in September 2008. As a result of the events during the crisis, it is now widely believed that the tri-party repo market is subject to serious vulnerability (see, for example, Dudley [2009]). Attesting to this is the fact that in 2009 the NewYork Fed asked a group of senior private U.S. bank officials to form a task force “to address the weaknesses” in the