Responding to industry criticisms, the Federal Reserve has established a private-sector working group to recommend steps to mitigate risks in the clearance and settlement of US government securities.
The US regulator says the working group will explore ways that JPMorgan Chase and the Bank of New York, the two major clearing banks operating in this market, could substitute for each other if the services of either were interrupted or terminated. The working group has been asked to prepare a final report before the end of 2003.
Michael Urkowitz, senior adviser to Deloitte Consulting, has agreed to chair the group, which will include senior representatives from the two banks, the Government Securities Clearing Corporation, securities dealers, interdealer brokers, custodian banks, The Bond Market Association, and the Investment Company Institute.
In May, the Board and the SEC issued a White Paper on 'Structural Change in the Settlement of Government Securities'. The document expressed concerns about operational, financial, and structural vulnerabilities associated with the status quo, in which all of the most active market participants are critically dependent on one of two clearing banks for settlement of their trades and financing of their positions. The White Paper requested comment on whether structural change was needed to address the vulnerabilities.
Market feedback suggested the authorities concentrate on mitigating risks within the current structure, at least in the short run. Several suggested formation of an industry group to explore the specific changes required for the two clearing banks to substitute for each other in the event of a breakdown in services.