Repo Fire-Sale Plan Within Reach

After Fed sounds alarm about risk of future asset fire sales like those at Lehman Brothers and Bear Stearns, industry groups hatch plans to guarantee most-liquid collateral used for repos.

Wall Street’s biggest firms are close to agreeing on a plan that would safeguard the financial markets from the crippling fire sales that engulfed Lehman Brothers Holdings Inc. and Bear Stearns Cos.

By doing so, the participants seek to reach a solution to what the Federal Reserve sees as the last systemic risk in the $1.6 trillion-a-day market for short-term funding yet to be addressed: The potential for questions over a bond dealer’s liquidity to unleash a wholesale dumping of assets that causes a crisis of confidence in the financial system.

Investment funds that may have difficulty liquidating such collateral during times of distress would be able to enter into pre-arranged agreements with those firms with the ability to do so efficiently, based on the proposals, they said.

Some academic researchers such as Stanford University’s Darrell Duffie have suggested the repo industry needs more drastic changes to effectively prevent fire sales, especially for illiquid and harder-to-sell collateral, from inflicting losses across financial markets.

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