Fed to explore operational risks in clearance of US government securities

The US Federal Reserve Board has established a private sector working group to recommend steps to mitigate operational risks in the clearance and settlement of US government securities.

The working group will explore ways the two major clearing banks, JP Morgan Chase and the Bank of New York, could substitute for each other if the services of either were interrupted or terminated. A final report will be released before the end of 2003.

Michael Urkowitz, senior adviser to Deloitte Consulting, will chair the working group, which will include representatives of the two major clearing banks, the Government Securities Clearing Corporation, securities dealers, inter-dealer brokers, custodian banks, the Bond Market Association and the US-based Investment Company Institute. Staff of the Federal Reserve, the Securities and Exchange Commission (SEC) and the Department of the Treasury will participate in the working group as observers and technical advisers.

In May, the SEC and the Fed issued a white paper on structural change in the settlement of government securities. “The white paper 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 Fed said.

Comments resulting from the white paper urged the authorities to concentrate on mitigating risks within the current structure, rather than considering structural change, which in turn led to the formation of the working group.