ORLANDO - A Federal Reserve-sponsored working group is expected to recommend the creation of a bond-market clearing bank that could step in if either Bank of New York Co. or J.P. Morgan Chase & Co. should lose the market's confidence, panel members said Thursday.
The bank would be set up in advance as a shell bank, jointly owned by the big players in the government securities market, according to the tentative recommendations. If something were to happen to one of the two existing banks, the new one could be activated to contract with it and take over its clearing operations.
"We're not yet sure that this is really practical, but that is the notion, that you would have on the shelf another bank that could step into the shoes," said Patrick Parkinson, the Federal Reserve Board's adviser to the working group on clearing bank issues.
Mr. Parkinson and Paul Saltzman, who represents the Bond Market Association on the panel, discussed the group's conclusions at the BMA's annual operations conference in Florida.
The group includes executives from a wide range of Wall Street firms, assisted by observers from the Fed, the Treasury Department, and the Securities and Exchange Commission.
The working group is expected to release its final report this year. It was formed in response to a white paper by the Fed and the SEC that noted the vulnerability of the current clearing system, which is centered on just two clearing banks.
Bond markets have already weathered one major operational disruption. Bank of New York was particularly hard hit by the Sept. 11 attacks, leading to settlement problems that took months to straighten out.
The two clearing banks have separate clienteles and incompatible data systems. There was early talk that they should develop ways to communicate, but that idea was rejected early on. Panel members said it would divert resources from other disaster planning plans and could exacerbate the industry's concentration problems. It also could jeopardize the competitiveness of the two-bank system if one bank's customers decided to defect.
Mr. Parkinson and Mr. Saltzman said the final report will focus on how markets should shape contingency plans for the unexpected exit of one of the clearing banks. Two scenarios take center stage: operational problems and bank-specific financial problems.
The panel is expected to recommend that the two banks continue to strengthen their backup facilities and plans. J.P. Morgan Chase and Bank of New York have established backup locations outside the New York area, and both banks operated smoothly during the August blackout.
