A two-year inquiry into tri-party repurchase agreements has not figured out how to fully eliminate systemic risk from this arcane market.

In a final report issued Wednesday, the industry-led task force said more work was needed to head off the outside possibility of a market failure.

The robustness of the so-called "repo" market, in which banks such as JPMorgan Chase & Co. and Bank of New York Mellon act as intermediaries for overnight collateralized loans, came into doubt during the 2008 financial crisis. Participants worried about counterparty risks cut back on repo lending, leaving companies struggling to raise cash and investment banks facing liquidity shortfalls.

The Federal Reserve Bank of New York created the task force in September 2009 to address the roots of these problems. Its final report says that the group has laid the groundwork for a "meaningful reduction" of tri-party risk and laid out a "target state" for future reforms.

But "[f]urther work [is] necessary to more concretely specify a 'Target State' infrastructure that would facilitate the full achievement of the Task Force's most important recommendation — the practical elimination of intra-day credit associated with the settlement of tri-party repo transactions," according to the report.

A major concern that was partially addressed was the risk that the clearing banks, JPMorgan and BNY Mellon, might be stuck with risk if a participant in the market failed in the middle of the day. Even though each deal is safe on its own, the sheer volume of transactions creates a possible risk. The committee has reduced this threat by shortening the hours during which the clearing banks are exposed to counterparty troubles.

"We know the daily unwind has not been eliminated," the report states. "In many cases, the Clearing Banks are still extending discretionary credit equal to the full amount of each Dealer's notional tri-party book each day, albeit for a shorter period of time."

Some good news cited in the report is the committee's perception that cash investors are no longer blind to counterparty risk.

"Cash investors now understand they are very likely to bear credit and liquidity risks in the event of a Dealer default."

But the committee makes clear that there is still the possibility of an infrastructure collapse in the event of dealer default.

The task force panel's members include representatives from Bank of America Securities LLC, Bank of New York Mellon Corp., Citigroup Global Markets LLC, Goldman Sachs & Co. and JPMorgan Chase & Co.

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