The encyclopedia · Finance & Accounting · Financial decision · 2012–2016
BNY Mellon's collateral optimizer cut tri-party repo intraday credit 97%
Mixed-integer programming rebalances repo collateral so dealers need far less bank credit intraday — 97% less risk on $1.4 trillion of daily collateral.
Bank of New York Mellon (BNY Mellon)
the move
In the U.S. tri-party repo market, dealers fund themselves overnight using securities held by clearing banks — and until reform, the banks extended massive discretionary intraday credit while collateral was being moved. That dependence was the target of the Tri-Party Repo Infrastructure Reform Program.
BNY Mellon, one of the two clearing banks, developed a set of integrated mixed-integer programming models: rebalancing, continuous portfolio optimization (CPO), and the CPO settlement algorithm. Each day they process $1.4 trillion of client collateral, deciding which securities to move and when so dealers' intraday credit needs collapse.
The measured result: intraday credit risk in BNY Mellon's U.S. tri-party repo market fell by more than 97 percent, with several hundred million dollars in annual savings for dealers. The Federal Reserve Bank of New York recorded the industry-wide change — usage down from 100 percent of daily volume in late 2012 to about 20 percent by early 2014, over a trillion dollars less credit a day.
BNY Mellon's work was a finalist for the 2016 INFORMS Franz Edelman Award.
why it works
- Optimization attacks the root cause — collateral timing — rather than managing the overdraft.
- CPO rebalances continuously, so portfolios are always settlement-ready.
- Dealers share the gains: hundreds of millions in annual savings across the market.
- The reform's goal (90 percent reduction) was exceeded by the model's 97 percent.
what transfers
When a market depends on a bank's intraday overdraft, the fix is to optimize the collateral flow itself: a rebalancing model can remove the credit the market was built on.
what came after
BNY Mellon's models process $1.4 trillion of client collateral daily, cutting its tri-party repo intraday credit risk by more than 97 percent; the NY Fed documented market-wide intraday credit dropping from 100 percent of daily volume to about 20 percent by February 2014, and the work was a 2016 Edelman finalist.
references
- BNY Mellon Optimization Reduces Intraday Credit Risk by $1.4 Trillion
- Update on Tri-Party Repo Infrastructure Reform
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