By Katy Burne 

Federal Reserve Gov. Jerome Powell said in a speech Monday the central bank is stepping up its scrutiny of Bank of New York Mellon Corp. as the bank prepares to become the sole provider of settlements in government bonds following a planned exit by J.P. Morgan Chase & Co. from the business.

J.P. Morgan said it would cease settling trades in the $13 trillion U.S. Treasury market in July, leaving Bank of New York Mellon the sole provider. J.P. Morgan gave a roughly two-year timeline for clients to migrate across and Bank of New York is signaling its intent to take on as many of those firms as it can, according to people familiar with the matter.

Nevertheless, Mr. Powell said the Fed is keenly aware that BNY's unique position raises questions and said the central bank is keeping a close eye on the transition and the New York bank's operating standards owing to its large share of the market when J.P. Morgan leaves.

"As BNYM becomes the sole provider, we will raise our expectations even higher," said Mr. Powell in remarks introducing a Treasury conference panel at the Federal Reserve Bank of New York of Monday. "We have long recognized that any disruptions to these critical market services could have serious consequences for financial stability, and have calibrated our supervisory expectations accordingly."

The whittling of government securities settlement providers to one firm is the byproduct of decades of market evolution and mergers. There used to be six providers but after a series of mergers and exits, that number fell to two in the 1990s.

Many market participants felt it was only a matter of time before J.P. Morgan would pull out, in part because the business has low margins and BNY Mellon had a larger slice, but the timing still caught some by surprise and the Fed didn't force J.P. Morgan to stay in. BNY already has about 85% of settlements in a $1.6 trillion corner of short-term loans called repurchase agreements, or repos, backed by government debt.

Mr. Powell said the Fed would push to extend the two-year migration timeline if it was necessary on account of any market disruption, but that all parties were working to ensure a smooth transition.

Following J.P. Morgan's exit, Bank of New York will settle transactions including the majority of Treasury debt sold at U.S. government auctions, the majority of Treasurys traded in the secondary market and most U.S. government debt exchanged in the overnight repo market, a key source of funding in which financial institutions use the bonds as collateral for cash loans.

Officials at both banks have told the Fed the shift shouldn't disrupt trading, and BNY has sent out questionnaires to many of J.P. Morgan's existing customers inviting them to provide details of their requirements before moving settlements platforms, the people familiar said.

"We take our role and responsibilities for the smooth and reliable functioning of the market very seriously," said Gerald Hassell, chief executive of Bank of New York Mellon, on the New York Fed panel. "This is an important business for us... . This area, securities services, is what we're all about."

Write to Katy Burne at katy.burne@wsj.com

 

(END) Dow Jones Newswires

October 24, 2016 16:09 ET (20:09 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
JP Morgan Chase (NYSE:JPM)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more JP Morgan Chase Charts.
JP Morgan Chase (NYSE:JPM)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more JP Morgan Chase Charts.