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with lessons learned following the crisis, morgan stanley has worked over the past several years to add significant risk management enhancements to our secured funding program. as mentioned above, we have added significant term to the ma tutors in our secured funding liabilities, and since a large portion of those liabilities come from investors who utilize the triparty repo platform, our credit from our clearing banks has been meaningfully reduced. we've extend the maturity of our secured funding book from less than 30 days to now in excess of 120 days. this is now at a disclosure metric in our public filings. extending the maturity and limiting rollover risk are the most powerful, tactical steps that can be taken by bank dealers immediately to reduce the intraday extension of credit.

since the critics tension takes place at the maturity of the trade, creating a longer and staggered maturity profile can yield significant risk reduction. the triparty reform committee has worked to identify the issues and put forward recommendations for the remediation of the gaps that became apparent in 2008. many of those recommendations are now in practice or in scope and on a clear timeline. many enhancements to the process have created increased stability and added clarity. it is clear, however, that the main and most important goal of reducing intraday critics tension has not yet been achieved. it is also clear the responsibility of this cannot be solely assigned to the two clearing banks. we in the bank dealer community have to take the immediate and incremental steps available through our liability management practices to become a much bigger part of the solution. there is no single operational solution or systems development that can solve this issue completely. what is required is collaboration between the bank dealers and the two clearing banks to provide a set of strategic steps to begin a tactical but meaningful

reduction of intraday critics tension in parallel to building the operational systems enhaments. we believe the status quo is unacceptable, and by beginning this reduction through prudent liability management, we can reduce risk during the proposed buildup by the clearing banks. at morgan stanley, we've seen results achieved by working directly with clearing banks to take these steps. morgan stanley is committed to taking the steps necessary to build investor confidence in this important funding channel. the market's liquidity is provided by investors who seek transparency, a clear understanding, and the information they need in real time to make appropriate risk decisions and to effectively manage their collateral and counterparty exposures. we have worked with the triparty committee and other industry groups to move this reform forward. morgan stanley is committed to achieving the entirety of the goals laid out in the committee's report and has invested and executed on changes to our processes well in advance of the scheduled timelines with the goal of meeting the needs of our

investors. this is a top priority of our firm, and we will continue to work at both an industry and a firm level along with our regulators to add stability and durability to this platform. again, we are appreciative of the opportunity to discuss these important issues and look forward to providing this committee with any level of detail and information that will be helpl as you deliberate on the past forward. >> thank you very much for your excellent testimony, and we'll do seven-minute rounds and i'll yield at the end of my time to the senator. i suspect we have the luxury of going back and forth a bit after that too. again, thank you. let me recognize there has been progress made by the clearing banks, by the broker dealers, in terms of prudent steps to prove the process. but this echoed something, the continued intraday-trading activities is still a severe

problem. and second, they talked about the need for increased government involvement. this task force was the principal private with detect ability systems in the federal reserve bank of new york. that leads me to a question, and this is sort of echoing from our discussion about the libor, which a question of who was really in charge. so, with respect to this issue, does the new york fed bank have the responsibility, authority to step in and be the involved party, or is it the board of governors, the s.e.c., or lots of people? i'm leading to the conclusion, everybody has a role, but no one's in charge. >> thank you, senator reed. let me begin by emphasizing i'm here today speaking for the

federal reserve board, but obviously the federal reserve bank of new york and the federal reserve board worked closely and collaborately on this triparty issue. i think in the wake of the most acute phase of the crisis, i think there was a broad agreement that some steps needed to be taken and that the risks that had become evident during the crisis needed to be addressed. i think we also at that time were not entirely clear as to what exactly the right way would be to address those. one thing that was clear was that the triparty market is unusually large and unusually complex. it does not just have any broker dealers, clash lenders, clearing banks, but all of the above involved fundamentally in a daily settle process that is fairly complicated and has to be accomplished in a reasonably tight time frame.

we started out hoping we could find an industry solution. as you suggested, that involves bringing people together in 2009. as all of us in various ways, i think, have reflected in our testimony, substantial progress was made through that process. people have mentioned some of the specifics, but everybody also has fundamentally recognized what i would like to emphasize today, which is that we did not get to the end of that road. this task force process did not get to the end of the road, despite the fact, for example, that the daily unwind now occurs later in the day than it did several years ago. essentially all of the $1.8 trillion triparty market is still unwound every day. what we want to emphasize, i think, is we began with an industry process.

we thought that the industry was best positioned to think about what the right solution would be, but that we were absolutely committed to progress being achieved here, and to that point, when it became clear in the middle part of 2011, that the triparty task force was not going to meet its public commitment from 20 10, despite significant progress having been made to practically eliminate intraday credit by the end of 2011, the federal reserve increased our involvement, and in particular, brought supervisory tools to bear in a very direct way. the details of that are, you know, described, for example, in our july 18 press release. >> let me just -- i think this is an important point. who is in charge?

if the fsoc is going for greater involvement to try to shepherd this initiative to a timely conclusion, which several panelists have said must be done, who's in charge? who's the person that's got the mission to do this, to get this done? is it mr. dudley or chairman shapiro, or is it who knows? do you have an answer? >> yeah, i mean, i think there's two answers. one is sort of all of the above, right? there are reports that each of those individuals have that bring to bear on specific -- on participants in the market. that having been said, the 2010 dodd-frank act did also create a financial stability oversight council, which does have, i think, a clear statutory responsibility to deal with situations where things threaten, as you suggest, might be the case here. >> i appreciate your comments, but i think this is something

that, as a result of this hearing, we need a specific answer, because we don't want to be in a situation again where everybody's involved, but no one's responsibility. if, in fact, the fsoc, has you point out, has called for greater government involvement. i appreciate your response, but what has been the stumbling block to prevent dealing with the intraday-trading issue? mr. wolf has been quite specific that's still a huge problem. second, it was pointed out that it's been moved back to 3:30, every day you're rolling the dice in some respects. >> i would absolutely reiterate what mr. eichner said we all need to work in concert, and i believe the fed has provided

great leadership for this. our part of it that has provided a stumbling block is we really are responsible to get a technology platform to enable simultaneously -- a simultaneous settlement between new and expiring trades, and we are working on that right now. so we can provide a platform so that this all happens much more efficiently. >> would it be helpful if you were -- well, helpful at least to justify the funding, if you were sort of required at a certain time, certain to do it. is that an issue? >> we have actually reduced the time already. we were originally projecting to finish this at the end of 2016. we've reduced that time through a lot of extra technology to 2014. >> the tenoregon some of the comments from the panel, but also from fsoc, is even the 2014 deadline still exposes the

system to risk that should be mitigated. just the final point, because my time has expired and i'll recognize -- one of the aspects of the progress made is the automatic substitution of collateral. previously i understood that individual broker dealers could come in and sort of rearrange the collateral at the end of the day or during the day, causing delays and confusion, etc. is that still possible? is that still prevalent? >> no, actually, the addition of automated deal matching, plus the cash substitution for automatic substitution has actually improved that significantly. >> thank you. again, that is -- that's a testimony and a tribute to what you all have done. i appreciate it. >> thank you very much, mr. chairman. i'd like to understand the objective we're trying to achieve here a little better. as i understand it, the entire triparty repo market is unwound every day still, if i

understand you correctly, mr. eichner. and ms. peetz indicated simultaneous settlement is the ultimate objective. explain to me, ms. peetz and others, i welcome putting your input in here too, how would it ideally work? how would the market ideally work if we can achieve the objectives that the task force is seeking to achieve? >> there would be several changes. this technology would enable just the trades that are actually matured to be rolled, if you will, and so you wouldn't have the intraday required for the whole book. it would be just for that activity that's changing. so that would reduce the amount of intraday significantly. you also have higher quality klatt val another aspect we're working on and asking dealers to tremendous fund that

collateral. so what we call trimming the book will be another concrete move toward getting the risk out of the equation. >> thank you. anybody else? >> yeah, i would just say, taking the more 10,000-foot approach here, the critical problem i think in the market that became evident during the crisis was that the focus of certain risks was not fully understood in a consistent way by all market participants. so, when you sort of say, what is the key goal here? the key goal here is to make sure that it's very clear who bears risk at every single moment and that those risks then can be priced into people's decisions. >> i would say we certainly support elimination of the process of unwinding trades every day, particularly term trades. it certainly helps us to have

more of a static pool of assets. as i said, we actively manage and stress test those assets daily, so the fact that they don't change over and are reklatt rised after the market is certainly a benefit for investors. >> thank you. >> we would agree with that, and we think where some of these interests are very much aligned is bank dealers funding their less liquid assets for longer term makes sense, combined with the fact that reducing this optimization that occurs every day on trades that are much longer to maturity al hours our investors to have a more stable pool of collateral that they can risk manage on a much more real-time basis. so, by changing that more frequently, that presents a lot more revaluation and the like. so, the extent that the intraday credit is drawn at the point either at maturity or at these substitution points, reducing that, stabilizing the pool is actually beneficial to both investors and the reduction of intraday credit risk. >> explain that better to me. one of the points you made in

your testimony was that the issue or the risk related to collateral management or the turnover of collateral is one of the big problems that we're trying to deal with here. i don't understand how the collateral turnover issue plays out. could you explain that? >> it plays out in two forms. first, at mat tutor of the trade, there's a critics tension. it's a trade that has been put on, now come due. at that point, the collateral is coming back through the clearing banks or the bank dealer, who now has to take intraday credit. to the extent that those books have been moved out considerably and if those ma tutors are staggered, the amount of actual credit that's going to be extended can be reduced. so, simply stated, if the entire book rolls over every day and if the liabilities are one day in nature, the amount of credit is considerably higher than if the book has been put out for six months or a year. additionally, with the less liquid assets, which present more risk, and we've seen, in working with our clearing banks, the meaningful outcome

of pushing those ma tutors out has really benefited significantly in the reduction of intraday credit. then there is a optimization where the substitution of collateral, as dealers need collateral back and want to reoptimize the book, the frequency of that also creates some critics positive sure as well. when we think about investor confidence, having a more stable pool of collateral with our investors, giving up some of that ability to optimize plays out both from an investor confidence perspective and from a credit perspective. >> thank you. the basil three frame work includes two new minimum standards for funding lick quidity. one, the liquidity coverage ratio, which is intended to promote short-term resilience, and the other, the net stable funding ratio, or nsfr, which

is intended to address liquidity and provide incentives for banks to use stable sources to fund their activities, to what extent will the new basil liquidity standards affect the triparty repo market? i guess that question is for mr. eichner. >> happy to start. that i think gets to really a very important part. we've talked here about three basic vulnerabilities. senator reed began by reiterating those. one involves the funding profile of dealers. we've talked about that extensively as well. the ba si l three, l.c.r., and netted stable funding ratio requirements are surely going to provide additional impetus to dealers to more effectively manage that risk. so, it certainly directly addresses that one vulnerability. the second vulnerability is the one that we spent most of the time talking about, namely the settlement process and its reliance on intraday credit, which remains, as we've

emphasized, still quite a concern. the third is a dealer that faces distress or default. i think they're really focused on that first question, dealer liquidity risk management, providing additional incentives for that to be improved and strengthened. >> thank you very much. senator? >> thank you very much, mr. chair, and thank you all for testifying in this. the piece of this that i'm trying to get my hands around is the domino effect. that is, when one firm is in trouble and has to sell a lot of assets quickly, it creates a fire sale price that drives down the securities that have been used in other repo sections or deals, immediately causing trouble in other institutions. do we feel like we're in a

better position than we were say in 2008? >> i mean, i think as emphasized in the fsoc report, as we've emphasized in various other forms as well, you know, this remains a very real concern. we certainly recognize the tremendous progress that has been made and will continue to be made on the intraday settlement issue. the issue, senator merkley, which you referred to, that remains a task ahead of everybody sitting on this panel. i think we are hopeful at the federal reserve that like the intraday credit issue, this will be something for which, over time, the industry develops a consensus, and then that consensus can be a route to a solution, possibly with regulators urging along the regulators urging along the way.