LeoGlossary: Tri-Party Repo

Repurchase agreement in which a third party is responsible for the management of the collateral during the life of the transaction. This can be a:

• custodian bank
• clearing house
• a central securities depository (CSD)

In Europe, tri-party agreements are handled by:

• Clearstream Bank Luxembourg
• Euroclear Bank
• Bank of New York Mellon
• JP Morgan
• SIS

In the United States, Bank of New York Mellon is the single clearing bank. JP Morgan was a clearing bank but ceased serving this function in 2018.

Because collateral is typically selected automatically by the tri-party agent, tri-party repo cannot be used for borrowing and lending specific securities. It is a pure General Collateral (GC) funding facility. This is reflected in the large average deal size of tri-party repo and collateralization by multiple securities.

Participants:

• Dealers:
  -Seller of securities with promise to buy back at a later day. In effect, the borrower in the transaction.
  -Largest dealers are known as primary dealers.

• Cash Investors
  -Those who buy the securities to sell back at a later date. They are the lenders in the market. Money market mutual funds and securities lenders are the two largest groups of cash investors.

• Clearing Bank(s)

Function of Tri-Party Agent

• Calculation of collateral requirements and transmission of margin calls
• Verification of collateral eligibility as margin
• Processing the delivery of collateral to a trade counterparty
• Receipt of pledged collateral and placement in a segregated account
• Ongoing monitoring for collateral sufficiency, including daily mark-to-market
• Collateral substitution
• Reporting to both parties to the trade
• At the maturation or termination of the trade, return of collateral

Tri-Party Repo Market Volume - New York Federal Reserve

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