Triparty Repo
A triparty repo is a repo where the bonds lent/borrowed are not specified but are allocated by a triparty agent based upon a pre-defined set of rules and criteria agreed by both counterparties. The triparty agent, Euroclear or Clearstream for international bonds, acts as custodian for the collateral. In the example below, the collateral is delivered by the seller to the third party agent and held by that third party in a separate account on the buyer's behalf.
In effect, it is a transaction that provides dealers with portfolio optimisation opportunities, incurs minimal settlement cost to the investor and gives the investor independent confirmation that their cash is fully collateralized.
From an investor's credit perspective, this arrangement is better than HIC (Hold in Custody) repo but not as good as bilateral DVP repo. Consequently, the yield on their cash (assuming collateral of identical credit quality) should be somewhere between the two. In addition to the regular repo agreement between dealer and investor, a separate triparty agreement needs to be in place between dealer, investor and custodian before dealing can commence.
More recent types of triparty agreement include the Security Lending Triparty where securities borrowed or lent bi-laterally can be collateralized by a free movement of collateral via triparty and the Security Lending Triparty DVP.
Benefits of triparty repos:
- They are an active liquid market where you can provide funds at a good relative value whilst freeing up your capital
- Triparty eases the burden of back office work by providing verification and eligibility checks, daily mark-to-market, movement of securities and custody monitoring of collateral received on your behalf
- They provide optimal risk management by having controlled risk profiles and timely margin calls
- They provide corporate actions processing for securities used as collateral
- Triparty represents a more secure form of lending since the lender's securities sit with the custodian not the counterparty, thus offering protection against counterparty default
- Triparty provides flexibility in terms of the period of the repo and the credit quality of the bonds that are acceptable through it
- It enhances efficiency by autoselecting pledgeable securities based upon the collateral eligibility agreement
The different risk management tools available in triparty repo include:
- eligibility criteria - A client can define specific risk profiles based on different security criterias such as the rating, instrument type, currency and issuer
- concentration limits - Clients may supply limits on their exposure to categories of securities or issuers
- haircut per market - A client may specify haircuts by cross-currency, quotation age and security type.
- multiple sets - Client can also apply the above risk controls to different sets all within the same account
Read more statistics about the triparty repo market. This data is from the ICMA European Repo market survey.
An eligibility profile form has to be filled by new counterparties before they start doing repo.
