How Triparty Repo Works?

In the previous article, we have already learned about the repo market. We learned about how the repo market is one of the most important segments of the money market. We also learned about the large volumes of transactions that take place in the repo market.

We already know that about $2 trillion to $4 trillion changes hands daily in the repo market. Since the volume of transactions is so large and so frequent, buyers and sellers often feel the need to outsource some of their duties to a third party. This type of transaction is called the triparty repo. It is a variant of the original repo transaction and has the same effect. The third party is included just for the ease of execution.

This article explains the concept of the triparty repo as well as how it is executed in real life.

What is a Triparty Repo Agreement?

The effective transfer of collateral to the buyer and then back to the seller underpins any repo transaction. However, when investors are involved in the large-scale execution of repo contracts, the management of collateral can become quite tedious and complicated. Hence, a triparty repo system agreement is created in order to outsource these activities.

It needs to be understood that the triparty agent is merely providing collateral management services. The actual financial transaction continues to remain between the buyer of the collateral and the seller of the collateral. The triparty agent does not have any liability related to the purchase, sale, or valuation of the actual collateral.

How a Triparty Repo Agreement Works?

The steps involved in a normal triparty agreement have been listed below:

  1. The buyer and the seller decide to enter into a repo transaction. This means that they have already decided on a repo rate, the securities to be transferred as well as the maturity. It is important to note that the triparty agent does not play a role in the parties finding each other. The triparty agent is generally selected once the buyer and seller have already decided on the terms. The triparty agent does not provide any venue for the execution of these contracts.

  2. The triparty agent receives the details of the transaction from both buyer and the seller. They reconcile these details to ensure that both parties have the same understanding of the transaction. The triparty agent is responsible for reconciling information received from both parties as well as pointing out any inconsistency in the information.

  3. The cash provider does not directly provide cash to the securities seller. Instead, they deposit the cash with the triparty agent provider. Similarly, the party selling the securities does not directly sell the securities. Instead, they also hand over the securities to the triparty agent.

    Hence, the triparty agent becomes the custodian of the cash as well as the securities. In some cases, the selling party does not even have to provide details of securities to the triparty agent. Instead, the triparty agent has access to their account and also has authorized access. Hence, the triparty agent can themselves identify security that matches the criteria and use them as collateral.

  4. The triparty agent then has to communicate to both parties that the counterparty has executed its part of the contract. This means that they conform to the cash provider that the securities have been received and vice versa.

  5. The cash is then transferred to the seller. However, the securities are often held by the triparty agent in a segregated account. This generally means that they are in the possession of the bank. However, their ownership lies with the buyer.

  6. The triparty agent is also responsible for providing ongoing reporting around the repo contract to both parties.

  7. The triparty agent also helps the buyer and the seller to draw up their positions and renew their contracts in case they want to roll over the repo contract.

  8. The triparty agent also has to keep a watch on the quality of the underlying assets. If any collateral falls below the required threshold, then the triparty agent needs to notify the seller to substitute the security. In some cases, they have access and authorization to the seller's account and hence can carry on such substitution on their own.

  9. Lastly, once the contract has been completed, the triparty agent is responsible for executing the repurchase transaction which leads to the amount as well as the security being returned to the respective parties.

Benefits Of a Triparty Repo Agreement

The triparty repo agreement is quite popular amongst investors since it provides certain benefits to both parties. Some of these benefits have been listed below:

  1. Triparty agents are usually big banks such as Morgan Stanley, JP Morgan Chase, or Bank of America. These banks have automated systems in place which can successfully settle transactions at a very low cost. The cost incurred by the buyer and seller as fees is very less as compared to the costs, they would have to incur to execute this transaction on their own. The buyer and seller can benefit from the economies of scale being offered by the tri-party agent.

  2. The efficient services of triparty agents make it possible to use the services of triparty contracts to use equity shares and other private securities as collateral. The accurate and timely reporting helps make margin calls and reduces the likelihood of default.

To sum it up, a triparty repo contract is an important part of the money market. It allows firms and banks to easily participate in the repo market without taking into account the administrative complexities and costs which are associated with such transactions.

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