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Tri-party repo: Difference between revisions
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''From the [http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/24-what-is-tri-party-repo/ {{tag|ICMA}} Website]'' | {{a|gmra|}}''From the [http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/24-what-is-tri-party-repo/ {{tag|ICMA}} Website]'' | ||
Tri-party {{tag|Repo}} is a transaction for which post-trade processing --- collateral selection, payment and settlement, custody and management during the life of the transaction --- is outsourced by the parties to a third-party agent. Tri-party agents are custodian banks. In Europe, the principal tri-party agents are Clearstream Luxembourg, Euroclear, Bank of New York Mellon, JP Morgan and SIS. In the US, there are only two: Bank of New York Mellon and JP Morgan. | Tri-party {{tag|Repo}} is a transaction for which post-trade processing --- collateral selection, payment and settlement, custody and management during the life of the transaction --- is outsourced by the parties to a third-party agent. Tri-party agents are custodian banks. In Europe, the principal tri-party agents are Clearstream Luxembourg, Euroclear, Bank of New York Mellon, JP Morgan and SIS. In the US, there are only two: Bank of New York Mellon and JP Morgan. | ||
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*'''Types of Bond''': European tri-party repo is normally used to manage non-government bonds and equity (although the proportion of government bonds has more than doubled since the crisis), whereas US tri-party is focused on Treasury and Agency debt. | *'''Types of Bond''': European tri-party repo is normally used to manage non-government bonds and equity (although the proportion of government bonds has more than doubled since the crisis), whereas US tri-party is focused on Treasury and Agency debt. | ||
*'''Tenor and margining methodology''': In European tri-party systems, there has always been true term repo, whereas term repos in US tri-party systems have traditionally unwound each morning, to be re-arranged in the afternoon. This was intended to give sellers (who are usually broker-dealers) the daily opportunity to substitute collateral and adjust for price fluctuations (instead of margining with the other party), but it requires the tri-party agents to finance the sellers for most of the day, creating a systemic intra-day credit exposure. In Europe, the need to unwind tri-party repos daily has been avoided by the use of direct substitution and margining. Concern about the systemic risk posed by the huge intra-day credit exposures taken by the US tri-party agents (JP Morgan and Bank of New York Mellon) have prompted reforms to the US tri-party market which are bringing it closer to the European tri-party model. | *'''Tenor and margining methodology''': In European tri-party systems, there has always been true term repo, whereas term repos in US tri-party systems have traditionally unwound each morning, to be re-arranged in the afternoon. This was intended to give sellers (who are usually broker-dealers) the daily opportunity to substitute collateral and adjust for price fluctuations (instead of margining with the other party), but it requires the tri-party agents to finance the sellers for most of the day, creating a systemic intra-day credit exposure. In Europe, the need to unwind tri-party repos daily has been avoided by the use of direct substitution and margining. Concern about the systemic risk posed by the huge intra-day credit exposures taken by the US tri-party agents (JP Morgan and Bank of New York Mellon) have prompted reforms to the US tri-party market which are bringing it closer to the European tri-party model. | ||