Finadium: Due Diligence on Tri-party Repo and Collateral Managers

Finadium has conducted a due diligence inquiry on tri-party repo and collateral managers. A new research report presents our findings and ideas for the evolution of this market.

Tri-party repo and collateral management has long been seen as a core business process and infrastructure in financial markets; banks and asset managers have grown to appreciate the ability to outsource settlement and reporting functions with a bank or Central Securities Depository. With the growth of collateral management needs, the continued focus on daylight overdraft risk in the US and the termination of the European Central Bank’s CCBM2 program, tri-party now plays an even greater role in facilitating movements of cash and securities worldwide.

A discussion of tri-party tends to refer to repo, but that is not the only product that tri-party can facilitate. These arrangements are also well-designed to hold collateral for a variety of transactions including OTC derivatives. As one example, CME Clearing will accept some types of corporate bonds so long as they are held in an “IEF4” program. The defining aspects of this program are that assets are held with BNY Mellon or J.P. Morgan Chase; CME Clearing controls the account; assets are pledged for a term; and substitutions may occur during the business day so long as the “deal” amount is kept constant. If a custodian can or should supervise an asset for the benefit of a third party, the tri-party mechanism can be an ideal solution.

This report is a due diligence inquiry into the functioning of tri-party repo providers. The report starts with an evaluation of the players and the market size, then presents results of a proprietary survey conducted by Finadium in Spring 2014 of the four major tri-party agents: BNY Mellon, Clearstream, Euroclear and J.P. Morgan. While the agents perform very similar functions, some important differences remain in pricing and the philosophy underlying their services. The report concludes with a discussion of six issues facing the tri-party market going forward, including opportunities in conjunction with central counterparties (CCPs) and the expansion of tri-party agents into new geographies.

Any financial institution looking to evaluate a tri-party repo or collateral service provider should read this report; the findings will be applicable for assessing both new and existing relationships. Dealers and banks may find the report useful for understanding how their tri-party relationships may evolve in the future. Asset managers, securities lenders, Central Banks and other cash providers will gain a greater understanding of the mechanics behind the tri-party curtain, resulting in a better awareness of how their assets are managed and collateral calls made.

Please visit the Finadium website for more information on this report.

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