Due Diligence on Tri-Party Repo

Finadium
June 2014

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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.

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.

This report is 26 pages with 9 exhibits.

TABLE OF CONTENTS

■ Executive Summary

■ The Business of Tri-party Collateral Management
– The Players
– Sizing the Tri-party Market

■ Operations and Supported Instruments
– Fee Schedules
– Interoperability

■ The Future of the Tri-party Model
– Tri-party and CCPs
– Bilateral vs. Tri-party
– Alternative Collateral
– Target2-Securities
– Growth in Asia
– One Hub or Many?

■ About the Author

■ About Finadium