Friday, July 29, 2005

'Triparty Repo'

Introduction

The repo market has seen tremendous growth over the past two decades.

Rising debt issuance, the explosion of the derivative market, and an increase in interest rate volatility have contributed to an increased daily trading volume.

The growth of dealer positions led to demand for an efficient financing instrument. Triparty repo was developed to satisfy this demand.

Triparty is currently the largest growth area in the international repo market. Triparty is being increasingly used as a firm-financing tool at MSIL.

Approximately 70% of MSIL’s financing needs in Euro and US dollars being met through Triparty. This figure averages 12 billion USD a day.

 

Triparty

“A special form of delivery repo involving MSIL, the investor and a third party custodian (agent)”

Flexibility Triparty has developed to incorporate bond vs. bond triparty, as well as bond vs.cash.

 

Main players -

Agents Euroclear, Clearstream, Bony.(Custodians) 

Cash providers Central Banks, Securities Lenders and other cash-rich (Investors) institutions such as retail banks. 

Collateral providers Broker/Dealers like MS

 

Generally, there is now a better understanding of the triparty product amongst investors.

This has led to a greater range of institutions showing an interest from both an agent perspective and an investor perspective.

 

Role of the Agent -

·  The investor is provided with two accounts at the custodian free of charge: A collateral account and a cash account.

·  The investor pays money into its cash account at the custodian, at the start of a trade. The custodian returns the cash plus repo interest

at the end of the trade into the predesignated bank account.

·  Collateral Provider delivers eligible bonds to the custodian.

·  Custodian values the securities, verifies that the collateral is acceptable to the investor, and then moves the securities into the investor’s collateral account.

The custodian then transfers the investor’s funds to Collateral provider’s cash account.

·  Custodian sends collateral listings to the investor.

·  The agent marks to market on a daily basis to determine whether the trade is fully collateralized. If a deficit exists additional securities are delivered to the agent,
who then moves them into the investor’s collateral account. If an excess exists, the agent releases the excess amount of securities

and delivers them back to Collateral provider. This process ensures the client’s investment is always fully collateralized.

·  The agent’s role is to oversee that both the collateral and cash providers’ interests are looked after.

The exchange of securities and cash between the collateral provider and the investor is made under the supervision and control of the agent

to ensure compliance with the terms of the agreement.


NOTICE: If received in error, please destroy and notify sender.  Sender does not waive confidentiality or privilege, and use is prohibited.

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