FRM Exam Part II · Repurchase Agreements and Financing

Repo Market Structure and Settlement: Tri-Party, Bilateral and Cleared

Updated 11 October 2026 · Fact-checked

The repo market has three structures. In bilateral repo, two parties settle and manage collateral themselves. In tri-party repo, a clearing bank handles settlement, collateral selection, valuation and substitution. In centrally cleared repo, a CCP such as FICC novates trades, nets them and guarantees settlement. Know who holds collateral and who bears counterparty risk.

Understand Repo Market Structure and Settlement

A repurchase agreement (repo) is a sale of securities with a promise to buy them back later at a higher price. Economically it is a collateralised loan. The cash lender is the repo buyer (reverse repo side). The cash borrower is the repo seller. The price difference gives the repo rate.

The market has three structures. In bilateral repo, the two parties agree terms, deliver securities against cash directly (usually through a securities settlement system) and manage margin themselves. This is flexible. It is also operationally heavy. Each lender must monitor collateral values and make margin calls.

In tri-party repo, a clearing bank acts as agent. In the US this has been BNY. The agent holds collateral in segregated accounts, checks that it meets the agreed eligibility schedule, values it daily, applies haircuts, issues margin calls and substitutes collateral on request. The agent is not a guarantor. The cash lender, often a money market fund, still faces the borrower's credit risk, backed by collateral. A well-known feature is the intraday unwind. Historically, trades were unwound each morning, so the clearing bank extended intraday credit to dealers until re-settlement in the afternoon. Reforms after 2008 reduced this exposure.

In centrally cleared repo, a central counterparty (CCP) becomes buyer to every seller and seller to every buyer through novation. In the US, the Fixed Income Clearing Corporation (FICC) clears Treasury and agency repo. Netting across trades cuts gross settlement and balance sheet use. Members post margin and contribute to a default fund. Sponsored repo lets a FICC member sponsor clients, such as money market funds, so their trades are cleared and netted without the clients being full members. Dealers can then net sponsored trades against other positions, saving balance sheet.

Participants include cash lenders (money market funds, securities lenders, corporates, central banks), cash borrowers (dealers, hedge funds, banks), clearing banks, CCPs and custodians. The key exam link is the run risk: fire sales of collateral if a borrower defaults, and haircut increases in stress.

Key formulas to remember

Repo interest: Interest = Cash lent × repo rate × days ÷ day-count basis; Use 360 for USD repo, 365 for GBP. Repurchase price = cash lent + interest.
Haircut: Haircut = (Collateral market value − Cash lent) ÷ Collateral market value; Equivalent view: Cash lent = Collateral value × (1 − haircut). Check which base the question uses.
Margin (over-collateralisation) ratio: Collateral required = Cash lent ÷ (1 − haircut); Collateral value must be at least this amount to keep the loan fully secured.
Structure rule: tri-party: Tri-party agent = settlement + collateral management, no credit guarantee; Counterparty risk stays between lender and borrower.
Structure rule: central clearing: Novation: CCP is counterparty to both sides, trades netted, margin and default fund apply; Counterparty risk moves to the CCP.

How to solve Repo Market Structure and Settlement questions

Use this sequence for most repo structure and settlement questions.

1Identify the structure: bilateral, tri-party, centrally cleared or sponsored.
2List who does what: who settles, who holds and values collateral, who makes margin calls.
3Locate counterparty risk: with the other party (bilateral, tri-party) or with the CCP (cleared).
4Check for a calculation: interest, haircut, collateral needed or margin shortfall. Write the formula and the base.
5Consider netting and balance sheet effects if the question mentions FICC, sponsored repo or multiple trades.
6Identify residual risks: intraday credit, collateral fire sales, haircut procyclicality, CCP concentration.
7Pick the answer that matches the exact role described, not a plausible general statement.

Quickest way: Role-matching shortcut

When to use it: Conceptual multiple-choice questions comparing repo structures.

Ask: who guarantees performance? Only a CCP does.
Ask: who values and substitutes collateral? Tri-party agent, or the parties themselves in bilateral.
Ask: is netting mentioned? That points to central clearing.
Ask: are money market funds clients of a dealer in a CCP? That is sponsored repo.
Eliminate options that give the tri-party agent a guarantee role.

Common mistakes in Repo Market Structure and Settlement

Saying the tri-party agent guarantees the trade
The agent sits between the parties, so it looks like a counterparty.
Fix: The agent is an administrator. Credit risk stays with the borrower. Only a CCP novates and guarantees.
Treating tri-party and centrally cleared repo as the same thing
Both involve a third party and reduce operational work.
Fix: Tri-party is collateral management and settlement. Central clearing is novation, netting and margining by a CCP.
Mixing up the haircut base
Haircut can be quoted on collateral value or on cash.
Fix: Standard: haircut as a share of collateral value. Cash = collateral × (1 − haircut). Read the question.
Using 365 days for USD repo interest
Habit from other calculations.
Fix: USD money markets use actual/360 unless told otherwise.
Thinking sponsored clients become full CCP members
The word sponsored hides who is a member.
Fix: The sponsoring member stays responsible to the CCP. Clients access clearing through it.
Assuming central clearing removes all risk
Novation sounds like a full fix.
Fix: Risk is concentrated in the CCP. Margin calls can strain liquidity in stress, and CCP default waterfalls matter.

Worked examples

Example 1

A dealer enters a 7-day tri-party repo, borrowing USD 50,000,000 at 5.40% (actual/360). Collateral has a 2% haircut on collateral value. Find the repurchase price and the minimum collateral market value.

Show the solution

Interest = 50,000,000 × 0.054 × 7 ÷ 360.
50,000,000 × 0.054 = 2,700,000. Times 7 = 18,900,000. Divide by 360 = 52,500.
Repurchase price = 50,000,000 + 52,500 = USD 50,052,500.
Collateral required = 50,000,000 ÷ (1 − 0.02) = 50,000,000 ÷ 0.98 = 51,020,408 (rounded).

Answer: Repurchase price is USD 50,052,500 and minimum collateral value is about USD 51,020,408.

Example 2

A money market fund lends cash to a dealer through a sponsored repo cleared at FICC. Which statement is correct? (A) The tri-party agent guarantees repayment. (B) The fund's counterparty is FICC after novation. (C) The fund must hold no margin exposure. (D) Trades cannot be netted against the dealer's other trades.

Show the solution

Sponsored repo is a centrally cleared structure, so novation applies.
After novation the CCP is counterparty to each side. This supports B.
A is wrong: a tri-party agent does not guarantee, and it is not the structure here.
D is wrong: netting of the sponsoring member's trades is the main benefit.
C is wrong: the CCP uses margin, with the sponsor responsible to FICC for the sponsored obligations.

Answer: B

Exam tips

Questions often hinge on one word: guarantee, novation, netting or segregation. Match it to the structure.
Expect a case on repo run risk: haircuts rise, lenders pull back, dealers fire sell collateral.
Do the arithmetic with the right day count and haircut base before reading options.
Know the intraday credit issue in tri-party repo and why it concerned regulators.
Link this topic to liquidity and CCP questions: margin calls from clearing can cause liquidity strain.

Practice questions from Repurchase Agreements and Financing

Repo Market Structure and Settlement: frequently asked questions

What is the main difference between tri-party and bilateral repo?

In bilateral repo the two parties handle settlement and collateral themselves. In tri-party repo a clearing bank settles the trade and manages collateral selection, valuation, margin and substitution. The agent does not guarantee performance.

What does central clearing do for repo?

A CCP such as FICC novates trades so it faces both sides. It nets obligations across members, collects margin and uses a default fund. This reduces bilateral counterparty risk and can lower balance sheet use.

What is sponsored repo?

It lets a CCP member sponsor clients, such as money market funds, so their repo trades are cleared at the CCP. Clients get cleared access without being full members, and the sponsor can net the trades.

Is the tri-party agent exposed to credit risk?

Not as a guarantor of the trade. Historically the clearing bank gave intraday credit to dealers during the daily unwind, which created exposure. Reforms reduced that.