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FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing

A dealer bank finances its government bond inventory through the U.S. tri-party repo market. Which statement best describes the role of the tri-party agent (clearing bank) in this structure?

The tri-party agent holds the collateral and performs operational services such as allocation, valuation, margining and settlement. It does not guarantee the borrower's repayment, novate trades like a central counterparty, or set pricing terms, which the dealer and cash investor negotiate between themselves.

  1. AIt takes the credit risk of the cash lender and guarantees repayment of the cash at maturity
  2. BIt acts as the central counterparty, novating each trade between dealer and investor
  3. CIt sets the haircuts and interest rate for each trade between the dealer and the investor
  4. DIt holds the collateral and handles allocation, valuation, margining and settlement between the two partiesCorrect

Explanation

In tri-party repo, the agent provides collateral custody, selection and allocation, daily valuation, margin maintenance and settlement. Haircuts and rates are negotiated by the counterparties. The agent does not guarantee performance or novate trades as a CCP.

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