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

A hedge fund uses a tri-party repo with a clearing bank to finance a portfolio of corporate bonds. Which feature best distinguishes tri-party repo from bilateral repo?

Tri-party repo uses an agent, usually a clearing bank, to handle collateral selection, valuation, margining and settlement for both counterparties. The agent does not guarantee repayment, so credit risk stays with the parties. Bilateral repo settles directly between them, and CCP-cleared repo involves novation and netting.

  1. AThe cash lender and borrower settle directly with no intermediary and no collateral substitution
  2. BA third-party agent handles collateral selection, valuation, margining, and settlement between the two counterpartiesCorrect
  3. CThe third party guarantees the borrower's repayment of cash and absorbs any default loss
  4. DCollateral is always exchanged for cash on a net basis through a central counterparty

Explanation

In tri-party repo an agent, typically a clearing bank, administers collateral allocation, pricing, margin maintenance, and settlement. It does not guarantee performance, so the default risk stays with the counterparties. Option 0 describes bilateral settlement, and central netting describes CCP-cleared repo.

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