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

In a tri-party repo, which function is performed by the tri-party clearing agent?

The tri-party agent provides operational services between the cash lender and borrower: selecting eligible collateral, valuing it, applying haircuts and margin, handling substitutions and settling on its own books. It does not guarantee the trade like a central counterparty, and the parties negotiate the rate and haircut themselves.

  1. AIt guarantees repayment of the cash if the borrower defaults, acting as central counterparty
  2. BIt sets the repo rate and haircut between the two parties on a binding basis
  3. CIt takes ownership of the collateral permanently and issues its own securities to the lender
  4. DIt handles collateral selection, valuation, margining and settlement on its books between the cash lender and borrowerCorrect

Explanation

The tri-party agent provides post-trade services: allocating eligible collateral, valuing and marking it to market, substituting collateral and settling via accounts on its books. It does not guarantee performance or set terms, which the parties negotiate. Option A describes a CCP, not a tri-party agent.

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