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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

Which feature of tri-party repo arrangements is most accurately described?

In a tri-party repo, a clearing bank acts as an agent that handles collateral selection, valuation, margining and settlement between cash lender and borrower. It does not guarantee performance or eliminate collateral price risk, and the lender still holds secured, not unsecured, exposure.

  1. AA clearing bank acts as agent, handling collateral valuation, allocation and settlement between the cash lender and borrowerCorrect
  2. BThe central bank guarantees repayment of the cash to the lender
  3. CThe cash lender and borrower both avoid any exposure to collateral price changes
  4. DThe repo is unsecured and relies only on the borrower's credit rating

Explanation

In a tri-party repo a third-party clearing agent manages collateral allocation, valuation, margining and settlement. It does not guarantee repayment, does not remove market exposure to collateral, and the transaction is secured.

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