Commercial Paper: A Primer
February 12, 2025
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In the previous article, we have already learned about the repo market. We learned about how the repo market is one of the most important segments of the money market. We also learned about the large volumes of transactions that take place in the repo market.
We already know that about $2 trillion to $4 trillion changes hands daily in the repo market. Since the volume of transactions is so large and so frequent, buyers and sellers often feel the need to outsource some of their duties to a third party. This type of transaction is called the triparty repo. It is a variant of the original repo transaction and has the same effect. The third party is included just for the ease of execution.
This article explains the concept of the triparty repo as well as how it is executed in real life.
The effective transfer of collateral to the buyer and then back to the seller underpins any repo transaction. However, when investors are involved in the large-scale execution of repo contracts, the management of collateral can become quite tedious and complicated. Hence, a triparty repo system agreement is created in order to outsource these activities.
It needs to be understood that the triparty agent is merely providing collateral management services. The actual financial transaction continues to remain between the buyer of the collateral and the seller of the collateral. The triparty agent does not have any liability related to the purchase, sale, or valuation of the actual collateral.
The steps involved in a normal triparty agreement have been listed below:
Hence, the triparty agent becomes the custodian of the cash as well as the securities. In some cases, the selling party does not even have to provide details of securities to the triparty agent. Instead, the triparty agent has access to their account and also has authorized access. Hence, the triparty agent can themselves identify security that matches the criteria and use them as collateral.
The triparty repo agreement is quite popular amongst investors since it provides certain benefits to both parties. Some of these benefits have been listed below:
To sum it up, a triparty repo contract is an important part of the money market. It allows firms and banks to easily participate in the repo market without taking into account the administrative complexities and costs which are associated with such transactions.
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