Tri-Party repo is a financial market instrument where a repo transaction between two parties is administered by a triparty agent which is a licensed financial institution. According to the RBI, “Tri-party repo is a type of repo contract where a third entity (apart from the borrower or lender), called a Tri-Party Agent, acts as an intermediary between the two parties to the repo to facilitate services like collateral selection, payment and settlement, custody and management during the life of the transaction.”
In the case of triparty repo, ‘an investor places its money with a custodian bank, which in turn lends it to another institution, and then assets are pledged as collateral for the loan.’
The RBI has notified the introduction of triparty repo in India in its April 11, 2017, Draft Directions. The triparty repo is a financial market instrument like the market repo and not like the Central Bank repo (RBI’s repo). This means that it may not have a monetary policy significance rather will have financial market significance.
The role of the triparty agent
The differentiating factor in the case of triparty repo, from the market repo is the presence of the third party which is known as triparty agent. In the case of usual market repo, there is not such an entity.
Job of the triparty agent is to administer the transaction between the lender and the borrower. Here, the agent does some post-trade processing-collateral selection, payment and settlement, custody and management during the life of the transaction. Actually, the tri-party agents are custodian banks who have the license to do the activity at the insistence of the central bank.
Once a lender or borrower notifies about transactions, the agent matches the transaction amount, conditions and, if successful, processes the transaction. The agent automatically select from the securities account of the seller, sufficient collateral that satisfies the credit and liquidity criteria set by the buyer.
Besides initiating the deal, the tri-party agent continues to manage the transaction by making revaluation of the collateral, margining, making income payments on the collateral etc.
The triparty agent doesn’t change the relationship between the parties, and he does not participate in the risk of transactions. In case of default by one party, the impact still falls entirely on the other party. This means that the level of involvement of the agent is less.
RBI’s Draft Tri-Party Repo Directions, 2017
RBI has issued a draft direction about the launch of triparty repo. The direction contains:
- the eligibility of collateral under the triparty repo,
- eligibility of participant institutions,
- eligibility of triparty agents,
- tenor (time period),
- settlements etc.
What is simple about the collateral eligibility and participant’s eligibility is that instruments and institutions in the existing corporate debt market and G-Sec market are eligible.
A. Eligibility of collateral (these are contained in the market repo guidelines and corporate debt security guidelines by the RBI).
Eligible collateral for tri-party repo shall be securities under repo directions.
1. Government Securities
i) Repo transactions may be undertaken in i) Dated securities and Treasury Bills issued by the Government of India and ii) Dated securities issued by the State Governments.
2. Corporate securities
- Listed corporate debt securities of original maturity of more than one year which are rated ‘AA’ or above
- Commercial Papers (CPs), Certificates of Deposit (CDs) and Non-Convertible Debentures (NCDs) of original maturity upto one year which are rated A2 or above.
- Bonds which are rated ‘AA’ or above, which are issued by multilateral financial institutions like the World Bank Group (e.g., IBRD, IFC), the Asian Development Bank or the African Development Bank and other such entities as may be notified by the Reserve Bank of India from time to time.
Participants in the existing (i) Market Repo Transactions in Government Securities Market and (ii) Corporate Debt Securities Repo market are generally eligible to participate in the Triparty Repo market as well. Detailed participation criteria is mentioned in the Draft.
C. Trading Venue: Tri-party repo can be traded Over-the-counter (OTC) including on electronic platforms.
D. Reporting of Trades: All tri-party repos shall be reported within 15 minutes of the trade to the tri-party agent.
E. Tenor, Settlement, Haircut and Disclosures: The tenor, settlement mechanism, minimum haircut, and disclosure requirements for tri-party repos will be identical to those applicable to normal repos, in terms of RBI directions or as permitted by RBI.
F. Tri-Party Agent: Eligible Tri-Party Agents are:
A. All tri-party agents need authorization from RBI to act in that capacity, before they commence operations.
B. Scheduled commercial banks are eligible to be tri-party agents.
C. Other entities regulated by RBI or SEBI subject to meeting the following criteria