Editing Repurchase agreement (section)

=== Tri-party repo ===
The distinguishing feature of a '''tri-party repo''' is that a [[custodian bank]] or [[Clearing house (finance)|international clearing organization]], the tri-party agent, acts as an intermediary between the two parties to the repo. The tri-party agent is responsible for the administration of the transaction, including collateral allocation, [[Mark-to-market|marking to market]], and substitution of collateral. In the US, the two principal tri-party agents are [[The Bank of New York Mellon]] and [[JP Morgan Chase]], whilst in Europe the principal tri-party agents are [[Euroclear Bank]] and [[Clearstream Banking SA]] with SIX offering services in the Swiss market. The size of the US tri-party repo market peaked in 2008 before the worst effects of the [[2008 financial crisis]] at approximately $2.8 trillion and by mid-2010 was about $1.6 trillion.<ref name = "Gillian">{{Cite web
| url= http://www.ft.com/cms/s/0/692d4184-c72d-11df-aeb1-00144feab49a.html |archive-url=https://ghostarchive.org/archive/20221210/http://www.ft.com/cms/s/0/692d4184-c72d-11df-aeb1-00144feab49a.html |archive-date=10 December 2022 |url-access=subscription |url-status=live
| title= Repo needs a backstop to avoid future crises
| work= [[The Financial Times]]
| author= [[Gillian Tett]]
| date = 23 September 2010
| access-date=24 September 2010}}
</ref>

As tri-party agents administer the equivalent of hundreds of billions of USD  of global collateral, they have the scale to subscribe to multiple data feeds to maximise the universe of coverage. As part of a tri-party agreement the three parties to the agreement, the tri-party agent, the repo buyer (the Collateral Taker/Cash Provider, "CAP") and the repo seller (Cash Borrower/Collateral Provider, "COP") agree to a collateral management service agreement which includes an "eligible collateral profile".

It is this "eligible collateral profile" that enables the repo buyer to define their risk appetite in respect of the collateral that they are prepared to hold against their cash. For example, a more risk averse repo buyer may wish to only hold [[On the run (finance)|"on-the-run"]] government bonds as collateral. In the event of a liquidation event of the repo seller the collateral is highly liquid thus enabling the repo buyer to sell the collateral quickly. A less risk averse repo buyer may be prepared to take non investment grade bonds or equities as collateral, which may be less liquid and may suffer a higher price volatility in the event of a repo seller default, making it more difficult for the repo buyer to sell the collateral and recover their cash. The tri-party agents are able to offer sophisticated collateral eligibility filters  which allow the repo buyer to create these "eligible collateral profiles" which can systemically generate collateral pools which reflect the buyer's risk appetite.<ref>In other words, if the lender seeks a high rate of return they can accept securities with a relatively high risk of falling in value and so enjoy a higher repo rate, whereas if they are risk averse they can select securities which are expected to rise or at least not fall in value.</ref>

Collateral eligibility criteria could include asset type, issuer, currency, domicile, credit rating, maturity, index, issue size, average daily traded volume, etc. Both the lender (repo buyer) and borrower (repo seller) of cash enter into these transactions to avoid the administrative burden of bi-lateral repos. In addition, because the collateral is being held by an agent, [[counterparty]] risk is reduced. A tri-party repo may be seen as the outgrowth of the '''due bill repo''. A due bill repo is a repo in which the collateral is retained by the Cash borrower and not delivered to the cash provider. There is an increased element of risk when compared to the tri-party repo as collateral on a due bill repo is held within a client custody account at the Cash Borrower rather than a collateral account at a neutral third party.