Tri-Party Repo

Q: What is repo?

Fixed-income financing, also known as repo, is a type of short-term borrowing in which counterparties obtain cash by posting collateral. Cash borrowers, such as hedge funds, often use repos to fund security purchases. Meanwhile, cash rich lenders such as money market funds (MMFs) take the other side of the deal seeking a profit. In most cases, a dealer—often a large bank—acts as an intermediary between the parties to facilitate the transaction.

Q: What is sponsored repo?

Sponsored repo is a transaction in which a dealer sponsors non-dealer counterparties onto Fixed Income Clearing Corporation’s (FICC) cleared repo platform—a system that matches and nets repo trades in U.S. government debt.

In a typical matched-book repo trade, a dealer would borrow $100 from a cash rich lender (e.g., a money market fund) and then on-lend the proceeds to a cash borrower (e.g., a hedge fund) in exchange for collateral. As part of this, the dealer would have to put up its own capital against $100 of repo exposure.

In sponsored repo, FICC intermediates both sides of the trade, thereby allowing dealers to net the transactions off against each other. This means the amount of capital banks have to hold is greatly decreased, allowing dealers to provide more balance sheet to clients or deploy capital towards other operations.

TRI-PARTY REPO FLOW

1. Investor sends cash balance to custodian
2. Dealer sends securities to agent
3. Agent releases cash to dealer
4. Dealer returns cashplus interest to custodian
5. Agent sends eligible securities back to dealer
6. Agent returns cash balance (plus interest) to investor

Step 1: GSD Dealer Member Borrower pledges collateral to FICC.
Step 2: Clearing Bank validates collateral and value.
Step 3: FICC onward pledges collateral to Cash Lender.
Step 4: Clearing Bank debits Cash Lender and credits cash to GSD Dealer Member Borrower via FICC’s account.