UK: New Central Clearing Service For Triparty Repo Market

Banking & Finance analysis: What is the significance of LCH.Clearnet's introduction of a EUR GCPlus Central Clearing Service for the triparty repo market? Daniel Franks, partner in the Derivatives & Structured Finance Group at Field Fisher Waterhouse, comments on the new service that has been launched in collaboration with Euroclear and the Banque de France.

LCH has just launched a new service for triparty repos which are more common in US than in Europe--is the timing significant?

The timing, of itself, is not significant, as this is the final step in a framework that was initiated by French market participants almost three years ago, and was initially due to be launched in October 2013. The significance lies in the fact that this brings together (within the Euroclear framework) various elements of the repo market--electronic trading, clearing, securities settlement and, importantly, triparty collateral manage-ment and the potential for refinancing by Banque de France. Some of these features already exist in other areas of the market (for example, the Eurex Repo market which provides for collateral management services for cleared repo), but this is the first time Euroclear has brought all of these features together within its infrastructure.

How does a tri party repo differ from a bilateral repo?

The primary difference between triparty and bilateral repo is that one or, more usually, both of the principal parties to the repo outsource certain collateral management functions to a triparty agent. Historically, the primary reasons for using triparty repo are that one of the parties does not have the internal infrastructure to perform collateral management functions itself, or that the automated substitution mechanics offered by triparty agents allow collateral providers to make more effective use of their collateral across their financing counterparties. The ability of the parties to 'lock up' the collateral in the collateral receiver's account has also been an attraction for market participants, although that is less likely to be relevant for EUR GCPlus where re-use will be permitted. More recently, triparty repo has also been used as an additional 'access point' for liquidity and funding in a capital efficient way.

Will the same securities be used as collateral?

As GC (or general collateral) repos, the repos will be in respect of a basket of liquid securities satisfying certain criteria. The baskets will be standardised and based on European Central Bank eligible securities for Euro financing, with the list being monitored and managed by LCH.Clearnet and Euroclear. Eligible collateral will be subject to concentration limits and subject to certain additional criteria, with automatic substitution in certain instances such as an approaching corporate event or maturity. So, in short, the securities that will be used as collateral will be a subset of the types of securities that are already used in the repo markets.

The third party is the 'agent'--what is its role?

The triparty agent in a triparty repo can offer a suite of services. These might include matching instructions, selecting collateral from a list of eligible collateral, settling the transfer of collateral, valuing the collateral, custody of the collateral and reporting. Typically, many of these functions will be performed using automated services (in the case of Euroclear, AutoSelect will be used for the selection of eligible collateral). In the case of EUR GCPlus, Euroclear will perform these functions (save to the extent that other platforms, such as elec-tronic trading platforms, already provide them at an earlier stage in the trade cycle).

Will the documentation be different for a triparty repo?

In the normal triparty repo context, the bilateral repo documentation between the collateral provider and collateral receiver is supplemented by additional documentation with the triparty agent. This can take a number of different forms, depending on who the triparty agent is and which services are to be offered. In the case of EUR GCPlus, additional documentation will need to be signed with Euroclear and LCH.Clearnet to benefit from the services being offered.

How do you think this will affect the market?

Only time will tell how this affects the market, but the expectation is that this will provide market participants with a greater range of services in relation to cleared repo, which may improve efficiencies and, as a result, improve liquidity.

Interviewed by Nicola Laver.

Originally published on Lexis®PSL Banking & Finance on 21 March 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.