A third party collateral agreement is an agreement between a borrower and lender that is administrated by a third party. The borrower sells securities (collateral) to the lender with the intent to repurchase (repo) them at a future date.
The administrative responsibilities of the agreement are performed by the third party which is a clearing bank. The clearing bank ensures the borrower's collateral is sufficient and meets the eligibility requirements set by the lender. The third party makes certain borrower and lender agree on the valuation of the securities. The third party also manages the settlement.
Third party collateral agreements help to mitigate or offset risk to the lender. The lender benefits by earning a return on a secured product. The borrower benefits by having greater flexibility in allocating collateral and also by having increased cash available for short-term funding strategies.
The tri-party repo market grew rapidly from the 1980s yet suffered greatly in 2008 during the financial crisis. Because they comprise 75 percent of the U.S. Treasury and agency securities markets, they are central to the U.S. economy.
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