The triparty collateral management service is used by two trading parties at the agreement of a business transaction (eg, a repo, a securities loan, ... ) when they want to secure the transaction with collateral. The management of this collateral (ie, agreeing on quantity and type, marking to market, ... ) is done by a third party, the triparty collateral manager.

Before starting to use these services, the three parties will first sign a contract in which they stipulate the rules of the agreement.

In the first scenario the triparty agent will calculate the necessary quantity of collateral and instruct the trading parties on which movements need to occur. Eg, party A and party B closed a repo deal for 1,000,000 USD. They inform the triparty agent of the deal details. The agent will then calculate which pieces of collateral need to be moved to cover the 1,000,000 USD exposure and will inform the trading parties. Parties A and B then settle the movements as instructed by the agent.

In the second scenario the triparty agent will also execute the settlement. By servicing a safekeeping account for both parties, the agent will not only calculate the necessary movements but will also settle them internally on its books.

The third scenario is only a slight deviation from the second one. In this case the agent has the authority to move securities from party A's and B's safekeeping accounts with their respective subcustodians.

Collateral Management Transaction

The triparty agent will create this transaction on receipt of the deal information from the two trading parties. Eg, when party A and B have agreed on a securities loan and have reported this information to the triparty agent, the agent will create a collateral management transaction to manage this securities loan on its internal systems.

A transaction is created, can be changed and is terminated.

Collateral Management Instruction

The trading parties will request the triparty manager to perform certain instructions on the collateral management transaction. An instruction can be to initiate a transaction, modify the terms of a transaction, or close a transaction (non-exhaustive list of instructions). The triparty agent will send feedback on the requested instruction.

Lifecycle of Collateral Management Transaction

When a transaction is initiated, agreed on by both parties, accepted and declared valid by the triparty agent, the lifecycle of the transaction starts. The transaction will normally last as long as the underlying deal. At the end of its lifecycle a transaction is closed.

Lifecycle of Collateral Management Instruction

The lifecycle of a collateral management instruction starts when the user of the triparty service sends an instruction message. At receipt of the instruction message, the triparty agent will process the instruction and assign a status (ie, valid or rejected). At each step in the lifecycle of an instruction a different status will be assigned. Eg, an instruction can be valid for processing or rejected because it is incorrect. If an instruction needs to be matched (eg, two initiation- instructions from party A and B need to match) it can have a status matched or unmatched. Other statuses describe the sufficiency or eligibility of the collateral.

A Delivery by Value (DBV) is a collateral mechanism whereby the collateral giver and collateral taker do not specify specific securities, but supply a value and a category of securities to the third party, eg, a CSD, which then allocates an appropriate basket of securities to the DBV transaction.

Collateral is automatically returned from the taker to the giver the next day, due to automated transactions created by the CSD in response to the DBV instruction. Each return transaction is created against a proportional payment of the original consideration of the DBV transaction (which may differ from the value of the basket of securities). This return is executed using regular settlement confirmation messages.