Shining a light on triparty repo

Key Takeaways

• Triparty agents have doubled assets in 10 years to USD 9.26 trillion
• The sector is responding effectively to evolving client demands
• Triparty agents will be essential in delivering asset tokenization

Over the last decade, triparty assets have more than doubled to reach USD 9.26 trillion by April this year, representing “impressive” growth given the USD 1.5 billion drop in the Federal Reserve’s Reverse Repo Facility.

Finadium’s study of the Global Triparty Services Market in 2024 reveals assets were up from USD 8.87 trillion in January 2023 driven by private sector US repo and diversification of triparty across product types, as well as higher interest rates from the European Central Bank (ECB), which the study’s authors say has “delivered new life to previously calm European rates and repo markets”.

Triparty agents (TPAs) are increasingly popular for market participants seeking improved efficiency, security, and cost-effectiveness of financial transactions involving collateral. They are particularly valuable in complex markets where managing collateral effectively is crucial for reducing risk and ensuring smooth operations.

It is this latter point that has served the TPA sector well over the last two years, as rising interest rates and the advantages of outsourcing much of the burden associated with bi-lateral repo are encouraging more market participants to join the trend and benefit from using a TPA.

As the Finadium report notes, TPAs are central to the functioning of global financial markets; the more assets they support, the more clients rely on them to deliver outsourced collateral movement and valuation services.

Moving with the times

A willingness to evolve and respond to market pain points continues to deliver momentum for TPAs.

The survey identifies a range of strategies from TPAs that support t market infrastructure trends, such as distributed ledger technology and asset tokenization, as well as those catering to emerging market developments, including helping clients respond to critical changes in regulations in the US and Europe.

By far the biggest focus for TPAs surveyed was collateral optimization and analytics. Finadium says clients “continue to ask for both outsourced and internal collateral optimization support as a means of mitigating Basel III costs, both current and in the now-live or future-projected endgames of their national regulators”.

Data gathering is another essential service, especially deriving in real-time.

Working together

Given there is just a handful of TPAs in the market and the sector is dominated by BNY Mellon with 65% market share, followed by Euroclear at 16%, interoperability and cooperation is key to success.

And this connectivity extends not just between TPAs but with other market participants and third-party service providers.

The Finadium research shows that connectivity with other TPAs has long been a focal point for clients but harder for the TPAs themselves to sort through.

“Now however, it appears that the majority of obstacles have been reduced if not removed: most TPAs report a range of connectivity with their peer platforms,” the study finds.

As noted, TPAs serve a crucial role in ensuring clients adhere to regulations across jurisdictions.

Planning for mandatory clearing of US Treasuries and US Treasury repo, the European Collateral Management System, and Basel III Endgame support are all “in full swing”, but TPAs in Europe now face the introduction of the Eurosystem Collateral Management System (ECMS).

ECMS is a unified system for managing assets used as collateral in Eurosystem credit operations and will consolidate 20 national central bank collateral management systems under one umbrella in a model similar to the Eurosystem TARGET services.

Compliance is a significant undertaking for TPAs and it will be interesting to see if they grasp the nettle with the same success as earlier regulatory initiatives.

Towards tokenization

Another interesting development is the move towards supporting the tokenization of assets.

More than half of the TPAs responding to the Finadium survey say tokenization represents an opportunity for their business, while the remaining half say it is both a threat and an opportunity.

TPAs can provide an essential service in managing tokenized assets as collateral, just as they do with traditional assets. They can handle the selection, valuation, and transfer of tokenized collateral, facilitating its use in various financial transactions like repos or lending.

Further, by managing tokenized collateral, triparty agents help mitigate risks associated with price volatility, counterparty defaults, and market change.

All this leads Finadium to conclude that while triparty remains “the most important business in capital markets that the fewest people have ever heard of” that may not be the case for much longer.

The sector is going from “strength to strength” in delivering a wider range of client solutions and becoming more recognizable across the span of actors in capital markets, including at higher levels of senior management.

As collateral management moves out of the back office to become a focal point for market participants, so too will TPAs emerge from the shadows as critical in supporting market effective market function.