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Tri-Party Agreement

A tri-party agreement is a contract between three parties, often used in financial transactions where a third party (such as a custodian or clearing agent) facilitates the exchange of assets between two other parties. These agreements are common in repo (repurchase agreement) markets, where the third party manages the collateral exchanged between the borrower and lender, ensuring that both parties fulfill their obligations.

Example

In a repo transaction, a bank (borrower) sells securities to a lender with an agreement to repurchase them later. A tri-party agreement ensures that the collateral is managed by a third-party custodian, reducing counterparty risk.

Key points

• A contract involving three parties in a financial transaction.

• Commonly used in repo markets and other transactions requiring collateral management.

• The third party acts as an intermediary to ensure that all parties meet their obligations.

Quick Answers to Curious Questions

They reduce counterparty risk by having a neutral third party manage the collateral or assets exchanged between the two primary parties.

They are frequently used in repo transactions, securities lending, and other deals that require collateral management.

The third-party custodian ensures that the collateral is properly handled and that all parties meet the terms of the agreement, mitigating the risk of default.