Demand for triparty collateral management services is soaring as institutional investors seek to access liquidity pools and reduce fragmentation.

Tri-party arrangements involve two counterparties to a transaction plus an entity that acts as an independent, third-party collateral agent to manage the collateral securing the transaction.

Tri-party structures have long been used for repo and securities lending in global markets.

The increased risks related to counterparty exposure as well as the new regulatory environment–Dodd Frank, Emir and Basel III in particular–are accelerating the need for more efficient and automated collateral management solutions that reduces collateral fragmentation.

“Mandatory clearing of OTC derivatives transactions as a result of new regulation, particularly Emir in Europe and Dodd-Frank in the USA, will put even more pressure on the financial community to source eligible collateral to reduce the risks inherent in derivatives transactions,” said Saheed Awan, global head of collateral management services at Euroclear, in a blog posting. “This is especially true for interbank transactions, where collateral is now an imperative to mitigate risks in repos, secured loans and securities lending transactions, for example, which is why triparty collateral management is increasing in importance.”

Euroclear’s Collateral Highway is a market infrastructure to source and mobilize collateral across borders. The entry points are where collateral will be sourced from all Euroclear CSDs, agent banks like Citi, clearers and CSDs located in any time zone. The securities are transported to where they are needed as collateral.

The service is particularly relevant against the backdrop of increased risks related to counterparty exposures and the greater need for collateral associated with new regulatory requirements.

Citi earlier this year launched a triparty collateral management service in which Citi mobilizes securities held in custody for mutual clients and make them available for use as collateral to Euroclear and Clearstream, the two international central securities despostiories (CSDs), acting as tri-party agents.

The alliance with Euroclear has boosted the pool of potential collateral that can be used to cover exposures arising from a wide variety of transactions, such as repos, loans, derivatives, CCP margins and central bank liquidity via Collateral Highway.

The potential pool of collateral held by Euroclear Bank is the equivalent of EUR 23 trillion, together with the assets held within Citi’s proprietary Direct Clearing and Custody network spanning over 60 countries.

Clearstream has launched a new legal master agreement for triparty repo transactions to enable market participants to sign one contract for multiple counterparties.

Clearstream Repurchase Conditions (CRC), a master agreement governed by Luxembourg law, effectively enables customers to be able to trade with their chosen counterparties within just a few days.

The CRC is proving to be of particular interest to new players in the repo market who are currently deterred by the existing lengthy contract negotiation process.

“We have seen clients give up on entering the repo market because they were waiting too long to negotiate bilateral agreements with each of their potential counterparties,” said Stefan Lepp, head of global securities financing at Clearstream. “We developed the CRC to deliver a pioneering, refined and simplified contract that offers a workable framework to satisfy the growing marked demand that goes hand-in-hand with new market segments entering the repo space.”

The CRC is available to customers on both the buy and sell-sides and is expected to appeal to corporates entering into reverse repos to secure their financing and then re-use the collateral they receive to cover OTC derivative margin requirements with clearing members or CCPs.