Everything You Wanted To Know About Tri-Party Repo Markets But Were Afraid To Ask

Tyler Durden's picture

The U.S. tri-party repo market is one of the most important components of the financial system - that noone has ever heard of (though not ZH readers: Tri-party repo has been a core topic of several of our 2009 posts exploring the nuances of the Lehman collapse - initially here and here and then multiple times since as we discuss the backbone of the shadow banking system). The 2007-09 financial crisis exposed weaknesses in the design of the U.S. tri-party repo market that could rapidly elevate and propagate systemic risk. We have long-discussed the importance of the collateral and hypothecation markets and a recent study of the market identifies the collateral allocation and unwind processes as two key mechanics contributing to the market’s fragility. While the topic is relatively specialized, it is critical to understanding the reality behind the curtain and the paper below provides clarification of the bilateral and tri-party repo markets (The Fed, Bank of NY, and JPM - who in effect have first refusal on any collateral in the system), dealers' intervention, and its potential as a source of financial systemic risk.


The US Repo Market:



The $1.8tn Tri-Party Repo market:


1210 Cope

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caimen garou's picture

all greek to me but thanks for explaining,a big cluster fudge!

Manthong's picture

You didn't re-rehypothecate that.

vast-dom's picture

perhaps the pertinant question is: why is there such a time delay gap?


answer: precisely to transmit systemic risk globally. 


why? to manage currency drains.

aint no fortunate son's picture

You've really gotta love that % concentration of risk in the top 3 dealers in figure 2 - really encouraging for when the shit hits the fan. Dominoes...

BandGap's picture

That, my friend, was excellent.

God, it's like gambling where you try and cut your risk........but never really get to in this environment.

These people are seeing a massive expansion of risk.


vast-dom's picture

it's hedging the risk on the risk to the Nth and hoping you can time your exit in the green. totally fucked up unregulated ill-conceived fraud precisely because there are TBTF players vs. everyone else and themselves. 

when a tri-party hedge is being filled out with 2/3 or even 3/3 of the parties originating from same TBTF institution you get some crazy shit going down.

zhandax's picture

This is just plain banking mechanics.  You notice they avoided touching on the part that can get things really FUBARed; re-hypothecation.  That's where Jamie's little minions get to sing and dance.

Urban Redneck's picture

Functionally it's less hedging and more squeezing the last bps out of yield & leverage- maximizing the bottom line at the expense of unnecessary bottlenecks, concentration risk, counterparty risk, and term mismatch, all of which lead to a false of sense market liquidity, and gives TPTB at TBTF the authority to pick the winners & losers when TSHTF.

The system needs to be carefully dismantled & rebuilt from the ground up.



caimen garou's picture

thanks Confundido, now I can say,A BIG CLUSTERFUCK!

illyia's picture

Thanks Confund... this stuff is work!

Atomizer's picture

You Are A Slave To The Government


Blows a kiss. Your future only becomes your desire. No need to help extend your cause, your cause will be understood once you see through propaganda of painting desires.


Insideher Trading's picture

What is the collateral?

In my opinion there is no collateral in any of those asset groups.

Dr. Engali's picture

That depends on what the definition of the word "is" is. At some point in time a liability got relabeled as an asset.

tom a taxpayer's picture

Is Tri-Party Repo a new type of sexual deviancy?

krispkritter's picture

No, but this is a new type of alchohol deviancy...I'll 'tri' a party with them anytime...

http://www.gspirits.com/ NSFW(Not Safe For Wife)

hedgeless_horseman's picture



No, it is merely a new twist on an old trick, check kiting, or check kiking, depending on your upbringing.

The GCF market has several functions for dealers. Some use the market for a substantial share of their inventory financing, on an ongoing basis. Dealers can also use GCF repos to fine-tune their financing at the end of the day, lending cash if they have secured more financing than they need or borrowing cash if they are [just a little] short. 

Kiting checks for securities DVP, versus busting the losing trades, is/was a low risk way for brokers with no capital to make good money...so I have heard.  It was illegal before the banks, themselves, got into it big time.

kaiserhoff's picture

Uh, I'll take two of those to go, bartender.

StychoKiller's picture

Make mine a "double!"  :>D

buzzsaw99's picture

is this akin to the tri wizard tournament where the banksters put all their loser betting slips into the bernank's goblet of fire and as a result receive huge bonuses?

dick cheneys ghost's picture

You guys know why they call it "tri-party repo''?

centerline's picture

ok, I'll bite....  why DO they call it "try-party repo?"

Atomizer's picture

World Bank & IMF. NATO and UN will police this process.

krispkritter's picture

Because 'We're triple ass-fucked with sand-embedded, FIAT wrapped, studded, horse-sized dildos on fire, by Wall Street and the Fed mother-fucking douchenozzles and unscrupulous whores' was taken?

Mercury's picture

Lot of good repo-porn here too: http://repowatch.org/

But while we're back on the shadow banking topic today...

I'm still not sure I completely buy/understand the assertion that shadow banking is an inflationary buffer. 

I know the short answer is: *unlike traditional banking, SB has no matched deposits* but how can credit expand that much over decades and not result in much more net buying power chasing (about) the same amount of fixed goods/hard assets such as housing and thereby driving prices upward?

Mortgage backed securities, GSEs and other such instruments and entities...aka "shadow banking liabilities" helped facilitate the recent housing bubble as much as anything else.

kaiserhoff's picture

Yes,  I think it has especially shown up in commodities "investing" by newbies who don't have a clue how to trade derivatives.

Atomizer's picture

Just another trifecta race bet. The laughter resides with betters who think they have insiders gaming wedges stacked in their favor. Oops. Hahahahahaha.

Umh's picture

The shadow banking system would benefit by taking lessons from a successful pawn shop owner. Think about it; you don't really want the underlying assets so make sure that it's painful when it does happen. And they need to think ahead; I mean how many tubas do you want.

e-man's picture

I say the pea is under shell number three.  At least I think that's what the banksters want me to believe.  These banksters are pretty quick at this...hey, where's my wallet?

illyia's picture

Thanks, Tylers. Eventually I will actually understand all this nonsense. But not tonight...

Tomorrow. Is. Soon. Enough.


Cosimo de Medici's picture

When the "traditional" risk free rate---the rate that in a dollar world stands behind everything from bank loans to corporate paper to pension return expectations to the entire enormous pool of derivatives---suddenly has credit risk, is any financial asset "correctly" priced?

Given the need for some benchmark in a global economy, or at least the dependence on a benchmark that the world economy has assumed in modern times, is not the combination of Qe-nfant terrible and the Fiscal Cliff the death knell for the dollar?

Is this dollar death not further exacerbated by Twist, which among other things, allows traditional holders of dollar obligations the chance to shorten their duration, and hence dollar exposure, because Bernanke is taking over the long end?  Does Twist, in fact, contain within it the end of the dollar as the reserve currency because non-dollar economies are being rid of their exposure as their ever-shortening maturity profile is retired?

What is the current duration of Japanese and Chinese holdings of USTs and Agencies?  Does that number represent the bestcase lifespan of the dollar?