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Triparty Vs Third-Party

The uncleared margin rules provide requirements that in-scope firms segregate their regulatory IM at an unaffiliated third-party custodian. This means:

  • opening pledgor accounts for every trading relationship,
  • executing extensive documentation, and
  • establishing connectivity with custodians offering UMR-compliant custodial services.

Since both parties to a trading relationship will be a collateral pledgor, each party must establish their own pledge account per relationship. Once firms become in scope for the rules, they will need to decide what type of custodial arrangement to use.  Two different models have emerged in the industry: third-party and triparty. Although these terms have traditionally been used interchangeably, they have now each taken on a distinct meaning, and there are some distinct and important differences between the two models.

In a third-party custody account, the collateral pledgor establishes one stand-alone account for each trading relationship. For each agreed collateral pledge, the pledgor must instruct the collateral to be moved into the account. For each return of collateral, the secured party must release the collateral out of the account. In this model, the custodian only has the role of holding the collateral and acting on the instructions of the two parties.
A triparty structure entails more responsibility for the custodian. In that model, the collateral pledgor establishes a “long box” account of assets owned by the pledgor. Linked to this long box are several pledge accounts, one for each trading relationship. Each day, the parties determine the amount of collateral needed to satisfy the day’s margin requirement (the RQV), and communicate that amount to the custodian. The custodian allocates the optimized collateral from the long box to each pledge account. Daily wire movements are not needed, nor is consent for substitutions. This model can be more efficient, but requires different connectivity than the traditional third-party model.

* Please note that this document is intended as an information resource only and does not contain legal advice.

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