SOLUTION SPOTLIGHT

Tri-party Processing Increases Efficiency
and Reduces Risk

A tri-party repo is a transaction whereby a third party (custodian bank or clearing agent) stands between a cash provider and its counterparty, and physically controls the securities offered by the counterparty as collateral.

In a generic tri-party repo transaction, a custodian bank acts as a third party service provider to the two principals in the trade, ensuring that each party receives cash or securities for the transactions. The custodian maintains cash and securities accounts for both parties, verifies collateral eligibility, establishes the mark to market value of securities pledged as collateral, processes income, and provides daily reporting to both parties. This increases efficiency in terms of effort and time, as well as helps to avoid the cost of moving collateral in the market. The benefits of tri-party repo have meant that it is also marketed as a collateral management solution, providing the benefits of reduced cost of settlement and collateral quality guarantees.

SunGard's Martini solution already provides support for the use of tri-party trades for cash and bonds.

Extended Use of Tri-Party in Today's Risk Conscious Market

As a low-risk and extremely liquid investment vehicle, tri-party repo is a well-established business. The tri-party repo market has experienced tremendous growth in the past 10 years, both in the U.S. and Europe. Over the years, third-party custodial service providers have helped to further its growth by facilitating transactions that offer a parking place for large influxes of short-term cash without a long-term commitment. Also, these transactions do no require investors to incur any special infrastructure or transactional costs.

The credit crunch has caused market participants worldwide to pay closer attention to the management of their risk exposures. In today's climate, no investment, trading counterparty or client is completely pristine and free of risk.

Basel II also has an impact as it attempts to segregate operational risk from credit risk. Firms are required to have rigorous risk and capital management measures in place, in order to ensure that banks hold capital reserves commensurate to the risk exposures arising from their lending and investment practices.

New Martini Processing

As part of SunGard's Martini support for the use of tri-party trades, when a tri-party trade is booked and then settled by the custodian, these tri-party movements should ideally be fed into Martini to reflect the collateral positions.

A new development being offered as an optional extension to Martini provides the ability to upload the tri-party information from the main tri-party agents, such as Euroclear, ClearStream, Bank of New York and JP Morgan Chase, directly into Martini. This allows the collateral movements to be incorporated in several areas of the system.

The extended Martini functionality:

• Allows the trader to define the required collateral for the tri-party transactions
• Receives and processes collateral movement information from tri-party agents
• Handles the exception processing of movement records and makes them visible to users
• Produces a file extract of the summary view of the tri-party allocations

In addition to the new processing incorporated within Martini, SunGard's other securities finance solutions of Global One and Loanet (via Smartloan/Bankloan), also have tri-party interfaces.