A collateral operations team that delivers variation margin or initial margin to a counterparty decides each day which assets to deliver and when to substitute them. When it chooses to hand that work to a third party, or reads the third party's reports, it needs to understand how the arrangement works.

The three parties, including the collateral agent

Tri-party collateral management involves three parties: the party posting collateral, the party receiving it, and a collateral agent. The agent is an institution entrusted by both with tasks such as selecting, valuing, and substituting collateral1.

To reduce the collateral workload and use collateral efficiently, Japan Securities Clearing Corporation (JSCC) added a tri-party method to the ways of depositing substitute securities2.

In a repo, handing the post-trade work (selecting collateral, exchanging cash and collateral, safekeeping, and management during the term) to a third-party agent is called a tri-party repo3. A custodian bank, an international CSD, or a national CSD can act as the agent3. The agent is not a party to the trade. In a repo, if one party defaults, the other party bears the impact; the agent does not take it on4. Services that hand collateral work to an agent are also offered for derivatives collateral5.

Bank GAgentFirm HRequired amountDaily reportRequired amountAllocated assets
Figure 1The posting party, the receiving party, and the collateral agent
Figure description

The required-amount instructions and the daily report are flows of information, not assets. The only asset arrow runs from the agent to Firm H; the route by which assets move from Bank G to the agent is omitted. The daily report goes to Bank G only, and the figure does not show whether Firm H receives one.

From allocation to substitution

The agent receives the required amount from both parties, allocates collateral, revalues it, and responds to substitution requests. The required amount is the amount to be covered by collateral.

Bank GAgentFirm HInstructs therequired amountInstructs the samerequired amountChecks that theinstructions matchSelects eligible,applies haircuts,allocatesReceivescollateralRevaluescollateralRequests asubstitutionTakes in new,returns theoriginal
Figure 2One example of the allocation and substitution flow
Figure description

The figure is one example, not a standard order. Bank G and Firm H instruct the required amount separately, and the agent matches the two instructions before allocating collateral. After allocation, Firm H's receipt and the revaluation of the collateral follow side by side, and Bank G requests a substitution after the revaluation.

The conditions for selecting collateral in allocation are pre-agreed credit and liquidity criteria, concentration limits, and transaction preferences. The agent automatically selects collateral that meets these conditions from the posting party's account until the required amount is reached6. It finds unencumbered assets and screens them for eligibility under the receiving party's conditions. It then applies haircuts and concentration limits, analyzes allocations for efficient use, and moves collateral to the counterparty7. Eligible collateral types, haircuts, and concentration limits follow a collateral schedule agreed in advance8.

The agent revalues collateral regularly6. Substitution (collateral substitution) takes place at the posting party's request. In tri-party repos, most European agents also substitute collateral that no longer meets the receiving party's criteria or that the posting party needs back to sell6.

Operating terms differ by provider. The following terms are those of BNY's service, not general terms of tri-party arrangements8.

  • The required amount is received in full, not as the change from the previous call.
  • Only matching instructions from both parties are processed, and under-collateralized accounts are not corrected at the agent's discretion.
  • Substitution is done with the new collateral coming in before the original is returned, and only for accounts whose value is at least the required amount.
  • Cash collateral is not accepted, and money market funds (MMFs) can be used as initial margin collateral.

An example of allocation and substitution

Consider a hypothetical example in which Bank G posts initial margin to Securities Firm H and the collateral agent allocates and substitutes collateral. The required amount is 9.8 billion yen on a post-haircut basis. In the collateral schedule, the haircut is 2% for government bonds (2% is deducted from market value) and 30% for listed shares. Bank G holds unencumbered government bonds (market value 10 billion yen) and listed shares (market value 20 billion yen) with the collateral agent.

On day 1, Bank G has asked to use government bonds first, so the agent allocates government bonds worth 10 billion yen. On day 2, Bank G requests a substitution to use the government bonds in other trades. The agent allocates listed shares worth 14 billion yen first, and then returns the government bonds worth 10 billion yen to Bank G.

Day Collateral allocated Market value (billion yen) Value after haircut (billion yen) Difference from required 9.8 billion yen (billion yen)
Day 1 Government bonds 10 9.8 0
Day 2 Listed shares 14 9.8 0
Day 3 Listed shares 12.6 8.82 −0.98

The value after haircut is the market value minus the haircut. Government bonds are 10 × (1 − 0.02) = 9.8 billion yen, and listed shares are 14 × (1 − 0.30) = 9.8 billion yen.

After the day 2 substitution, Bank G can use the government bonds 10 billion yen in other trades. In exchange, the market value tied up to meet the same value of 9.8 billion yen rises by 4 billion yen, and the assets now include shares. When the market value of the listed shares falls 10% on day 3, the value becomes 12.6 × (1 − 0.30) = 8.82 billion yen, which is 0.98 billion yen short.

Use for variation margin and initial margin

For non-cleared OTC derivatives, there are services that use the tri-party arrangement for posting both initial margin and variation margin. BNY's material presents this as a service for the rules on posting initial margin5. On Japan's margin rules, the Financial Services Agency (FSA) replied in 2015 that initial margin should preferably be managed in a bankruptcy-remote way. Using it by re-pledging or lending it in other transactions is prohibited as a matter of course. Using a custodian is cited as an example of a way to hold it separately9. The rules on segregating initial margin are covered on the Collateral Operations page.

Systems are also in place to use the tri-party arrangement for deposits with clearing houses. On September 4, 2026, JSCC announced rule amendments to its credit default swap (CDS) and interest rate swap clearing businesses. The amendments add a method using a tri-party collateral management service for depositing and managing substitute securities10. The effective date is a date JSCC sets on or after October 5, 2026. A clearing participant deposits substitute securities by transfer to a JSCC-named account opened at a provider that JSCC designates by public notice, and securities deposited this way are exempt from the fee JSCC sets (the collateral fee)2.

The outline for the interest rate swap rules (July 8, 2026) covers government bonds and US Treasury securities, which can be deposited as the interest rate swap clearing fund, initial margin (limited to the participant's own account), or default margin11. The provider at the effective date is Euroclear. The clearing participant, Euroclear, and JSCC must sign a collateral service agreement, and securities deposited this way are not placed in a trust at a trust bank11.

Differences from placement with a custodian

Delivery methods differ in where the work of selecting and returning collateral sits. BNY's material compares third-party custody, in which collateral is placed with a custodian, with the tri-party arrangement as follows12.

Method Collateral selection Collateral return
Third-party custody (placement with a custodian) The posting party chooses The traditional model needs a release signed by the counterparty; a model without it also exists
Tri-party The collateral agent chooses under the collateral schedule A book-entry movement starts automatically on the required-amount instruction

The tri-party arrangement can be adopted when the asset owner and the asset manager are aligned12.

Optimization and collateral transformation

The collateral agent's optimization reviews whether a better mix of collateral exists after the posting party's assets change, and makes the substitutions needed. For example, if securities the posting party bought later meet the receiving party's criteria, they can replace those posted first6. The agent looks for efficient use of assets through allocation analysis7, and JSCC's rule amendments also cite efficient use of collateral as an aim2.

Optimization reviews which of the eligible assets already held to allocate. The assets themselves do not change. Collateral transformation is a transaction that swaps held assets, such as less liquid ones, for higher-quality assets that can serve as collateral, for a fixed period. Collateral transformation is covered on the Sourcing and Substituting Collateral page.

Collateral agents and what they offer

The table lists collateral agents whose scope is described in public materials. The scope comes from each firm's own published material, and the level of detail varies.

Name Scope in the material Date of material
BNY Posting initial margin and variation margin for non-cleared OTC derivatives, short-term funding, and securities finance collateral5 PDF created June 2025
Euroclear An agent that takes over collateral selection, valuation, and substitution from participants, with a strategy of building a common collateral pool across the group1 2026 report (situation at end-2025)
Clearstream A link for ICE Clear Europe clearing members to deposit margin collateral through the Global Liquidity Hub tri-party structure13 Announcement of March 2015

Some firms that handle collateral work also offer services that take over margin administration, separate from selecting and substituting collateral. Mitsubishi UFJ Trust and Banking and Master Trust Bank of Japan offer a service that takes over margin calculation, shortfall management, reconciliation with the counterparty, and transfers for OTC derivatives14. The variation margin announcement is from February 2016, and the initial margin announcement is from July 2021.

Notes

  1. National Bank of Belgium, "Securities clearing, settlement and custody" (external site) (Financial Market Infrastructures and Payment Services Report 2026), section 2.2, page 22. A description of the Euroclear group's role. ↩ ↩2

  2. Japan Securities Clearing Corporation, "「金利スワップ取引清算業務に関する業務方法書」等の一部改正" (external site) (in Japanese), summary item 4, and the comparison table, Article 13, paragraph 2, item (2)-2 and Article 44 of the Handling of the Business Rules. ↩ ↩2 ↩3

  3. International Capital Market Association, "Frequently Asked Questions on Repo" (external site), 24 "What is tri-party repo?", paragraph 1. ↩ ↩2

  4. ICMA, "Frequently Asked Questions on Repo" (external site), 24, paragraph 2 (the agent is only an agent, and the risk relationship between the parties does not change). ↩

  5. BNY, "BNY Triparty Segregation" (external site) (PDF created June 2025), page 4 "Triparty Services" and the top of page 5. ↩ ↩2 ↩3

  6. ICMA, "Frequently Asked Questions on Repo" (external site), 24, paragraph 3 (automatic collateral selection, revaluation, substitution, optimization). ↩ ↩2 ↩3 ↩4

  7. BNY, "BNY Triparty Segregation" (external site), page 2, "What does it give you?" under "Triparty" (six items). ↩ ↩2

  8. BNY, "BNY Triparty Segregation" (external site), page 5 "Service Parameters" (required value, matching, pricing sources, substitution, cash and MMFs, schedules). ↩ ↩2 ↩3

  9. Financial Services Agency, "コメントの概要及びコメントに対する金融庁の考え方" (external site) (December 11, 2015; in Japanese), Nos. 109 and 110 (PDF page 18). ↩

  10. Japan Securities Clearing Corporation, "新旧対照表一覧（2026年）" (external site) (in Japanese), the two entries dated 2026/09/04, and the summary of the CDS amendment (external site). The effective date is in section III of each. ↩

  11. Japan Securities Clearing Corporation, "金利スワップ取引清算業務における債務負担成立判定に係る基準の一部見直し等に関する制度要綱" (external site) (July 8, 2026; in Japanese), item 4 (page 3). ↩ ↩2

  12. BNY, "BNY Triparty Segregation" (external site), page 2 "Triparty vs. Third Party". ↩ ↩2

  13. Clearstream, "Clearstream and ICE Clear Europe launch collaboration on triparty margin collateral management service" (external site) (media release updated March 2015), paragraph 2 of the text. ↩

  14. Mitsubishi UFJ Trust and Banking and Master Trust Bank of Japan, announcement of July 13, 2021 (external site) (in Japanese), section 2 (including the scheme diagram on page 2), and announcement of February 16, 2016 (external site) (in Japanese), section 2. ↩