June 26, 1990
TO: SEC RULES MEMBERS NO. 44-90
ACCOUNTING/TREASURERS MEMBERS NO. 13-90
RE: TREASURY DEPARTMENT LETTER ON TRI-PARTY REPOS
__________________________________________________________
The Department of the Treasury has issued a letter meant to
clarify when "tri-party" repos are subject to the hold-in-custody
rules for repurchase agreements under the Government Securities
Act of 1986. A tri-party repo occurs when a single custodian has
responsibilities to both the repo buyer and the repo seller.
The Treasury Department's letter states that the
determination of whether such a transaction is exempt from the
hold-in-custody rules depends on the role of the custodian, the
custodian's relationship to the buyer and seller, and the entity
that exercises control over the securities during the course of
the transaction. Each of these factors should be clearly covered
in the governing written agreement. Specifically, under the
agreement the custodian must undertake to act on behalf of both
parties and the specific terms of the transaction must be set
forth in sufficient detail to enable the custodian to verify
that the proper securities and cash have been transferred.
The letter sets forth various specific requirements
concerning segregation of securities, control over the transfer
of securities by the custodian, and procedures required for
substitution of securities. In addition, the written agreement
must provide that, in the event of default by the seller, the
buyer has the right, either directly or through instructions to
the custodian, to dispose of the securities and apply the
proceeds in satisfaction of the seller's liability.
A copy of the Treasury Department's letter is attached.
Craig S. Tyle
Associate General Counsel
Attachment