Tripartite agreements are a common feature of commodity financing and their use may intensify, with regulations aimed at strengthening the clearing of derivatives. It is important that, in the negotiation of these agreements, the parties be sensitive to the legal issues that may arise and the commercial concerns of other parties. Financial Collateral Arrangements (No. 2) Regulations 2003 (2003 No. 3226) (modified) If the broker is practical, a lender can probably live with the priority of the broker`s clearing and security rights, as they apply to specific hedging transactions. The lender is interested in insuring the net profits of the client on these hedges, in contrast to the customer`s losses due to the broker. One of the lender`s concerns is that the broker and client may engage in other unrelated futures. The brokerage agreement generally provides that the broker`s clearing and margining rights apply to all accounts, so that the broker can use a surplus on one account to compensate for a deficit on another account. In order to prevent the security gains from being used to cover other losses, the lender will likely require (1) that the transactions that finance that lender be held in a separate account and (2) the broker`s hedging and margining rights apply to that account from all other accounts held by the client with the broker. The lender will want the right to violate the tripartite agreement by requiring the broker to close the client`s open positions on the account.
In general, these rights are very broad in tripartite agreements and do not require, for example, defaults under the facility agreement. This reflects the convenience of the lender and a broker with its standard form. However, it may be worrying for a client who has negotiated that only the appearance of certain default events (including perhaps the termination of collateral contracts) would allow the lender to accelerate its facility. Brokers will generally try to retain their (usually broad) rights to close the account as part of their brokerage contract with the client. Customers and lenders will generally agree. But customers may have fears that the actions of rushed brokers will trigger cross-acceleration rules in the configuration. In some cases, a lender may have the right of prior notification and perhaps the right to veto any closure in order to avoid a closure in circumstances that reduce the lender`s recovery. This approach can create difficulties for a broker, as the brokerage account is probably their only source of recovery and any delay to closing can expose the broker to significant risk. As a result, brokers will generally resist this approach.
If a broker loses its creditworthiness or is late in payment under the applicable legal and regulatory system, or if it is the subject of an insolvency proceeding, the client may transfer his positions to another broker.