UK: Taking Security Over Hedging Accounts: The Tripartite Agreement


Lenders in commodity finance will often require borrowers to hedge exposure to commodity price movements. Hedging can shield the borrower from the downside of a change in the price of a commodity and help ensure the borrower can repay the loan. It is common for the borrower to hedge its exposure using exchange-traded derivatives entered into with a clearing broker. Hedges cleared with UK or European-based brokers will usually be principal-to-principal trades between the broker and its client the borrower. The trades will be held in a futures brokerage account maintained with the broker.

The lender will often look to obtain security over this account. Where this is agreed, the security will be contained in a three-way agreement between them, commonly known as a "Tripartite Agreement" or "TPA". This Alert will highlight the key concerns and common negotiation 'flashpoints' from the perspective of the three parties.

What does the Tripartite Agreement cover?

The basic contractual terms agreed between the broker and the client governing the brokerage account will be set out in an agreement between them. This will usually be based on the broker's standard terms of business. The lending terms will be set out in a facility agreement between the lender and the borrower. The Tripartite Agreement bridges the gap between the bilateral brokerage account and lending terms, and deals with matters relevant to all three parties. These will include:

  • the client's grant of security in favour of the lender
  • the lender's guarantee of, or responsibility for funding, the broker's margin calls
  • how it is determined what trades will be held on the secured account
  • the rights of the broker and the lender in relation to closing-out the hedging account

Are Tripartite Agreements normally standard form documents? Are they heavily negotiated?

Tripartite Agreements will typically begin life on the standard form of the broker or, sometimes, the lender. They will then be negotiated to a greater or lesser degree. The key negotiating points will usually be between the broker and the lender as potentially competing creditors of the client.

Competing creditors

The hedging arrangements protect the cash flow available to the client to repay the facility. In an effective hedging programme, if prices move against the client, this will result in gains to the client on the hedges. If the client defaults, the lender will want the ability to mitigate any losses by enforcing its security and applying the gains against the sums it is owed.

The broker wants to ensure that it does not suffer losses on its trades with the client and protects itself by requiring the client pay initial and variation margin with respect to its futures positions. If the client gets into difficulties, the broker can close out the futures account and use the margin to cover any losses on its trades with the client.

Ranking of security

The lender will want to take security over the trades and other property held in the brokerage account. It will also want to take security over the client's rights against the broker in respect of the account (e.g., rights to receive payment under the trades carried in the account).

The broker will not want the security interests granted to the lender to threaten its ultimate ability to close out the futures account and use the margin held on the account to cover any losses. And so the broker will want its close-out netting rights and any security rights relating to margin to rank ahead of the lender's security rights. This will be addressed through express provisions in the Tripartite Agreement.

Provided it is comfortable with the broker, a lender can probably live with the priority of the broker's close-out netting and security rights as they apply to the specific hedging trades. The lender is interested in securing the client's net gains on those hedges, as opposed to the client's losses due to the broker. One concern for the lender is that the broker and the client may engage in other unconnected futures trading. The brokerage agreement will usually provide that the broker's netting and margining rights will apply across all accounts, thus allowing the broker to use a surplus on one account to offset a shortfall on another. To avoid hedging gains being used to meet other losses, the lender is likely to require that (1) the trades hedging that lender's financing be held in a separate account and (2) the broker's rights relating to close-out and margining apply separately to that account from any other accounts the client has with the broker.


While the lender will want the broker to agree that the secured account is treated separately for netting and margining purposes, the broker will expect the lender in return to accept some level of responsibility for the margin the broker requires to cover the secured account. In some financings the lender will agree to fund the client's initial and/or variation margin payments to the broker. In those transactions, the lender will usually agree in the Tripartite Agreement that it will fund the client's margin payments and that any margin payments it makes to the broker will constitute an advance under the relevant facility. Where the lender advances the margin, the broker and the lender will usually prefer that the lender pays the margin directly to the broker.

Where the lender is not financing the margin calls, the broker will usually expect the lender to guarantee the broker's margin payments or provide some other form of support such as a standby letter of credit. Lenders should take account of these requirements in structuring facilities and analysing their exposures to the client.

Control over the hedging account

Invariably, the client will make the initial decision about what trades should be entered into for the account. In some arrangements, the lender has to pre-approve a trade before it is accepted for the account; in others, the lender has an opportunity to veto that a trade is carried in the secured account.

It will normally be agreed in the Tripartite Agreement that the broker will provide the lender with copies of all statements and confirmations relating to the secured account.

Hedging gains form part of the lender's security and so the lender will not want those gains dissipated. Therefore, the lender may require that the Tripartite Agreement prohibits the client from withdrawing any credit balance from the account without the lender's prior agreement.

Termination rights

The lender will want the right to collapse the tripartite arrangement by requiring that the broker close-out the client's open positions in the account. Generally, in Tripartite Agreements these rights are written very broadly and do not, for example, require that there has been a default under the facility agreement. This reflects convenience for the lender and a broker using its standard-form. But it can be of concern to a client that has negotiated that only the occurrence of specific events of default (perhaps including termination of the hedging arrangements) enable the lender to accelerate its facility.

Brokers will generally look to preserve their (usually wide) rights to close-out the account under their brokerage agreement with the client. Clients and lenders will generally agree to this. But clients can have concerns about precipitant broker action triggering cross-acceleration provisions in the facility. In some cases, a lender may want the right to receive prior notice of, and potentially veto, any close-out so as to prevent a close-out in circumstances that reduce the lender's recovery. This approach can cause difficulties for a broker as the brokerage account is likely to be their sole source of recovery and any delay in close-out may expose the broker to significant risk. Hence, brokers will usually resist this approach.

Tricky issues

Tripartite Agreements can give rise to difficult legal issues. These include whether the lender's security over the hedging account should be and/or can be fixed rather than floating and whether it needs to be registered or is exempt pursuant to the Financial Collateral Regulations.*

(a) type of security

Under English insolvency law, floating security has several disadvantages including that the holders of such security rank behind: (1) holders of fixed security; (2) the expenses of the insolvent estate; and (3) certain 'preferential' creditors. In addition, pay-out will be subject to the prior carve-out of the fund available for distribution to unsecured creditors and later fixed security will take priority over earlier floating security.

While fixed security has clear advantages over floating security, it requires the lender to have control over the charged asset i.e., the hedging account and the proceeds in that account. This standard is very difficult to meet in the context of security over brokerage accounts maintained by a third-party broker and would in any case make the operation of the hedging account burdensome.

(b) registration of security

Where the client is an English company or is an overseas company that has registered one or more places of business in England and Wales, the English law rules about registering company charges will be relevant. In practice, where the rules are relevant, the lender's security may well be registrable either because it is a floating charge or because it is regarded as a charge over "book debts" of the client.

Registrable charges must be registered at Companies House within 21 days of creation otherwise the debt secured by the charge becomes immediately repayable and the charge is rendered void against a liquidator, administrator or creditor of the company. In practice, the lender will have control over ensuring charges are registered, but it is the client (as the company creating the charge) who is legally responsible for doing this.

The Financial Collateral Regulations provide that certain specified types of 'security financial collateral arrangements' are exempt from the registration requirements that would otherwise apply. The Regulations are complex, and it is unlikely that most Tripartite Agreements will meet the conditions for exemption from the registration requirements.

Broker or lender failure

As the MF Global insolvency has shown, it is not just clients that can get into financial difficulties. It is prudent for a lender in a tripartite arrangement to make sure it has the right protections if the broker fails.

If a broker loses creditworthiness or, where the relevant legal and regulatory regime allows, defaults or becomes subject to an insolvency procedure, the client may be able to transfer its positions to another broker. In that case, the lender would presumably seek to put in place tripartite arrangements with the new broker and should think about what rights it has under the facility agreement if it fails to agree satisfactory terms with the new broker. Under most current clearing models in the UK and Europe, client margin will not be transferred with the positions. Thus, the client (or lender) will need to fund margin covering the positions with the new broker.

Transfers of positions are not always possible and the exchange may close-out the client's positions resulting in the loss of the hedges and the client either having a claim in the insolvency or owing a settlement amount to the defaulting broker. Again, a lender should think about what rights the facility agreement should grant it if this happens.

If a lender gets into financial difficulties, a broker will typically want the ability to terminate the separate account and so should think about whether its brokerage agreement close-out rights would allow it to do this.


Tripartite Agreements are a common feature of commodity financings and their use may rise as regulation pushes greater clearing of derivatives. It is important that in negotiating these agreements parties are sensitive to the legal issues that can arise as well as the commercial concerns of the other parties.

*The Financial Collateral Arrangements (No. 2) Regulations 2003 (2003 No. 3226) (as amended)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.