Introduction
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.
