Why triparty repo is the answer to your prayers
Look after your P&L – receive collateral for your cash and re-use it for additional revenue
The introduction of EMIR (and Dodd Frank), Solvency II, CRD IV, MiFID/MiFIR and others will require many systemic changes for all players in the financial market, both financial and non-financial institutions.
The shock of the crisis prompted regulators to make risk management their first priority and a wide range of regulators have been devised to maximise transparency and security across all markets and especially in the OTC derivatives space.
The regulations are complex and wide-ranging and occasionally overlap but if there were one overriding characteristic of this barrage of regulations it would be for greater securitisation of exposures. Collateral management is, without a doubt, the mot du jour.
Lack of trust
The financial crisis was exacerbated when the lack of trust between banks became so acute that unsecured interbank lending was impossible. Trust is being restored slowly but the difficult economic conditions mean there is still a nervous uncertainty throughout the banking sector.
This is posing an increasingly difficult problem for corporate treasurers. Many corporates are long cash and currently deposit their assets with banks unsecured. At Clearstream, we are speaking to more and more CFOs who are becoming concerned about counterparty risk and are looking for more secure, collateralised solutions as an alternative way of capitalising on their cash positions while still achieving high returns. Our experience is that many CFOs are unaware of the full advantages of triparty repo – and it is easier than they think.
How does triparty repo work?
Repo is the sale of securities together with an agreement for the seller to buy back the securities at a later date.
Most repos are agreed on a fixed term basis, which can last from a minimum of overnight to any future maturity date, but open trades are also possible. During the transaction period, the collateral receiver (that is, the cash provider) is able to re-use the securities they have received and so generate further revenues or cover other types of exposures with the received collateral they effectively then own.
The “triparty” aspect of the repo comes when a third party agent, such as Clearstream, carries out all the administration for the deal and acts on behalf of the two counterparties. The agent remains completely neutral in the transaction and performs the operations. The value of the collateral, which is typically bonds or equities, changes every day which means the mark-to-market is recalculated along with the resulting margin calls – this is work also performed by the agent.
Substitution of the collateral can be carried out automatically by the triparty agent, such as Clearstream, with all the operations happening behind the scenes. Of course, the agent carries out all the necessary operations to close out the deal.
Triparty repos are carried out under a standard legal agreement, the Global Master Repurchase Agreement (GMRA), which minimises the legal work necessary.
How to trade in triparty repo
The trade is negotiated as any other plain vanilla time deposit: the counterparties agree terms on the amount of cash to be lent, the rate and the duration. The agent is notified and then begins all the back-office administration which includes: ensuring the delivery, custody, valuation and margin calls and substitutions plus any corporate actions. Customers can see the status of the transaction – the up-to-date collateral portfolio – in real-time via our CreationOnline reporting system. The collateral is held in a segregated account at Clearstream until the cash is repaid.
The cash provider specifies all their collateral requirements with their agent. For example, Clearstream customers choose from a menu of granular options on the type of asset, its rating, its provenance, concentration limits etc. Or, we make it easier still, by offering a number of standardised baskets which range across the spectrum of risk appetites.
The banking world has been working with triparty repos for a long time – in fact, Clearstream was the first institution to offer them in Europe back in 1992. So in the last 20 years, banks have become used to trading in this way – in fact, the European market in triparty repos reached more than EUR 1 trillion per year. For corporates wanting to enter this world, a company such as Clearstream can help guide the entire process by “marriage-broking” that is by identifying counterparties, bringing them together so that they can sign the necessary agreements. Once the paperwork is done, they are ready to go.
Keeping it simple
Triparty repos are significantly easier to do than bilateral trade since the agent takes care of the vast number of administrative tasks. This would be the best option for the majority of corporate treasuries which appear to prefer to outsource the back-office work.
A classic triparty repo already offers corporate treasurers, acting as cash providers, more security and a good return on their cash. But that is only half the story: the cash provider (collateral receiver) has the ability to re-use the collateral and so gain the opportunity of yield pick-up to optimise the collateral holding. Again, an agent such as Clearstream can handle everything to enable the customer to gain the best returns. Triparty repo is the perfect solution for corporate treasurers who are looking to make the best of their cash positions – and it is a relatively simple process if they use a triparty repo specialist.
At Clearstream, more non-financial institutions are now coming to us looking for guidance in triparty repo and, in so doing, they are becoming interested in some of the other products and service we offer through our Global Liquidity and Risk Management Hub. There is now a definite trend towards collateralisation even for non-financial institutions. We are certainly very happy to provide services for corporate treasurers and look forward to developing new services for this market.
Clearstream is a successful securities services supplier with consistently high ratings. It provides customers worldwide with access to 52 domestic markets, the international securities market and the carbon emissions rights market. It delivers settlement and custody services, innovative investment funds plus award-winning collateral management and securities lending through its Global Liquidity and Risk Management Hub. The company is part of the Deutsche Börse Group.
Pascal Morosini is Global Head of GSF Sales and Relationship Management at Clearstream. He has been a collateral management specialist for the 18 years he has been with the company. Pascal can be contacted on +352 243 36868 or by email at firstname.lastname@example.org