Investment

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Tri-Party Repo: Futureproofing Risk and Cost for Corporate Treasurers Strate presents findings from recent conferences which suggest that tri-party repos are the mechanism of choice for mitigation against credit counterparty risk.

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Tri-Party Repo: Futureproofing Risk and Cost for Corporate Treasurers

Strate

“Tri-Party repos are becoming an increasingly more attractive mechanism for corporates to replace cash deposits to mitigate against credit counterparty risk. However, this concept needs to be sold to management.”

This was the common theme noted by over 80% of delegates in two separate conferences held during 2015 by Strate, in conjunction with ACTSA, and Strate’s global Tri-Party collateral partner, Clearstream Banking SA (a subsidiary of the Deutsche Börse Group).

In South Africa, only 25% of corporates have, at some point, used repos with counterparts.

Under Basel III regulations, banks receive a capital benefit by placing collateral against short-term deposits from a corporate counterpart rather than on an unsecured basis. Moreover, under Tri-Party repo arrangements, cash deposits will no longer have to be spread across multiple banks to mitigate credit counterparty risk, as larger deposits can now be placed with a single bank - secured by non-cash collateral.

It is no surprise then that the local market sentiment is in line with global trends and corporate treasurers acknowledge that accepting and placing collateral is to be future best practice.

What did corporate treasurers say at the Strate and ACTSA collateral conference?

  • In South Africa, only 25% of corporates have, at some point, used repos with counterparts;
  • Over 60% of respondents believed cash was not always invested properly; and
  • Over 96% of respondents would have preferred to secure cash deposits with collateral to generate a higher yield.

Figure 1 shows that:

  • Over 90% of attendees believed that the costs of financing trades will increase with new regulations in the banking and insurance sectors;
  • Collateral requirements for financing trades will increase and over 60% believed that non-cash collateral would play a key role over the expensive use of cash collateral; and
  • Collateral management would be the focus for impacts to cleared and non-cleared over-the-counter products in 2015, and the controlled re-use of non-cash collateral will be of great importance.

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