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Cash & Liquidity Management
Published  3 MIN READ

Corporate Treasurers’ Investment Strategy: The Collateral Frontier and Search for Yield Pick-Up

The Holy Grail of a corporate treasurer is to unlock yield pick-up, be adequately diversified and make sure that deposits are protected and secure. This quest has been difficult as cash-long corporates have traditionally had only two investment options in the South African market: invest in short- or medium-term bank deposits or in money market funds. Tri-party repo has been successful in the US, UK and European markets thanks to tri-party agents who facilitate transactions and unlock a different option for the corporate treasurer’s investment strategy.

South Africa, for the first time, now has a tri-party collateral agent, which easily removes the administrative difficulties of booking classic repos. Tri-party repo between a corporate and a cash receiver takes care of the collateral required, pricing of the collateral, and ensures the right collateral is delivered at the right time to the right counterparty – every time.

As in any adventure film, we’ve found the hero of the story. However, the search for the Holy Grail is fraught with pitfalls and snares:

  • Banking regulation under Basel III currently views unsecured bank deposits as having greater counterparty credit risk, and many foreign-domiciled corporates have higher credit ratings than domestic banks
  • Money market funds are using both variable and constant net asset values, where constant net asset values were the standard before
  • Collateral is not just a banking problem any more. New regulations for OTC derivatives, including popular products for corporates such as interest rate derivatives, will require the bi-lateral exchange of collateral with a phased implementation between 2019 and 2023.

A tri-party agent secures collateral, tracks it and ensures the efficient re-use of collateral where possible to create greater efficiencies for corporates.