Published: August 18, 2014
Although they have a reputation for being complex, triparty repos are really not that complicated. They are one of the simplest forms of secured investments, and really just a bank deposit backed by assets which are independently held and managed.
The message appears to be getting across, judging by the growth in participation in the market. More and more corporates are joining the triparty repo market at Clearstream. Combined cash volumes are now above €25 bn and the number of corporate customers has grown every week since the launch of a new master contract which enables faster access to the market. More than 30 corporates are investing their cash regularly with banks against collateral using Clearstream's Global Liquidity Hub: the market has almost tripled in terms of counterparties and volumes in the last two years. In response, Clearstream continues to adapt its products to cope with the demand, making trading easier and lowering the barriers to entry for corporate customers.
But why is there so much interest from the corporate world? The answer lies in the aftermath of the financial crisis, which left cash-rich corporates uncertain about how to invest their money, as unsecured money deposits no longer seemed such a safe option as concern over counterparty risk grew.
In a triparty repo, corporates receive collateral in the form of securities in return for their deposits for the duration of the trade. This means that they are both able to do more business with their preferred banks while at the same time gaining access to a whole new range of counterparties. To put it simply, the advantage of a triparty repo over cash lending is that a triparty repo is more secure.
That is what corporate treasurers are looking for as either their unsecured limits have been reached at the various banks they trade with, or they have concentration issues with those banks and need to diversify across a more secure range of products. With triparty repo, they have many more investment options as well as more diversification in terms of counterparties.
Triparty repos also offer another advantage to some of the large corporates not exempted from EMIR and Dodd-Frank who will have to post collateral for OTC derivative transactions with central counterparties (CCPs). By investing cash in a triparty repo, the corporates will receive collateral in the form of securities. They will own that collateral, held against their cash in Clearstream’s system, for the duration of the trade and will be able to post it with a CCP (clearing counterparty) for initial margin (IM) coverage.
This means that corporates hold the collateral in their own name, enabling it to be sold straight away if the counterparty defaults. In addition, corporates can use this collateral to cover derivative liabilities with clearers during the life of the repo. In essence, triparty repos are an alternative to money market funds for corporates looking to invest their cash in securities.
The rush from corporates to participate in triparty repos was initiated by large multinational enterprises, particularly those from the cash-rich chemical, energy and pharmaceutical sectors. They were followed by major industry players including telecoms, airlines and retail. These participants have one thing in common: they have a dedicated treasury function and specific cash investment guidelines. It should be noted that even the most sophisticated treasury operation reaps additional benefits from triparty repos as Clearstream has made it much more straightforward for corporate customers to join the secured money market ‘club’.
First, a company has to become a customer of Clearstream, which includes signing a triparty collateral management service agreement. That mandates Clearstream to perform all the necessary back-office administration for the corporate, including the collection, valuation and management of securities. Next, a corporate has to sign a master repurchase agreement with its trading counterparty, which sets out the rules and duties of the various parties under a repo transaction. As an alternative to signing many bilateral agreements with different counterparties, Clearstream has streamlined this sometimes arduous process by coming up with a new legal master agreement for triparty repo transactions called the Clearstream Repurchase Conditions (CRC), which allows market participants to sign just one contract for multiple counterparties. As a result, corporates who were previously deterred from entering the repo market by the lengthy contract negotiation process are now more likely to consider triparty repos.
In other words, the CRCs only need to be signed once and then corporates have access to a wide range of counterparties that have also signed under the same agreement. The process is now more standardised and hence much less complex. The CRC was launched in June 2013 and so far over 30 counterparties have signed it.[[[PAGE]]]
Clearstream has also simplified the task of the corporate treasurer by designing a wide range of standardised collateral baskets that make it easy to get started in triparty repo. Each basket contains a specific set of collateral guidelines to cater for the different risk profiles that a repo investor can choose from. For example, these include high-grade government bond, investment grade corporate and several equity baskets.
Under the guidance of a user group, Clearstream has put together a collection of criteria for baskets that cater to different needs and which the market participants can choose at their own discretion. This means that corporate treasurers not geared up to assess what kind of securities they can or cannot accept can benefit from a range of baskets with different levels of risk and return. Customers can choose to use these baskets to deal with a wide range of banks spread across 110 countries.
To give corporate clients access to its services, Clearstream has also partnered with 360T, a multi-bank, multi-asset platform based in Germany. The 1,200 corporate and institutional customers on 360T now have the opportunity to trade triparty repos with a range of banks on the platform, with Germany’s Commerzbank and the airline easyJet the first to strike such a trade on the system in October.
Once the trade between the bank and the corporate has been agreed on 360T, it is routed automatically to Clearstream’s collateral management engine. To be precise, it is straight-through processed into Clearstream’s Global Liquidity Hub where the exchange of cash against securities is triggered. All a corporate treasurer has to do is to execute the transaction on 360T and wire the funds to Clearstream for clearing. It is as simple as that.
Clearstream’s ‘all-in’ straight-through processing approach from trading through to collateral management makes it the provider of choice for triparty repos. Customers benefit from Clearstream’s 22 years of experience (it was the first to launch triparty repos in 1992) and the firm’s highly sophisticated collateral management system, which runs 24 hours a day in real time.
Clearstream is very optimistic about the future of the market and expects the increased levels of participation in the triparty repo market to last for a long time. After all, on the one hand, it is the perfect solution for corporates looking to manage their risk towards banks with whom they want to intensify their relationship. On the other hand, it provides a flexible solution for banks needing to access cash for term markets in a new, more highly regulated market under Basel III and EMIR.
These new regulations are forcing banks to enter into longer-term financing arrangements. It will never be acceptable any more for banks to cover the majority of their financing needs in the shorter end of the market. The Clearstream solution not only caters for different investment terms but also enables customers to benefit from lower counterparty risk thanks to the collateral. Depending on what collateral corporates are prepared to receive in exchange for their cash, the rates on offer could also be more attractive than the returns they yield on their current deposits or investments.
In general, Clearstream expects significant growth in the triparty repo market over the next six months. That is not only because of the numerous requests the firm is receiving from corporates all around the world for its services, but also because of its unique ‘one stop shop’ offering that allows customers to quickly become active in the secured triparty repo market. Corporates wanting to combine a potentially lucrative cash investment with the receipt of collateral, which can then be re-used to cover derivative obligations with no back office burden, need look no further.
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