Triparty Repo: So Much Easier Than You Think
Pascal Morosini explains the growth in the triparty repo market
by Pascal Morosini, Executive Director, Global Head of GSF & Broker Dealer Sales and Relationship Management, Clearstream
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’.
Easy access to the repo world
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.