There was in interesting article in the May 2015 Treasury Today “Do you have time for tri-party repos?”. What struck us was the difficult time corporate cash investors have setting up repo agreements.
It seems to us that corporate money investing in tri-party repo is a no brainer. Operationally it is a clean, well-oiled path. There is a lot of corporate money looking for low touch, highly secure ways to put their cash to work.
From the article:
“…so advantageous are tri-party repos for corporate investors that in the current environment – and especially given the growing levels of excess liquidity on many balance sheets – it is difficult to imagine anything but greater direct participation from treasurers in this market in the years ahead…”
Is the sell side seeing this cash? A poll was taken at Euroclear’s 2015 Collateral Management Conference in Brussels. The results were underwhelming.
“…a total of 53% of delegates polled during one of the corporate panels said that corporate cash remains just a small fraction of overall liquidity in the repo market. More perplexing still, a further 54% said that they didn’t foresee corporates playing a much greater role by 2018, the year that Basel III framework’s Net Stable Funding Ratio (NSFR) comes into effect…”
(As an aside, we would have liked to know the full distribution of the responses and how many actually answered the question. If it was a dozen people in a room of 200 answering the poll questions – we’ve seen this a couple times before – it’s not a convincing sample. But lets put that aside for the moment.)
So what is going on? Well, getting the agreements in place takes a long time.
“…’It took close to two years from inception,’ Peter J. Walker-Smith, Treasury Manager (Front Office), AstraZeneca told the conference… The paperwork was, frankly, quite cumbersome and the Global Master Repurchase Agreements (GMRAs) took quite a while, Walker-Smith explained. ‘We get this message, that they want our cash and they want to engage with corporates but we are not having our lives made easy for us by any means.’”
A similar story was heard from Bas Alberti, Treasury Manager at Nokia.
ICSDs like Euroclear have gone after the business, but they are not getting great traction.
“…what they [Euroclear] found was that the way such transactions were conducted with banks did not lend itself very well to the corporate space. “I would say that our offering for corporates has very much been a learning experience,” Philippe De Coninck, Sales and Relationship Manager at Euroclear told Treasury Today in a separate interview. Banking clients, he explains, have large legal teams that deal specifically with banking documentation. Not so for the average non-financial corporate, of course…”
There needs to be progress streamlining the process. Negotiating bespoke legal agreements is a barrier to entry. By having corporates execute a GMRA standardized for the purpose and available through their RepoAccess system, Euroclear has made execution and access to banks that have already agreed to the terms much easier. IT is another hurdle that needs to be overcome. Euroclear is working on adapting their EasyWay corporate actions system to address the needs of corporate clients. But getting critical mass is the key.
Banks, of course, hope that corporate money will be long term (and hence LCR and ultimately NSFR friendly) and a source of cash to fund riskier assets. Don’t hold your breath on that one.
Earlier this month we wrote a post about DBV-X, “Tradition’s DBV-X prepares for launch, selects Euroclear as tri-party agent” (sorry, it is available to SFM premium subscriber only). DBV-X looks to be layering a front-end on top of Euroclear’s functionality, including a way to manage collateral type, risk limits, haircuts, and concentration, oriented to corporates as well as hedge funds, asset managers and banks & broker-dealers. So far, DBV-X is just focused on Europe.
Like Euroclear, DBV-X is working to incorporate a generic repo agreement. Not everyone will accept this kind of standardization. Often market participants (and especially their lawyers) seem to be in love their own tweaks. But it is worth the effort.
DTCC is expanding their cleared repo capabilities to include money market funds, creating a special license that avoids risk mutualization and default fund contributions. It will be interesting if corporates could be included somewhere down the line.
These are wothwhile innovations that will increase the breadth of repo market participation. Perhaps all that is missing now is the bank balance sheet capacity to execute.