The Bank of Canada published an overview of global repo markets. Following the Canadian Dollar Offered Rate’s (CDOR’s) cessation many participants expect that repo may become one of the primary investment vehicles to replace Bankers’ Acceptances (BAs) for transactions, especially for tenors of less than 1-month.
Buy-side participants from the BA-related working group, the BA Transition Virtual Network (BATVN), identified the following advantages to repo transactions as an alternative to BAs:
- Maturity Date – Parties can negotiate bespoke maturity dates (i.e., term) at which time the collateral
will be repurchased. This is a benefit to investors who manage cash investments that are grouped by
common tenors (e.g. weekly, monthly or quarterly intervals) who can then plan for anticipated cash
injections. Note that should the investor need access to their cash prior to the maturity date, they can
either unwind the repo with the repo counterparty, or alternatively obtain the cash by entering into
a separate repo with the existing collateral. - Yield – Repo transactions are generally higher yielding than equivalent term T-bills with the yield being
dependent on the credit quality of the repo counterparty and the nature of the underlying collateral
used in the repo transaction. In general their yield is less than BAs from the same counterparty since
they are a secured exposure to that counterparty against collateral that is revalued daily.
Further, tri-party repo arrangements are particularly attractive to buy-side market participants because:
- In general, there are no additional direct costs for the collateral buyer/cash investor when engaging a third-party agent, as these fees are born by the collateral seller;
- Outsourcing the post-trade administration of a repo transaction is operationally less burdensome and provides more accurate collateral tracking for activities such as daily margining, the selection of collateral, as well as the creation, execution and settlement of collateral movement. Note that the counterparty risk to the trade remains the same whether the repo is transacted bilaterally or through the Canadian Collateral
Management Services (CCMS); - Centralized reporting and tracking of collateral helps to reduce settlement issues (risk) should there be a need to reuse the collateral;
- It is easier to transact for longer repo terms due to the efficiencies of collateral substitution;
- A tri-party service can increase the liquidity of the collateral in the system which will also help cash market liquidity;
- Buy-side participants who have not developed internal collateral management systems can engage in more repo transactions, which will encourage greater market activity;
- It allows for a larger number of securities with similar characteristics to be transacted using a specific or tailored (to a counterpart or set of counterparts) collateral basket, thereby also promoting greater liquidity in those securities; and
- Access to larger pool of counterparties thanks to the multilateral nature of the tri-party platform and repo agreement.