If you were wondering where all that corporate cash is going, according to a January 9, 2012 article in Reuters by Douwe Miedema (a link is here) it is going into the repo market. Afraid to lend the cash to banks in unsecured deposits, corporates are, more and more, investing in repo. The article quoted Frank Reiss from Euroclear, “Companies in the past were… happy to deposit cash on an unsecured basis to a bank for an interest payment…Now following the crisis, we have seen that companies are engaging in repos secured with collateral against the cash they are lending.” The article said “…Based on his daily practice, Euroclear’s Reiss estimated that up to 25 percent of the triparty market was on behalf of companies, a massive and sudden rise from the 2 to 5 percent where it had traditionally been….” That is a big shift in tri-party. We wonder if this pattern has been repeated in the US too?
There was also a passing reference to collateral transformation trades. Miedema wrote “They are also paying insurers and pension funds to take their illiquid bonds in exchange for better quality ones, in a desperate bid to secure much-needed cash from the ECB, which only provides cash against collateral.” That sounds rather ominous. We hope someone working at the cash provider knows how to value that stuff, much less liquidate it.
For more on this, read our January 3, 2012 post “Now Everyone is a Repo Trader”