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CORPORATE FINANCE
dity funds could potentially lose value in
times of market stress.
As a result, there is an increased risk
that the reinvested cash may not be fully
returned in all cases. The additional complexity of the current negative interest
rate environment in the Eurozone further
strengthens the traditional mantra of
the corporate treasurer that “security of
re-investment comes first, then liquidity,
then yield”.
Triparty repo as an attractive
investment opportunity
This is why triparty repo has entered the
arena as new re-investment opportunity.
And it is easy to see why. Unlike time
deposits, triparty repos are backed with
specific collateral which fully secures
the re-invested cash. In addition, the
collateral is marked to market on a daily
basis by a triparty collateral management
agent such as Clearstream. A triparty
agent is a neutral third-party that focuses
on asset safety and specialises in whole-
sale custody and settlement services.
The collateral it holds for its customers is
completely ring-fenced.
A further advantage of triparty repo is
that when a corporate treasurer receives
collateral under a repo, it can be re-used
to support other financial transactions
the treasurer engages in. This presents
a genuine commercial advantage. In
addition to offsetting the potential risk
of an insolvency of the repo counterparty, collateral received under a repo
is transferred with full title. It is therefore effectively owned by the corporate
treasurer pending the closing of the repo
(at which point the cash will be simultaneously returned to the treasurer and the
collateral to the counterparty).
This not only meets the security element
that is essential to corporate treasury
strategies but also offers genuine liquidity
and yield alternatives. Since the triparty
agent insources the operational management or back-office of any collateral
movements or margin calls required on
— JULY
N°90
—
The consequences of new regulation in
financial markets have been well documented. Since 2008, financial institutions
are required to reduce leverage, make
more effective use of capital, optimise
their balance sheet and diversify their
sources of liquidity in the interest of
making financial markets safer and more
stable. But is this environment also safer
for corporate treasurers?
Arguably, the answer is yes although the
environment has become much more
challenging. As a result, corporate treasurers need to look into more innovative
cash placements as part of an overall push
towards more sophisticated investment
strategies in the corporate world.
One of the big challenges is that banks
are awash with cash which makes time
deposits, in particular short-term cash
placements, unattractive as they increase
the cost and volatility of balance sheets.
In addition, new guidelines on money
market funds and the introduction of
variable net asset value means that liqui-
LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE
The current difficult market environment raises the bar for investment
strategies of corporate treasurers. Clearstream’s Otto Vaisanen explains
how innovative collateral re-use opens up a whole world of opportunities
for corporate treasurers in line with upcoming regulations.
/ AUG / SEP 2015
Time for more
sophisticated
corporate
investment
strategies
41
behalf of both parties, it is
Since the triparty agent
not only safe but also simple
to implement.
insources the operational
management or backMultiple collateral
office of any collateral
re-use possibilities
movements or margin calls Let’s look at what a corporequired on behalf of both rate treasurer could actually
re-use collateral for. It can
parties, triparty repos
be used for pretty much anyare not only safe but also
thing as long as the collateral
simple to implement.
A second collateral re-use opportunity is the covering of margin
calls related to OTC derivative transactions.
DIAGRAM 2
RE-USING COLLATERAL TO COVER INITIAL
MARGIN OBLIGATIONS
is ring-fenced under the
watchful eye of the triparty
collateral manager to guarantee asset safety and protect the
interests of both the corporate treasurer as collateral receiver
(securing his investment) as well as the financial institution as
collateral giver (facilitating portfolio movements and substitution rights).
A first re-use opportunity is the raising of liquidity. For
example, imagine a treasurer with excess euros to re-invest
who is looking to raise Chinese renminbi as part of a separate
transaction to support onshore manufacturing operations. The
collateral received under the euro triparty reverse repo from
one financial institution can be mobilised and re-used
with ease
by lodging it with another financial institution that can lend
Under new EMIR requirements, a number of counterparties that
It overhead
should be noted that EMIR also allows certain money market funds to be lodged as collateral with A first re-­‐use opportunity is the raising liquidity. For example, imagine a treasurer with renminbi. This
does
not of entail
additional
operational
tradeexcess swap transactions will now need to post assets to clearing
clearing houses. Therefore, corporate treasurers not only have the opportunity to re-­‐use collateral euros to re-­‐invest who is looking to raise Chinese renminbi as part of a separate transaction to on the
part
of the treasurer.
houses to offset the risks associated with these products. The
received from repos to cover margin obligations, they could also use direct money market fund support onshore manufacturing operations. The collateral received under the euro triparty reverse amount that needs to be covered is more commonly known in fiinvestments s w
collateral via triparty agents such as Clearstream without having to redeem them. repo from one financial institution can be mobilised and re-­‐used with ease by lodging ait ith another nancial markets as initial margin and can usually be covered with
financial institution that can lend renminbi. This does not entail additional operational overhead on securities.
However, in view
of the
current
In sum, triparty either
repo cash
and or
the eligible
resulting re-­‐use opportunities for the received collateral offer the part of the treasurer. negative
interest
rate environment
in theof Eurozone,
it is becocorporate treasuries additional flexibility and a wider range product options in terms of accessing and investing liquidity. In addition, triparty are houses
very cost-­‐efficient, making them a very ming more
commonplace
forrepos clearing
and their members
Diagram 1: Re-­‐using collateral to raise liquidity attractive way for corporate treasurers to make their investment strategies more sophisticated in a to prefer the use of securities as collateral where feasible.
simple manner. For
For corporate
the corporate treasurer, repo orand the re-­‐use of collateral certainly treasurers
whotriparty don’t own
manage
a portfolio
of
appear to be raising the and the door to new investment bonds
tobar lodge
asopen collateral,
triparty
repo
presents aopportunities simple solu-in the current changing regulatory tionenvironment. to access securities. For example, a corporate treasurer could
—
N°90
— JULY
/ AUG / SEP 2015
DIAGRAM 1
RE-USING COLLATERAL TO RAISE LIQUIDITY
re-invest some of its euro balances for term and then simply reuse the collateral it receives to cover its initial margin obligations.
This same example also applies to variation margin under the
credit support annex (CSA). Instead of the corporate treasurer
posting cash collateral to a bank to cover its margin obligation
and potentially paying a negative rate, the treasurer could simply
replace the cash with bonds or equities as collateral. To do this,
the corporate treasurer needs to withdraw the cash posted as collateral and instead invest it in a term reverse repo and then reuse
the received collateral to cover its margining obligations.
It should be noted that EMIR also allows certain money market
funds to be lodged as collateral with clearing houses. Therefore,
A second collateral re-­‐use opportunity is the covering of margin calls related to OTC corporate
derivative treasurers not only have the opportunity to re-use
transactions. Under new EMIR requirements, a number of counterparties that trade swap collateral received from repos to cover margin
transactions will now need to post assets to clearing houses to offset the risks associated with these obligations, they could also use direct money
products. The amount that needs to be covered is more commonly known in financial markets as market fund investments as collateral via
initial margin and can usually be covered with either cash or eligible securities. However, in view of Clearstream
triparty agents such as Clearstream without
the current negative interest rate environment in the Eurozone, it is becoming more commonplace having to redeem them.
for clearing houses and their members to prefer the use of securities as collateral where feasible. LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE
Otto Vaisanen
For corporate treasurers who don’t own or manage a portfolio of bonds to lodge as collateral, Otto For has example, been the a Head
of GSFtreasurer Sales &
triparty repo presents a simple solution to access securities. corporate Relationship
could re-­‐invest some of its euro balances for term and then simply re-­‐use for
the Continental
collateral it rEurope
eceives to since December 2014. He promotes the
cover its initial margin obligations. full range of products of Clearstream's
This same example also applies to variation margin under tGlobal
he credit support Hub
annex (CSA). Instead of Liquidity
for
all customer
the corporate treasurer posting cash collateral to a bank to cover its securities
margin obligation segments
(repo,
lending and and
potentially paying a negative rate, the treasurer could simply replace tmanagement).
he cash with bonds or equities collateral
as collateral. To do this, the corporate treasurer needs to wPrior
ithdraw the cash osted as ascollateral and to that,
he p
worked
a GSF sales
instead invest it in a term reverse repo and then reuse the manager
received cfor
ollateral to cover its which
margining six years
during
he
obligations. was responsible for the French, Spanish,
Belgian, Luxembourgish, Finnish,
Diagram 2: Re-­‐using collateral to cover initial margin obligations Turkish and Swiss markets. Otto joined
Clearstream in 2005 in GSF operations.
42
In sum, triparty repo and the resulting re-use
opportunities for the received collateral offer
corporate treasuries additional flexibility and
a wider range of product options in terms of
accessing and investing liquidity. In addition,
triparty repos are very cost-efficient, making
them a very attractive way for corporate
treasurers to make their investment strategies more sophisticated in a simple manner.
For the corporate treasurer, triparty repo
and the re-use of collateral certainly appear
to be raising the bar and open the door to
new investment opportunities in the current
changing regulatory environment.