Repurchase agreements (repos) have long seemed like the ideal investment for corporates looking to park their cash. However, that reality has never quite comes to pass and it’s a conundrum the International Capital Market Association (ICMA) is in the early stages of trying to remedy.
In a repo agreement, one party sells securities to a counterparty and agrees to buy them back at a higher price, usually the next day or week or sometimes longer periods. The seller is effectively borrowing the funds, and the securities act as collateral, providing a secured investment vehicle.
The repo arrangement is defined in legal agreements that require significant negotiation and documentation, and that’s where hurdles emerge for corporates. The repo market is a major source of funding for large brokerages that employ entire teams to negotiate terms and complete the documentation, a luxury unavailable to many corporate treasury departments.
“There is a perception amongst corporates that [Global Master Repurchase Agreement] documentation is too complex to warrant the effort … and treasurers do not want to introduce another layer of documents when they already have to manage bank facility, bonds markets, and swaps agreements,” said Stephen Baseby, associate policy and technical director at the Association of Corporate Treasurers.
Although the GMRA document is less lengthy than many perceive, factors including counterparty location, the type of counterparty, credit rating and tax law, can prompt risk and compliance teams to push to negotiate additional provisions into the GMRA. Sources said the ICMA initiative is seeking to identify plain-vanilla repo transactions for which it can establish pre-negotiated agreements, eliminating much of the negotiation process.
The ICMA’s pre-negotiated agreements would be based off the GMRA. However, bank and nonbank counterparties often seek additional provisions to satisfy in-house requirements, so a pre-negotiated form may not be acceptable to them. The ICMA is exploring whether it can find sufficient market consensus to move forward, compiling a list of typical provisions and distinguishing the absolutely necessary ones in a standard, pre-negotiated agreement from those that would be nice to have but may be a hurdle, sources said. The trade group will have a clearer view whether it will proceed with the initiative after presenting findings to its European repo and collateral committee in September.
The ICMA has established a working group that includes repo users as well as Euroclear and Clearstream, which both provide tri-party repo services and have also sought to facilitate uncomplicated access to the repo market. Euroclear’s solution also works off the GMRA and offers a negotiation service to counterparties with insufficient expertise and/or resources.
Clearstream launched in 2013 the Clearstream Repurchase Conditions (CRC) document, a set of standardized dedicated master repurchase conditions for triparty repo that enables market participants to sign just one document providing access to a number of counterparties.