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Capital Markets

DTCC Repo Market Offers Funding Alternative

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March 02, 2018

Settlement house’s program could be new source of short-term funding for corporates

5 and 10Following a move last year to open its repurchase agreement programs directly to new lenders, the Depository Trust & Clearing Corp. (DTCC) will now permit them to borrow via the repo market, potentially providing corporates with a way to diversify short-term funding sources.

The DTCC announced January 30, 2018 the start of a “new era of buyside participation in the cleared repo market” after funds managed by Capula Investment Management completed the first cleared sponsored repo transactions as a collateral provider—that is, a borrower.

The tri-party repo market, in which an intermediary connects funding providers with borrowers, has long provided Wall Street firms with short¬-term funding by selling securities in their inventories and agreeing to buy them back again at an agreed higher price and time. The difference effectively becomes interest on a loan.

In May, the Securities and Exchange Commission approved the DTCC’s Fixed­Income Clearing Corp. (FICC) subsidiary to expand central clearing of repos beyond its existing GCF Repo Service, which has enabled dealers to trade FICC­cleared general collateral tri­party repos. The approval permits certain institutional investors, including corporates, to access the FICC directly through its Centrally Cleared Institutional Tri­ Party (CCIT) service, which went live last June.

Last year’s approval also gives institutions access to this alternative vehicle to park short-term cash through one of two current sponsor banks, State Street Bank & Trust and BNY Mellon, a program that has been in place since 2005 for the FICC’s financial institution members. The January transaction represents the first time an institutional investor has acted as a borrower in a DTCC repo transaction, with Capula providing collateral in return for funding in a cleared repo transaction. The collateral comprised Treasury bonds and agency debentures.

“Today, with the addition of institutional participation as collateral providers, we have achieved our goal of providing a true cleared repo solution for the buyside, lowering risk in the market,” said Murray Pozmanter, DTCC managing director and head of clearing agency services.

The development may present a source of short-term borrowing that’s an alternative to the commercial paper market many large corporates rely on today for funding. Broadening the program to institutions is still early days, but the sponsor program has seen volumes double versus previous peaks since institutions gained access last May, according to the DTCC. So far, no corporates have signed up as lenders in the CCIT program, although the DTCC has been in discussions with several nonfinancial corporates about using it. In the sponsor-program scenario, repo lenders establish relationships with one or more of a long list of FICC members who are seeking to borrow funds, and then clear subsequent repo transactions through the FICC.

“If you’re used to transacting in the tri-party market, then the mechanics and flow for CCIT product are very similar,” said Jim Hraska, managing director and general manager of the FICC.

Mr. Hraska said hedge funds, banks, corporates and other institutions are typically interested in using the repo market as a place to park short-term cash. And European corporates have regularly tapped the tri-party markets established by Euroclear and Clearstream as an alternative to invest short-term, in part because the transactions are typically overcollateralized; they can also choose to accept only high quality collateral, such as sovereign bonds. The corporates in discussions with the DTCC, Mr. Hraska said, tend to be nonfinancial companies able to do sufficient repo-transaction volume to warrant the resources necessary to join a clearing corporation.

“Some of the large financial corporates are already bilateral counterparties with the dealers, whereas we think the more generic corporates would probably love to get secured financing via the CCP [central counterparty] in a capital-efficient manner for their dealer counterparts,” Mr. Hraska said.

Corporates may also be accessing the DTCC’s cleared repo market through one or both bank sponsors, unbeknownst to the clearing and settlement house. The sponsors would handle many of the operational necessities, such as posting margin, potentially making the repo market more accessible to corporates of less-than-gigantic size.

Neither sponsor responded by press time to requests for information about corporates accessing the sponsor repo market. Capula Investments declined to comment.

James Tabacchi, president and CEO of South Street Securities, said his firm’s occasional business with corporates has usually originated via board members, investors or other relationships. He said that corporates have long had access to the tri-party market, in which transactions are over-collateralized and lenders can choose highly secure Treasuries and agency securities. He added that corporate reticence regarding repos appears to stem more from uncertainty about tapping a new market than the product itself, which besides being highly secure is easily accessible using current technology at large as well as midsize intermediaries.

“Some days the rate on commercial paper is a bit better, some days the rate on repos [is better]. They’re both money market products, and their rates are not going to be far off from each other—why wouldn’t you want to have that option?” said Mr. Tabacchi, who is also president of the recently formed Independent Dealer and Trader Association. “Not only do you have the best collateral, but the biggest custodian bank in the world—BNY Mellon (where tri-party accounts are held)—is pricing the securities every day and looking out for your interests.”

At a NeuGroup meeting last year, one treasury executive at a pharmaceutical company said his company does tap the repo market to manage cash, and that a repo central counterparty such as the FICC would be attractive in light of the single legal agreement with a highly rated counterparty (the DTCC is rated AA). He added, however, that his company only executes repos with banks in its credit facility.

The DTCC confirmed that its service does provide visibility through to the counterparty.

In terms of putting up collateral to borrow short-term funds, corporates can already do that in the traditional tri-party market, although their capacity depends on their counterparty relationships. In the DTCC program, borrower’s credit must be underwritten by BNY Mellon and State Street, for now the only two sponsor banks, which each meet the settlement house’s sponsor-requirement of having at least $5 billion in capital. Laura Klimpel, managing director, core business development at DTCC, said that so far the DTCC has yet to talk corporates about borrowing via the DTCC’s sponsored repo program, although the bank sponsors may be pursuing such business

She added, “There wouldn’t be any restrictions from the FICC to allow that to go through.”

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