Clearstream’s volume jumps as coporates glom on to European repo markets.
The European tri-party repurchase agreement (repo) market is drawing more multinational corporations (MNCs), as they seek more security and, counter-intuitively, more attractive returns than traditional alternatives.
Clearstream, specializing in settlement and custody, has seen the percentage of repo volume in which corporate treasuries are participants jump to 23 percent from 15 percent a year ago, and its number of corporate repo clients nearly double.
According to Steve Lethaby, senior sales manager at the Deutsche Börse-owned firm, “many more” corporates are in the pipeline, and that existing corporate clients who have come aboard since Clearstream began wooing them a few years ago have become more comfortable with the product and increased their activity. While corporate volume has increased, Lethaby noted, the percentage increase stems partly from banks reducing their repo activity, as a result of stricter regulations aiming to reduce traditional interbank cash lending.
Meanwhile, Euroclear, based in Belgium, now has north of 60 corporate clients participating in the repo market, including Microsoft and AstraZeneca. Corporates represent a bit more than 10 percent of its repo volume, a small increase over the percentage a year ago. Gösta Feige, director, product solutions, collateral management at Euroclear, said the settlement house also has more corporates in the pipeline, and that companies across a variety of sectors are participating.
A main driver behind the decision to lend in the repo market for InterContinental Hotels Group (IHG) was the additional security the collateralized transactions provide. Bert Heirbaut, group treasury manager, IHG, said his interest was sparked a year or so ago when the tri-party administrators began approaching corporates more openly. IHG’s treasury then spoke to the company’s relationship banks and found them to be supportive, largely because borrowing on a collateralized basis was attractive to them from a regulatory capital standpoint, due to new regulations such as Basel III.
“So it’s like a bank deposit, and you get the security of the collateral,” Mr. Heirbaut said. “That was a big plus for us, especially with most of the major banks downgraded over the last several years.” He added that IHG, which uses Euroclear, requires conservative collateral baskets—AAA-rated government or supranational bonds for a minimum of 60 percent of transactions, and the remaining 40 percent can be rated AA with a concentration limit of 20 percent per AA security.
European corporates and non-European corporates with cash on the continent are faced with the challenge of negative rates for sovereign bonds and some bank deposits. That’s less of a problem for UK-based IHG, which reports in US dollars and pays dividends in pound sterling, but the premium repos provide over bank deposits is nevertheless a plus.
“Compared to bank deposits, quite often you achieve a better rate, which seems contradictory given repos are collateralized and you have extra security,” Mr. Heirbaut said, adding any premium depends on each bank’s needs at the time.
IHG attaches greater importance to collateral’s risk than the bank counterparties, but, Mr. Lethaby said, some corporates in the program have started prioritizing counterparties. They’ve adopted baskets that include much riskier collateral, and their counterparties are willing to pay rates that are much more attractive than rates for unsecured bank euro deposits, or at least not negative ones.
“They’re saying, ‘We’re placing our euro cash with the bank anyway, on an unsecured basis, so now we’re placing our cash with the same bank on a secured basis, where the collateral may not be of high quality but at least we can get a positive spread,’” Mr. Lethaby said, “which is unheard of in the unsecured euro market.” He added that as of late November, depending on the collateral a counterparty accepted, repos were paying positive euro spreads anywhere from one week out, compared to unsecured deposits that offered negative returns. “Positive spreads on repos may only start at a few basis points depending on the term, but at least you’re not paying,” he said.
Alan Chitty, regional treasurer, Europe, at SABMiller, said the company faced a significant buildup of cash on its balance sheet starting midway through 2013, in part due to selling a division. Bank downgrades, however, had shrunk its counterparty credit limits for deposits, and treasury viewed money market funds as overly exposed to financial institutions. So the company turned to lending in Clearstream’s repo market, limiting counterparties to other corporates and government agencies.
The company started engaging in repos in the second half of 2014, after taking nearly a year and a half to set up the legal infrastructure. At that time, Clearstream was in the process of launching its Clearstream Repurchase Conditions (CRC) service, which is a master agreement governed by Luxembourg law that permits institutions to sign one legal agreement and trade with any of the counterparties who have also signed on, rather than multiple bilateral agreements.
Mr. Chitty said banks then required both the CRC and the bilateral master repurchase agreements to “satisfy their own legal councils,” adding that, “In theory [using only the CRC] would have been a nice simple process, but in practice it didn’t happen that way.”
Nevertheless, Mr. Lethaby said, the CRC has been a “door opener” into repos for corporates more recently. “I would say nearly all of the corporates we are currently onboarding are doing so via the CRC,” he said.
Euroclear’s RepoAccess service functions similarly, enabling participants to sign only one agreement, appointing Euroclear Bank as their agent to enter into agreements with repo borrowers. The settlement bank settles the transaction and manages the collateral, including valuing it, margin calls, and reporting. Euroclear’s Mr. Feige noted that following longtime market practice the service is essentially free to the cash providers, and borrowers pay the fees.