As regulators worldwide push for more collateralized transactions and corporate treasurers seek to minimize risk, multinational corporations are increasingly turning to the tri-party repurchase agreement (repo) market.
“We estimate corporates represent 10 percent to 15 percent of our tri-party repo market today, and that this percentage will continue to grow,” said Pascal Morisini, head of global securities financing sales and relationship management.
Mr. Morisini said the number of corporate customers has “grown every week” since Clearstream, wholly owned by Deutsche Borse and one of the two largest tri-party agents in Europe, launched its master repurchase agreement last June. That agreement enables participants to access the market faster by signing one contract that’s applicable to multiple counterparties, instead of bilateral agreements with each counterparty.
“With combined cash volumes now above Euro25 billion, the Clearstream market for corporates has almost tripled in terms of counterparties and volumes in the last two years,” Mr. Morisini said. Euroclear, the other main tri-party agent, estimates corporates make up about 10 percent of its tri-party repo market.
Tri party repos are distinguished from other repos by having a third-party agent, such as the European clearing firms or major custodial banks in the US, act as intermediaries that also administer the transactions. The corporate move to repos has been fueled by their desire to minimize the counterparty risk that stems from depositing funds in banks, following the collapse of Lehman Brothers and other major financial institutions during the financial crisis.
Corporates depositing cash in tri-party repo transactions receive collateral in return, reducing risk while also helping them meet new regulatory requirements stemming from the Dodd-Frank Act in the US as well as European Market Infrastructure Regulation (EMIR) rules. Mr. Morisini said another benefit is that tri-party repos offer more investment options and diversification in terms of counterparties.
“Initially, the types of corporates signing up to our tri-party repo services were primarily large multinational enterprises, in particular the cash-rich chemical, energy and pharmaceutical sectors,” Mr. Morisini said. “More recently, this has been followed by telecoms, airlines and retail, with the common factor to all being they have dedicated treasury functions.”
The Clearstream Repurchase Conditions (CRC) is a master agreement governed by Luxembourg law that enables customers to trade with their chosen counterparties within a few days. Clearstream says the CRC effectively allows repo market participants to test their commercial appetite regarding the number and volume of trades with a counterparty, before making additional effort to enter into other types of bilateral repo agreements.
Clearstream adds that one appeal of the CRC to corporates is the ability it provides to enter into reverse repos to secure their financing and then re-use the collateral they receive to cover OTC derivative margin requirements with clearing central counterparty clearing houses (CCPs) and their clearing members. Corporates are generally exempt from clearing mandates, but regulators in the U.S. and Europe have proposed imposing initial and variation margin requirements on their bilateral, uncleared swaps.