Corporates are increasingly turning to the tri-party repurchase agreement (repo) market in Europe, in the wake of banks’ tougher capital requirements, falling rates, and a recently more standardized documentation process.
Repo agreements have long been a bank financing tool, in which the bank or another entity seeking short-term financing sells securities to a third party under the agreement to repurchase those securities later at a higher price. The security sellers have traditionally been asset managers and other financial firms looking to put cash to use.
Although nonfinancial corporates, usually large multinationals, have participated in the tri-party repo market for some time, their interest in the market has jumped recently.
As of mid-January, “Corporate tri-party repo volume made up 15.4 percent of the broader repo pool, an increase of 50 percent over the last two years,” said Charlie Bedford, VP of global securities financing at Clearstream, the clearing and settlement division of Deutsche Börse based in Luxembourg and Frankfurt.
Clearstream did not provide a precise volume number for tri-party repos, so called because a third-party custodian such as Clearstream manages the process. However, the firm’s monthly average outstanding volume in December for all global securities financing services, also including securities lending and collateral management, was EUR 627.6 billion, a 6 percent increase over a year earlier.
Mr. Bedford said the main reason for the increase in corporate repo use stems from new regulations requiring banks to hold more capital against unsecured exposures. Basel III, for example, comes into effect gradually over the next several years, but many large banks have already adopted its stricter capital requirements. Fully collateralized repos are looked upon favorable by regulators from a capital standpoint.
Another change is the regulatory push for money market funds (MMFs) to adopt a floating rather than fixed net asset values (NAV). Corporates typically prefer the guaranteed return of a fixed NAV, and additionally MMFs often invest in tri-party repos, so corporates engaging in the market directly cuts out the middleman.
Historically low government- and corporate-bond rates in Europe, at times dipping negative, have also played a role. Repo rates have also fallen but often to a lesser degree, and the transactions’ collateralization provides an extra degree of comfort.
Mr. Bedford noted that corporate use of tri-party repos has been facilitated by standard documentation the custodian launched in 2013. Now, corporates can fill out the Clearstream Repurchase Condition (CRC) documents once with the custodian and trade with any of the banks signed onto the service on the other side, cutting legal fees and other transaction-related costs.
“They’re able to essentially join this club, where they can trade with one or all of the participating banks,” Mr. Bedford said. “To remove as many barriers as possible, we’ve agreed to wave all fees, so there are no incremental costs for them, regardless of the number of counterparties and the total balance of outstanding trades.”
Mr. Bedford said about half of participating corporates are using the CRC documents, with large multinationals that have participated in Clearstream’s tri-party repo market for years continuing to use the documents they’ve drawn up, and new participants opting for CRC documents.