Q&A with Clearstream: Triparty repo is the best way corporate treasurers can ensure cash is secure

In the current climate, with recent reports of customer cash disappearing and financial institutions being under threat of going out of business, unsecured bank accounts are becoming increasingly unreliable at keeping treasury cash safe. Treasury Insider spoke to Steve Lethaby, senior sales manager of repo and collateral management, custody and securities lending at Clearstream Banking about how more and more corporations are using triparty repo and an intermediary between their treasury department and the bank to ensure that cash is kept safe.

Clearstream were present at ACT Manchester 2015, what can you do for leading treasury professionals?

We have always serviced larger corporates that have vast volumes of cash that they want to invest within our programme. However, we are now focused on the mainstream corporate treasurers and we regularly exhibit at events like Eurofinance, ACT and the IACT, the Irish equivalent of ACT. When I went to the IACT in Dublin a few years ago, there was a panel at the end with four leading corporate treasurers who were answering questions. One of the questions that had been sent through was: would you as a corporate treasurer consider triparty repo as an alternative investment to what you currently invest in? Three of the four corporate treasurers said that they could not answer that question because they did not know what a repo was. This is when I realised that part of the problem is getting people to understand that a repo is simply a straightforward securitised deposit. Therefore, we can offer treasury professionals greater security with triparty repo as they can obtain collateral against their cash and hold this with us as a neutral third-party rather than placing their money unsecured with an institution.

As a subsidiary of Deutsche Börse AG, how does Clearstream ensure that assets are traded securely?

Clearstream is a large infrastructure provider, which means that whilst we are a bank, we do not take on direct investments nor take on risk. Our responsibility is simply to hold money on behalf of other organisations, predominantly financial institutions, and manage the collateral held against treasury investments in segregated accounts under Luxembourg law, which is known to be one of the safest legal jurisdictions for financial markets. If corporates placed their cash with a bank and that bank were to go under, as a custodian and triparty agent of the collateral being used to secure that money, Clearstream would allow them access to their account immediately so they could liquidate the assets.

What difficulties do you believe treasurers face when dealing with triparty repo?

Documentation has been one of the biggest barriers to triparty repo for corporate treasurers as it is assumed to be far too onerous to negotiate and would create a lot of extra work for the treasury department. Clearstream has tried to simplify the standard trade documentation, the Global Master Repurchase Agreement (GMRA), by launching its own Clearstream Repurchase Conditions (CRC) that can only be used between companies that have also signed them. Alongside this, unlike the GMRA which works as a one to one company document, the CRC is a one to many companies document and has revolutionised the way corporate treasurers now view the triparty repo world. We also have links to 360T and Bloomberg in order to automate more of the trade process which allows the corporate treasurer to be a lot more hands off on the administrative side of the business.

What legalities or regulations do you have to consider when dealing with triparty repo?

Basel III and the Net Stable Funding Ratio (NSFR) are important, as banks need to show they have access to liquidity in the market and they would usually want to take cash on a secured basis. There is one subtle difference though. If banks take cash against collateral from corporates, there would only be a 50% weighting of cash taken from the corporate under the NSFR. On the other hand, if a bank takes the same cash from a bank, they could only receive a 0% NSFR weighting, which is less attractive for them. Banks are starting to turn away unsecured cash at the moment because their balance sheet cannot handle it and are suggesting that corporates start to take collateral within triparty to cover their counterparty risk.

What are the differences between European and US triparty markets?

What you find with the European market is that there is much more cross currency activity, whereas the US market has always been focused on USD cash vs USD collateral in triparty. There is increasing demand for European triparty agents to take a more global view on triparty repo and we’re helping to open doors in this area by improving settlement deadlines and turnaround times with the US market.

How do you see the treasury landscape evolving globally?

We are a global organisation and from a corporate perspective, cash could be sitting anywhere. Whilst I’m based in London, I spend a lot of time in and around Dublin where all the major US treasury hubs, such as Pfizer, IBM and General Electric are based. Although not all treasury departments are in Dublin, this city is seen as an attractive gateway to corporate cash. The US market itself is also an extremely important area for us as we believe there is a lot of untapped cash that is floating around and still being placed on an unsecured basis.

What are the company’s plans for the future?

Clearstream’s plan for the future is to continue to focus on corporate cash in Europe, Asia and the Americas. With banks telling us that they would prefer not to take unsecured cash, it is our job to help both the banks and their corporate clients in shifting their business to a secured basis with the help of simplified documentation such as the CRC’s. As well as this, we would like to focus more on educating the market about triparty repo and ensure that at events, repo gets an appropriate forum to be discussed as it is an important subject for treasurers.