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Best Liquidity Management/Short-Term Investing Solution Highly Commended: Microsoft

Published: Jul 2014

Daniel Packham of Barclays, Anita Prasad and Jayna Bundy, Microsoft and Mohit Manaktala, Bank of America Merrill Lynch

Photo of Daniel Packham of Barclays, Anita Prasad and Jayna Bundy, Microsoft and Mohit Manaktala, Bank of America Merrill Lynch.


The optimal liquidity management and short-term investing vehicle was to implement a euro tri-party repo with Euroclear Bank as agent, with three (bank) trading counterparties. This solution greatly enhanced the Microsoft Capital Markets trading team’s ability to manage the large euro closing costs (relating to their major acquisition of Nokia’s Devices and Services unit) of over €6.5 billion. This solution highlights the best practices of having the services of a tri-party agent perform and manage the daily repo trade life cycle tasks.

Alex Blackmur

Fixed Income Team

Eric Barka

Treasury Manager

Jayna Bundy

Group Treasury Management, Treasury Capital Managment

Microsoft

Founded in 1975, Microsoft is the worldwide leader in software, services and solutions that help people and businesses realise their full potential.

in partnership with

Bank of America Merrill Lynch Barclays logo

The challenge

The challenge related to Microsoft’s custodian banks. Microsoft had intended to leverage its USD tri-party agent, one of two present in the US, to implement a new EUR tri-party repo structure. However, its treasury team quickly realised that the majority of the dealers it benchmarked with housed most of its euro collateral with Euroclear or Clearstream. This practice – where dealers move collateral back and forth between their existing US-based tri-party agent – was deemed neither efficient nor cost effective.

Microsoft was faced with a number of hurdles to overcome: Counterparty identification and legal documentation (the process of final execution of documents took a significant amount of time and was not completed until mid-February 2014); Euroclear Bank tri-party agent on-boarding; negotiating eligible collateral schedules; and E2E SWIFT trade testing (SWIFT MT527 trade initiation messaging was embedded in the internal portfolio management system, BlackrRock’s Aladdin. The use of MT527 was key to the confirmation and control process to support full straight through processing).

The solution

With Microsoft’s major acquisition of Nokia’s devices and services unit, the optimal liquidity management and short-term investing vehicle was to implement a euro tri-party repo with Euroclear Bank as agent, with trading counterparties Barclays Bank, Merrill Lynch International and Deutsche Bank.

This solution greatly enhanced the Microsoft Capital Markets trading team’s ability to manage the large euro closing costs of over €6.5 billion. It also provided the ability to put large euro overnight and term fund balances to work with the safety of collateralisation that supplemented the core short-term debt and commercial paper investments for this major acquisition.

With the impending acquisition, the treasury team began to prepare by holding collections of euro in the preceding months to closing. Euro balances were initially invested in euro-denominated debt and commercial paper. However, as these positions were short-term with rolling maturities, an additional euro liquidity cash management vehicle was sought as an alternative to uncollateralised bank sweeps for more effective overnight or term placements.

“The advantage of using tri-party repo as collateral taker or investor is the ability to mitigate market risk on securities collateral and operational risk through bi-lateral agreements outlining the terms and conditions, operating procedures, and acceptable collateral profiles,” explains Eric Barka, Treasury Manager.

Best practice and innovation

Considering that Microsoft’s treasury trades large notional amounts, ranging from €50m to €500m, tri-party repo offered best-in-class risk management and acceptable market rates of return. The treasury team was able to negotiate highly specific eligible collateral schedules with its counterparties including acceptable euro sovereign and supranational credit quality, concentration limits, and collateral margins. Using Euroclear as their agent ensured that there was effective management and oversight of matching terms of the deal, collateral selection, margin calls, settlements, and asset custody during the life cycle of the tri-party repo trade, minimising counterparty risk.

This solution highlights the best practices of having the services of a tri-party agent perform and manage the daily repo trade life cycle tasks.

Key benefits:

  • Time taken to implement solution and realise benefits.

  • Productivity gains:

    Real-time processing through the use of SWIFT MT527 trade initiation messaging provides full straight through processing capabilities including trade matching and status reporting.

  • Process efficiencies:

    Comprehensive reporting providing visibility into daily pledged collateral from Euroclear Bank gives peace of mind that the tri-party repo trades are fully collateralised according to specific eligible collateral schedules.

  • Risk mitigation:

    Secured exposure management and risk mitigation of counterparty default risk, legal risk through use of market standard agreements (GMRA), market risk on securities collateral through clearly defined acceptable collateral schedules, concentration limits and daily margining, and operational risks associated with settlement and corporate events.

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