Photo of Zsolt Tajti and Marco Brähler, F. Hoffmann-La Roche and Heiko Schwalb, Euroclear.

This solution leverages SWIFT to deliver an alternative source of funding which, since September 2015, has successfully accomplished half a billion euro with multiple repo trades. This is an innovative project.

The challenge

With stable cash flow throughout the year, dividend pay outs in March and low, or even negative, interest rates, there is always a need for flexible funding. Asset managers from treasury approached the back office team in April 2015, indicating they would like to fund the Roche Group through tri-party repos, where Roche would act as the cash receiver.

This meant of course that Roche would be the collateral giver, which was the main concern. The back office had to be capable from a process and systems perspective, to transfer the initial collateral, which could consist of multiple securities, and to manage the margin calls and the repatriation of the securities on maturity.

Since 2014, Roche had experience with investing in reverse tri-party repos, where Roche would receive collateral on their custody account with the tri-party repo agent. The legal and documentary hurdles back then in the initial stages of the implementation were now helpful to tighter manage the efforts to set up global master repurchase agreements (GMRAs) for multiple counterparties.

In addition to this onboarding workload, Roche as a collateral giver, would be in the driver’s seat of the trade and has to monitor the transfer and valuation of the underlying securities. An insufficient collateral basis could be seen as technical default by the counterparty.

Adding to the complexity was also the unique aspect of a corporate treasury managing supply and delivery of eligible securities-collateral for the repo trade. Unlike banks, corporates have typically less knowledge and technical experience and capabilities to handle the ‘giving’ part of collateral (often, receiving collateral in a reverse-repo is already a challenge).

Here, Roche treasury needed to take into account the additional custodian from where bonds needed to be made available for further processing by the tri-party agent, Euroclear, to the ultimate collateral receiver (cash lender).

The solution

The back office was eager to take on the challenge. Being one of the first non-financial corporates to engage into tri-party repos as a collateral giver, Roche internally developed a custom-made solution with the SWIFT network as the primary enabler.

Marco Brähler, Head of Back Office, Roche, recalls: “On 9th September 2015, Roche successfully engaged into the first tri-party repo deal, receiving the funds and delivering the underlying securities to our tri-party agent Euroclear.”

In less than six months, the treasury team had built up the required repo expertise in order to create treasury processes, a system framework in SAP and the SWIFT automation as the key elements for successfully funding the Roche Group through tri-party repos. The key to building this solution in such a short time-frame was the solid system expertise, but also the flexibility and reliance of SWIFT messaging.

Best practice and innovation

With this solution the back office team has shown that it can quickly adapt to new requirements from the front office by enhancing the utilisation of the current SWIFT SCORE and MA-CUG agreements. One of the main challenges was to send out and match at least four SWIFT messages per deal initiation and another four at maturity (MT199, MT599, MT540, MT542 and additional MT540/542 if ‘repo’d’ multiple securities).

Also the collateral for margin calls and substitutions during the trade’s lifecycle had to be monitored in an automated manner (MT535, MT545, MT547, MT548).

Since there was no ‘out-of-the-box’ software solution for tri-party repos in their TMS, a new repo framework was built in SAP on top of the correspondence matching engine with in-house expertise. So far, funding for almost half a billion EUR has been successfully accomplished since September 2015 with multiple repo trades.

What’s more, in order to address the risk of insufficient collateral basis, Roche adopted an innovative approach of using a ‘buffer pool’ collateral with the tri-party agent. In this way, the collateral in the running trades could be efficiently substituted and (re-)allocated.

“The successful execution and the tremendous positive feedback has triggered great interest in this funding solution, paving the way for other corporates, as well as solution providers to engage in tri-party repos,” Brähler says.

Key benefits

• Repo expertise developed.
• Alternative funding instrument identified and implemented successfully.