There have been important shifts in the corporate repo market over the last 18-24 months that are allowing corporate treasury teams to tap lucrative yields on their cash. In an interview with Treasury Today, Marton Szigeti, Head of Collateral, Lending & Liquidity Solutions at Clearstream, the tri-party platform that seeks to match counterparties in the repo market and help clients with their collateral needs, explains.

Szigeti attributes increased bank demand for corporate liquidity to the shift in monetary policy. During Quantitative Easing (QE), Central Banks injected liquidity into the financial system by purchasing government and financial securities from the market. Today, Central Banks have changed the rules on which market participants will have access to their facilities that can pay interest, meaning that over the last 18 months free liquidity has dried up, and it has grown much harder for banks to access cash. Cash-hungry institutions like banks which need cash in exchange for securities to fund their daily operations are looking for different sources of liquidity.

“Because cash is more valuable, corporates especially those with a broad credit appetite, can secure a good yield on their cash,” says Szigeti who joined Clearstream five years ago following a long career in investment banking.

Regulatory change has also played a hand. Under the European Central Bank’s (ECB) Targeted longer-term refinancing operations (TLTROs) programme, the ECB would take a mixture of assets on banks’ balance sheets like Collateralized Loan and Debt Obligations (CLOs and CDOs) and give cash in return. Now, because of monetary policy tightening, the ECB has stopped funding these assets.

“Banks are now structurally long in these assets which they once funded via Central Banks. Most financial institutions avoid using these assets as collateral in repo because they are complex, less liquid, and can negatively affect capital and liquidity ratios, but corporate treasurers are able to take them in return for good yields and banks are actively seeking out these types of counterparties.”

He adds that corporates are less concerned about the quality of these assets because they don’t sit on their balance sheet and they are comfortable with more complex risks like supplier risk. “Corporates are already exposed to, say, the credit quality of all their suppliers and they don’t take credit risk as a balance sheet item.”

Other types of regulation have also served to make cash more valuable. Banks came under pressure to manage their liquidity ratios under post-GFC reforms like Liquidity Coverage Ratio (LCR), explains Szigeti. Banks have integrated this cost in phases over the years, and it used to be centrally allocated. Recently, in a more sophisticated approach supported by structural changes to better manage costs, banks’ liquidity management costs are no longer internalised but reflected instead in banks’ trading books so that individual traders now manage their own liquidity ratios.

“Banks have distributed their cost of liquidity down to the trader level in a process that has increased the demand for liquidity in the market and made corporate cash much more attractive to banks,” he explains.

Clearstream facilitates three different types of repo but Szigeti says the company’s Clearstream Repurchase Conditions (CRC), is seeing most interest from corporate treasurers. CRC is a standardised repo contract whereby corporate treasurers looking for repo capabilities can sign one contract and access multiple (around 70) counterparties. Meanwhile the platform supports all operational outsourcing and tax implications that treasury teams might struggle to process.

“We are seeing most corporate activity in our CRCs. It’s suitable for corporates because it’s homogenous and a low lift from a legal perspective. It’s not very sophisticated but offers a broad range of choice of collateral with a lot of bank borrowers on the other side that are keen to take corporate liquidity.”

Szigeti continues that “every cent” of corporate money Clearstream has in its CRC product “is lent straight away” reaffirming “corporate cash is highly valuable because it helps banks with their funding ratio and liquidity coverage. They can take corporate cash and put it to really good use on their balance sheet to help support their regulatory position. Banks much prefer borrowing corporate liquidity.”

CRC repo is uncleared. In this way the counterparty to the repo – the corporate – will take the credit exposure of the institution they choose to trade with. “If a corporate is lending money to another repo counterparty it will take their credit risk and the risk and also the flexibility of the collateral they provide.”

Although Clearstream offers cleared repo whereby clients take clearing house risk rather than bank risk – and therefore negate the credit risk of the transaction – these transactions aren’t that popular with treasurers because this type of credit enhancement costs more.

“Corporates are also less credit sensitive than financial institutions to credit risk and treasurers are also looking for higher yields than a central counterparty (CCP) can provide,” he concludes.