Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016 - (Page 49)

CORPORATE FINANCE ONLINE WWW VERSION INVESTING SURPLUS CASH IN REPOS Corporate treasurers are discovering the benefits of repos for investing their cash, writes Olivier de Schaetzen Typically, companies have parked their short-term cash with banks or money market funds. But we now live in atypical times. Banks have become a higher credit risk, and money deposited with them is paying very low rates of interest. As for money market funds, new regulations have made them less attractive than they used to be. Consequently, repos, in particular tri-party repos, have become more in vogue for corporate treasurers. Even so, they are still used far less by corporates than bank deposits and money market funds. Repos defined A repo is an agreement for the sale and repurchase ("repo") of securities. The seller of the securities (the "collateral giver") agrees to repurchase them from the buyer (the "collateral taker") at a later date for a set price. The repurchase price is higher than the original sale price, and the difference is known as the "repo rate". - JUL N°94 The securities are often high quality government bonds, but they can be lower-rated corporate bonds, equities or other securities. If the seller defaults, the buyer can sell the securities to recoup the cash invested. Striking a balance between risk and return The main objective of corporate treasurers when investing surplus cash is to strike the right balance between investment risk (credit, liquidity and market risk) on the one hand, and the investment yield on the other. Several years ago, before the global financial crisis, the balance was generally skewed more towards yield. Today, the balance is more in favour of risk mitigation, with yield taking second seat. - Sellers are usually investment banks, broker-dealers, prime brokers looking for funding. Buyers are usually cash-rich, riskaverse investors - such as commercial banks, central banks, money market funds, insurance companies and, to a small but growing extent, corporate treasuries - looking for short to medium-term, highly liquid investments. LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE Repos are an increasingly popular choice for corporate investors looking for a safe, liquid and relatively high-yield haven for their surplus cash. The repo market is particularly well developed in Europe and the US, and in recent years corporate treasurers have taken a keener interest in it. / AUG / SEP 2016 A repo, however, allows the corporate treasurer to make an investment which is backed by the securities held as collateral, and which generates a yield based on the credit worthiness of its counterparty and the underlying performance of those securities In other words, the priority for corporate treasurers has generally become "return of capital" rather than "return on capital", and they are looking for new ways to protect their capital. Repo is one of these ways. 49

Table of Contents for the Digital Edition of Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016

Table of contents
INTERVIEW Philippe Gelis - Kantox - Fintech and the future of banks
Lost in transformation
Everything has a price – a transfer price
Treasury Survey - an unprecedented picture of treasury activities in Luxembourg
The impact of negative rates on Treasury and Risks Management Systems
Towards reporting harmonisation?
Understanding the Treasury impact of BEPS
Impacts of Single Resolution Mechanism and Bail-in for European Banks
Supply chain? Not concerned?
Collateral management and the Corporate Treasury function.
Efficiently Managing Cross-Border Payments in Turbulent Times
How Mid-Market Companies Can Efficiently Manage Enterprise-wide FX Risk as they Grow
Investing surplus cash in repos
A wind of technology changes in the treasury management world
Invoicing can be fun….?
Comment améliorer la performance des fonds de pension européens

Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016