Trésorier/Treasurer magazine - N°91 - Oct/Nov/Dec 2015 - (Page 40)
cash in repos
Corporate treasurers are discovering
the benefits of repos for investing their
cash, writes Olivier de Schaetzen
/ NOV / DEC 2015
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.
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.
LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE
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".
Sellers are usually investment banks, broker-dealers,
prime brokers looking for funding. Buyers are usually
cash-rich, risk-averse 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
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.
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.
The main benefit of repo is that it provides "double indemnity" for the cash invested, reducing the risk: first,
there is the indemnity provided by the credit quality of
the bank borrowing the cash; and second, there is the indemnity provided by the name and standing of the securities used as collateral. The treasurer therefore mitigates
the company's exposure to the credit quality of the bank
by holding the securities as collateral as he or she will be
able to sell the collateral received in the event of default of
its counterparty to recoup his or her investment.
Another benefit of repo is that the
treasurer can design a collateral
basket to meet the company's
yield and risk objectives. The yield
from a repo can be higher, and
the risk lower, than that provided
by short-term, unsecured bank
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.
Table of Contents for the Digital Edition of Trésorier/Treasurer magazine - N°91 - Oct/Nov/Dec 2015
Table of contents
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW Ben Poole Editorial Services
To What Extent Should Treasurers’ Activities be further centralized?
Capital Markets Union (CMU)
Upsurge in fraud
Using analytics to cope with uncertainty and volatility for treasury
IFRS 9 : Nécessite d’une reorganisation bancaire majeure
Taux zéro : de nouvelles stratégies pour un nouveau monde
Investing surplus cash in repos
Warranty & indemnity insurance
Making the switch from Excel to a Treasury System
Corporate treasury in the digital age
Fini le casse-tête des paiements internationaux pour les entreprises !
Bank Independent Cash Pooling
Gérer l’offre de retraites : un choix complexe pour l’entreprise
15 MINUTES AVEC CIAM
THE FINANCIAL RISK OBSERVATORY
LIFE BEYOND NUMBERS
Trésorier/Treasurer magazine - N°91 - Oct/Nov/Dec 2015