Trésorier/Treasurer magazine - N°91 - Oct/Nov/Dec 2015 - (Page 40)

Investing surplus cash in repos Corporate treasurers are discovering the benefits of repos for investing their cash, writes Olivier de Schaetzen - N°91 - OCT / 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 Repos defined 40 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 liquid investments. 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 deposits. 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

Cover
Table of contents
EDITORIAL
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW Ben Poole Editorial Services
FOCUS
To What Extent Should Treasurers’ Activities be further centralized?
Capital Markets Union (CMU)
Upsurge in fraud
FORUM
CEO impersonation
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
CORPORATE FINANCE
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
NEWS
LIFE BEYOND NUMBERS

Trésorier/Treasurer magazine - N°91 - Oct/Nov/Dec 2015