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Corporate Treasurersí Investment Strategy: The Collateral Frontier and Search for Yield Pick-Up The key objective for any corporate treasurer is to unlock yield pick-up, however the lack of investment options in the South African market generates a range of administrative difficulties. A solution has arrived in the form of the tri-party repo, which manages collateral to deliver immediate yield benefits.

Corporate Treasurers’ Investment Strategy: The Collateral Frontier and Search for Yield Pick-Up

Corporate Treasurers’ Investment Strategy: The Collateral Frontier and Search for Yield Pick-Up

By Steve Everett, Strate’s Collateral Management Services

The Holy Grail of a corporate treasurer is to unlock yield pick-up, be adequately diversified and make sure that deposits are protected and secure. This quest has been difficult as cash-long corporates have traditionally had only two investment options in the South African market: invest in short- or medium-term bank deposits or in money market funds. Tri-party repo has been successful in the US, UK and European markets thanks to tri-party agents who facilitate transactions and unlock a different option for the corporate treasurer’s investment strategy.

South Africa, for the first time, now has a tri-party collateral agent, which easily removes the administrative difficulties of booking classic repos. Tri-party repo between a corporate and a cash receiver takes care of the collateral required, pricing of the collateral, and ensures the right collateral is delivered at the right time to the right counterparty – every time.

As in any adventure film, we’ve found the hero of the story. However, the search for the Holy Grail is fraught with pitfalls and snares:

  • Banking regulation under Basel III currently views unsecured bank deposits as having greater counterparty credit risk, and many foreign-domiciled corporates have higher credit ratings than domestic banks
  • Money market funds are using both variable and constant net asset values, where constant net asset values were the standard before
  • Collateral is not just a banking problem any more. New regulations for OTC derivatives, including popular products for corporates such as interest rate derivatives, will require the bi-lateral exchange of collateral with a phased implementation between 2019 and 2023.

A tri-party agent secures collateral, tracks it and ensures the efficient re-use of collateral where possible to create greater efficiencies for corporates.

What’s in it for the corporate?

Not only will tri-party repo provide immediate yield benefits, it futureproofs the corporate treasury from the changes coming, as listed above.

Tri-party repo has a unique mix of risk/reward for yield pick-up given a variety of durations, collateral sets and a diversified mix of counterparties. Given that the use of tri-party services for cash providers is free of charge, friction and administrative costs are greatly reduced and the process of receiving or placing collateral of any dematerialised asset type becomes seamless.

Tri-party agents perform an intermediated function and facilitate transactions between corporates and banks while upholding the rules of the Global Master Repurchase Agreements, giving corporate treasurers peace of mind and ensuring transactions are secured, tracked and have the potential for re-use to cover other financial collateral obligations.

Pioneering the collateral frontier through partnership

Many of history’s great adventurers had great partners in their quests. Access to tri-party repo through Strate’s web-based front-end and partnerships with domestic and global specialists is critical to building counterparty networks and increasing diversification.

Strate has partnered with Clearstream, a global tri-party collateral leader, to bring tri-party repo capabilities to the South African market. Furthermore, corporate clients have access to collateral services by partnering with a pioneer in the South African market, Addendum, a world-class funding platform that offers unsecured funding solutions to banks and corporates.


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