Repo strengthens 3i’s investment strategy - Euroclear
3i Group Plc’s cash management activity had been focused primarily in money market funds (MMFs) and small bank deposits for short durations. The company has a conservative approach to counterparty credit risk and had some concerns over whether AAA MMFs could really be relied upon to provide full AAA-rated risk levels.
Additionally, new regulations - especially regulatory changes for MMFs - prompted 3i to look around for alternative ways to invest.
“We needed to find somewhere we could put the cash to work where we could achieve reasonable yields without compromising on counterparty risk,” said Matt Shelley, Group Treasurer of 3i. “We settled on reverse repo.”
3i worked with their relationship banks and triparty agents to fully understand the process, market and documentation, including the Global Master Repurchase Agreement (GMRA), and chose Euroclear as their first triparty agent.
Matt’s team then sought approval from the 3i Group board in July 2014 to go ahead with this new cash management strategy.
3i sets up for repo
The GMRA is often cited as a barrier to entry for corporates taking part in triparty repo. But 3i had a good experience in achieving all the necessary paperwork.
“We were a little apprehensive, given market feedback on how long GMRA negotiations can take,” said Matt. “We thought it might be a drawn-out process but actually it was relatively quick. We did want to use the GMRA as it is an industry standard and has been tried and tested in default situations.”
The GMRA is the main legal framework which is then supplemented by Euroclear’s Triparty Service Agreement that includes the detail on the assets acceptable as collateral. 3i has seven GMRAs signed with its relationship banks and, when documentation was agreed, 3i agreed test trades with each bank.
Dedicated Euroclear staff provided a high level of support during this set-up period. “I can’t praise them enough,” said Matt. “They held our hands throughout the process, tracked the test trades at each stage and it meant we received quite an individual approach.”
It took less than four months from gaining 3i board approval to making the first trade.
“Repo was new to 3i, so we were learning throughout the entire process”, explained Matt. “We also wanted to have the simplest process we could, avoiding new systems if at all possible, to minimise the operational burden on a small team,” he said.
3i preferred to execute and confirm the trade through Bloomberg, relying on email to track collateral positions.
“This wasn’t a problem for Euroclear but proved to be a difficulty for the repo counterparties, as the confirmation process was new for them. At first, none of them were fully aware of what setup was required, so we had to work with Bloomberg and the counterparties to get each test trade right. After that, it worked well.” said Matt.
3i’s conservative risk appetite means they currently only accept gilts with no haircuts or restrictions for all-sterling repos. Additionally, they focused very strongly on minimising counterparty risk. “For us the repo counterparty credit risk is a bigger priority than collateral quality. However, we have also made sure we have robust processes for selling the collateral in the event of our counterparty defaulting,” added Matt.
“Some banks are unwilling or unable to move gilts out of CREST into triparty repo arrangements, preferring to repo those assets bilaterally. Euroclear were helpful in suggesting banks which were happy to do so through a triparty arrangement.” said Matt.
Matt’s team is currently regularly placing various amounts of cash in repos for terms of up to one month. They decided this was optimal for their purposes as they found there was no additional yield advantage for slightly longer durations.
Repo is certainly proving worthwhile with regard to yields: for short-term transactions, Matt said he was gaining better yields than in the unsecured money market and at comparable levels with MMFs.
Reverse repo has proved to be a practical and efficient cash management tool for 3i and the company were more than happy with the triparty service delivered by Euroclear. “Triparty repo has become an important part of our investment strategy,” said Matt.