The Benefits of Short-term Cash Investment in Securities
Treasurers do not naturally think of investing in securities when they plan their short-term cash investments. The deposit market is perceived as far more competitive in terms of liquidity and placement flexibility than any investment in securities. While cash time deposits remain the standard practice for cash managers, short-term securities repo transactions are increasingly popular. These deals are attractive to a wide range of counterparties, and they are flexible.
However, we sense that the benefits to cash investors of covering exposures arising from these investments with securities are not sufficiently apparent to offset the operational risk associated with them. Sophisticated triparty collateral-management agents are changing this.
Globally, the use of collateralised transactions as a secured financing technique is booming. Chiefly, this is because it supports financial institutions and, in particular, investment banks and prime brokers, in their sophisticated financing strategies of obtaining the most competitive funding rates across many markets, asset types and currencies.
A neutral triparty agent is the natural meeting point for treasurers and investment banks, where secured funding converges with secured-cash investment. The increased use by such financial professionals of triparty collateral services means that they can shift the administrative burdens associated with collateral management to expert third parties, while retaining control of their portfolios. These agents fully assess all areas of collateralised transactions, i.e. they perform daily mark-to-market and margin checks, to provide a two-name risk that mitigates potential credit risk. And delivery-versus-payment (DVP) settlement takes care of any settlement risk as the exchange of securities and cash is simultaneous and irrevocable.
The simplicity of entering into a triparty deal is another reason for treasury managers to consider this option, including those that manage cash balances on an overnight investment basis.
By taking collateral under agreement, cash investors gain the confidence that they are adequately covered in the event of counterparty default, so much so that this has become a factor in the decision-making process to undertake more business with an expanding range of counterparties.
Triparty collateral management can accommodate many types of securities and almost any quantity of cash from a wide spectrum of currencies, for virtually any term, using a variety of profiling options that each party can customise to best fit their own risk appetite. For example, a treasurer may only be willing to take high-grade government debt as collateral for the cash supplied to the collateral giver. Conversely, if the treasurer is more flexible, it may take a variety of lower-grade securities as collateral in the quest for greater financial returns.
In addition, some triparty agents offer the capacity to enable cash investors to re-use collateral received in an onward financing transaction gives them a similar level of liquidity in comparison with a deposit-market investment.
Closing the gap between the deposit market and the securities-collateral market intrinsically requires an infrastructure that allows for the high-speed transfer of securities throughout the day. This can be achieved with some integrated real-time settlement platforms.
A settlement platform functioning 20 hours a day could give the triparty agent the possibility to automatically calculate margin adjustments, select and substitute securities throughout the day. Moreover, extending securities collateral transfers until 4:45 pm (CET) on value date would allow securities, from an operational viewpoint, to compete with the cash-deposit market.
Treasury desks are realising that automated, neutral collateral-management service providers can help secure gains made from the investment of long cash balances outside the deposit market. By removing the administrative burden from securities collateral management, triparty agents can provide treasurers with diversified investment opportunities in the money market sector.