This seems like potentially disruptive technology. By targeting term trades to corporates (who typically transact unsecured deposits) on a secured tri-party basis, the product could be very appealing to both sides. Like any tri-party arrangement, the “devil in the details” will be the acceptable collateral schedule. Cash lenders will have to be cautious about exactly what collateral they agree to take.
By Steve Johnson, The Financial Times, September 18, 2011
A new electronic trading platform expected to launch in January could help funnel more wholesale funding to Europe’s beleaguered banking sector and provide higher returns to lenders such as companies and asset managers.
However the Agency Cash Management platform, a joint venture between Newedge, a broker, and MTS, part of the London Stock Exchange Group, could potentially undermine Europe’s €1,500bn ($2,073bn) money market fund industry.
The platform is designed to allow lenders to make fully collateralised loans to banks, with the collateral managed by a “tri-party agent”, such as Clearstream, Euroclear, BNY Mellon or JPMorgan.
Newedge and MTS argue that the comfort blanket of secured lending will encourage corporates and other institutions to commit to providing the “term” lending, of at least 31 days, required by banks under the Basel III accord, in order to earn a higher return than from shorter term lending.
At present, worries over the health of European banks are prompting many lenders to limit bilateral funding to 24-hour notice deposit accounts. Simultaneously, tighter
regulations have forced money market funds to hold more overnight liquidity and reduce the average maturity of their holdings.
“Banks require term cash whereas the biggest investors, money market funds, tend to invest on a short-term basis. That is potentially a huge risk,” said Ulf Bacher, co-head of ACM at Newedge, who said the platform would target private banks, hedge funds and asset managers, as well as the corporate sector.
“Cash is normally given to banks in very short-term unsecured deposits, because the customers want to have security and safety. By using the repo market [involving an agreement to repurchase collateral] then we are back into a relatively safe environment, so you can lend for term.”
One leading repo trader added: “In theory it will allow people to lend for longer. You can take much longer risk than if you are lending through deposits. I’m sure Ikea would be happier to lend to RBS through collateral on a six-month basis than through a deposit. Corporates are lending unsecured only to banks with a high credit standing. With collateral, you are happier to take a lower credit standing. It might be most beneficial for banks with a low credit standing and it may rebalance funding across banks.”
He added the platform “could represent disintermediation of money market funds,” and if so this would improve aggregate funding levels for banks because funds typically invest around a third of their assets in short-dated government debt and commercial paper issued by non-financial companies.
However, Kathleen Hughes, head of global liquidity sales and distribution at Goldman Sachs Asset Management and a director of the Institutional Money Market Funds Association, said: “Corporates right now can buy bank paper and enter into tri-party arrangements. That can peacefully co-exist with money market funds.”
Bloomberg and Tradeweb already offer platforms, but they are believed to have far fewer banks on board than the 150 MTS said it had a relationship with.
Over-the-counter activity accounts for the bulk of direct lending and the success of the new platform could rest on how much standardisation it is able to bring to such a customised activity, one source argued.
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