European corporate treasurers are increasingly considering repos as a cash management tool whether directly or through pooled vehicles such as money market funds (MMFs), says Fitch Ratings.

In economic terms, a repo is comparable with a collateralised loan or secured deposit. One party buys securities from another party, which then agrees to buy those securities back at a future date.
 
Accordingly, repos provide users with access to short-term funding in exchange for assets or the ability to place short-term cash on a secured basis. This acts as a liquidity management tool and serves an important cash management role.
 
Repos provide a double indemnity against credit risk. If the counterparty defaults then the other party has recourse to the collateral. Margin is posted and maintained, mitigating the risk of mark-to-market losses.
 
Global Master Repurchase Agreements (GMRAs) govern repos. Operational complexity and the need to implement a GMRA, despite their standardisation, may deter some users from directly transacting in the repo market. For these users, other vehicles that do transact in repos, such as MMFs, can provide indirect access.
 
Fitch notes that the European repo market is substantial. The total outstanding amount of repos in Europe was EUR5.5trn in December 2013 according to ICMA. The European repo market is overwhelmingly bi-party (transacted between two parties). This contrasts with the US market, where repos are predominately tri-party, whereby the securities are held by a custodial bank.


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