Canada’s triparty repo launch aims to fill C$60bn void

The first trades on a new triparty repo platform have brought Canada a step closer to plugging a C$6o billion ($44 billion) gap left by the demise of the country’s antiquated corporate paper market.   

Canada’s five largest banks—BMO, CIBC, RBC, Scotiabank and TD Bank—completed the first repo trades on the Canadian Collateral Management Service (CCMS), a triparty platform created by TMX Group, Canada’s largest exchange operator, and Clearstream, a Deutsche Börse post-trade unit.

Triparty repo is being eyed as a possible replacement for Banker’s Acceptances, short-term loans to corporate borrowers traded on the secondary market. These notes are the main input for the Canadian dollar offered rate (CDOR) and will cease issuance when the benchmark is switched off on June 28, triggering a switch to the Canadian overnight repo rate average, or Corra.

You can’t really efficiently and effectively place that [C$61 billion] bilaterally. It would be too hard. You need to have some kind of automated capability to help you

Marton Szigeti, Clearstream

While banks broadly support the phase-out of BAs, which don’t count as high-quality liquid assets under the liquidity coverage ratio, Canada’s money-market funds are seeking a replacement for the instruments, which represent roughly 20% of their assets. 

“Looking at the Canadian market as Banker’s Acceptance goes away, you’re going to move to an uncleared and cleared repo market,” says Marton Szigeti, head of collateral, lending and liquidity solutions at Clearstream. “Money needs to be invested, it needs to generate yield, it needs to be secured, and these markets are the primary tools for achieving that.”

The triparty initiative represents a “quantum leap from where we are today”, says Steve Everett, head of post-trade innovation at TMX Group.

“It is very difficult to move non-cash collateral in large volumes,” Everett says of the current system. “The infrastructure has been lagging for a number of years.”

Borrowing in Canada’s bilateral repo market requires participants to first check their available collateral then confirm with their counterparty whether it will be accepted over email or chat. The parties must then liaise with custody banks and the Canadian Depository for Securities to complete the transaction.

According to Szigeti, volumes still invested in BAs means it would be operationally challenging to rely on the bilateral market. Data from the Bank of Canada show C$61.2 billion of BAs outstanding at the end of February—down from over C$90 billion a year earlier.

“I think the size of that number kind of illustrates that you can’t really efficiently and effectively place that bilaterally. It would be too hard. You need to have some kind of automated capability to help you place that money in the market,” he says.

CCMS sees Clearstream act as the triparty agent, arranging the settlement and managing the collateral that secures the repo trades. Clearstream’s software instantaneously picks the collateral based on the counterparty’s eligibility requirements, sends trading instructions on behalf of the counterparty, settles the trade and then updates client post-trade systems. Known as Oscar, the software uses artificial intelligence to scan client assets in the securities depository to work out which bond in the inventory is the best match to back a specific short-term loan.

The approach makes it easier to swap out a piece of collateral—for example, when a bank needs to sell a particular bond that is tied up in a repo transaction.

“We can facilitate unlimited substitutions in a market where substitutions are very cumbersome to do,” notes Everett.

Szigeti says CCMS is now open for repo trades secured against government bonds. Corporate bonds and equities will be added later this year, along with a link to the US post-trade giant Depository Trust & Clearing Corporation. In the longer term, the Canadian triparty settlement system will likely become interoperable with other Clearstream-powered collateral markets, such as Australia, Brazil, Germany, Luxembourg and South Africa.

“You’re going to have general collateral-pooling products getting scale… It’s going to follow the course of a more modernized market like you have in the US or in Europe,” Szigeti says.

Seeking yield

For money-market funds, the main drawback of repo compared to BAs is the lack of a yield pickup.

A higher-yielding repo product is in the works. Everett and Szigeti plan to introduce a novel form of securitized financing to CCMS that could help lenders unlock value from balance sheet assets.

Securitized General Collateral (SGC) is a TMX structure that bundles a portfolio of Level 2 high-quality liquid assets into a note that can be sold for cash and traded in the market. Securities underpinning these notes, which will be backed by the credit of the banks issuing them, could include government and provincial bonds, corporate credit debt and select mortgage-backed securities.

“There’s a wide variety of different assets that sit on banks’ balance sheets that sometimes they’re not using optimally,” Luc Fortin, president and chief executive of the Montreal Exchange and global head of trading at TMX Group, told Risk.net, WatersTechnology’s sibling publication, in January.

Everett likens SGC to an app on the CCMS platform. He says the exchange group is planning to launch SGC notes in “the next few weeks to month… it’s imminently ready”.