Understanding collateral - a guide to secured FTFs

The repo market: The foundation for secured FTFs

The $10 trillion+ repo market is a critical source of short-term funding for banks, allowing them to access liquidity while providing security to lenders. Historically, access to secured funding through the repo market has been limited to large banks and capital markets institutions with billions of assets to invest. TreasurySpring has unlocked this asset class for cash investors who previously had no access, enabling a broader range of businesses to benefit from the additional protection typically offered by secured investments.

What’s the difference between a secured and unsecured FTF?

TreasurySpring offers a diverse range of Fixed-Term Funds (FTFs) for clients to make cash investments in. Each FTF provides exposure to an underlying investment, such as a Term Deposit, Commercial Paper, Treasury Bills, and other short-term cash investment instruments (Underlying Investments). One category of FTFs involves lending to financial obligors (banks), which can be broken into two main categories:

Secured FTFs: The Underlying Investment (loan) is backed by collateral of the obligor that fully meets or exceeds the value of that Underlying Investment.

Unsecured FTFs: The obligor provides no collateral to back the Underlying Investment. If the obligor defaults, there is no claim over specific assets, making the Underlying Investment unsecured.

The key distinction is that a secured FTF can offer protection, reducing exposure to obligor  credit risk and improving capital preservation. Depending on their risk appetite, FTF investors can choose between unsecured FTFs, which may offer higher yields or collateral-backed secured FTFs, which can provide greater security than equivalent unsecured products.

The role of collateral in secured FTFs

Collateral is the term used to describe the asset or pool of assets delivered by the obligor (in this case, a bank) as security to protect the lender (in this case, the TreasurySpring cell company in which the FTF is held, and ultimately a cash investor on the TreasurySpring portal).

A simple way to understand how collateral works is to compare it to a mortgage. When a bank lends money to a homebuyer, the mortgage is secured against the house—the house serves as collateral for the bank providing the loan. If the borrower defaults, the lender has a claim over the house and can sell it to recover the outstanding loan. The same principle applies to secured FTFs: collateral acts as a safety net, ensuring that if the obligor fails to repay, there should be a pool of assets that can be liquidated to recover the outstanding Underlying Investment.

Collateral provided against a secured FTF is monitored and maintained by a neutral third party, known as a tri-party agent—for example, Clearstream—which is intended to ensure transparency and trust.

Collateral coverage ratios

The collateral coverage ratio represents the value of the collateral relative to the Underlying Investment. A ratio above 100% indicates that the collateral value exceeds the Underlying Investment value.

For example, if an investor subscribes £10m into a secured FTF on the TreasurySpring portal that has a collateral coverage ratio of 105%, the obligor (the bank) would need to provide at least £10.5m worth of collateral to the tri-party agent.

The collateral is monitored and revalued intraday by the tri-party agent to ensure its value always meets or exceeds the agreed collateral coverage ratio, with additional assets being required from the obligor (the bank) if the value of the collateral decreases in value below an agreed threshold.

What assets qualify as eligible collateral?

To determine what assets qualify as eligible collateral to secure the Underlying Investment, a collateral schedule is pre-agreed between TreasurySpring and each obligor. These agreements specify factors such as asset type (e.g., debt instruments or equities), country of issuance, and currency denomination.

After a client selects an FTF within the TreasurySpring portal, they will see a high-level summary of the relevant collateral schedule, referred to as ‘Collateral Information.’ This provides an overview of the assets that qualify as collateral to secure a particular FTF.

It’s important to note that while a collateral schedule may allow for multiple currencies or different types of debt securities, not all of these assets will necessarily be used as collateral. They provide the obligor (the bank) with the flexibility to deliver a mix of collateral assets as long as they remain within the agreed schedule and that the collective value of those assets meets or exceeds the collateral coverage ratio.

Conclusion

TreasurySpring’s platform provides unique access to secured cash investment options, Secured FTFs, previously unobtainable by most firms. This enables our clients to mitigate risk in their cash investment portfolio and consider returns on a risk-adjusted basis.

Secured FTFs can provide significantly better risk-adjusted returns than comparable unsecured options, as the Underlying Investments are backed by collateral.

If you’d like to learn more about secured FTFs and their benefits, please don’t hesitate to reach out to a member of the TreasurySpring team.

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.