Although the repurchase agreement market has been traditionally between large institutional investors and major investment banks, new technology is emerging that will allow smaller players with less capital to take advantage of this short-term collateralized lending/investment market.
Deposit Software Inc. (DSI) has developed software and a servicing center that allows small-and medium-sized banks and their corporate customers, which generally don't have the volume of capital to open up repo accounts themselves, the ability to aggregate their funds with other institutions so that they can get into the market. "This system will aggregate the smaller balance of funds from a lot of smaller institutions and send that information to a Lehman or Goldman. So instead of dealing with 20 or 50 firms, (the major investment banks) deal with one transaction at the end of the day which is collateralized in bulk," says Larry Tabb, The Tower Group's senior analyst of securities and investments.
Unlike working with third-party consolidators to get into this market, the smaller institutions can deal directly with the major investment houses-freed from consolidator fees. And because this technology pools their funds, the investment houses can afford to offer these institutions a better rate than the consolidators. "Their funds also end up being collateralized," says Tabb, "whereas with a consolidator, you're generally talking about commercial paper or CDs or some sort of time deposit placement that won't have the collateral backed against it of an (investment house)."
The DSI software is free; the technology company plans to make its money in long-term service contracts, funded by revenue generated in the repo transactions. DSI has established a service center that interfaces with the software placed at the investment firms' customer sites. After pooling together customer funds, the service center interfaces with the investment firms' repo desks. Representatives at the center also answer customer questions regarding the use and implementation of the software. The firms' customers, however, cannot "cherry pick" from DSI's customer hosts, viewing which of the investment houses at DSI has the best rate. Says DSI CEO Earl Johnson, "We're the filter, the link from a service standpoint of answering those calls, making sure that we have the telecom capability to facilitate the gathering and disposition of those orders and then feeding them into that back office stream at the host provider."
Though in negotiations, DSI has not yet signed its first customer.