Why You Need Term Commitments

The evolving financial landscape, shaped by new regulations and market events, has pushed institutional investors to demand greater security in the form of committed financing. This pressure has prompted investment managers to secure committed financing across a range of asset classes—including public securities and derivatives. But why is this becoming such a critical issue now? And what does it mean for firms that use leverage in their strategies?

Who Needs Term Commitments

Term commitments are vital for any strategy that uses leverage. Leverage comes in several different forms including:

• Margin debits
• Securities borrows for short positions
• Derivatives, including
• OTC swaps
• Futures, options, and cleared derivatives

These financial products and strategies come with inherent risks. Committed financing mitigates those risks by ensuring the firm has stable, pre-agreed financing terms to reference when needed.

What Term Commitments do for You

Term commitments act as the governing rules for:

• Duration certainty: Providing a set timeframe during which agreed-upon rules and terms cannot be altered.
• Margin requirements: Establishing set terms for financing with collateral.
• Pricing Limits: Fixed cost of financing for each transaction.
• Credit Limits: Pre-determined caps on credit extensions.
• Operational protection: Protecting firms from unforeseen events like recalls, buy-ins, or settlements.

In short, these commitments give firms the certainty and operational resilience by establishing committed terms for margin, credit limits, and pricing. Firms can engage in leveraged strategies without exposing themselves to sudden liquidity crunches or market disruptions.

The Role of Treasury Systems in Managing Term Commitments

Term commitments only hold their value if firms can consistently track and manage them in real-time. This is where treasury systems become critical. Attempting to monitor these commitments across multiple asset classes, counterparties, and commitment caps on a spreadsheet is nearly impossible, and the risks of non-compliance are too great.

Firms are increasingly adopting treasury systems to manage the complexities of:

1. Committed and non-committed financing: Tracking which securities within the firm’s portfolio are covered by a term commitment versus which are not.
2. Excess funding capacity: Ensuring that there’s enough capacity for additional financing when needed.
3. Attribution by security: Understanding which securities are covered, which are excluded, and which have additional margin requirements.
4. Counterparty optimization: Ensuring optimal portfolio coverage across counterparties, avoiding higher margin requirements and financing costs at one counterparty versus another.

As institutional investors and regulators increase their scrutiny, treasury systems provide firms with the tools they need to ensure compliance, manage financing effectively, and optimize their portfolios across counterparties.

How Quadrangle & QDS Can Help

At Quadrangle, our team of subject matter experts can assist you in determining whether a term commitment is beneficial for your strategy. With extensive experience in complex financing arrangements, we review and negotiate these agreements with your counterparties on your behalf to ensure optimal terms.

Beyond review and negotiation, we provide ongoing technical support with software that enables you to store, track, benchmark, and manage the terms of your term commitments. The QDS Platform integrates seamlessly with treasury systems, ensuring your commitments are consistently monitored, helping you stay compliant while maximizing your financing efficiency.