To increase its leverage, CCSZF is turning to ICBC -- and for good reason.
In the post-crisis world, ICBC has become a big player in repo financing as Dodd-Frank makes it costly for U.S. banks to compete. While ICBC is the world’s largest bank by assets, the enhanced capital requirements that have made it prohibitively expensive for major U.S. firms to provide repo financing apply only to its local units. And because their combined assets fall below the $50 billion threshold where those extra costs kick in, ICBC has the flexibility to offer far more competitive terms than its American rivals.
Repo Financing
ICBC Financial Services, the bank’s brokerage unit, provided about $88 billion of repo financing at the end of 2015, up from $59 billion two years ago, according to regulatory filings. The figures are before netting agreements that can be used to reduce overall assets and liabilities. Almost all the repo financing that ICBC provides is on U.S. government bonds.
“Everybody uses” ICBC for repo financing now, said Will Heins, an independent consultant and former interest-rate derivatives broker at Javelin Capital Markets. “They’re cheaper than everybody else.”
And in an era of rock-bottom interest rates, a key to Siu’s and CCSZF’s success may just hinge on getting the lowest possible repo rate.
These days, “most of the relative-value trading between cash and futures is focused upon, ‘What interest rate can I borrow the bond at?” said Pacific Investment Management Co.’s Harley Bassman, who created the widely followed rate volatility gauge called the MOVE index.
This article was provided by Bloomberg News.