Despite a dip when the financial crisis hit, the European Repo market has more than doubled since 2001.
And as the crisis continued repo balances increased, primarily because the product represented a way to absorb the additional liquidity added by central banks and allowed a more secure alternative to the deposit market – it is certainly the case that every major institution revisited its credit parameters during this period and the additional support provided by collateral was viewed very favourably.
However, this trend has changed. Despite credit appetite being high, and banks’ leniency on credit standards in a zero-rate environment, the growth of the market has been muted. The overall size of the market is likely to continue to decline as participants reflect on the economics of collateralised lending following the introduction of a more punitive set of regulations.
Global regulation has required banks to hold larger capital reserves against all sorts of lending and this will fundamentally make repo more expensive, both for the banks providing the service and ultimately the underlying client.
The introduction of the Basel III regime will result in capital reserves becoming more expensive and when returns are assessed the relatively narrow spread extracted on repo desks will not fare well in the fight for allocations on a bank’s balance sheet.
The enormous repo balances run by bulge bracket banks in the run-up to the global financial crisis now look uneconomic and untenable.
Regulation and the overall bank size have created an environment in which the overall balance sheet size has to be offset by the many demands of potentially numerous banking departments. This has driven global banking players to reassess areas of the market in which they are able to viable compete and serve clients well.
While constraints on the supply side of repo products are clear, it has coincided with pressures which are driving new participants to the repo market. Global markets are still in need of financing services from funds, real-money investors and banks with an interest in building leveraged portfolios.
This is coupled with a relatively new interest in repo from corporate treasurers and other cash-rich money managers who are increasingly interested in the additional level of credit support that comes from secured lending.
The reluctance to rely upon the unsecured deposit market – and a very definite reluctance from banks to accept significant cash balances in a world which is still long of liquidity – has driven interest in the repo market.
This represents a fundamental problem. The market has more appetite to use repo as both a tool for generating cash and financing long bond positions at exactly the same time when regulation means that banks are more reluctant to provide the disintermediation service required for the smooth transmission of this cash.
This generates opportunity for new entrants into the market and the potential for increased involvement of players who were previously regarded as peripheral in the repo market. It may well be that this splintering of business in the repo market results in healthier competition, a reduction in costs to the end user and a less concentrated risk profile throughout the market.
It is this trend which makes the arrival of ICBC Standard Bank into the Global Markets business all the more timely and pertinent.
ICBC growing into capital markets business
ICBC is the largest company in the world, and has held this position for four years (Forbes). It employs in excess of 450,000 people in hundreds of countries around the world.
Founded in 1984, it has grown to a position of prominence in all areas of commercial banking. As ICBC’s position in the global markets space is a recent development, the firm and its clients are not encumbered by the legacy issues impacting a number of other global banks. In February 2015 the acquisition of Standard Bank plc, the non-African Global Markets operations of Standard Bank of South Africa created ICBC Standard Bank, which now operates as the global markets hub for the entire ICBC Banking Group.
About ICBC Client Financing Services
The ICBC Standard Repo and Structured Financing business allies the financial strength of ICBC with 25 years of Standard Bank experience in global emerging markets collateralised financing to offer clients competitive and innovative solutions on an unparalleled range of assets in both emerging and developed markets.
As a key part of this plan, Iain Colquhoun has been hired from Mitsubishi UFJ to manage the introduction of the new Asian and GCC client base and offer an enhanced level of support to existing and prospective EM clients. Iain has occupied a variety of roles in the client financing market for 15 years and this new role represents an opportunity to construct a new international franchise.
“Having had the opportunity to appreciate the unique strength of the business, our experience, extensive counterparty network and diverse sources of liquidity allow us to source or upgrade a broad range of fixed income securities from illiquid high-yield EM to liquid high-grade DM and to refine our pricing to market leading levels,” says Colquhoun.
ICBC Standard also has a broad experience of structuring equity financing transactions, often in challenging EM jurisdictions and can offer bespoke financing solutions on a vast array of equity instruments at a shareholder or corporate level.
The breadth and diversity of ICBC Standard’s client base affords us huge opportunity to fully employ and further develop our product offering as part of the full suite of global markets products which ICBC Standard brings to the ICBC Group.
Tim Pike, who has been trading emerging market repo for Standard Bank for eight years, sees a major shift in client appetite to CNH repo, where he is actively quoting out to 12 months and can offer extremely competitive pricing, especially in the high-yield space where the firm is particularly well placed, given its significant emerging market experience.
The rise of the renimbi
As the global use of renimbi has exploded in recent years, London has wasted no time in cementing itself as the pre-eminent liquidity centre for CNH trading among offshore centres. According to a 2014 City of London Report, London is responsible for 67% of CNH spot turnover and 42% of CNH FX swap turnover. The average cumulative daily turnover of these transactions totals $37bn. Since its inception under the ICBC umbrella a short seven months ago, ICBC Standard is a growing presence in the London CNH market.
With ICBC’s Chinese pedigree, balance sheet scale and global girth, ICBC Standard is well positioned to connect these key ingredients with its legacy London business’s sophisticated systems and core franchises.
ICBC Standard’s electronic trading capabilities are an efficient tool with which to scale ICBC’s global importance while CNH offers the opportunity to take ICBC Standard’s world leading commodities and niche FICE (fixed income, currencies and equity) businesses mainstream. As a niche liquidity provider of South African, African and global frontier product, ICBC Standard boasts impressive interbank penetration and established relationships with the world’s largest investors.
ICBC Standard’s designated CNH market making team has seen a sevenfold increase in turnover since its February inception and is set for further strong growth as continuing investment in the CNH business gathers pace.