| Several years ago, Canadian Imperial Bank of Commerce (CIBC) decided to expand into the US securities business to meet the needs of its Canadian clients, and to grow internationally. But becoming a big player in US government securities wasn't the first thing on its mind. Nonetheless, the bank hired an 18-member team of government securities traders from SG Warburg, received authorization to be a primary dealer in US government debt and started running huge matched books of repos and reverse repos. Although hardly a profitable business, running such a matched book is a game that many commercial banks play in the US. Absurd as it may seem, it has allowed them to participate in securities business, prohibited by the Glass-Steagall Act of 1933. The matched books exist to help the banks pass the "90-10 test", to comply with the Federal Reserve Board's ruling that banks' securities subsidiaries may earn no more than 10% of their gross revenues from securities underwriting that the banks themselves are not allowed to do. The revenues from the repo books count towards the 90% target for eligible revenues to set against the 10% the subsidiaries can earn from such "ineligible" activities as underwriting commercial paper, municipal revenue bonds, corporate debt and equity. |