Markets Asia, US, Canada, CEE Global Securities Infrastructure Lending Tri-party Collateral Management, GSL| Repo, Risk Management ProfIles EquiLend, CalPERS, Eurex, Anetics

Gsl Issue 02 Sold Short Has the lending industry been unfairly treated?

Plus revved up for repo: asia lender Profile: calPers country focus: usa

Cover GT to DC.indd 1 26/9/08 18:40:33 eDItorIaL Lend an ear “Securities lending is the missing building block for market completeness”

Markets The securities lending industry is an increasingly essential part of US, Canada, CEE the financial machine. However, as an industry which has been strengthened by growth in the alternative funds sector, the FSA ruling Infrastructure on short selling and SEC ruling on ‘naked’ short selling has caused Tri-party collateral management, controversy and debate. In a month, which has brought disaster of Repo, Risk Management fictional proportions to the financial services industry, we attempt to ProfILes answer some of the questions raised by the FSA ruling on short selling Brian Lamb, Dan Kiefer, Paul Wilson and its effect on securities lending (p14). In readiness for the RMA’s 25th Anniversary securities lending editor: conferences in Texas, GSL looks at the securities lending markets catherine kemp ([email protected]) in North America. Joe Corcos provides an update on the securities reporters: lending industry in the US (p21) and Catherine Kemp investigates the Joseph corcos ([email protected]) regulatory changes that have lead to growth in Canada (p27). Ben roberts ([email protected]) Transparency and the ability to ensure an accurate view of your Group editor: Giles turner ([email protected]) risk remains a Sisyphean dilemma. GSL talks to Dan Kiefer of the California Public Employees’ Retirement System (CalPERS) about the value of auctions in ensuring transparency and why beneficial owners contributors: Brian Bollen, should be able to retain their right to vote proxies while securities are anthony Harrington out on loan (p19), and Paul Wilson at JPMorgan about how securities lending has evolved into a front office function that chases alpha (p56). Design: Jerry May from OPERS writes on risk from a lenders perspective (p55). David copsey Elsewhere Francisco Gonzalez at Eurex SecLend discusses the future of electronic lending (p50), Anthony Harrington discusses the challenges operations Manager: of ensuring an accurate global view of collateral risk exposure across all sue Whittle ([email protected]) asset classes (p39), and David Little from Rule Financial discusses the industrialisation of collateral management (p44). Publishing Manager: GSL continues to explore emerging markets. Ben Roberts looks at Monique Labuschagne the numerous obstacles to developing securities lending in the Czech ([email protected]) Republic, Poland and Hungary (p31), while Brian Bollen encounters the world of Asian repo and the potential for growth (p35). commercial Manager: Jon Hewson The bankruptcy of Lehman Brothers, the buy out of Merrill Lynch, the declassification of the Morgan Stanley and Goldman Sachs as Publisher: investment banks, the buy out of HBOS, and the restrictions on Justin Lawson short selling globally, are events which have dramatically changed the ([email protected]) landscape of the financial services industry. How long these seismic shakeups will change the securities fincance industry is difficult to tell. ceo: Mark Latham What is for certain is that the waters will remain choppy for some time. ([email protected]) Catherine Kemp 16-17 Little Portland street, London W1W 8BP t: +44 (0) 20 7299 7700 f: +44 (0) 20 7636 6044 © 2008 Investor Intelligence. all rights reserved. no part of this publication may be reproduced, in whole or in part, without prior written permission from the publishers. Issn 1759-0728 Printed in the uk GSL | 1

GSL p01-15 Final.indd 1 26/9/08 16:14:00 contents News

4 news 8 news analysis 12 across the atlantic 14 short selling 16 ceo Profile - Brian Lamb 20 Lender Profile - calPers

Country Profiles

21 country overview - usa 27 country overview - canada 31 country overview - eastern europe 34 australia - esecLending

Industry Insight

35 asian repo 39 tri-Party collateral Management 44 Post crunch trends 46 swift on securities lending 48 anetics on asset management

Technology

50 eurex - francisco Gonzalez 51 sunGard on risk management 54 statistics on the short selling volatility

People

55 opers - Jerry May 56 JPMorgan - Paul Wilson 56 rMa 25th conference Preview 62 appointments 64 Meet the future - nora reemts

Companies eSecLending - 18, 22, 40 OhioPERS - 55 Eurex - 50 Opes Prime - 10, 34 Anetics - 48 Euroclear - 40 Penson - 26, 29 ANZ - 10 Federal Reserve - 8, 22 Performance Explorer - 27 Bank of America - 12 FSA - 13 Quadriserv - 20 BBH - 21 Goldman Sachs - 17, 24, 36 Raiffeisen - 31 Bear Stearns - 12, 17 ICAP - 20 RBC Dexia - 27 BNY Mellon - 38, 39 IMC Trading - 64 RMA - 12, 58, 59 Budapest Stock Exchange - 32 iSEC - 20 Rule Financial - 44 CIBC Mellon - 30 ISLA - 13 State Street - 12 Citi - 35 JPMorgan - 56 SunGard - 51 Credit Suisse - 24 Lehman Brothers - 8 SWIFT - 46 CSOB - 31 LendEX - 18, 59 TSLF - 8 Data Explorers - 22, 54 Merrill Lynch - 8, 12, 17 UNIVYC - 31 DTCC - 13 Morgan Stanley - 24 Warsaw Stock Exchange - 10 EquiLend - 17 Northern Trust - 24

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GSL p01-15 Final.indd 2 26/9/08 16:14:00 GSL p01-15 Final.indd 3 26/9/08 17:57:03 News Global securities lending news Top industry stories at deadline. For more recent updates go to www.isj.tv

Participant (GCP) of EuroCCP (European avoid unintended damage to the liquidity of Central Counterparty Limited). This will cash equity and related derivatives markets. provide clients with simple and rapid access In particular, dealers must be allowed to take to Turquoise, the new pan-European share short positions in the course of providing trading platform launched on 15 August liquidity for their customers. They need 2008. This service complements those that therefore to continue borrowing financial are already available on new trading venues shares from lenders, such as pension and like the Chi-X pan-European alternative investment funds and insurance companies, trading platform, as well as on the traditional for this purpose. Continued lending is also regulated markets. SGSS’ clients can also important in order to prevent chains of access a wide range of post-trade services on failed settlements. For these reasons, we ask the main regulated and multilateral trading that regulators do not introduce measures facility (MTF) markets. that might prevent or discourage lending of financial shares. For example, selling New York - Erste Group Bank has selected shares that are currently on loan should not Citi Global Transaction Services to provide be treated as entering into a short position a single integrated electronic execution where the seller can recall the lent shares and custody solution. The service provides within the normal settlement cycle. Lenders a single counterparty to execute, settle and should also be able to lend in good faith provide custody in all major execution without requirements to make enquiries markets worldwide. Through the linking about or obtain documentary proof of the Paris - SecFinex and LCH.Clearnet have of Citi’s capital markets and securities intentions of borrowers. launched central counterparty services for capabilities operational inefficiencies and More generally, we encourage lenders to stock borrowing and lending across the risks that come from dealing with multiple continue to make financial shares available SecFinex Order Market multilateral trading providers are removed. for lending in order to support market facility for Euronext markets. This will making and efficient settlement. Any include stock loan transactions in France, London - SIFMA, ISLA, RMA, PASLA & wholesale withdrawal of financial shares Belgium, The Netherlands and Portugal. ASLA released the following statement would have highly unwelcome consequences This is the first time that stock borrowing on the 26 September 2008 in regards to for liquidity in the cash equity and derivatives and lending markets will be able to take developments within the lending industry: markets that would be against the interests advantage of the services offered by a central “Against the background of the current of investing institutions and contrary to the counterparty. market turmoil, the International stated intentions of regulators in introducing Securities Lending Association (ISLA), these measures. We are encouraged by the Vienna - JPMorgan has launched its Asia Risk Management Association (RMA), response of securities lenders and again urge offshore payments clearing system, designed Securities Industry and Financial Markets them to continue to lend and to maintain to process payments from initiation to Association (SIFMA), Pan-Asian Securities their on-loan positions as appropriate in light settlement. Intended to service the global Lending Association (PASLA) and Australian of their respective goals.” trading needs of the bank’s financial Securities Lending Association (ASLA) institution partners and their customers, recognise why regulators around the world Abu Dhabi - Standard Chartered Bank has it will allow them to keep liquidity in have put in place temporary restrictions on expanded its custody services in UAE with the region, clear in multiple regional short selling of financial shares and support the recent addition of Abu Dhabi Securities infrastructures, concentrate their accounts their objective to protect the integrity Exchange (ADX and now provides a full and benefit from same-day finality. of markets and guard against financial custody services in three markets, including instability. Dubai International Financial Exchange Paris - Société Générale Securities Services It is vital, however, that these temporary (DIFX) and Dubai Financial Market (DFM) (SGSS) has become a General Clearing measures are designed as far as possible to in the Middle East.

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GSL p01-15 Final.indd 4 26/9/08 16:14:54 Natixis

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GSL p01-15 Final.indd 5 26/9/08 16:14:32 News

Madrid - Family Investments has appointed able to use our risk measures in our business “We are very pleased to welcome DWS Santander Asset Management UK to decision making in 12 months’ time.” Investments which further strengthens manage its GBP1.5 billion investment our German client base. This underscores portfolio. This is the first institutional asset Brussels - Fortis Bank, Old Mutual and our ongoing commitment to providing management mandate win for Santander Tianjin TEDA Investment Holding entered innovative securities finance solutions to the Asset Management in the UK, and reflects into an agreement for Old Mutual to acquire Global Securities Finance marketplace,” says its growing reputation in this market. The the 49% stake that Fortis holds in ABN Sharon Walker, managing director, EquiLend Family Investment Portfolio comprises of AMRO TEDA Fund Management a major Europe Ltd. 23 funds, including the Family Child Trust Chinese asset management joint venture, Fund, and the Family staff pensions scheme. for a cash consideration of approximately Tokyo - Asian clients are now able to use

Santander Asset Management UK will take EUR 165 million. The sale is the result of Euroclear Bank’s triparty services to close over management of the portfolio regulatory compliance following Fortis’s overnight repo transactions with European during Q4 08. acquisition in April 2008 of the asset counterparties at the end of their business management business of ABN AMRO Group, day, thereby leveraging their end-of-day Belgium - To ensure the transparency of the and is subject to approval by the China securities positions as collateral, and have shareholder structure of listed companies, Securities Regulatory Commission (CSRC) full use of these securities the next morning. new transparency legislation in Belgium and relevant government authorities. European-based firms, in turn, are now able requires investors to notify the regulator to finance their yen and other Asian currency and the company at which shares are held New York - Dresdner Kleinwort has exposures with local Asian securities whenever they exceed specific shareholding been awarded a third party US equity and counterparties. thresholds. The Belgian regulator Banking, securities lending mandate by Colorado Clients can use Euroclear Bank’s triparty Finance and Insurance Commission (CBFA) Public Employees’ Retirement Association collateral management service to move also now requires companies to disclose the (Colorado PERA). PERA is the 23rd largest securities and/or cash automatically between information their investors need in order public pension plan in the United States, and the relevant accounts, and to automatically to submit these notifications, and are also at the end of 2007, the fund had over USD41 substitute securities that are used in financing required to disclose the information received billion in assets available for deals when needed to fulfill other transaction in these notifications themselves. benefit payments. settlement needs. Tim Smollen, global head of agency Vienna - The Polish National Depository securities lending at Dresdner Kleinwort, New York - A group of global commercial for Securities (KDPW) is implementing said: “We interface seamlessly with Colorado’s and investment banks, including Bank Microsoft BizTalk Accelerator for SWIFT, for custodian, Northern Trust, using straight- of America, Barclays, Citibank, Credit the transport, management and exchange of through processing technology.” PERA Suisse, Deutsche Bank, Goldman Sachs, JP more than 4 million SWIFT transactions per provides retirement and other benefits to Morgan, Merrill Lynch, Morgan Stanley, year. As the central institution responsible for the employees of more than 400 government and UBS, today initiated a series of actions the management and supervision of clearing agencies and public entities in the state to help enhance liquidity and mitigate the and settlement in Poland, KDPW will use of Colorado. unprecedented volatility and other challenges Microsoft’s leading solution for financial affecting global equity and debt markets. messaging integration, leveraging BizTalk New York - DWS Investments, the mutual Specifically, the banks are working together to Accelerator for SWIFT to help about 10 fund arm of Deutsche Asset Management and do the following: domestic and global customers efficiently and the second-largest European mutual fund First, to assist in maximizing market effectively connect to SWIFT. company, has selected EquiLend’s trading and liquidity through their mutual commitment trade reconciliation services to enhance their to their ongoing trading relationships, Munich - Algorithmics announced that it is securities finance business. dealer credit terms and capital committed to working with Allianz Group on a strategic “Choosing EquiLend reflects DWS markets. insurance risk management project that will Investments’ commitment to strengthening Second, to establish a collateralized enable Allianz to calculate its risk capital automation across its business lines as it borrowing facility, which ten banks (Bank of across the entire group and meet its Solvency aims to mitigate operational risk and achieve America, Barclays, Citibank, Credit Suisse, II requirements. Tom Wilson, CRO of Allianz, greater processing efficiency. EquiLend will Deutsche Bank, Goldman Sachs, JPMorgan, said: “Our goal is to be able to quantify all help us to maximize the “alpha” generation Merrill Lynch, Morgan Stanley, and UBS) our risk types across our entire organization for our investors in an efficient manner“, says have committed to fund for USD7 billion and shorten our reporting time for economic Dirk Bruckmann, managing director, DWS each (USD70 billion in total). The facility will capital significantly. Ultimately we want to be Investment GmbH. be available to these participating institutions

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GSL p01-15 Final.indd 6 26/9/08 16:15:36 News

for liquidity up to a maximum of one third of provides clearing and settlement of trades the facility for any one bank. It is anticipated in more than 65 markets and 23 exchanges, that the size of the facility may increase as clients benefit from a wide coverage at low other banks are permitted to join the facility. cost.” Third, to help facilitate an orderly resolution of OTC derivatives exposures between New York - Fundtech, a provider of global Lehman Brothers and its counterparties. This transaction banking solutions, announced the effort included opening the OTC derivatives introduction of Global CASHplus (GCP), a market for trading this Sunday afternoon. new generation transaction banking platform that combines comprehensive global cash New York - JPMorgan Securities Lending management with the full range of automated has become the first major agent lender to financial supply chain features. For banks, lend Greek and Polish equities, and is now GCP provides a competitive edge with its actively lending in over 30 international integrated features, operational efficiency, and markets. “JPMorgan’s approach to opening Web 2.0-inspired user interface. Corporations new markets means our clients are at the will benefit from an unprecedented level forefront of opportunities to enhance returns of global financial control, enabling them through securities lending,” explained to optimize their working capital while Nick Rudenstine, Global Securities Lending managing risk. Product Head, JPMorgan Treasury & GCP is an extension of Fundtech’s end-to- Securities Services. Entering both the Greek end-to-end (also referred to as E-to-E2) and Polish markets ahead of the competition strategy, which expands the traditional allows the bank’s clients to take advantage boundaries of global end-to-end transaction of higher fees driven by increased demand banking to include corporate clients and their and limited supply. JPMorgan began trading partners. With far more visibility into lending Greek equities within seven business their clients working capital needs, banks days after the Hellenic Capital Market are able to provide new services that deliver Commission approved using the over-the- greater financial leverage through just-in- counter facility for securities borrowing and time cash. lending. The first trade in Polish equities followed shortly behind. London –The Financial Services Authority has banned short selling of financial stocks, in London - JPMorgan has announced that a move designed to address market concerns. its GlobeClear business will now offer third The FSA will require from 23 September daily party clearing for Warsaw Stock Exchange disclosure of all net short positions in excess (WSE) members who wish to trade Polish of 0.25% of the ordinary share capital of the securities. JPMorgan will be providing relevant companies held at market close on clearing and settlement capabilities to clients the previous working day. Disclosure of such who want to transact in equities and fixed positions held at close on September 19th will income products on the WSE. This latest also be required on Tuesday September 23rd. offering marks the 23rd exchange supported The FSA stands ready to extend this directly by JPMorgan GlobeClear. Its first approach to other sectors if it judges it to be client went live on the WSE with JPMorgan necessary. These provisions will remain in GlobeClear on 5 August 2008. Alex Dockx, force until 16 January 2009, although they GlobeClear product executive, JPMorgan, will be reviewed after 30 days. A review of the said: “By providing direct access to the WSE, rules on short selling will be published international investors can now directly trade in January. in one of the most promising and vibrant markets in Europe. Central Eastern European markets are rapidly growing, and the WSE is a leading trading centre. Through JPMorgan GlobeClear’s single access portal, which

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GSL p01-15 Final.indd 7 26/9/08 16:15:36 News

securities, agency securities, and AAA-rated needed for their business models. mortgage-backed and asset-backed securities, Meanwhile, ten large banks, including JP it will now accept all investment-grade debt Morgan and Goldman Sachs have set up a securities, making it easier for everyone to fund of USD70 billion in order to help the offload what they can’t sell onto the Treasury. market stay liquid. Furthermore, the Fed has decided to add The industry and regulators are USD25 billion to the pot of securities on scrambling to head off the crisis, which

offer. This means there is now a total of together they have created, but only time will USD200 billion available. tell if they will be successful. To many it seems This was in reaction to the price of as if things are falling apart, as if the centre lending climbing rapidly on news of the cannot hold. Many will wonder if some Lehman collapse. Fed funds were trading as revelation is at hand. high as 6% after the bank announced it was bankrupt. This is a full 4% above the target News Analysis rate set by the central. It is hoped that with a massive infusion of liquidity from the Fed JPMorgan opens the door that the rate will go down to to securities lending in normal levels. So continues the financial bailout of Greece and Poland proportions that have rarely been seen News Analysis before. This means that there will be little JPMorgan has become the first major lending Lehman collapse sparks accountability for those whose profligacy agent to lend Greek and Polish equities. is now being exposed, but in effect the Fed The bank’s securities lending business loosening of collateral has little choice but to continue with its began lending Greek equities seven business emergency measures, lest the entire system days after the Hellenic Capital Market The sheer angst emanating from the financial sink further into the morass. Commission approved the use of the over- sector these days is palpable. Mortgage The Fed created the Term Securities the-counter facility for securities borrowing firms and investment banks once the pride Lending Facility (TSLF) back in March in and lending. The first trade in Polish equities of Wall Street have been humbled, brought the wake of Bear Stearns spectacular collapse followed shortly after. The bank announced low by their own blind greed and stupidity, and bailout, the first major soap opera of the news on 10 September 2008 and is now and the knock-on effects are reverberating the crunch. The TSLF was created alongside actively lending in over 30 international throughout the world economy. The sight the Primary Dealer Credit Facility to aid the markets. of Lehman Brothers employees standing markets. But with the most recent round “JPMorgan’s approach to opening new despondent outside their Canary Wharf of collapses and near-collapses many are markets means our clients are at the forefront offices, clutching their boxes of personal predicting that interest rates are soon to be of opportunities to enhance returns through items was only the latest of the losses of the slashed as well. securities lending,” explains Nick Rudenstine, crunch. Playing the role of desperate fireman It will take months for Lehman to unravel global securities lending product head, trying to douse the worst of the conflagration all its deals. Lehman, along with many other JPMorgan Treasury & Securities Services is the US Fed. outfits, was an enthusiastic user of the repo The expansion of the securities lending With the collapse of Lehman Brothers, market in order to gain funding. market into emerging markets such as Asia which, after a fruitless search for a buyer, filed The Fed is claiming these measures are non-Japan has been a major trend in the for bankruptcy with debts of USD613 billion, temporary. However how temporary is industry for a number of years. However, the Fed has decided more action is necessary questionable. What the long-term effects emerging markets in Europe are now the new to infuse liquidity into the ailing market. of the conflagration will be are uncertain. point of interest for exposure hungry lenders. And no, this doesn’t mean a multi-billion Some are predicting the demise of the Lending in emerging markets can be dollar bailout for Lehman. Instead, after an independent broker/dealer. Bear Stearns is lucrative, often creating higher returns emergency meeting between Ben Bernanke, no longer, Lehman Brothers has bit the dust relative to holdings of equities in more central bankers and industry figures, the Fed and Merrill Lynch has been bought by the developed markets. This is because there is has decided to expand the types of collateral Bank of America. Only the future will see if less supply of securities and so people are it accepts for its sec lending programme. JP Morgan, Goldman Sachs, et al will survive. willing to pay higher fees. Whereas before it was only accepting Treasury Even if they do, a radical change may be Currently, Poland is the dominant equity

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GSL p01-15 Final.indd 8 26/9/08 16:15:36 Some think something extra. We think customized securities lending. AD CIBC

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Securities_203x267_e_neu 1 21.7.2008 14:40:48 Uhr GSL p01-15 Final.indd 9 25/9/08 19:14:20 G11581 4sight advert 1prf:Layout 1 9/10/07 12:06 Page 1

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market in Eastern Europe. Companies across Greece’s equities market in August but still News Analysis the region list on the Warsaw Stock Exchange owned half of the market’s free-float, data Down turn down to draw in cash from pension funds and from the Athens stock exchange shows. benefit from surging share prices. Month-on-month, the Greek equity market’s under for ANZ The Warsaw market, whose companies total capitalisation fell 2.5 % in August 2008 have a combined market value of USD155.2 to EUR124.5 billion, which represents about The sacking of two senior executives at billion, is already larger than bourses in 54 % of the country’s gross domestic product Australian bank ANZ after a rigorous Prague and Budapest, at USD50.5 billion and (GDP). Year-on-year the market’s value fell internal review of its securities lending USD39.3 billion respectively. Poland has had 32.4 %. However, the government plans operation revealed this year’s themes of risk 28 initial public offerings of shares this year, to combat the global financial crisis with management and operational oversight will while Hungary has had three. Two share sales new taxes and changes to labour markets. still keep financial institutions on their toes. in Prague this month will be the first IPOs in JPMorgan’s move to open up the lending The review, overseen by chief executive Mike two years. markets in Greece and Poland is welcomed Smith, concluded that there were deficiencies The Greek government forecasts the economy by industry representatives. They think that in staff knowledge – most notoriously the to grow 3.6% this year, below a previous 4% securities lending won’t necessarily have inability to distinguish between securities estimate due to higher oil, energy and food an effect on the level of these markets, but lending and equity finance. Further, the prices, and global economic turmoil. The moving into these markets will provide more bank’s involvement with the troubled broker European Commission expects growth liquidity, by for example making it easier to Opes Prime was deemed to have cost the of 3.4%. have an index derivative. And it will aid the bank damages to its reputation. In 2007, data shows that Greek mutual development of these markets and making Opes Prime went into receivership in March fund investors pulled cash out of domestic them more attractive for foreign investors. this year following the revelation by Deloitte, equity and bond funds in 2007 switching into It will be interesting to watch as these the receivers, of “a number of cash and stock funds investing abroad for diversification. two very different markets expand with the movement irregularities” on its accounts. In August 2008 foreign investors took a net opening up of securities lending. It had been a significant player within the EUR262 million (USD372 million) out of securities lending market, with ANZ a key business partner, with the bank also providing the broker with equity financing. This financing allowed Opes Prime to provide margin loans, with ANZ retaining the official ownership of the shares.  "

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GSL p01-15 Final.indd 11 25/9/08 19:14:22

GSL pp01-15 GT2.indd 15 5/8/08 12:15:12 news Across the Atlantic Michael P. McAuley, chairman of the RMA Committee on Securities Lending, discusses the current challenges facing the industry.

into place. Importantly, another hope is that beneficial owners will have the confidence to continue lending to viable counterparties, as appropriate. Amid all the market turbulence of the past year, beneficial owners have earned significant revenues from securities lending due in large part to the unusually wide credit spreads. Those who had confidence in their agent lenders’ ability and commitment to provide disciplined risk management were rewarded with appropriate risk-adjusted returns. Strong risk management practices will remain the foundation of successful lending programs, especially given the fact that we now have fewer trading counterparts, leaving potentially higher balances concentrated in the hands of fewer borrowers. Also, the trend toward non-cash collateral will increase as those counterparties closely manage their balance sheet and capital requirements. Lenders that have flexibility in the forms of collateral they are willing to accept can benefit by meeting this market need. Finally, I would like to touch on my role as incoming chairman of the Risk Management Association’s (RMA) committee on securities lending. I have set several goals for the coming year, not the least of which is joining with the rest of the committee members to continue our work with the Securities Industry and Financial Markets Association, the International Securities Lending Association, the Pan Asia Securities Lending Association, the Australian Securities Lending The securities lending industry in the United and Exchange Commission’s Emergency Association, regulators and other industry States has been coping with concerns in the Order with respect to short selling and participants to attend to those challenges that credit markets, as well as the recent fallout new regulations have clearly changed the confront our industry and help set a prudent and subsequent regulatory responses to landscape and will have an impact on the course for continued growth. Also, in this new environment, I would like those events. Bank of America’s acquisition future of the industry — both in the US to spotlight more attention on the important of struggling Merrill Lynch & Co., the fire and abroad. work our subcommittees are doing, most Much of what our industry will face going sale of Bear Stearns to JPMorgan and the notably the operations and legal/regulatory/ forward will be determined by how we deal loss of Lehman Brothers Holdings, Inc. to tax subcommittees. with these extraordinary events. The hope bankruptcy have led to an unprecedented Through this column, I will strive to keep is that beneficial owners will take comfort in consolidation of market players. The Global Securities Lending readers informed the borrower default indemnities provided by intervention of US federal agencies, namely about what’s happening in the securities their agent lenders, the manner in which their lending marketplace from this side of the US Treasury’s conservatorship of Fannie agents work through the Lehman default the Atlantic. Mae and Freddie Mac and its bailout of and other evolving circumstances, and the American Insurance Group, the Securities stabilising controls that regulators have put

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GSL p01-15 Final.indd 12 9/10/08 17:51:33 news David Rule, chief executive, ISLA ISLA’s chief executive defends securities lending markets and provides an update on how ISLA has been attempting to fine tune the securities lending industry.

Agreement (GMSLA) for comments. The new version updates the 2000 version; seeks to clarify the tax obligations of borrowers and lenders; addresses areas of that agreement that are commonly amended by borrowers and lenders in side letters, such as whether failure to deliver equivalent securities and collateral is an event of default; and brings the agreement into line with other industry standard agreements in some areas, such as set-off procedures following default. Over twenty comments on the draft have been received, with lively debate over some of the proposals. ISLA is now recalling its working group of lawyers from member firms to discuss the next steps. ISLA has continued to work with regulators Charged with facilitating short selling and, and infrastructure providers to improve the so it is argued, driving equity prices lower, environment for securities lending in Europe. securities lending markets remain under the For example, the Spanish authorities are spotlight of regulators and commentators. expected to publish a regulation permitting ISLA has continued to put the case for the Spanish UCITs funds to lend securities industry, pointing out the academic evidence shortly. That follows ISLA’s earlier work on that short selling has no long-term effect on the Irish, Luxembourg and UK regulations. share prices and emphasising the importance In order to help educate regulators, of securities lending to the wider liquidity of commentators and market participants about wholesale markets. the market, ISLA will be running its first Meanwhile, ISLA’s broader work to securities lending workshop on 12 November improve industry standards has continued. in conjunction with the established ICMA/ In July, we published a recommended model SIFMA repo and collateral management for agency lending disclosure (ALD) in course. Details are available on the Europe, which builds on the successful US ISLA website. model, using the same file formats and the DTCC as a file-transfer hub. But it adds reporting of agency repo trades and optional reporting of agency reverse repo trades, and addresses reporting of triparty and Crest DBV collateral to meet the needs of borrowers under Basel 2. The UK FSA has said it will welcome the proposal, which will help borrowers to meet the FSA requirement to obtain daily data about their exposures to underlying principal lenders by 1 January 2010. In May, ISLA published a draft new version of the Global Master Securities Lending

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GSL p01-15 Final.indd 13 26/9/08 18:18:30 news Sold Short The FSA ban on short selling has caused controversy and debate but what effect will it have on global securities lending, asks Catherine Kemp

The FSA has banned short selling outright for hedge funds until 16th January 2009.

The ruling helped to lift stock markets immediately, but whether that is because of the ban on short selling or because of recent action by the Fed to create a new scheme to buy up toxic assets is questionable. Some argue that short selling, the borrowing of stock and selling it on in anticipation that it will lower in price so it can then be bought back for less, allows market participants to gain better price discovery. However, the FSA is concerned that while short selling is a valid trading process, it may have caused the driving down of share prices. It is also concerned that the practice of short selling makes companies more vulnerable when markets are volatile. David Rule at ISLA says: “If hedge funds are deliberately manipulating the market then that isn’t the fault of short selling. You don’t ban cars because people drink and drive.” Rule believes the decision to ban short selling is just a way to appease public opinion. “There is academic evidence that short selling has no long-term effect on share prices,” he says. “These are dictated by the underlying changes in the expected future earnings of companies. The FSA being seen to take a strong line on the financial crisis is good for public confidence and may put share prices up in the short term, but ultimately hedge funds are not market makers and share prices will go down again, because fundamentally the banks are unstable. I would say that the market is bolstered at the moment [Friday 19 September], less because of the ban on short selling, but because US Treasury Secretary Hank Paulson and Ben Bernanke, chairman of the Federal Reserve, are creating a new scheme to buy up toxic stocks. “Thankfully, market makers are exempt from these restrictions. Short selling is absolutely vital to the way dealers operate in the market. You cannot operate in the market buying and

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selling to customers without the ability to However, Data Explorers released data that PROHIBITION ON SHORT POSITIONS IN hedge yourself by going short. And so dealers indicates only 3% of HBOS stocks were on FINANCIAL STOCKS continuing to be able to perform their vital loan during the tumultuous week beginning role in providing liquidity for customers in 15th September, which indicates that it was Against the background of the current market the cash equity and derivatives markets.” not the shorting of its shares that made it turmoil, the International securities Lending ISLA has sent out a press release urging too expensive for them to borrow money to Association (IsLA) understands why the lenders of financial shares to continue to appease their debt – but the instability of the Financial services Authority (FsA) and other lend in order to facilitate market making and financial system itself. regulators around the world have prohibited efficient settlement (see insert). However, There is a case for saying that the value at temporarily the creation of new net short both CalPERS and Dutch pension fund APG risk is a system that works well for broker positions in financial shares and supports stopped lending certain bank stocks on Friday dealers because they constantly change their objective to protect the integrity of 19th September to help bolster the markets. positions as the market changes, but for the markets and guard against further financial CalPERS temporarily restricted the lending owners of stock it can make everything so instability. nonetheless, IsLA believes that of securities of Goldman Sachs, Morgan short term that there isn’t time to recover. the role of short selling in the markets for Stanley, State Street, and Wachovia. APG was However, some still believe short selling many financial shares recently has been less specific, but a spokesman said: “We have is a fair practice, even beneficial to the overstated. The underlying drivers of share stopped stock lending in several American market. The FSA ordinarily embrace it as a price movements are not the actions of but also European banks whose shares face fundamental driver of growth. Hedge funds, particular groups of buyers and sellers but the most downward pressure, among others which often have aggressive shorting tactics, rather underlying changes in the expected from short sellers. By doing this we are trying have been blamed, but Charlie McCreevy, the future earnings of companies. to discourage short-selling activities, and EU Commissioner for International Markets IsLA welcomes the reiteration provide stability to the market. We do not instead believes: “As much as some people by the FsA that short selling is a legitimate disclose the names of these banks.” want to demonise hedge funds, they are not investment technique in normal market The danger is that lending will become the cause of the difficulties in the market. conditions and looks forward to the removal synonymous with short selling, in the sense Let us not forget where the present crisis has of these temporary restrictions when the that it facilitates short selling. Some anticipate its roots.” current extraordinary market conditions pass. that this will decrease liquidity and be IsLA welcomes the exemption dangerous for the health of the market. from these restrictions for market makers, The defence from the hedge funds is that which should allow dealers to continue to they use fundamental financial analysis to perform their vital role in providing liquidity for find out whether a company is too expensive customers in the cash equity and derivatives or not – companies are bought when they are markets. It also notes that the FsA has not cheap, and sold when expensive. By doing this imposed restrictions on securities lending and they are putting the prices at the level they urges lenders of financial shares to continue should be, not pushing them down. From a to lend in order to facilitate market making securities lending perspective, hedge funds and efficient settlement. IsLA Chief executive often promote the growth of markets because David Rule commented today, ‘Any wholesale they drive demand, increase utilisation and withdrawal of stock available for loan could profits from both sides. This in turn have highly unwelcome consequences for increases liquidity. liquidity in the cash equity and derivatives Sir Peter Burt, former chief executive of markets that would be contrary to the stated Bank of Scotland which merged with Halifax intentions of regulators in introducing these to form HBOS seven years ago, has said that regulations’. HBOS was a “victim” of speculators after a sustained and dramatic fall in share price.

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GSL p01-15 Final.indd 15 26/9/08 18:18:31 EmErging markEts

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GSL 16-35 BR to DC.indd 16 26/9/08 16:42:07 CEO PrOfilE Brian Lamb Giles Turner speaks to Brian Lamb, CEO of EquiLend, about the future of the company, and the development of products within the securities finance industry

It has been nearly been three years to the day turns out that Bank of America was not a EquiLend’s client institutions using Trade2O since Brian Lamb took the job at EquiLend. client of EquiLend, so fortuitously that may for their daily borrowing and lending needs. Lamb, formerly of Barclays Global Investors, result in a net positive for us. Lehman’s is Lamb was personally behind the joined EquiLend in 2005, succeeding former perhaps the most complicated of all for us development of this product: “I very much President and CEO Dirk Pruis. While some because. Time will tell but the net of it all is see it as EquiLend fixing what it tried to do may wonder whether Lamb may have wished that we will see more consolidation among six years ago. We had a product (One-to-One for a luckier third year in the securities our ownership group and we still have more Negotiation) in this space but it was ahead finance market, Lamb on the other hand, is than 40 non-owner clients so our client base of its time and as a result not adopted by anything but negative. continues to grow at a healthy rate. the market. Part of what goes on regarding The recent issues regarding the market Before such black swans crashed into Wall product take-up is real behavioural and shake-up of investment banks may have Street, Lamb has made the most of these past cultural dynamics. People like to do things caused much hand wringing at EquiLend three years: “Time flies when you are having the way they have done them before. I as the company is made up of a number of fun, but no-one could have foreseen what understand that as I traded for years. For ‘global financial institutions joined together, has happened in the credit markets in the example people don’t like to give up of real looking for ways to optimise efficiency in the past 18 months. But in regards to securities estate off their screens. They like to use securities finance industry by developing a finance some things have been predictable. the phone. They like to deal with the same standardised and centralised global platform The adoption of technology solutions to people. They get into a comfort zone. It is for trading and operations services.’ These support the growth for the global industry. difficult for any electronic trading platform institutions included Barclays Global The adoption of electronic trading in to penetrate that dynamic. But we are really Investors; Bear, Stearns & Co. Inc.; Credit securities finance as a paradigm that people pleased with the result as we have tried to Suisse; The Goldman Sachs Group, Inc.; J.P. are willing to utilise. Clearly our place in that go about it differently. We have specifically Morgan Chase & Co.; Lehman Brothers; space continues to evolve. We have been up utilised input and feedback only from people Merrill Lynch; Morgan Stanley; Northern and running now for over six years and we who have experience trading.” Trust Corporation; State Street Corporation; are well past the tipping point and at a stage Trade2O has predominantly been used and UBS. where we are evolving into new things and for the US equity market. Though there has Recent market events have changed the doing the old things better than before.” been some interest in Japan, and increasing ownership structure of EquiLend. Lamb takes Time also flies when you remain busy, development in Europe and the UK. Lamb such changes in his stride: “Bear, Merrill and and EquiLend have continued to develop also believes that there are also some Lehman’s are owners in EquiLend. Typically at pace. The roll out of Trade2O, a trading interesting possibilities for basket trading. these matters take some time to be worked services that allows traders to negotiate and Lambs ‘can-do’ attitude continues by out regarding the intricacies of what is agree trade terms for global equities and seeing the securities business through a global actually done with the holdings and anything fixed income securities and process them perspective. Rather than defining it ‘securities that is owned by these companies. In the case straight through to a proprietary system lending’, as is the term of choice in Europe, of Bear Stearns, JPMorgan Securities bought without having to use the telephone or other Lamb sees the industry as ‘securities finance’, that company, so we fully expect our current manual methods. offering possibilities beyond just lending. relationship to be incorporated within their The platform, released in January 2008, Regarding EquiLend’s expansion, Lamb sees existing business. In the case of Merrill, it has already had good feedback, with many of a dichotomy between the equities side and

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the fixed income side of the house. “The fixed of EquiLend’s offering to the marketplace. meet the requirements of the Hong Kong income side of the house on the dealers side EquiLend’s real prowess lies in its trading exchange, giving a real boon for clients has repo and not securities finance, although platform. Lamb explains: “In terms of new wishing to avoid filling out of forms for each essentially the dynamics are pretty much trades done everyday on our platform we see and every transaction common for inter- the same. I think there is some potential for 15-20,000 each and every day, globally in 27 regional transactions. Although EquiLend are EquiLend to add functionality to the fixed markets around the world. That’s roughly not planning to have an office out in Asia any income securities finance side.” USD15-20 billion of new deals done every time soon, training is supplied on a The growth of the securities finance day. That is the lion’s share in what EquiLend regular basis. business has allowed EquiLend to is all about, trading.” differentiate itself within the industry, Lamb remains positive about the future, something that many find it hard to do. but only if people remain at the top of their How has being a trader In Europe, the confusion over the services game, and the quickest way to providing helped you? offered by EquiLend and eSecLending, high-end products is if clients continually an electronic and securities borrowing demand more. “In regards to competitiveness Obviously being a trader i and lending agent, was often down to and the global landscape, I hope that clients, understood what i needed to do to the similarities in phonetics, rather than institutions, dealers, custodians, and hedge trade. in terms of any sort of system products. However at the turn of the century funds continue to be even more discerning design i can at least consult on there were several dot-com offerings that and more demanding of their service some of those things and ask the sprung from the securities finance industry, providers in order that the providers offer developers questions before we put EquiLend and eSecLending included. Some solutions like ours that are global, 24/7, and export to the trading community. survived, others did not, however all got enable the client to achieve a lot of efficiency also as a trader i think that you lumped together into the same basket. as a result. There are too many disparate need to be able to make decisions “People rarely paid attention to what it solutions out there in my view.” very quickly and take in as much exactly each company were offering, instead Does this mean that people are failing to information as you possibly can making the assumption that we were all was demand enough from their service providers? in order to make a very quick and offering the same thing. eSecLending is a “Historically there has been a tendency for educated decision and then move on lender, period. Their lending style makes people to be accepting of less.” to the next thing. i think those sorts use of an auction platform. It is as simple as On a global perspective, Lamb sees of things have helped me in this role that,” states Lamb. “EquiLend is a consortium great promise in the now almost emerged and hopefully they will continue to that caters to lenders and borrowers. Because markets. “I am very excited by the dynamics help me. eSecLending is a lender they are a very in the Asian securities finance marketplace. natural client of EquiLend and I hope that EquiLend has always had clients in Japan. they will a very big client some day.” We have always had securities lent and Europe holds a continued borrowed on our platforms from the Asian misrepresentation of EquiLend, often markets.” EquiLend has also made inroads describing it as an auction platform. into the Australian market, and as of last year EquiLend does indeed offer auction EquiLend offered post-trade services and are functionality in the shape of AuctionPort, hoping to offer trading services, if not by the a browser-based portfolio auction service end of this year then by early 2009. that allows the lender to host an auction of Similarly there are lots of opportunities in a securities portfolio. However this auction Taiwan, India, Korea, Hong Kong. EquiLend’s functionality represents less than 1% in terms trade and electronic confirmation services

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GSL 16-35 BR to DC.indd 18 26/9/08 16:42:09 lEndEr PrOfilE Dan Kiefer GSL speaks to Dan Kiefer of the California Public Employees’ Retirement System (CalPERS) about the value of auctions and why beneficial owners should be able to retain their right to vote proxies while securities are out on loan.

opportunities arise, they are analysed on a case-by-case basis. We work with our agents and utilize the auction to gather information and determine which, if any, route to market is most appropriate. CalPERS was the founding client for eSecLending, taking part in their inaugural auction in October 2000.

What attracted you to the auction model and how successful has it been for you? After spending time evaluating the securities lending business, the inefficiencies in the market became clear to us at CalPERS. Following a review of our route to market options available at the time, we determined that the best way to optimize our lendable assets would be to offer them directly to the borrower community for exclusive access via a blind competitive auction. In 2000, we co- developed an auction program based upon our specific needs and objectives. The result was a product that offers CalPERS a lending solution other than the traditional custodial or other third-party structure. Through our auction based platform, we have obtained greater transparency and control over our lending activities while achieving significantly higher returns; the auction model has Can you tell me how you got involved model was developed. Our first auction, facilitated this growth without comprising in the world of securities lending? which was actually conducted telephonically, our risk parameters. In August of 1993 I came to CalPERS as was a tremendous success. The model has been extremely successful a research analyst in the fixed income for CalPERS and our approach and group. In 1999, after spending several years As of April 30, 2008 CalPERS philosophy has not changed. Today, we are managing a convertible bond portfolio, I investment portfolio had a market still achieving premium returns and we have took over the securities lending program. value of USD 248.4 billion. What complete transparency into the program for Immediately, I questioned the custodial and proportion of this is lendable at any everything from performance and risk to all traditional agency structure. There was too given time? operational components. Over the last eight much inefficiency and too little transparency; In general, slightly over half of the portfolio is years, CalPERS has auctioned nearly USD 800 I knew there was a better way. With the help lendable at any given time. As new portfolios billion in assets through 30 separate auction of many resources, an on-line blind auction are funded and new securities lending events.

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How do you choose what to auction The credit crunch has raised awareness protecting CalPERS’ interest as a shareholder and what not in regards your among industry participants and in through corporate governance. CalPERS lendable assets? particular the cash collateral reinvestment promotes a highly collaborative effort CalPERS auctions everything. The auction portion of a lending program has become between our Corporate Governance and itself is a great mechanism for price discovery more of a focal point. The need for securities and route to market allocation. It effectively diligent and sophisticated counterparty risk Lending units. The guidelines set by the exploits the inefficiencies of the lending management has also increased given the Corporate Governance group are supported marketplace and we use it as a tool to current market environment and we believe by strong operational procedures and we determine how best to optimize each lending many agents are enhancing their analytics believe that we lead the industry regarding portfolio or market. Through the auction to better understand and monitor perceived best practices for securities lending and we invite bids from both exclusive principal credit risks. All of this has caused beneficial corporate governance. borrowers and agents. We use the results to owners, to place an increased emphasis on make decisions as to which assets are best risk management across both the lending and With all the new technology platforms optimised via an exclusive, and which may cash collateral reinvestment portions of their and trading venues over the last five be better suited to trading on a discretionary programs. years from ICAP iSec to LendEX basis. We want to know where returns are being and Quadriserv, where do you see generated and what risks are taken to achieve the market heading with regards to With discussion still raging about them. I think these types of questions have electronic lending platforms? transparency, what is your view as helped educate the entire industry which in The securities lending industry has come one of the biggest lenders? the end is a good thing. a long way from negotiating rates over The demand for greater transparency and the phone. There has been a tremendous best execution in the securities lending increase in the emergence of electronic market is continually growing. I expect this How do you measure against your trading platforms in the last couple of years. trend to continue in the coming years as peers’ securities lending programs? These platforms have certainly created asset managers look to optimise an objective, While we actively monitor our securities significant efficiencies and increased the level regulatory-friendly and auditable securities lending performance and are mindful of of automation for many participants in the lending program. benchmark returns, we understand each plan securities lending marketplace. is unique. Given CalPERS characteristics, There is still significant room in the market What are your views on the SEC’s the auction platform was most beneficial for further automation and technological initiative in regards to “naked” in determining the most efficient route advancements for operational processing and short selling? to market. It works for us and have been trading. Given the increased focus on best In general I believe that short selling helps pleased with our earnings since moving to execution and transparency, I expect that create pricing efficiency and liquidity in the this platform. we’ll see a more rapid progression towards market. Although the order has expired, if screen based trading and more efficient post it were to be implemented again it would How do you manage your risk/return trade processing in the years to come. benefit the overall securities lending market profile? because it would increase the demand to Comprehensive reporting is key for us. If you could change one thing in borrower securities to comply with the CalPERS keeps a balance between managing the world of securities lending what new rule. In particular, it makes exclusive risk and returns in mind when making would it be? arrangements more attractive because of the investment decisions. To that extent, we Proxy tracking. Beneficial owners should be ease in demonstrating access to the particular have worked with our agents to build able to retain their right to vote proxies while positions. several forms of daily and weekly reports. securities are out on loan. For instance, if Describe how the industry has been These reports enable us to make continued DTC could extend the mechanism for income affected by the credit crunch over the adjustments to our program and keep our tracking to cover proxies it would facilitate an past twelve-months and what has the risk/reward profile in balance. The reports easier balance between corporate governance industry done to respond? are designed to address the risks inherent in and securities lending. While on loan balances have decreased, any securities lending program including: beneficial owners accepting cash as collateral counterparty, operational, reinvestment, and should be enjoying the benefit of record legal/contractual. earnings due to increased spreads on both Our fiduciary responsibilities are balanced intrinsic and reinvestment sides of between enhancing total return through their program. securities lending fee revenue and by

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GSL 16-35 BR to DC.indd 20 26/9/08 16:42:09 COuntry PrOfilEs Coming of age Amid hard times, the securities lending industry in the US has cemented its place within the structure of the financial system and is preparing for strong growth, Joe Corcos reports.

merica is a large place, and in several arenas this size is reflected. A The American consumer sets the barometer for the world economy and New York-based companies still dominate the financial services sector. As well as having the largest equities market and the largest bond market, the US securities lending infrastructure remains heftier and more developed than any other. Therefore any trends and developments in the US market are watched closely by the rest of the world - especially during the current climate of change. The continuing wake of the credit crisis has seen change happen in many areas. Hedge funds, pension funds, banks, prime brokers, regulators and others are all frantically reassessing and re-evaluating their practices. Meanwhile, the securities lending sector, with its ability to inject liquidity and boost price discovery has cemented its vital role in the financial tapestry. The credit crunch has actually highlighted the benefits of sec lending and both lenders and beneficial owners are seeing record earnings as a result of widening of spreads. Volumes have also been more or less maintained throughout the volatility. Elizabeth (Missy) Seidel, senior vice president and head of global relationship management at Brown Brothers Harriman, says: “With recent credit events there have been challenges for all market participants, and securities lending has been able to provide some stability in the capital markets via liquidity.” Many of those in the industry see the Federal Reserve’s decision to create its own securities lending facility as part of its emergency lending programme as a vote of confidence in the function of securities lending. Under the Term Securities Lending Facility (TSLF), the Federal Reserve has

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promised to lend up to USD200 billion of if they have allocated their portfolio in the best and underscore the strength of its ability to Treasury securities to various primary dealers. way among different agents and routes deliver products and invest in its business has Initially the term for these was overnight, but to market. suddenly come back in vogue and is seen to be this was recently extended to a term of 28 days “The more knowledgeable the beneficial a valuable attribute. with the option for further extension. When owner base is and the more the beneficial “Prior to the credit crunch that may have announcing the expansion of the programme, owner is paying attention and challenging been undervalued a bit as we saw more the Fed stated: “The TSLF is intended to agents and asking them questions about boutique providers enter the market who may promote liquidity in the financing markets for performance and risk, the better. Ultimately have been single strategy or single security Treasury and other collateral and thus to foster the more this happens, the better the lenders type players. the functioning of financial markets more and lending agents will get and the more the “I think the pendulum has swung back now to generally.” The fact that the Federal Reserve beneficial owners will receive.” look for a big fortress-like provider and gain has extended this facility, alongside its Primary The lending agents who are slow to latch the comfort from that, that change will be here Dealer Credit Facility rather than just cutting onto this trend will certainly suffer for it. for a while now.” rates is of course evidence of how seriously the Northern Trust’s deputy head of global Whether this is true is debatable. While Federal Reserve regards the current volatility securities lending, Jeff Benner, says: “There’s many clients may indeed appreciate the and lack of liquidity in the market. definitely been a trend for transparency. We’re security of a big player, increasingly some will Of course the practice of securities lending active in communicating with our clients and prefer specialists to optimise their overall is also seeing some gradual change, independent data providers to see how well lending portfolio. some of which is the result of the crunch, our clients have performed versus benchmarks, A further trend, that has risen partly out of some of which is not. As in most sectors, there whether it be the RMA or others.” the need for more risk management, but which is a renewed emphasis on both transparency Seidel says that clients are now choosing has other catalysts as well, is a preference and risk management. Beneficial owners now lending agents using the same criteria as they towards non-cash collateral among borrowers. wish to be more informed of what is occurring would an investment manager. Agents must Historically the US securities lending industry in the lending and cash collateral reinvestment now be able to tailor programmes to specific has always preferred to take US dollars as side of their programmes. While this trend clients’ needs. Increased transparency is “the collateral. This is in contrast to Europe where has been snowballing for the last few years, the future for lending.” non-cash collateral has historically been events of the credit crunch have exacerbated Hand in hand with transparency is a preferred. However currently both regions are it. Seidel adds wryly: “The credit crunch has trend towards greater examination of risk shifting more towards each other’s ethos, with been an enlightening time for many clients in management across the entire spectrum of the US leaning towards non-cash collateral lending. securities lending. Awareness of counterparty and Europe becoming more familiar with cash “The returns have been exceptional, but risk is ever more important and risk relative collateral. Many lenders and agent lenders in clients have also been drawn to potential to return is now a major concern of clients. the US have found that accepting non-cash risks within their programs, particularly on As the complexity of lending has increased, collateral can cut the risk of clients’ overall the reinvestment of cash. The concept of risk lenders have an increased responsibility to collateral exposure. adjusted returns is becoming more provide risk management. Northern Trust’s Benner says: “When we prevalent again.” Another symptom of the evolution look at the assets and liabilities, the assets The result of this is that agent lenders are of securities lending is the desire for the being the collateral and the liabilities being under more pressure than ever before to put in unbundling of services, which is something the loans, the correlation of the two is very good performances. This is a sea change from that has been happening in the US for some positive. If one goes up the other one goes up the early days of the industry. Ten years ago time and is also being replicated worldwide. with it, or if one goes down the other one goes securities lending was more of a back office Increasingly beneficial owners are utilising down with it. function where, on the whole, if lending agents different routes to market and tending to “Taking that as part of the mix of our were making enough to pay custody fees then unbundle from custody. Some do not regard collateral we are trying to optimise the clients were satisfied. Obviously today the this as necessarily beneficial and believe that collateral we are taking so that we actually function of securities lending has evolved, the credit crunch may have slowed the trend. reduce our clients’ VaR.” moving closer to the front office and becoming JP Morgan’s head of business development In the last year, up until 29 August the an alpha-generating tool. for securities lending, Bill Smith, says: “I think amount of US equities being lent against Chris Jaynes, of eSecLending, says: the jury is still out on the long-term value non-cash collateral has risen by almost 29%, “Beneficial owners are paying more attention seen in diversifying your lenders. But I think according to numbers from Data Explorers. to their programme, trying to understand that has been slowed significantly as we’ve The amount of US equities being lent against the returns they’re generating and the risk gone through this turmoil, because this has cash collateral on the other hand has risen by they’re taking to generate those returns. They been a period when knowing that your agent barely two per cent. are taking a greater interest in revealing the has USD125 billion worth of shareholders The recent preponderance towards using performance of their agents and determining equity capital to back up its indemnities non-cash, including equities and debt, has

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Country Profiles

been caused by clients having qualms about the industry will certainly see this substantial reinvesting their cash collateral in the present growth. But one issue that still needs to be climate. Additionally, non-cash collateral is ironed out is the standardisation of messaging attractive to clients who are inclined to us their between the supply and demand sides of the long inventory as collateral, which means that business. Currently there are several platforms they don’t have to convert into cash. available for clients, and as volumes rise, lack Overall, the sec lending industry in the US of standardisation could become an obstacle. and elsewhere is set to expand. The desire to Currently the EquiLend platform is the most borrow securities is growing, though for now widely used in the market. Created in 2000 supply still far outstrips demand. Lenders and the platform has 11 large firms behind it, agents are looking at the much-trumpeted including Barclays, Credit Suisse, Goldman 130/30 strategy to be a major driver of growth Sachs, State Street, Northern Trust and in the future. However, in 2008, despite all the Morgan Stanley. It touts itself as being a full hype, 130/30 funds did not grow significantly. solution, encompassing front, middle and back But many are predicting that from next office functions. year we will see many former long only Seidel says: “I do think that there is a real institutional asset managers use the strategy. need for more standardisation, particularly This is good news for lending agents, as it will as supply and complexities increase in the make sense for asset managers to use those market. With more volume, there is a real need agents they work with to lend securities to help for increasing efficiencies with counterparties.

Elizabeth Seidel - senior vice president and head of them borrow in order to establish long short We’ve seen some great progress with the likes global relationship management, Brown Brothers portfolios. Consequently many agents are now of an EquiLend, and that’s a real need going Harriman busily shaping their products to comply with forward to ensure that we create efficiencies such strategies. and standardisation between the supply and “We’re going to Seidel predicts of 130/30: “We’re going to see demand side.” some activity there [130/30]. It’s been more of The issue of a standardised platform may be see some activity a challenging market for these funds to take solved in the near or more likely, the distant, off lately. But as these funds do expand, we will future. But what is more important is that the there [130/30]. It’s likely see some increased opportunities in the securities lending industry has come through lending market with the introduction of the the credit crunch not only intact, but positively been more of a short side of that equation.” vindicated as a vital component of the wider Obviously any strategy that involves hedging financial machine. Now the industry is gearing challenging market strategy can only be a boost to securities up to process the higher volumes that are lending. Thus the expanding uptake in almost certainly over the horizon. And the for these funds to quantitative strategies and synthetic vehicles middle-men are poised to reap the fees that will also have an effect. will come with that volume. Let the lending take off lately. But Northern Trust’s Benner says: “Long run, begin and the good times roll. we’re very bullish on the long-short strategies as these funds do to continue. I think 130/30 took off in 2008, but I think they’re going to come back as the expand, we will likely quantitative approach gets better performance. “We’re expecting 130/30 to grow, we’re see some increased building our 130/30 capabilities in being able to service those clients from the custodial opportunities in the and fund administration standpoint. We are definitely looking at 130/30 as an opportunity lending market with going into 2009 and beyond.” There is no doubt that the securities lending the introduction of industry as a whole is preparing itself for growth. Once the liquidity issues in the market the short side of that sort themselves out – as they must eventually – firms’ balance sheets increase, cost of funds equation.” decrease and the current de-leveraging ends,

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GSL 16-35 BR to DC.indd 24 26/9/08 16:43:53 MarkWeeksGSL203x267.pdf 8/29/08 2:00:03 PM

C

M

Y

CM

MY

CY

CMY

K Country Profiles

US equities lent: non cash vs cash

80, 000.00 560,000.00

70, 000.00 540, 000.00 USD Millions USD Millions 60, 000.00 520, 000.00 50, 000.00 500, 000.00

40, 000.00 480, 000.00

30, 000.00 460, 000.00

20, 000.00 440, 000.00

10, 000.00 While lending against cash, traditionally preferred in the us, is still the 420, 000.00 favoured way to operate in the us, lending against non-cash collateral is growing. 0.00

8/5/08 5/6/08 3/7/08 29/8/07 26/9/07 17/1/08 14/2/08 14/2/08 10/4/08 31/7/08 28/8/08 24/10/07 21/11/07 19/12/07 Date

What are the largest challenges - fiscally, by the big prime brokers - all of whom are market or otherwise - facing the securities still operating. The situations developing lending industry? with Lehman and Merrill should not change In my experience, the industry operates quite things much. smoothly. The biggest problems seem to crop up in relation to changes in regulation Is the range of different kinds of (i.e. dealing with the Securities Exchange collateral considered acceptable, Commission (SEC) emergency order this expanding? summer) and the relative lack of documentation No. If anything lenders are pulling back and formal checks and balances covering and requiring cash or treasuries only. intermediate lending firms in the lending chain. The one context where I see broader My experience is that the market operates collateral accepted is in the arranged short informally based in large part on relationships/ lending and global netting products used contacts. by prime brokers to extend more credit to customers. Even there, dealers have Penson’s senior vice president Are more clients asking to unbundle the tightened up collateral requirements since Andrew Koslow gives his views lending function from custody? the credit crunch, including, for example, on the industry Not in my experience. disallowing substitution of collateral without consent. Does stock lending add liquidity and Is there a need for standardisation in transparency in the wake of the credit securities lending platforms? Is it a Do you expect the uptake of the 130/30 crunch? practical possibility? strategy to increase stock lending? Based on the apparent importance to Based on my experience there is no such Yes - if the “arranged short” product prime brokers with whom our clients a need. The market seems to operate is considered to be securities lending are negotiating documentation of re- quite smoothly. I do think that it would be (which it should be - but it could also be hypothecation rights for derivatives possible to standardise, however given that distinguished since the lending transaction collateral and of being able to access not the structure, in its current form, seems to is inextricably linked to the long side, only margined securities but also fully-paid work smoothly, I don’t know why it would be managed portfolio securing the stock loan). securities, it seems as though the lending worthwhile to do so. I am not aware of many market is robust and a very important failures or problems in the transactions. source of revenue for broker-dealers - which would imply that the practice What effect is increasing consolidation is adding liquidity to the market. My having on the industry? experience is that prime brokers are even I don’t have the impression that the biggest more focused on this revenue source post- consolidation to affect big players in the credit crunch (i.e., summer of 2007). industry (ie the Bear Stearns-JP Morgan I don’t know of ways in which stock merger) has affected the industry much at all. lending adds transparency. My impression is that the industry is dominated

26 | GSL

GSL 16-35 BR to DC.indd 26 26/9/08 16:46:41 Country Profiles Bring it on Changes in regulation and tax laws have allowed Canada’s securities lending market to grow significantly, writes Catherine Kemp

The Canadian securities lending and “The regulators had a clear view of the Canadian market place, that was a key event borrowing market has grown considerably industry and the phenomenal track record in 2001,” says Fieldhouse. “But it wasn’t a over the last seven years, with approximately it had had over the previous decades,” says shotgun start. There were a few clients that USD1.1 trillion dollars available to lend, Mark Fieldhouse, head of technical sales in came on board initially and then gradually according to Performance Explorer. the Americas at RBC Dexia. “They realised more and more funds moved over in the last Four regulatory and tax changes opened that there was no reason not to allow mutual three to four years. These recent entries have up the market to new lending opportunities. funds to participate and that the funds were really pushed growth.” In 2001 mutual funds were given the right essentially hampered by not being allowed This caution is characteristic of Canada’s to lend securities; in 2005 the 30% cap on to participate.” securities lending and borrowing market. investing on foreign markets was lifted; The decision to allow mutual funds to lend While the decision to allow mutual funds and in 2007 the prescribed market rule was securities boosted the market place as many to lend is now widely considered a positive decoupled from securities lending and the took advantage of the additional revenue to step, there were debates about the effect of cross boarding withholding tax was removed. be generated from lending assets. At the end allowing mutual funds to lend. James Slater, This has introduced cash collateral into of August 2008, 35% of securities available senior vice president of capital markets at the market, increased volumes of available for loan belonged to Canadian mutual CIBC Mellon says: “The vast majority of our lendable securities - both Canadian and fund companies, according to Performance mutual fund clients now lend their securities. foreign origin - and increased lending Explorer. This represents a pool of USD381 Initially market participants thought that opportunities in other markets. billion, with USD55 billion on loan, which the additional supply would exert downward However, the opening up of the market represents a 14% utilisation rate. (The pressure on fees. This has not been the has been a slow and discursive process, and Performance Explorer universe is believed to case. Several factors have helped to mitigate market participants have been cautious about represent around 90% of the lending activity dilution of returns, including the growth expansion. In 2001, a movement by Canadian in the market place, with all large lending demand for securities by hedge funds, and lending institutions working with mutual agents submitting their data.) However, it the increasing allocation to foreign markets funds in lobbying regulators prompted a took a few years for funds to have an impact. among Canadian institutional investors.” regulation change to allow mutual funds “The lending of mutual funds put well The removal of the 30% cap on tax-assisted to lend securities. over hundreds of billions of assets into the savings and pension plans investment in

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Canadian Securities timeline

2007 the prescribed market rule was decoupled from securities lending, which ensured that Canadian pension plans were not only able to invest in foreign markets but lend in them as well.

Bill C-28 was passed in December 2007 and eliminated the withholding tax on fees or interest on cross-border loans against cash-collateral.

2005 the 30% cap on tax-assisted savings and pension plans investment in foreign markets was lifted

2001 in 2001 mutual funds were given the right to lend securities

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foreign markets in 2005 has allowed pension In the Tax Act the rules around securities threshold for what people are willing to pay. funds to make much larger investments in lending before 2007 stated that for a security Slater explains that while many larger foreign assets, including access to the Asian to receive favourable tax treatment in a pension plans and retail investors had markets. “It’s becoming more important for securities lending transaction, it must be a enjoyed a greater exposure to global markets securities lending participants in Canada to qualified security - most importantly, it had through the use of derivatives, the regulatory combine their local knowledge with global to be listed on a prescribed stock exchange. change has meant that these more expensive access as pension funds look for more supply This list did not include most emerging positions have been unwound and have of international stocks as well as finding markets, which inhibited growth. Canadian been replaced by direct investment which value from lending out their international agent lenders lobbied the finance department has expanded the range of securities lending positions,” says Richard Mills, division in Canada to amend the legislation and in opportunities. “Increased global allocations director, at Macquarie Securities in 2007 the finance minister announced that has made more assets available to borrowers North America since these positions had previously been The rule change has caused the market to Lending into foreign held in derivatives,” he says. “These additional become far less Canada-centred as a result, assets have brought greater diversity in our explains Fieldhouse. “It has increased the markets is driving lending pool and new opportunities to breadth of lendable securities considerably. securities lending profits enhance returns for our clients. With more Before this rule change, growth in the diversity comes greater capacity to satisfy our Canadian market was centred on buying and generally, because there borrowers globally, and greater access to a selling Canadian equities. There was really a is less supply in these broader pool of securities.” critical mass with regards to assets available to Terry Bourne, CEO of Penson Financial lend, so by allowing diversification there has markets and so it creates Services Canada, says they are also seeing been an increase not only in holdings in large a high price threshold growth in this market. “At this time we are cap stocks in some of the more established certainly seeing an increase in volume and markets.” for what what people are interest in these markets. With our firm this However, market participants are cautious willing to pay has impacted our trade desk more so then about expansion into these markets. “There our lending desk. We have seen a growing wasn’t an immediate change,” says Slater, interest in global lending and are working “people didn’t just jump into foreign markets. the prescribed market requirement was to be with a clearing customer today to help put Pension plans and other institutional decoupled from the securities lending rules. this in place for their firm.” investors very carefully structure their This has meant that the ‘qualified securities’ The commodities boom has also bolstered portfolios, typically based on some form of that market participants are allowed to lend the lending market, says Slater. “Demand for asset liability profile that drives an investment has been extended to include those traded on resources has been on the rise and Canada strategy. So it took a while for plan sponsors any exchange anywhere in the world. is one of the richest countries in the world to do their analysis. Over the last couple of “There was a restriction in certain markets in terms of natural resources. This has really years we have seen a gradual shift of assets, so that if you did a lending transaction it fuelled our capital markets by pushing up where clients are starting to reduce some of would be classified as a sale and repurchase,” asset values and resulted in an influx of new their Canadian equity allocations, increasing says Fieldhouse, “which obviously created players coming into the market. This has also foreign bond and equity as they go into some restrictions on what our clients could meant that the Canadian dollar has done emerging markets.” do. The rule change has also opened up remarkably well against the US dollar, and Fieldhouse adds that it has taken a long lending opportunities in emerging markets, means that pension funds and institutional time for the large institutional investors which our Canadian clients hadn’t been investors see current market conditions as to evolve their asset allocations to take exposed to before. Emerging markets are favourable for diversification out of Canada. advantage of the opportunities presented by where a lot of the growth is coming from and That’s very positive for us from a securities the change in regulation, but RBC Dexia has is where a lot of the big revenue opportunities lending perspective because of the lending seen a gradual movement to a steady increase come from.” opportunities this creates.” in the allocation to non-North American According to Fieldhouse, RBC Dexia’s Rising commodity demand has also lead markets, with a proportion heading to clients’ returns from lending in emerging to increased attention to the Canadian emerging markets. markets are much higher in comparison equities market from internationally based The changing of the qualified security issue to their Canadian holdings. Lending into funds. Mills explains that it’s becoming more in December 2007 ensured that Canadian foreign markets is driving securities lending common to be dealing with a European pension plans were not only able to invest profits generally, because there is less supply or Asian based fund that is looking for in foreign markets but lend in them as well. in these markets and so it creates a high price exposure to Canada. The Canadian securities

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lending market has become more focused Mellon anticipates cash balances to increase in the coming years.” on servicing these clients, offering these as greater liquidity returns. This has allowed the demand side of international funds local expertise and access. The growth of the hedge fund market the business in Canada to keep pace with Bill C-28 was passed in December 2007 has also dramatically increased demand. the growth from mutual funds joining the and eliminated the withholding tax on fees Canadian hedge fund managers now control lending programmes. It has also led to new or interest on cross-border loans against over CD37 billion in assets, according global entrants to the Canadian securities cash-collateral. The rule change has meant to Investor Economics in Toronto. This lending landscape as well as an offering of that the Canadian market has gone from zero represents only 5% of the overall retail more sophisticated products. “Funds are use of cash as collateral to an estimated 20% mutual fund market - but as Slater explains, looking for their securities finance teams to use of cash as collateral in a year and a half. “pure hedge funds are only a part of provide a wide array of solutions, whether And means that it is becoming increasingly the story”. physical or synthetic” says Mills. “Firms that like other securities lending markets globally, “Increasingly long-only managers and can offer flexibility in collateral continue to like the US where cash accounts for around institutional investors are driving additional have success. Canadian equity finance desks 60% of collateral and in Europe, where cash demand for borrowing as they wade into are becoming one-stop shops leveraging their collateral is increasingly being used. alternative strategies. Canadian retail mutual local knowledge with global access.” “The rule change has opened up additional funds are now permitted to hold up to 20% The changes in regulation and tax avenues for collateralising transactions,” says of the value of a fund in short-positions, with law have given the market considerable Slater. “We expect this increase in business regulatory approval. In two years this hybrid room for expansion, and greater lending to carry on through this year, into next year, segment of the market has grown from opportunities will drive volumes in the and to continue to build. It has also driven market. As institutional interest in the hedge an increase in activity from global borrowers It’s becoming more fund market grows and lenders increase their and given lenders maximum flexibility in parameters, Canadian securities lending meeting the stringent demands of borrowers. important for securities can only grow in size and become more Along with an increase in tri-party collateral, lending participants in competitive internationally. the Canadian market is becoming more consistent with global trends in composition.” Canada to combine their Canada has abroad range of government local knowledge with backed fixed-income securities that are widely used as collateral in transactions. There is also global access as pension a trend for using equities as collateral. This funds look for more combined with cash collateral capabilities makes Canada very attractive for borrowers. supply of international “Allowing for greater use of cash as stocks as well as finding collateral builds on the flexibility of clients to cover borrower requirements,” says value from lending Fieldhouse, “which makes the market that out their international much more attractive for borrowers and ensures that securities are that much more positions likely to be borrowed.” Market participants consider that cross- around CAD7 billion in assets to CAD15 border lending against cash collateral will billion, according to Investor continue to grow. Beneficial owners are Economics research. becoming more likely to accept cash on “Furthermore, Canadian pension a domestic or cross boarder basis as they funds now hold around CAD20 billion in begin to recognise the benefits of enhanced alternative asset classes, representing around returns, with minimum risk, earned from two per cent of their overall holdings, reinvestment of collateral in a well according to CPF Investment Directory. This managed program. is a small allocation but the figure is growing However, Slater explains that growth has as most funds above the CAD 1 billion asset been hampered by the credit crunch as the threshold are beginning to allocate to these broker-dealer community is less likely to investments. In fact, some of our custody collateralise loans against cash than other clients have stated a goal of achieving up to less expensive forms of collateral. But CIBC 20% of their assets in alternative investments

30 | GSL

GSL 16-35 BR to DC.indd 30 26/9/08 16:46:42 Country Profiles At the starting line The Czech Republic, Poland and Hungary are yet to get off the blocks when it comes to securities lending despite interest, writes Ben Roberts For out-and-out trading, the Czech Republic, that securities lending can bring even more which were formerly intended not to be Hungary and Poland are three markets transactions to the market,” she says. implemented until the central depository was growing, diversifying and deepening, with The Czech Republic, on first analysis, created. This way trade clearing will become subtle differences between them and other looks to have many of the right credentials. more effective for the participants”. countries. For lending and borrowing, It has a central securities depository called Karban believes the creation of a new however, all three remain “at the starting UNIVYC, the chief settlement body in the depository will be vital as the fulcrum for line”, according to Tomas Karban, an analyst country that maintains a pool of securities, generating interest in lending and borrowing, at Wood & Company, a trading and research including those for lending, with an a business that Wood & Company is keen to firm. This view is common among many increasing divergence of assets. But Karban develop. “There is no one institution which active in the region, from banks such as explains that the pool is small and a capacity would put these parties together: someone Raiffeisen and Erste Bank that have developed to lending securities “is not interesting for who would organise, take these stocks from networks of custodial and security services the lenders”. He adds that the conditions are the fund, convince funds this is interesting, in the region, to local players such as the not really favourable for mutual and pension convince politicians that they should make Czech bank CSOB, to the stock exchanges. funds; they have not discovered “the beauty changes in their local legislation and bring Regulation, legal issues, supply, market of lending and borrowing, as these markets in customers to borrow the shares,” he says. awareness and infrastructural issues combine were growing fairly rapidly so the margins “There are clients looking to borrow the in different ways to hinder the development in borrowing and lending are so small they shares, but they don’t know how much it will of a liquid economy for lending and don’t care”. These “conditions” include a cost, where they will borrow them, whom to borrowing that is at all recognisable to the current rule that pension funds cannot lend ask, there is no pool for them.” He adds that rest of Europe and the US. their stock. “There are limits, for instance if it is the international custodians that hold Alexander Schleifer, head of custody at they are buying the shares they cannot sell pools of stock, and the lending agreements Erste Bank, says the stability of the three them below the purchase price. They have to are essentially over the counter. markets has actually prevented many market keep them and sell them higher – they are not Further, securities lending is subsidised by players from thoroughly examining the allowed to make a loss on the trade”. Further, prime brokers in London, and hedge fund benefits of securities lending. He compares securities can only be loaned for 30 days, managers are using prime brokers in these Central and Eastern Europe (CEE) to the according to Ivo Mestanek, spokesperson for financial centres primarily due to a lack of BRIC (Brazil, Russia, India, China) markets, CSOB bank in Prague. “The reason of this contacts in the local market. “You don’t need which have seen such an unprecedented limitation originated from the history of the to inform the stock exchange in Prague about boom this decade that they were encouraged lending and borrowing system. From the very transactions being done in London; I don’t “to look at this topic”. The CEE, by contrast, beginning of the system, the main lenders think that goes to the local market at all. small but steady, is only just opening to used to be funds and lending of funds’ assets These transactions are purely done outside extensive foreign trade and so “there was had been limited by the legislation - 30 the country.” not much liquidity coming in to the market. days. According to latest information from The reliance on foreign brokerage outfits If there was the same boom then they will UNIVYC, there is possibility of changing and with no requirement for the exchange have to deal with that – at the moment there this rule because UNIVYC is open to discuss to be informed means the Czech Republic is progress but all market players look at changing it or cancelling it at all.” stands outside the centre for its own potential lending but no one is running that much There have been stalled plans for the market for securities lending. By contrast, money. The Czech market growing 20-40%, development of a new central depository repo transactions are a lot more common for but now we’re seeing a downturn in the to improve supply and encourage lending entirely local transactions, Karban says. market they may be looking for alternative.” and borrowing. In the latest annual report, Ivo Mestanek at CSOB believes that a Babett Pavlics, director of Raiffeisen’s Helena Cacka, general director of UNIVYC, central security depository will help to financial institutions division, thinks along writes that the plans stopped last year “due improve the current weaknesses of the similar lines. “Pension funds might avoid to the non existence of evaluation of the borrowing and lending system, including security lending because they think ‘oh, the Prague Securities Centre databases”. However, the official change of beneficial ownership markets are going this way, why should we “at the end of the year we will be preparing according to the Czech legislation. The do this?’ But Raiffeisen explains to them modifications in the clearing of securities, success of a new system, he says, depends on

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the shareholders’ readiness to put their shares private, bilateral agreements outside the continues, “if the brokers want to borrow for into it. On a brighter note, he adds that the central security depository, called Keler, short selling they usually don’t know how appetite to be a lender is “steadily increasing. according to Bozso. “Since 2006 pension long they need the security - sometimes one Investors are looking for new means of funds are permitted to lend securities after month, two month. Again, this is something increasing the profit of their assets and this the modification of the Pension Fund Act the pension fund doesn’t like because in its relatively safe possibility can be accepted in but against expectations it did not spurred portfolio evaluation they have to somehow the near future because of the cash collateral the lending market,” she says. “Only the few indicate an end date for the transaction”. provided by the borrower and full biggest pension funds take advantage of She describes the Keler system as inflexible. UNIVYC guarantees.” securities lending as an additional revenue The possible lender must contact Keler to Poland, home of the highly ambitious source, most of them are still cautious. The create a securities pool, she says, “but this is Warsaw Stock Exchange, is beset with volume of lent securities in Hungary is closely what the pension funds don’t like to do - they legislative problems different to the Czech dependent on the actual market situation usually go on a transaction-by-transaction Republic but an equal hindrance to securities and valuation levels. Lending activity slowed basis. So Keler’s system is not working.” lending. There is current confusion as to somewhat recently as a strong negative trend Raiffeisen has developed a unique whether lending securities will entail a 1% persists since July 2007, and at such low answer to the problem. The bank has plans, stamp duty charge for each transaction. valuation levels investors are reluctant to take according to Pavlics, to reinvent itself President Lech Kaczynski is soon to sign an short positions. We expect to see acceleration effectively as a CSD for the region using its amendment to the Financial Act that Karban of the lending market after a rise in central ‘mother’ bank in Vienna as a kind believes will clarify the matter, and says the equities valuations.” of securities hub. The bank’s international security centres are “not of any help - they market contacts will provide a platform don’t care about developing new business There are clients looking for Hungarian pension and investment opportunities they just follow the strict funds to have access to lend and borrow wording of the legislation”. Unlike the Czech to borrow the shares, securities around the world. At the same market, a fully functional CSD ensures that but they don’t know how time, the local contacts in the market will all transactions, including potential short generate and sustain a local appetite for selling from foreign traders, must take place much it will cost, where securities lending. Pavlics reveals that her on the local market. But again, the issue they will borrow them, team has already converting a number of is local appetite for the activity, although pension funds to this line of business. “Local Karban adds that the WSE rarely rests on whom to ask broker-dealers were lacking securities to its laurels. “WSE is very proactive, the most borrow [if they are] lacking transition for the aggressive in the region. It has built up a very compulsory settlement or for short selling. efficient market, it is lending and bringing Pavlics of Raiffeisen, who has headed a So they would call an international bank – in international securities to the market, new financial institutions department since such as JPMorgan – because they could not offering remote membership,” he says, adding January, is wholly critical of the potential find a partner in Hungary. Or they found a that the lending will inevitably begin with structure for securities lending in Hungary. partner in Hungary but these only one or blue chip companies. Firstly, like Poland, there is legislative two transactions. There is a need for such an Hungary has opened up significantly to uncertainty. Pension funds are not sure if institution, such as Raiffeisen Hungary, who foreign investors. Orsolya Bozso of the engaging in securities lending entails the could actually start this teaching/education Budapest Stock Exchange estimates that 80% portfolio manager signing each contract process and we’ve started to get the possible of the listed securities on the exchange are or the pension fund – or both. Even the borrowers on board and tried to establish a foreign owned, the highest proportion in authorities, she says, have no clear idea. At the system whereby these lender could lend.” Europe. She adds that some of the biggest moment “the pension fund must be involved The strength of the plan, she explains, is securities lenders in Hungary have foreign in each transaction because a securities to maintain a ready supply of borrowers and background and they lend securities also lending transaction is usually something that lenders. Hungary, she supposes, could be seen from their foreign funds. Hungarian lenders has to be done very fast. So we have to go to as the bank’s “pilot”. It could be argued that have been working recently to acquire the pension fund and the portfolio manager Raiffeisen itself is a pilot for banks operating international partners and customers she to sign the contract and this is not easy”. as a CSD in a market still developing says, but adds that this process “requires more Secondly, the act says the securities lending sufficient resources for securities lending. time to make its effect felt”. agreement must be concluded for a specific For Ronald Nemec, head of securities However, much of Hungary’s securities term. This means that each loan needs a lending at Erste Bank, the question for lending business exists on the basis of starting date and the end date. However, she each market remains: is securities lending

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needed? “I would say there are hedge funds CZECH MATE: the Prague stock exchange has seen a tempestuous year

looking for securities lending, but maybe 1955 this is a question of which new products are 1905 available.” He says the launch of certificates 1855 such as oil and gold by Erste Bank in 1805 1755 February newly listed on the Budapest Stock 1705 Exchange is an example of the more exotic 1655 assets available. He adds that equity lending 1605 1555 especially gives markets additional liquidity. 1505 Tomas Karban believes the Czech Republic, 1455 Poland and Hungary have great potential 1405 as competitive arenas for lending. Foreign 1355 1305 business will bolster the market, he believes, and local players will have to work hard to 11.9.2007 2.5. 2008 4.6. 2008 8.7. 2008 8.8. 2008 compete using their indigenous knowledge. 12.10.200714.11.200717.12.200724.1. 200826.2. 200831.3. 2008 10.9. 2008 Date But a sound framework needs to be in place first. “I’m very much interested in borrowing and lending because I believe in a bright POLES AXED: the Warsaw stock exchange has seen a similar decline over a year future for it. But we are struggling to bring about legislative changes.” 4250 4000

3750

3500

3250

3000

2750

2500

2250 07-09 07-12 08-03 08-06 08-09 Date

HUNGARIAN CONTRARIANS: the Budapest stock exchange has been steady

30,000.00

25,000.00

20,000.00

15,000.00 Close

10,000.00

5,000.00

0.00

7/4/08 5/5/08 2/6/08 8/9/08 10/9/0724/9/078/10/07 5/11/07 3/12/07 14/1/0828/1/0811/2/0825/2/0810/3/0824/3/08 21/4/08 19/5/08 16/6/0830/6/0814/7/0828/7/0811/8/0825/8/08 22/10/07 19/11/07 17/12/0731/12/07 Date

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GSL 16-35 BR to DC.indd 33 26/9/08 16:46:42 Country Profiles A Prime target for scrutiny Simon Lee, senior vice president, business development, EMEA at eSecLending, analyses the effect of the Opes Prime fall out on transparency in securities lending in Australia.

agreement that Opes Prime was using to it has become clearer now that securities lend client assets to ANZ. This was a version lending should be treated as an investment of the industry standard Australian Master management function. As such, lenders Securities Lending Agreements (‘AMSLA’), should be viewing their choice of provider itself an adaptation of the Master Securities in the same manner, and making decisions Lending Agreement (‘MSLA’) based on the same quantifiable factors, often used globally. summed up as ‘best execution’. While the activities undertaken by Opes Currently, Australian regulators are focused Prime bore only the briefest resemblance to on a disclosure regime that satisfies interest the workings of the global securities lending in securities lending and short selling. It industry, some press reaction ensured that remains to be seen what form this takes and the securities lending market in Australia whether or not the increased disclosure solely was put under the spotlight like never before. focuses on short selling, or is expanded to The situation in Australia quickly drew the take in securities lending activities. Whatever attention of securities lending practitioners the outcome, it is inevitable that the level worldwide. The International Securities of transparency in the Australian market Lending Association noted “the concept of will increase, which the majority of market title transfer is fundamental to securities participants would agree is a good thing for lending and repo markets, as it is critical to the securities lending industry as a whole. Following the collapse of the Australian the ability of the receiver of the securities to stockbroker Opes Prime earlier this year, May give good title to a third saw the conclusion of the Beconwood versus party to whom it may transfer those ANZ Banking Group Australian court case. securities. This ruling will give further Judge Finkelstein confirmed the effectiveness certainty to market participants that of transfer of title to securities lent under securities loans governed by agreements industry standard securities lending such as the Global Master Securities Lending agreements. What began as a story of a Agreement are legally robust.” victim of a turbulent market quickly became Ultimately, securities lending in Australia an extensively reported examination of the has continued in much the same way as it had securities lending industry in Australia, with a before the Opes Prime story broke without specific focus on the form of legal agreement suffering the widespread interruptions that all securities lending transactions that had been predicted. That said, lenders worldwide are conducted. in Australia were compelled to place their The Opes Prime business unravelled at the lending programs under great scrutiny, beginning of the year leaving many private satisfying themselves as to the prudent investors facing substantial losses as ANZ sold management of their programs, the amount off borrowed stock positions to cover cash of transparency being received, the adequacy shortfalls realised through the failure of Opes of their risk management, and whether or Prime’s margin lending business. At the heart not the financial rewards were commensurate of matter was the form of securities lending with all these factors. Through this process,

The views expressed are the views of the author only through the period ended 31 August 2008 and are subject to change based on market and other conditions. The information we provide does not constitute securities lending advice and it should not be relied on as such

34 | GSL inDustry insight Revved up and ready to repo As fears about leveraged access to market post-Asia financial crisis decrease, regulators in Asia ex-Japan are beginning to realise the value of repo in ensuring liquidity. Brian Bollen reports.

The pace might be glacial but there is little doubt amongst market participants that when it comes to the adoption of repo as a financing tool in Asia the landscape is changing. As Ed Gildar, Head of Asian Fixed Income Financing at Citi in Hong Kong, puts it: “There is an increasing acceptance by participants and regulators in many countries throughout the region of the necessity of a functional, well-developed repo market.“ The main players are local commercial banks, local securities houses, and global investment banks. The main driving forces can be broadly sorted into three: one, international banks and investors want to enter and build scale in specific new markets; two, increased awareness of local participants who realise their current model could be greatly enhanced and that Basel 2 has placed greater focus on secured financing; three, the desire of local regulators to have the biggest market in the region. The increase in credit risk globally over the past 12-18 months has resulted in a greater understanding of the value of secured financing relative to unsecured financing, suggests Ed Gildar. Separately, the understanding of the trading and market- making liquidity provided by a liquid repo market has also been on the rise. “There has been an evolution away from restricting repo to prohibit both short-selling and leveraged investment into fixed income markets,” he adds. “This is due, in part, to a growing realisation that the value provided by liquid repo markets cannot be ignored, and cannot be recreated in any other way. Targeted regulations to control markets have proven more effective, in comparison to prohibiting

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a broadly valuable tool to control against Markets Association survey on repo in least recognise the concept. And increased certain uses of it.” Europe hit the streets during the preparation international participation is needed to grow When it comes to discussion of the big of this article. it. We are here for the longer term and will issues affecting the market, the answers sound Asia, some people argue, has a better be glad to work with local institutions and reassuringly familiar. The big players, like understanding of the risks and benefits of regulators so that we can all take advantage Citi, would like to see a harmonisation of, or repo markets compared to Europe when it of the huge opportunities that I believe even better the removal of, any withholding was at a similar stage in its development. exist here. No market will become a major taxes on repo transactions. The provision Others recognise the need for growth in Asia financial centre unless it has liquid equity of financing, and the increased liquidity because of the experience they have had in and bond markets, and you need a liquid afforded by repo markets should warrant Europe. However, Europe was at a similar repo market for the latter; people won’t buy a simplification, or ideally an exemption, stage to Asia nearly 20 years ago, and there government bonds unless they can fund of incremental withholding taxes on remains a significant amount of work to them, and you need to be able to fund in repo transactions, runs the argument. A do, to get the market to an as equally well- order to invest. We believe that in three to complicated WHT regime will likely limit developed position as Europe is today. four years Korea, China and India could or eliminate the use of repo, resulting “It is a multicurrency, multi-jurisdictional, have liquid, actively traded bond markets, in significant inefficiency and economic multi-cultural region with different rules for with regular corporate as well as government loss, while the incremental tax revenue on onshore and offshore participants,” adds Alex issuance. Once you have a liquid market, repo transactions is likely to be small in Blanchard, head of Asian Money Markets people can trade in and out of positions, and comparison. at Goldman Sachs in Tokyo. And in looking price discovery becomes easier. Everyone They would also like to see a strong legal forward to the expansion of business in non- benefits. We build our franchise, governments framework, which includes: Japan Asia as well as further growth in Japan can sell their bonds to a wider range of the agreement by all participants to use itself, he adds: buyers, and local taxpayers benefit as the standardised documentation; “That won’t change in the foreseeable government debt burden reduces because the acceptance within the local legal framework future, but we think there is a business case interest rates it must pay drop in response of the need to allow a true title transfer of in non-Japan Asia and we will be looking to to the greater demand. There will be some repo collateral, and the ability to use that build repo in the region, even though it won’t cynicism given the difficulties that the more collateral as needed and as specified within be easy due to the difficulty in generating developed economies have found themselves the repo documentation; cross –border economies of scale.” in lately, but there couldn’t be a better time to participation in repo markets. Also on So, what happens next? Again, the answer promote liquidty. Without a liquid funding the wish list is a level-playing field for is very familiar, and has been said of many market in the US, things could have been participation by foreign institutions in the other products and services over the decades: very much worse. If anything, the repo story local repo markets. education, dialogue and support. Continued is even more compelling today than it was a Major trends identified by undertaking education of the market participants, year ago.” a straw pool of market participants include continued dialogue with the market In the meantime, at the risk of over- an increasing awareness of repo as a useful regulators, and continued support for the generalising, the appetite for risk, the funding tool for liquidity management, evolution of the repo markets. eagerness to take a bit of a gamble, is and the use of repo by regional financial What needs to be done to take the market notoriously greater in Asia than in some institutions using repo as part of their forward? “Promoting a deeper understanding other parts of the world. It is safe to say funding toolkit. that the more liquidity sources an institution that compared to elsewhere, more market Liquidity is singled out as a major driving has, the better they are positioned to participants are comfortable taking moderate force, both for funding and trading liquidity. withstand market turmoil and disruption,” economic risks within a near-term time “Regulators are emphasising more strongly says Ed Gildar. “Luckily, Asia was not the horizon. “However, there is little appetite for the funding diversity of financial institutions,” centre of the current market disruption, taking any tax or regulatory risks, and also says Ed Gildar. “At the same time, everyone so it has avoided any major impact. The a lower level of appetite for economic risks is increasingly aware of the value of trading authorities will certainly learn from the beyond a certain time horizon, or beyond a liquidity to the overall stability of financial troubles of other financial institutions, and certain value,” adds Ed Gildar. markets. Repo in Asia is a work in progress, should continue to support the development That can affect the market by slowing moving in the right direction, at a reasonable of repo markets to allow a stronger, more down the development of new markets or pace, but with a substantial amount of work diversified funding structure for Asian other innovation, because most innovation still left to do.” institutions.” requires development in the absence of Comparing the landscape and market Alex Blanchard adds: “We need to precise regulation, with the regulation with Europe can be an interesting exercise, see domestic institutions recognise the coming later. A resistance to taking regulatory especially as the latest International Capital opportunities that repo presents, or at risks when considering new products or uses

36 | GSL

GSL 16-35 BR to DC.indd 36 26/9/08 17:27:55 Industry InsIght

of products, will inevitably lead to fewer, or at macroeconomic framework of a country least slower, incremental innovations. There from its currency to its fiscal position. are, however, two sides to that debate, as not Rightly so, governments are concerned all innovation is necessarily proven to be about the impact from trading activities on useful. more serious matters of fiscal budgets and Spreads have increased in Asia in line economic growth. However by working with the overall tightening of credit in the through the issues, and identifying the value last 12-18 months, comments Ed Gildar; of trading activities and funding diversity, profitability follows spreads in developed and more precisely targeting the regulations markets. “However, the local markets for repo to restrict excessive behaviors, there is an are not developed to the stage where we are increased understanding of the value of repo focusing on incremental profit growth, but as a liquidity tool.” more about development of a robust The perception that repo itself is problematic has receded completely, contends Ed Gildar. “The regulators have moved well beyond that and are focused on maximising the value of repo, while ensuring a framework for controlling against any excessive or unwanted effects of its use. I think during and immediately following the Asian Crisis 10 years ago, there was a suspicion of leveraged access to markets, and short-selling which was extended to include repo financing, since repo financing can be used in these ways. In contrast to equity markets, where there is more acceptance of short-selling, and the impact is on a single stock, fixed-income markets impact the entire

“I think during and immediately following the Asian Crisis 10 years ago, there was a suspicion of leveraged access to markets, and short-selling which was extended to include repo financing, since repo financing can be used in these ways. In contrast to equity markets, where there is more acceptance of short-selling, and the impact is on a single stock, fixed-income markets impact the entire macroeconomic framework of a country from its currency to its fiscal position.” Ed Gildar Head of Asian Fixed Income Financing at Citi in Hong Kong

GSL | 37

GSL 16-35 BR to DC.indd 37 26/9/08 17:27:55 Analyse Asia with Dominick Falco Dominick Falco, BNY Mellon’s managing director, broker-dealer services in Asia, who carves out a living selling collateral management and valuation services to potential users, describes himself as a fox among the chickens, referring to his own previous life as a user at Morgan Stanley and the late, lamented NatWest Markets. “The fashion for more aggressive collateral management in Asia has taken off completely,” he comments. “Historically, the region never had to pay too much attention to it, because the market was relatively small. Now they want to get a similar level of efficiency as you will see in the US and Europe; they want to grow repo and other collateral transactions quickly, because of the cost of cash. Demand is being pushed by assets on the balance sheet, and pulled by the desire to have new, even unique, investors. The primary issue is one of education, explaining to potential investors why they should move into collateralised transactions rather than non-collateralised, something that most people would regard as a ‘no-brainer’. But when some people look at repo, instead of thinking in very simple terms – you are lending, do you want collateral or not? – their view is fixated on the differences between repo and other forms of financing. They are like deer caught in the headlights; they simply don’t understand that a new level of comfort is being offered to them. It’s not that they are suspicious, although I applaud healthy scepticism of anything of which you’re uncertain, it is just that more education is needed.” “By contrast, dealers understand that if they are putting out collateral against their own borrowing then it is better for them and their liquidity ratios (the ratio of secured borrowings to unsecured borrowings). The higher the percentage of your borrowings are secured, the better your liquidity ratio. With most dealers, to the extent that you can repo, you can borrow cheaper than something that is not repo’d; if you can use something to generate cash, it becomes self-funding. The discipline of working in secured financing environment should make it beneficial from a cost/risk standpoint.” He says there are two main way to educate potential users. One is to meeting potential customers on a one-to-one basis. The other is to hold introductory seminars, and to participate in industry seminars. “The tide is turning,” he says, reaching for another metaphor to encapsulate38 | GSL the trend. “But like anything, it takes time.“

GSL 16-35 BR to DC.indd 38 26/9/08 17:27:55 Industry InsIght Three way street A flexible collateral profile has become a key selling point for those in the middle of tri-party deals, writes Anthony Harrington

The credit crunch has sharpened the way In 2006, BNY Mellon started looking at to provide, particularly with respect to organisations of all kinds approach risk providing services to derivatives deals. “Here equities, since it can measure and generate management and their use of collateral. we become the outsourcing receiving centre actions on that exposure. “Some 80% of the When liquidity is tight, there is considerable making margin calls on behalf of our clients, world’s collateral in the derivatives space is pressure on assets, and both borrowers and who are typically buy-side players,” cash, and if there is a margin call of a certain lenders look to maximise the potential worth he says. percentage per million, that will generally be of their portfolios’ contents. This has put When the bank’s systems and capabilities a cash call; or if it is coverable by securities, collateral management very much centre handle the collateral management, the they will be sovereign securities. We can make stage. This is good news for the tri-party buy-side is able to move from being reactive calls on behalf of our client against the dealer. agents and just about anyone else in the to pro-active. “We can help them with We agree the numbers, provide the custody collateral management game. independent valuations of the swaps and if necessary and any clearing that is required Mark Higgins, head of sales and collateral. This means that if you are a small around the collateral,” he explains. marketing and with responsibility for player, you can operate on an equal footing In the current climate, an agent is business development EMEA at BNY Mellon, with a player who has 4,000 agreements.” particularly suited to these transactions for has over 10 years’ experience in collateral. When a pension fund or an investment those receiving securities as collateral wanting “Our traditional product at Bank of New fund enters into a securities loan or an to take advantage of rehypothecation (the York was tri-party repo, but an expanding interest rate swap with a bank or other assignment of the securities to the lender). part of our business is now the provision of institution, the trade creates exposures that They are going to want to onward lend the outsourcing services for bi-lateral parties,” need to be margined. This is the kind of securities and generate payment in return. he says. service that BNY Mellon is ideally placed However, the bi-lateral world is generally a

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Industry InsIght

simpler affair for an agent to manage, with lenders currently accept non-cash collateral of swapping out part of the collateral that one line of cash being matched to one line only. But where lenders are prepared to a counterparty might want to trade. The of securities. accept various forms of cash and non cash system will automatically move a counter- “We see a pool of assets which the agent collateral with proper margining, they are balancing package of securities into the lender wants to lend out at a fee,” says best positioned to capitalise on the increased collateral taker’s account that fulfils the terms Do you have Higgins. “So institution A will lend a dealer returns that the market is offering.” of the collateral agreement specified in the a range of securities that the dealer wants “The credit spreads have been enormous bi-lateral contract as a substitute for the and will take collateral in return that will be as a result of the crunch, so lenders taking securities removed for trading and settlement either equities or more bonds. The dealer cash collateral and investing are making purposes. an eye will provide a slight excess of collateral above average returns,” says Poikonen. It “The important fact is that neither over the loan. Margins and margin calls should be done in a prudent fashion, with a counterparty needs to contact us to make this have become a very critical area, and there sound, conservative investment programme arrangement. Provided there is a sufficient are lots of very busy people making and behind it. eSecLending has a team of people volume of securities in the collateral giver’s for value? receiving margin calls in the derivatives who are dedicated solely to risk management portfolio to do the substitution, the system space right now because of market volatility. as a value added service to the client. will automatically detect and release the Dealer downgrades, too, will result in “One of the paradoxes of this market securities the counterparty wants to sell, additional margin calls, all of which needs is that although beneficial owners, broker and move just the right type and amount of to be managed. That creates real service dealers, and agents are strained more than securities from this counterparty’s portfolio opportunities for us.” ever before, they have the opportunity to into the collateral taker’s account,” he says. In Twenty years ago, trading was a very realise record earnings from their securities the unlikely event that the collateral giver did gentlemanly activity and margins were not lending activities and collateral management not have sufficient securities in its portfolio necessarily adhered to, he explains. But – provided that these activities are prudently to cover the substitution, the system would You can now use and re-use collateral with today regulation and risk mitigation are the managed,” he comments. automatically flag this as a problem, inform full and immediate substitution capabilities. watchwords and “the mechanics of collateral Olivier Grimonpont, director and head the client and would not release the security might not be that different, but the controls of collateral services at Euroclear, says due used as collateral. Our reduced tariffs also mean the lowest around collateral have tightened very to the number of different transactions “At this point, we would be phoning the prices ever. Use your eye for value and get that require exposure management there is collateral giver to tell them that they need significantly”. so much more for so much less. Christopher Poikonen, managing scope for Euroclear to expand its tri-party to bring new eligible securities into their director and global head of trading at support activities beyond tri-party repo. account if they want to press ahead and eSecLending, the independent third party For example, when two counterparties to a trade securities already used as collateral,” he Triparty services for securities collateral. securities lending manager, says there is a securities lending transaction have agreed comments. It is key here that when securities High on value, low on cost. very strong market for beneficial owners that that they want an agent involved to manage need to be substituted, the collateral taker’s have a flexible collateral profile. “Collateral the collateral passing between them “we then exposure is never unsecured. flexibility has become increasingly important take the rules and agreements that constitute Similarly, Euroclear can automatically and the most successful beneficial owners the fundamentals of the bi-lateral transaction enable the counterparty receiving will be those who can accept a broader range and ensure that all the collateral movements securities as collateral to use them in of collateral options, regardless of their fulfil the rules set by the counterparties. turn to collateralise an exposure they jurisdiction,” he says. Our role in this is completely impartial and might have with another counterparty. “The recent market events have heightened neutral to both counterparties,” he says. “These securities could be used to cover the demand for lenders to increase their Often Euroclear will also be acting as a securities lending, derivatives, secured collateral flexibility because borrowers who a custodian for one or both parties, so it loan transaction or any other transaction are looking to manage their balance sheets will have a view of their existing portfolios. requiring collateral as agreed between the more proactively will offer premiums to This enables Euroclear to automate a huge two parties,” he comments. This is known as those clients who can accommodate different amount of the back office functions involved rehypothecation, or the re-use feature of tri- collateral types including US dollar cash, in managing the collateral in a bi-lateral party collateral management. Euro cash and non-cash collateral.” arrangement. “What is key here is that there “It is very important in the derivatives However, cash collateral in particular are ways of capitalising on the use of a single world where counterparties are accustomed requires careful management to ensure pool of collateral to manage exposures to using cash to secure exposures. For these both sufficient liquidity and also prudent against a range of different transaction counterparties to use securities instead of investments and it is an area where a types beyond repo,” he comments. This cash, the rehypothecation feature was a specialist service provider like eSecLending, is what makes using an agent so effective. prerequisite. Typically, you might have an can add significant value. “Cash collateral is They bring their tremendous overview of open derivatives position with one dealer a much larger percentage of all trades in the the collateral pool to the table, along with and a reverse position with another dealer. US than it is in Europe, where around 70% of automated procedures that make light work Here you might have collateral movements

40 | GSL © 2008 Euroclear Bank SA/NV, 1 Boulevard du Roi Albert II , 1210 Brussels, Belgium, RPM Brussels number 0429 875 591 [email protected]

GSL 36-46.indd 40 26/9/08 16:49:29 Global SECURITIES LENDING 22/07/08 12:34 Page 1

Do you have an eye for value?

You can now use and re-use collateral with full and immediate substitution capabilities.

Our reduced tariffs also mean the lowest prices ever. Use your eye for value and get so much more for so much less.

Triparty services for securities collateral. High on value, low on cost.

41 | GSL © 2008 Euroclear Bank SA/NV, 1 Boulevard du Roi Albert II , 1210 Brussels, Belgium, RPM Brussels number 0429 875 591 [email protected]

GSL 36-46.indd 41 25/9/08 17:10:49 Industry InsIght THE WIDER VIEW simultaneously. These kinds of complexities, collateral management systems from Tier Collateral management agents are in a good once again, are best handled by a specialist One investment banks and hedge funds. position to help their clients achieve this Get a global perspective on collateral allocation collateral management agent, unless the Little points out that many of the traditional global view, and Little reckons that Rule organisation concerned has built up a very IT systems in the dealing space already Financial’s operation is well-placed to build substantial collateral management capability have some kind of collateral management the necessary systems interfaces to let the in-house.” capability or support function. banks take maximum advantage of the The demand for rehypothecation has “Trading system software providers services offered by tri-party and bi-lateral picked up among agent lenders. “They sit such as Global One, Martini, Anvil and agent collateral managers. between the two counter-parties and act 4-Sight all offer some kind of collateral on behalf of the beneficial owner of the collateral, and interface with the borrower. “One of the paradoxes of this market is that although They can use a triparty agent to administer the collateral movements when lending their beneficial owners, broker dealers, and agents client’s securities to a borrower, receive the collateral and ultimately move the collateral are strained more than ever before, they have the back to the beneficial owner,” he notes. Grimonpont believes holding all a client’s opportunity to realise record earnings from their assets and treating them as a single pool of securities lending activities and collateral management – collateral to be used across all exposure types is a significant benefit for clients using a tri- provided that these activities are prudently managed,” party collateral management agent. Grimonpont also notes that as a Christopher Poikonen, eSecLending result of Basel II regulations, intra-family t

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42 | GSL

GSL 36-46.indd 42 26/9/08 16:54:31 THE wider ViEW Get a global perspective on collateral allocation

• Rule Financial’s tri-party agents’ interfaces enhance your bank’s risk management by radically broadening your perspective on the collateral landscape. • Identifying the collateral allocations made on your behalf by the major tri-party agents and bringing that data directly into your system generates a full, global picture of your risk exposure at any given moment. • The transparency and control this affords can also help institutions achieve the Advanced Rating sought by Basel II, which, in turn, could significantly reduce regulatory capital obligations.

Rule Financial is the UK’s leading independent provider of business consulting, change management, IT services and complex technology to the investment banking community. We employ over 200 people and count some of the world’s foremost financial institutions on both sides of the Atlantic among our clients. To learn more please contact our Marketing Department: [email protected]

Rule Financial

101 Moorgate, London EC2M 6SL Tel: 020 7826 4444 www.rulefinancial.com Industry InsIght Post-crunch trends in collateral management An industry focus on collateral has produced new outlooks regarding vendor packages, risk management and transparency, says David Little, head of Securities Finance, Rule Financial.

The credit crunch has cut across a number of these separate silos together as a common emerging trends in collateral management. collateral management desk. To compete, Some of these will continue once the global organisations had to go for scale. financial services sector finally emerges from With margins decreasing and volumes the shadows, but others will probably not - or increasing, substantial investment in systems is not in their current form. Speculation is rife needed to cope, while scale is essential to cover on the new developments emerging in the the investment costs. post-crunch world. This is essentially the “industrialisation” of When the crunch started to bite in August the collateral management environment 2007, collateral management became a more through the use of strong, scalable IT systems integral and high-profile element of both and processes. Straight through processing risk management and corporate governance. (STP) and automation are the twin goals Looking back over the past decade, it is clear here, and both are increasing in the drive that the supporting IT infrastructure for for improvement. Among leading banks, for securities finance has moved from favouring example, STP percentage ratios are probably in-house bespoke systems to vendor in the high 90s, which is about as good as it‘s packages. This move has been driven largely likely to get. The only elements receiving a by cost pressures as organisations begin to human touch nowadays are exceptional items appreciate the high total cost of ownership requiring skilled decision-making. associated with bespoke systems. Confronted It is important to note that organisations by a more agile and dynamic environment, which have reached this point of maturity in “hard-coded” legacy bespoke systems prove their handling of collateral, and which now themselves to be anything but responsive support systems with this kind of capability, and costly to maintain, let alone alter. Vendor are looking to leverage that systems base, and packages provide the opportunity to offload their own skill sets, to develop and design continuing development work to the supplier new products to bring to market. and to spread the cost across a much larger This in turn has created a trend that has seen client base. collateral management moving from being a The importance for collateral purely back office function to being a profit management is that the scale of the centre in its own right. Indeed, the aim now management, administration and reporting is to make money out of your collateral, tasks involved requires substantial systems borrowing it in at “x” and lending it out again support. The typical investment bank in at “x + y”. The returns organisations can expect 2008 has collateral agreements with literally on their collateral book might be a couple of thousands of counterparties, so IT support basis points in the repo market, while in the is essential. Typically, until very recently, this equities market 10 basis points is acceptable, support would be provided on a silo basis with some trades generating with different departments each having substantially more. their own collateral management desk. However, here too, margins are getting This created a fixed-income trading silo, squeezed as the on-lending of collateral a derivatives trading silo and an equities becomes more industrialised. So once again, trading silo. if the lending organisation is not in the scale Prior to the credit crunch, the prominent business, then it will find itself unable to win trend was to create efficiencies by bringing a significant share of this market.

44 | GSL

GSL 36-46.indd 44 26/9/08 16:55:35 Industry InsIght

If these were the patterns prior to the credit example: the only time they needed to borrow to a certain stock or asset class or region is crunch, what might we expect to see a year or bonds was when someone failed to deliver, ‘x’, when it is really ‘y’. We expect to see real two down the track? “Business as usual” does and they had to borrow to complete delivery time feeds integrated into risk systems and at not look like an option. Instead, some of the to a client. The bonds in all probability would Rule Financial we are already implementing trends are likely to accelerate while some new be lent as a favour and the idea of collateral projects on this theme for some clients. The trends might also emerge. would never come up. risk manager can then see at a glance what One prominent new development is the Where might this lead? One could their exposure is - for example, to oil related rise of liquidity risk. It already seems clear suggest that we might start to see the rise stocks in BRIC countries. that liquidity risk - hardly a consideration of central counterparties for repo*. The One of the drivers here is the bank’s ability prior to the crash of the Bear Stearns funds central counterparty in this scenario would to get the advanced ratings on regulatory - is going to stand shoulder to shoulder be an institution whose ownership would capital. It need to be able to show the with credit and market risk. Managers be probably split between the banks and regulator that they have a complete handle on will be asking themselves: “What’s the risk governments. They would occur on a market- all its risk. It is not convincing to say, “I can’t that I won’t be able to shift this chunk of by-market basis and their great attraction see my intra-day exposure on this or that line collateral I am taking, tomorrow if I have would be that they would dismantle credit of business”. It must tell the regulator that it to?” Consultation papers have already been risk. The exposure of the two parties to the know exactly how a particular transaction is issued by the Basel Committee on Banking transaction would each be to the central collateralised and that you have a real time Supervision relating to liquidity risk: might counterparty, with government guarantees. feed on that. they be the pre-cursor to Basel III? This is a kind of mirror image of the way CLS In the current illiquid climate there has There is an increasing awareness that has come into being in the foreign been a dip in the volumes of transactions as risk systems need to be unified to provide exchange markets. everyone is hanging onto their cash instead of a holistic view of the organisation’s total The key here is that the central lending it. However, this will pick up. During risk portfolio. The old days of apportioning counterparty, as a government backed this period, organisations have time to revisit different risks to different risk managers and institution, would be “cast iron” and their supporting IT systems and can allocate different risk management teams look like highly unlikely to fail. Funding for such a time and resources to re-architect those fading into history. Some of Rule Financial’s development would come from the players in systems. Rule Financial is seeing a number major clients are already pulling their stand- the sector, who would pledge margin for it, of clients taking advantage of the fall off in alone credit and market risk teams and and their gain would be the guarantees they’d trading volumes to do exactly this. systems together into one, unified team. enjoy from the central counterparty if their Then we come to the most important issue: counterparty failed to fulfil their obligations. * See “Containing Systemic Risk: The Road collateral itself. Natural as it now seems, the Again, there is no guarantee this will actually to Reform” issued by the Counterparty ball only got rolling in New York in the 1970s happen, but it shows the kind of completely Risk Management Policy Group, chaired by and 1980s. Collateralised trades were a high new developments we could see in a post- E. Gerald Corrigan (Goldman Sachs) and maintenance proposition from crunch world. As markets mature, they tend Douglas Flint (HSBC) August 6th 2008. www. the outset. to develop similar characteristics, with a crmpolicygroup.org/docs/CRMPG-III.pdf They are so much more complicated central exchange, a central clearing house and than a straight buy or sell trade which is only settlement venue. At the moment, bi-lateral on the books for two or three days through collateral has no such institution available to it. the settlement period. A collateralised trade However, since collateral management services might be a rolling trade, remaining on the can be highly profitable, some organisations books for years. On top of this, inside the would prefer to retain these themselves, so one collateral there can be a raft of corporate can expect some resistance to such a scheme. events requiring maintenance Further, we will see more demand for new and management. transparency in certain vital areas, such as tri- Given this complexity, the rise of the party allocation. At present, the agent carries tri-party collateral management agents such out all the allocations automatically through as Clearstream and Euroclear was inevitable. their systems, catering for asset swaps and The agents have removed all the intricacy substitutions. They may report to the lending associated with the back office administration bank on a daily basis via a batch report, but of collateral and, instead, offered its it is a challenge to get that information back management as a well-paid service, one to into the bank’s risk systems. Without this, the which they continue to add value. Take the risk manager lacks a complete view of their experience of bond traders of the 1980s, for exposure. They may think that their exposure

45 | GSL

GSL 36-46.indd 45 26/9/08 16:55:35 Industry InsIght A perfect match An initiative between SWIFT and six major prime brokers to create a new trade-date matching solution for hedge fund trades is set to reduce costs and risks for prime and executing brokers worldwide, writes Thea George at SWIFT

for the brokers, and help them to improve their service to their hedge fund clients.” Which firms are involved? The brokers working with SWIFT to help cre- ate the new pre-settlement matching solution include Citi, Credit Suisse, Goldman Sachs, Lehman Brothers and Merrill Lynch. A pilot is targeted to start in Q4 2008, with a view to the solution going live in Q1 2009. SWIFT and the prime brokers are also working together to raise awareness and encourage the wider community of brokers processing trades for hedge funds worldwide to take advantage of the new solution.

Why SWIFT? SWIFT was chosen to provide the new pre-settlement matching solution follow- ing a competitive selection process, with the brokers having done due diligence on a number of providers before picking SWIFT. An important factor in the brokers’ selection Failed securities trades are a considerable potential to prevent trades from settling on of SWIFT was that they had decided on a source of cost and operational risk in the time. Today, these errors are often not dis- central matching – rather than a local match- industry. The longer it takes for errors in the covered until late in the process, at the local ing – model. details of a trade to be discovered, the more settlement agent level. Central matching is a more efficient solu- likely it is that the trade will fail to settle on Timely automated matching of trade details tion than each party using local matching time, requiring expensive manual interven- between counterparties offers an opportunity in an environment in which prime brokers tion to fix. As trade volumes grow, so does the to identify problems early enough to prevent are managing feeds from multiple executing cost of manual repair. In an environment in settlement fails, thus reducing cost and risk brokers. Executing brokers are routing trade which margins are falling, rising operational and improving straight-through confirmations to multiple primes, and hedge costs are a highly undesirable trend. processing (STP). funds are typically engaged with multiple The level of operational risk created by high A new initiative under which SWIFT has prime and executing brokers. trade fail rates is also unacceptable given the been selected by six major prime brokers SWIFT has been providing central matching increased focus on risk management and to develop and operate a pre-settlement for foreign exchange (FX), FX options and improved transparency in the marketplace matching solution is aimed at reducing the OTC derivatives trades through its Accord today. Prime broker/executing broker trade operational risk of processing hedge fund service – used by banks, brokers and invest- matching: the challenge trades – and cutting the escalating cost of ment managers worldwide - for a number In recent months, the cost and risk of fixing failed trades manually. Says Fabian of years. failed equity and fixed income trades has Vandenreydt, Head of Broker/Dealer and Pre- To support pre-settlement matching for been a particular problem for prime and Settlement Services within the Markets divi- equity and fixed income trades, SWIFT is executing brokers processing trades originat- sion of SWIFT: “By enabling trade matching extending its existing Accord solution, adding ing from hedge funds globally. Discrepancies on trade date or T+1, the new solution will functionality to match securities messages to between trade details submitted to prime allow errors that could cause settlement fails the system’s existing capability to match FX brokers by the hedge funds on one hand, and to be identified up to two days earlier than messages. Because SWIFT is not creating their executing brokers on the other, have the they are today. This will reduce risk and cost

46 | GSL

GSL 36-46.indd 46 26/9/08 16:55:36 industry insight

By enabling trade matching on trade date or T+1, the new solution will allow errors that could cause settle- ment fails to be identified up to two days earlier than they are today. This will reduce risk and cost for the brokers, and help them to improve their service to their hedge fund clients.”

this system from scratch, it is able to meet the uncovered until the day before settlement or help create the new pre-settlement matching brokers’ requirement for a rapidly delivered even settlement date itself, increasing the risk solution include Citi, Credit Suisse, Goldman solution to the problem of hedge fund trade of settlement failure. Sachs, Lehman Brothers and Merrill Lynch. matching. Once the new pre-settlement matching A pilot is targeted to start in Q4 2008, with a Since the brokers that have signed up solution is in place, trade details will be view to the solution going live in Q1 2009. to use the new solution are already users of submitted to Accord in ISO standard format SWIFT and the prime brokers are also Accord, adoption of the functionality for by both the executing broker and the hedge working together to raise awareness and equity and fixed income trade matching fund’s prime broker. Accord will then match encourage the wider community of brokers is simplified, and will require minimal IT the trades, and flag any mismatches and the processing trades for hedge funds worldwide disruption. Additionally, the new solution reasons for them to the brokers as close to to take advantage of the new solution. will be based on ISO standard messaging, T+0 as possible – meaning any problems Why SWIFT? meaning the brokers can tap into their that could cause trade fails are identified SWIFT was chosen to provide the new existing messaging expertise to take much earlier, leaving plenty of time to fix the pre-settlement matching solution following advantage of trade-date matching for hedge breaks. a competitive selection process, with the fund trades. brokers having done due diligence on a Jitu Parmar, Head of Broker Dealers, What are the next steps? number of providers before picking SWIFT. Treasury and Derivatives, UK and Ireland SWIFT has been working with the brokers An important factor in the brokers’ selection at SWIFT, says: “We are building on our for several months to establish their of SWIFT was that they had decided on experience of providing central matching requirements for the new pre-settlement a central matching – rather than a local for FX. That experience is very important matching solution, and is now engaged in matching – model. to the prime and executing brokers, because adding the necessary new functionality to Central matching is a more efficient they know we understand the business of Accord. Once the pilot scheduled to begin solution than each party using local matching matching, irrespective of asset class.” later this year is complete, the solution will go in an environment in which prime brokers Once the ability to match securities trades has live in Q1 2009. are managing feeds from multiple executing been added to Accord, it will be positioned As part of their commitment to use the brokers. Executing brokers are routing trade as a truly cross-asset matching solution, new solution, the brokers are working with confirmations to multiple primes, and hedge enabling financial institutions to exploit the SWIFT to raise awareness of the benefits funds are typically engaged with multiple benefits of central matching across a wider of pre-settlement matching among other prime and executing brokers. range of their trading activities. Expanding brokers executing trades for hedge funds SWIFT has been providing central matching asset class coverage is a continual focus for globally. As with any central matching for foreign exchange (FX), FX options SWIFT, says Vandenreydt, because “brokers solution, the more market participants use it, and OTC derivatives trades through its and asset managers are looking for solutions the more widely the efficiency benefits will be Accord service – used by banks, brokers that cover as many asset classes as possible felt across the industry. and investment managers worldwide - for a through a single interface”. In addition, the brokers will also oversee number of years. the evolution of the solution going forward, To support pre-settlement matching for How will the solution work? as SWIFT continues its efforts to help equity and fixed income trades, SWIFT is Hedge funds typically notify their prime the broker/dealer community implement extending its existing Accord solution, adding brokers about executions at the end of the automated solutions to eliminate cost and functionality to match securities messages trading day. The prime brokers then match risk in other areas of their business. to the system’s existing capability to match the trade details with those they receive from “The broker community is the driver for us, FX messages. Because SWIFT is not creating the funds’ executing brokers, in a process to inform and educate us in terms of what we this system from scratch, it is able to meet the that currently involves disparate systems and should be doing,” says Parmar. “We are a co- brokers’ requirement for a rapidly delivered often manual work. As a result, discrepancies operative, and they are our members.” solution to the problem of hedge fund trade. between trade details are frequently not The brokers working with SWIFT to

GSL | 47

GSL 47-55.indd 47 26/9/08 17:10:47 technology the trading hub Rob Sammons from Anetics on global securities lending

and its role at the centre of modern day asset management.

lobal securities lending is no securities lending professional earns his or principal is to hold true, your firm will always longer a practice limited to the her keep. Each business day the race is on drift back to 80:20 even as you strive for, say, facilitation of short selling or to satisfy the firm’s internal requirements even 75:25. But it will be a stronger, more dividend arbitrage. It touches by making favourable external deals in the efficient 80:20. onG almost every aspect of a firm’s asset marketplace. Trading hubs are useful, especially the management. An absolute prerequisite to accomplish largest with order routing and straight- Assets that can be used as fee-generating this work is Information: Who’s long and through bookkeeping and settlement. But instruments or corresponding collateral and willing to sell or loan, who’s short and needs it is unreasonable to believe that there swapped with a trading partner on terms to buy or borrow, at what rates, with what will ever be one hub with access to every that facilitate customer dealing, reduce costs, offsetting collateral. Sounds like this too opportunity. Instead, the securities lending generate income, manage risk, and adjust should be simple, however… desk must be prepared to aggregate and the balance sheet. For a firm to be successful The dissemination of information leverage the various hub opportunities with at this new style of securities lending, there between trading partners, a prerequisite its own bilateral relationships. This is where are two key requirements - one internal, the to dealing, is where the industry is stuck telephone, e-mail, Bloomberg messages, chat, other external. The securities lending desk in the twentieth century. Sure, now there spreadsheet attachments, all flying around, sits in the middle. are trading hubs that aggregate some aim to fill the gap. The internal requirement may sound information. The major agent and custodial Let’s digress for a moment. Price, or rate simple, but not always: You must know your lenders publish daily, if not real-time, lists transparency in securities lending, is a position. To wit, what instruments do I have of aggregate holdings available for loan, but popular topic. Admittedly, it is helpful to available to lend or sell, and on what terms; this is only part of the picture. Aggregate lists know, for a specific security, the level at which what instruments should or must I borrow or are just that – big lists that don’t necessarily others are dealing, to benchmark or gauge buy, and on what terms. These instruments reflect sub-lists of opportunity. The industry where, say, my firm should be dealing. It is include securities, cash currency, and certain may have graduated from the use of fax as a a bit like a homeowner asking a neighbour derivative products. Depending upon the size means to distribute lists, but it remains mired with a similar house, ‘What was the total and complexity of the firm, this information in a patchwork of electronic messages and cost to heat your home last winter?’ as a way may be readily available from one master phone calls as a key dealing medium. of benchmarking total heating costs. But system. More likely, the securities lending The Pareto principle (the 80-20 rule), or Dr. without knowing the myriad factors that go desk must compile it from a series of internal Joseph Juran’s observation of the “vital few into actually heating a home, temperature sub-systems. and trivial many,” applies to this industry preferences, fuel and source, heating system The external requirement has, at its just as others. The securities lending desk age and type, et al, foundation, a dealing agreement with at likely can satisfy 80% of the firms dealing such benchmarking can be misleading. least one or more trading partners - the requirements with 20% of the day’s work. Furthermore, in evaluating performance, marketplace. In the case of just one trading The remaining 20% of firm dealings it isn’t about specific instruments, but the partner there is little to do. The day’s work requires 80% of the effort. One might total value of what one can deliver to a is submitted to the trading partner, terms conclude: Adjust the work to diminish those customer, firm, counterpart, trading desk, or agreed, resulting deals then turned over to trivial tasks that take 80% of the time. But any other aggregation unit. And even that the middle and back office for execution, that theory is flawed as some of these trivial value isn’t just income or expense. It has risk, settlement and maintenance. many tasks belong to the vital few of your durability, and balance sheet considerations. But most firms don’t deal with just one best customers. You end up weakening your It is unlikely there will ever be a big board trading partner. They have dozens if not a franchise. defining the bid/offer dealing levels in the hundred or more trading partners - each The better approach, and this is where the borrowing or lending of a security. The offering a distinctive product or benefit future of technology has its best opportunity, reason being that the purchase or sale of a in a hierarchy from most-favoured to is to aim to adjust the joint ratio from 80:20 security on an exchange like the NYSE has counterparty of last resort. And it is here, to, say, 70:30 or 60:40. Admit that you’ll absolutely nothing to do with who is buying in leveraging these relationships, that the never get to 50:50. In practice, if the Pareto or who is selling – only that buyer and seller

48 | GSL

GSL 47-55.indd 48 26/9/08 17:10:47 technology

met in that market at a single point in time and agreed on price and quantity. Conversely, borrowing or lending a security has less to do with the subject security (other than certain key attributes, like fungibility) and everything to do with who is borrowing, who is lending, and why. As such, price or rate discovery in a security borrow/loan transaction is primarily a bilateral process with the market for each counterparty pair specific to the level at You have a utility that runs on your desk that counteroffer, acceptance, execution. This which they agree and deal. Any firm that fails you and your team use to engage in serial, is just what is happening across securities to acknowledge this reality and deals at, say, bilateral communication with your hierarchy lending desks today but with frequent blanket or benchmark rates for the bulk of of trading partners, in the order you favor, document copying and pasting, double or its requirements is potentially dealing at the as you seek to do deals. We won’t take this triple key-entry of data, and a team of people wrong level, or missing deals entirely. too far into the future so we’ll assume the that must remember the state of play on Right now, today, we may be seeing as much favored communication medium is e-mail each negotiation. transparency in securities lending as we will (it can be secure, there is an already existing While the purpose of this discussion ever see - or need to see. With the advance audit trail). Your e-mails will be generated is to focus on the 20% of the work that of technology that enables more automated at your direction by this desk utility, it will takes 80% of the time, this future desk bilateral discovery, transparency is of lesser maintain a database of what you distribute utility is not just for bilateral deal hunting, importance. The market value to borrow or and to whom, and the e-mails will be in a but would communicate, desk to trading lend any security will be the weighted average format that is also machine readable by the hub, desk to coordinated order routing, aggregate of the firm’s dealings. The level counterparts you aim to do business with. desk to auction house; a complete dealing other firms are dealing at doesn’t matter. Since the entire Street will have moved to this solution. And while for simplicity we’ve future of technology, your counterpart’s desk discussed serial bilateral negotiations, with That’s their deal. utility, upon receipt of your e-mail, will have computer, database aided tracking, multiple Let’s assume for this discussion that your already compiled your transmittal into its negotiations may occur simultaneously. desk has the requisite system tools to present database and alerted your trading partner of Middle and back office operations like a complete and accurate picture of current your request. Your trading partner will then mark-to-market and corporate actions are settled and pending positions, and your tasks review your request against his or her own not addressed in this discussion but can for today’s work are any of the fairly typical, position and any other requests that may benefit from the same sort of common, borrow to enable short-sale settlement, be pending, and respond to your inquiry in straight-through exchange of information – loan to reduce financing costs, refinance to minutes if not seconds. day’s work appears on a screen, counterparts optimize earlier short coverings, raise cash, This response goes directly into your agree, one click and the action flows straight return and re-borrow items that have been desk utility upon receipt, you are alerted, through to settlement on both sides (through recalled, et al. You know what you have to do. any deals you agree to do are accepted and automated messaging). This is not a single Question is, forwarded directly to your trading system platform, but any number of platforms that with no further key entry. A confirming know how to communicate. How to do it quickly and easily? e-mail is automatically returned to your On to the future! First step likely is to leverage any automated trading partner’s desk utility so it can book resource available to your desk. Trading its side of the deal. Done; two minutes and hubs, coordinated order routing, bilateral fifty-two seconds of elapsed time; on to the auto-borrow/ auto-loan, and the like. This next trading partner. cleans up 80% of the work in 20% of the In practice, this is bilateral dealing as it time. Next, on to the future of technology… has been since the dawn of commerce: Offer,

GSL | 49

GSL 47-55.indd 49 26/9/08 17:10:47 technology technology interview: Francisco gonzalez The head of Eurex SecLend discusses his role and the future for an electronic lending market.

rancisco Gonzalez has been secured financing marketplaces. I don’t desk to process all the flows of opportunities instrumental in designing the see that an electronic trading system on its with the best possible price discovery (best F products offered by Eurex SecLend own can dramatically lift trading volumes.” execution), it is necessary to automate by and has done much to shape the automation He cites the fragmentation of the market, introducing an electronic trading system like of securities lending and borrowing meaning there are a number of sub-markets, Eurex SecLend.” trading. As head of business and product each of which represents part of the invisible “At present, services like collateral development Eurex secured funding product overall market. Eurex’s goal is to streamline management, corporate action services and line – covering both securities lending and processes and minimize fragmentation at mark-to-market services are at the top of the repo – he demonstrated early and impressive the trading layer by channelling various banks’ wish lists. I think this will also push intuition in the industry in 2002, when it settlement and custody networks. centralised facilities forward.” was a lot smaller than today’s multi-trillion He mentions SIS SegaInterSettle AG’s Will the hard-to-borrow market be traded market. Now the key is to bring this market Triparty SecLend service as an example of a electronically in the near future? “Yes, I think forward to the next level of trade automation, sophisticated and valuable service featuring it will,” he says. “The market does not seem execution and integration. fully integrated and automated settlement ready yet, but in my opinion, it is on its way. “The electronification of the securities and risk management functions. One major advantage of a system like Eurex lending market is pervasive and He adds that in view of increasing market SecLend is the fact that a bank can reach far revolutionary. The difference between mailing standardisation, a partially open marketplace more counterparties at the same time and and electronic trading seems very small such as Eurex SecLend seems well positioned. that the counterparties all apply the same compared to integration efforts. One major Gonzalez emphasises the increase in standards for trading and collateralisation step is the integration of trading activities opportunities available to traders thanks to (eg, collateral schedule). This makes fees with the bank’s infrastructure, including expanded horizons. One key success factor more easily comparable and volumes deeper.” collateral management; integration with the for a trader is his or her personal network in Eurex SecLend, spurred by Gonzalez, has settlement and custody network, including the industry. This factor is being protected adapted to change. “I think a service provider tri-party facilities, is another important step and placed above other business drivers, even like Eurex has to develop different models in realising full STP.” best execution. which offer added value for Gonzalez says trading activities have However, he acknowledges that the market participants.” shifted towards high-quality collateral. personal relationships between market As a result, last year volumes declined in participants – the fulcrum of over- certain segments due to the financial crisis. the-counter (OTC) trading – will not “Sovereign securities, serving various diminish very much. “I think a trader financing needs, have been in high demand,” needs relationships with corresponding he says. “This is the main focus for many counterparts at an appropriate level,” he says. investment professionals who use Eurex’s “But in order for a profit-oriented trading

50 | GSL

GSL 47-55.indd 50 26/9/08 17:10:50 technology leveraging the us Jane Milner, market specialist at SunGard Securities Finance, analyses the progression towards a harmonised adoption of risk management requirements in Europe.

With the continued evolution of the Basel can lend on behalf of undisclosed principals, appropriately. This enhances transparency, Accords in Europe, the most recent Basel and any problems with lending transactions giving investors and industry participants II capital adequacy directive is designed can negatively affect all parties. Pillar 1 of the ability to better evaluate a bank’s to create an international standard for Basel II complements the minimum capital capital structure, risk exposures and capital safeguarding clients against the financial requirements and the supervisory review adequacy. and operational risks banks face. It seeks to process by encouraging market discipline A Co-Operative Solution to US ALD accomplish this by establishing rigorous risk through enhanced and meaningful public Since the start of October 2006 the disclosure and capital management requirements so disclosure. By increasing the banks’ disclosure of underlying principal details has been a banks hold capital reserves appropriate to the requirement, industry participants are regulatory requirement for agency lenders in risk inherent in their lending and allowed to have a better picture of the overall the US. The introduction of this additional investment practices. risk position of the bank and allow the regulation produced unprecedented level of In the securities financial world, agents counterparties of the bank to price and deal co-operation between market participants,

GSL | 51

GSL 47-55.indd 51 26/9/08 17:10:52 technology

provides a lead-time to allow FSA-regulated participants to get automated processes in place. To assist the market in implementing a solution, ISLA formed the ALD Working Group, in which SunGard is a founding member, and has worked in conjunction with consultants Capco to identify a workable model for the final solution. The solution is largely based on the existing US model, with additions to specifically handle: DTC access for non-DTC members Repos/reverse repos Tri-party collateral DBV collateral Industry Classification Codes regulators and IT solution providers. Parties worked together for two years, incorporating An implementation timetable has been drawn the credit pre-qualification process, in order up by ISLA, working towards full compliance to ensure that the requirements could be by January 2010 latest. met in the most effective manner. SunGard, EquiLend and DTCC joined forces to provide Interim Solution a service that allow lenders and borrows In the meantime, the priority for the brokers to supply files to a single service provider, has been to receive data from their largest regardless of the service used by the end lenders and they are now exchanging files user of the data. Today, over 100 market through the existing mechanisms. With this participants provide their files directly in place SunGard understands that brokers into the SunGard hub, with more than two will now be encouraging their remaining million records being transmitted through lenders to provide the required data files on the hub on a daily basis. as frequent a basis as possible. Even lenders who provide details of the underlying European ALD/Basel II Co-Operative principals at the time of trade are required Solution to US ALD to provide loan and collateral information The disclosure of principal requirement in the agreed file formats in order to allow was initially to be implemented throughout the brokers to carry out the necessary capital Europe from the start of 2008. However, adequacy calculations. there still appears to be much confusion in Automation of this process can greatly the market as to whom this impacts and what reduce the effort and opportunity for must be done. This may be partly because error that this additional reporting burden there are multiple authorities involved, represents. introducing the potential for each to translate Like ALDoP, the disclosure of principal the EU Basel II requirements differently. In required for Basel II is a very large, complex the case of the FSA, there is the option for project. The introduction of ALDoP in the interim monthly reporting, with the move U.S. ran smoothly because the industry to the mandatory daily reporting deadline worked together with regulators and IT being held-off until January 2010. Although solution providers from beginning to end. this does not give the borrowers full relief SunGard’s ALDoP service was successfully from the capital implications of dealing with implemented and continues to run well. It lenders who do not provide the necessary is anticipated that a similar model can be trade and collateral reporting files daily, it replicated in Europe.

52 | GSL

GSL 47-55.indd 52 26/9/08 17:10:56

next issue

industry view:

GSL looks back on the events of week September 15th and analyse the effect on the securities lending market.

gsl looks at securities lending in the nordics:

Sweden, Norway, Denmark and Finland, Iceland.

UK pension funds’ involvement in the securities lending market and gauges the effect of the FSA’s September ban on short selling.

Asian tri-Party collateral Management –

In June, BNY Mellon became the tri-party collateral holder between Goldman Sachs and Rabobank. Is this the first of many deals in the continued merge of Western banks and Asian countries within securities lending?

south Africa:

RMA Conference Review.... Securities in South African pension funds have become very popular among borrowers in Europe and the US due to the tax situation in the country. GSL reports on the burgeoning market for lending as the country booms.

GSL | 53

GSL 47-55.indd 53 26/9/08 17:10:58 STATISTICS Neither borrower nor lender... Data Explorers have released graphs documenting market cap out

on loan versus value of stock in the period running up to HBOS acquisition by Lloyds TSB, Lehman Brothers filed for bankruptcy, and Merrill Lynch’s acquisition by Bank of America.

HBOS % Market Cap on Loan Price Market Cap on Loan (%) 700.00 HBOS’ Market Cap out on loan (%MCOL) to short 20.00 investors showing that short positions were covered Price (GBP) between September 16 and September 17 this week, 18.00 600.00 with the MCOL falling from 2.96% to 2.75%. 500.00 Data Explorers: “This percentage is nowhere near the 16.00 HBOS high of 18% MCOL in July, and to put it into 400.00 context - Fannie Mae and Freddie Mac at some stages 14.00 peaked to 40%.The data appears to conflict with the views of the popular press who are suggesting a surge 300.00 in short-selling. The risks inherent in being a short 12.00 seller could not be more clear than in the HBOS - 200.00 Lloyds TSB saw to that.” 10.00

17-Mar-08 14-Apr-08 12-May-08 09-Jun-08 07-Jul-08 04-Aug-08 01-Sep-08

Lehman % Market Cap on Loan Price

Market Cap on Loan (%) 18.00 The percentage of LEH MCOL increased from 10% to 20.00 18% between September 5 and 11. Utilisation jumped 16.00 from 35% to 63% in the same time frame. 18.00

14.00 Price (USD) Data Explorers: “Lehman (LEH), who filed for bankruptcy last September 15, saw an enormous 16.00 12.00 spike in short interest the previous week, presumably as short investors got wind of the possible catastrophe 14.00 10.00 at the weekend.”

12.00 8.00

6.00 10.00

28-Aug-08 01-Sep-08 03-Sep-08 05-Sep-08 09-Sep-08 11-Sep-08

Merrill Lynch % Market Cap on Loan Price % Market Cap on Loan (%) There has been a general decrease in the short 16.00 40.00 positions in Merrill Lynch (MER), from a %MCOL of 5% 14.00 in early August to 2.6% today, although short interest Price (USD) has picked up from 2% on September 8th. Utilisation 12.00 35.00 is at just 11% so there is plenty more left to borrow. 10.00

8.00 30.00

6.00

4.00 25.00 2.00

0.00 20.00

11-Jun-08 09-Jul-08 06-Aug-08 03-Sep-08 54 | GSL

GSL 47-55.indd 54 1/10/08 16:53:54 PeoPLe Ignorance is the enemy Jerry May, cash securities lending officer at OhioPERS, writes on managing risk in an unstable market.

In January 2007 securities lending programs examining for an industry that is largely lending process - from counterparty risk in the US were anticipating a strong year dependent on the ability of counterparties to operational risk; from reinvestment risk for earnings. The Federal Funds rate was at to return borrowed assets. Yes, there are to legal risk. Boards, in particular, seem to 5.25% having just experienced 17 regimented measures in place to counteract this situation, have a skewed view of lending, and the risks increases of 0.25% by the Federal Reserve. when a counterparty is unable to return involved. Whether this has been of their own There was some speculation as to whether the assets, but no one wants to endure the choice, or from communication they have Fed had overshot its intended target, and just headaches of actually having to enact received, these individuals, who bear the most how soon and at what trajectory rates would these measures. risk in the process, need to be educated in come back down. Cash collateral managers Boards and management of beneficial what those risks are, how those risks can be were in their sweet spot by being able to take owners have had to get involved in an activity quantified, and what can be done to mitigate advantage of extending durations in cash that is not risk-less. Fate or providence has those risks. portfolios, and picking up some amount of a way of reminding participants of this fact Some steps that can be taken include: an incremental yield. every decade or so. in-depth review of cash investment guidelines Rather quickly in the year, though, there with all parties so that risks that can be taken were signs of difficulties with sub prime So, what do market participants do now? are well known; a discussion with the cash mortgages at the forefront of many analysts’ Where do we go from here? manager of the program so that the risks that concerns. Bear Stearns’ hedge funds had If one examines reactions after the are being taken are communicated, and all publicised problems, and by August of that difficulties in the early to mid-1990’s, some parties are comfortable; and a formal look year, there had been significant tightening insight could be found into what may into the aggregate counterparty risks being of liquidity within the marketplace. For the happen in the next few months and years. born, including securities lending. last year now, the securities lending market, If memory serves correctly, to some firms Ignorance is an enemy of the securities as well as other short-term markets, have the word “derivative” became synonymous lending industry, as we have found out time been dealing with this liquidity crisis. Risk with dumping barrels of money into a river, and time again. Education is one way to has been significantly re-priced in the cash never to be seen again. As most now know, fend off problems, and difficulties that may markets, with financials taking the brunt of derivatives can, in fact, be acceptable if all occur after a crisis. While no individual or the change in investor sentiment. of the parties understand the risk and the firm is able to correctly identify all potential In addition, securities lending programs reward involved, and the actual structure of problems, a legitimate effort to educate have had to deal with the rapid deterioration the security being contemplated. those who are the risk takers will create in a significant counterparty – Bear Stearns The same reaction might be in store for some degree of trust, as well as provide – and the implications of that situation upon the term “leverage” after the current crisis. a foundation of knowledge from which the industry as a whole. Even though most The problem with reacting, though, is that it management out of the crisis can take place. organisations were aware of the pressure leaves you little time for anticipating. upon investment banks, it seems that the What may be a more appropriate response suddenness of Bear’s decline is worth re- is to educate participants in the risks of the

GSL | 55

GSL 47-55.indd 55 1/10/08 16:53:55 PeoPle Paul Wilson, global head of client management and sales in the securities lending division at

JPMorgan, talks to Joe Corcos

typically a large custodian, was earning enough to pay custody fees then everybody seemed to be happy. Overall however, much of the debate in the industry still centres around the same subjects as it did when I first started; best route to market, the risks of cash collateral management, impact of lending on proxy voting, risk management and transparency.

What do you find particularly interesting and gratifying about your role as Global head of client management and sales in the Securities Lending division at JPMorgan? What part of the job is the most demanding?

The feedback that we have had from our client base over the last year on the way in which we have managed the market turmoil has been exceptionally pleasing and rewarding. I think this is an area where both JPMorgan and specifically our securities lending business have really been differentiated. I also find it interesting to look at the different trends and issues in the market and how they vary from region to region. The issues, challenges and opportunities do vary across the different regions of Europe, Asia and the US. I would add that it has also been very satisfying that we have continued to invest and build out our What major changes have you seen a greater interest and active involvement in client management and sales teams across the develop since you first started lending activities. Also, most agent lenders globe, to the point where we now have more working in the sec lending arena? have developed their own specific style of than 70 professionals globally in our client lending so that most of the major lenders management and sales team. As a result the A major change has been the transformation actually look very different to each other. business has grown dramatically over the last of lending from being a back office ancillary The industry has also become much more 2-3 years, as well as significantly improving function to a front office alpha-generating competitive; when I first started in the the experience for our clients. activity. With this has come an increase in industry ten years ago, questions about the focus on risk management. Clients have also lending agent’s performance weren’t asked As corporations grow beyond their become significantly more demanding, taking as much. In those days, if the agent, who was own countries and markets become

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more liberal, there is now a greater The debate has always been there regarding Of late there has been increased need for cross-border financing, how the role and impact that securities lending growth in both hedge fund activity has this impacted sec lending? has on the market. I think that the credit and the use of 130/30 strategies, crunch specifically has highlighted many of which has in turn boosted desire for Any source of new demand, i.e. new the positive aspects that lending brings to the the lending of securities in order to organisations needing to borrow securities market. As an example, securities lending support short positions - has this or having new reasons to borrow securities, is a way of putting additional liquidity into noticeably benefited lenders can only be positive for the securities lending the market, particularly at a time when the and agents? industry. As we have seen from many of the market was looking to borrow very high industry statistics, over the last five years quality treasury securities for collateralisation 130/30 and long short trading strategies have there has been quite a lot of new supply and financing purposes, as additionally become much more talked about, but to what coming into the market, and you obviously evidenced by the Fed implementing its own extent that has translated into vast amounts need to balance that with new sources form of lending programme for exactly the of additional lending volume resulting from of demand. same reason. Secondly, with the markets these types of trading strategies is unclear. Clearly, if supply dramatically outstrips being volatile there has been an increase Certainly there is more to come. From a demand, that will have an impact on price. in trading activity, which gives rise for the JPMorgan perspective, we have focused a That’s pure economics. It has to be a positive potential for more failed trades. Lending large amount of our investment over the last that these new sources of demand are out provides a way in which many such failed couple of years actually integrating the ability there, and long may there continue to be new trades can be avoided. In this regard lending to support 130/30 and long short strategies sources of demand. One of the things I’ve also provides another form of liquidity in with our securities lending product. We see a also seen in my time in the business is that certain stocks and securities where trading number of asset managers and pension funds as the lending industry has grown and new volumes are thin and may be difficult to who are owners of securities and want to lend sources of supply have come into the market, trade in tight markets. Having the ability to them, but are also launching 130/30 funds the industry has done a very good job of borrow those securities gives rise to more where they need to borrow securities, which responding positively and absorbing that efficient markets and creates greater pricing from our perspective is all part and parcel without any significant detrimental impact. transparency. Thirdly, and perhaps this is of the same process. So we have developed less often realised, securities lending agents the capability to effectively lend on the long How has the role of the lending have large sums of cash that must be invested side and then help our clients finance/borrow agent evolved? every day, and historically a lot of that has the short side, which has been quite a critical been invested in secondary money market development for us. Some may argue that As I have already mentioned, the business instruments which have provided sources of this is the start of convergence between prime has transformed from being a back office financing for issuers and companies. brokers and agent lenders/custodians, but I ancillary function to a front office alpha- would actually disagree. Nevertheless we are generating activity. In the “good old days” Is the dealer community now certainly involved in things, which we weren’t lending was virtually an automatic add-on requesting more diverse types of two years ago, because of the advent of the to custody. Now we’re assessed on how good collateral? If so, why? 130/30 long short product. our risk management and indemnity are, on our reporting and client management, The amount of cash collateral as an overall Have you seen the desire from clients as well as on our ability to generate superior percentage of collateral in the market has for more unbundling of services? earnings within a client’s management declined, which has been caused by two framework. The role of the lending things. Firstly, the broker dealers themselves Absolutely. The biggest growth in our agent has become more focused on risk have been looking to reduce the amount of business right now is in our non-custody management and certainly has become more cash collateral, given the cost of doing so lending book. I hate to call it “non-custody,” consultative. And with that, many clients are and also balance sheet constraints. Secondly, because I look at and consider JPMorgan as now demanding for more detailed revenue from a client’s perspective the investment a global lending agent. The location of the performance and attribution reporting in of cash collateral is where they consider the underlying assets is just geography. What we respect of what value has been added and most risk to be. So what has happened is are now selling is our style of lending, our where out-performance has been achieved that these two things have come together performance and revenue generation, and our relative to the peer group. I think the role and, naturally, that has led to more non-cash risk management supported by the JPMorgan of the agent has changed in that regard. It’s collateral. Right now, collateral flexibility is balance sheet, along with the depth, strength these and a wide variety of other things that definitely the name of the game. The broker and expertise across the entire JPMorgan have moved us from a sleepy back office dealers are looking for more flexible and organisation. The US market has been function into a front office alpha-creating cheaper ways to finance some of the lending unbundled to an extent for a considerable activity. trades, but similarly clients are also looking time, but we’re starting to see more and more to diversify and expand collateral. However, of that in Europe as well. How has the credit crunch affected from the client perspective, having diversified the role of sec lending in the broader collateral does not necessarily mean taking financial system? more risk.

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pg56-64jc.indd 57 26/9/08 12:22:10 RMA CoNFeReNCe

As investment banks topple, european-based folks will also take place on the 14th, which The Boy With Two Belly Buttons. short-selling halts, and the entire grab the chance to flee the onset everyone is invited to. This on the 16th there will be a financial system is reappraised, of shivery autumn winds and has been described as ‘a Market outlook Panel, Cash one glimmer of joy remains bask in the heat and hospitality discussion on key issues Collateral and Balance Sheet amid the encroaching tides of San Antonio, Texas. affecting the industry’. The Management Panel and a primer of despair. That’s right, the The conference is to be held in State of the Industry Update panel on swaps and securities RMA 25th Annual Conference the Westin la Cantera Resort from Spitalfields’ Mark Faulkner lending. That night will see the on Securities lending is right and will feature a veritable deluge takes place on the 15th, and is annual Goldman Sachs blow-out around the corner. And perhaps of cocktail receptions, tennis followed later in the day by the to end the conference. the timing of the conference is tournaments, golf tournaments, Industry leaders Panel, Treasury But after a few days of just right. Players in the industry live bands, buffet dinners, and Market Practice Group Update, sun, cocktails and general may welcome the chance to more cocktail receptions. But Hedge Fund outlook and the hobnobbing, perhaps things reappraise, take a break and amid the merriment some serious keynote speech by Steven D may not look so bad and the take the opportunity to chat with business will be taking place. levitt, co-author of the iconic Goldman folks, along with the colleagues and engage in a bit A ‘Fall Securities lending Freakonomics, and author of the rest of the attendees, will let their of analysis and reflection. Round Table’ will lesser known children’s book, hair down.

Itinerary

Monday, October 13th Dinner Buffet Tennis Tournament Compliments of 7:30 p.m. – 10:00 p.m. 1:00 p.m. – 4:00 p.m. SunGard Cocktails, Food, Compliments of Compliments of Monday Night Football, Barclays Global Investors WachoviaSecCommand Additional Baseball Playoffs, and Bull Riding. Citi Cocktail Reception Conference Sponsors “Welcome to Texas” Jefferies & Co 5:30 p.m. – 7:30 p.m. Reception Macquarie Compliments of Bottled Water 7:30 p.m.– 9:30 p.m. Morgan Stanley www.rbccm.com Compliments of Ramius Securities llC State Street Compliments of Southwest Securities Thursday, October 16th www.statestreet.com Frost Bank Internet Kiosks Penson Financial Services Inc live Band/Music Breakfast with exhibitors Compliments of from the Oh So Good Band! 7:30 a.m. – 8:45 a.m. J.P.Morgan Tuesday, October 14th Dance Floor, Cocktails Compliments of Keycards 8:00 p.m. – Midnight Penson Financial Services Inc Compliments of live Band/Music San Antonio’s Oh So Good Band! Coffee Break Cantor Fitzgerald Dance Floor, and much, much Number one for variety dance 10:45 a.m. – 11:00 a.m. USB Pen/Flash Drives more! music and entertainment. Compliments of Compliments of opening Reception FINACe ING Financial Markets 6:30 p.m.– 8:30 p.m. Wednesday, October 15th MF Global Compliments of Breakfast with exhibitors Golf Tournament BNY Mellon 7:30 a.m. – 8:45 a.m. 1:00 p.m. – 5:00 p.m. Deutsche Bank Compliments of Compliments of Dresdner Kleinwort Coffee Break locateStock Kellner Dileo & Co 10:15 a.m. – 10:30 a.m. Cocktail Reception Merrill lynch Compliments of 5:30 p.m. – 7:30 p.m. The Northern Trust Co

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pg56-64jc.indd 58 26/9/08 12:22:12 RMA Congratulations to The Risk Management Association on your 25th Anniversary Conference from:

On behalf of RBC Dexia Investor Services, we would like to congratulate the Risk Congratulations to The Risk Management Association on your 25th Management Association on the occasion of Anniversary Conference from all of us at LendEX. this historic milestone – the 25th anniversary of the RMA Annual Conference on LendEx Securities Lending. 30 Montgomery St. Suite 1502 Jersey City For the past quarter century, your signifi cant NJ 07302 contributions to the securities lending industry USA have been instrumental in its continued growth and development. Additionally, the annual conference has served as an integral forum for business leaders to address and discuss the most important issues facing the industry.

RBC Dexia continues to advocate the importance of such conferences in helping to shape the future of the industry. We are delighted to have had the opportunity to participate and contribute to this annual conference throughout the years. 4sight offers our congratulations to the RMA for 25 years of success. Once again, congratulations on your silver anniversary and we wish you continuing 4Sight Financial Software success in the years ahead. Conference House 152 Morrison Street Reeve Serman Edinburgh Global Head, Securities Lending Trading & Market Execution T: 416 955 6901 E: [email protected] All the best from: Yvonne Wyllie Global Head, Global Product Management, Securities Securities Lending GSL| Lending T: 416 955 7517 E: [email protected]

GSL | 59

pg56-64jc.indd 59 26/9/08 12:40:01 PeoPle Access the Experts from Everywhere, Anywhere

Regulation in Rio, technology in Tuvalu and securities services from the Square mile.

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pg56-64jc.indd 60 25/9/08 19:32:02 PeoPle

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pg56-64jc.indd 61 25/9/08 19:32:47 PeoPle Moves Appointments

Jörg Debé, relationship management director in Germany Jon Anderson, global head of over-the-counter (OTC) Mike Head global partners director at Temenos for Société Générale Securities Services (SGSS) derivatives for GlobeOp

September was previously head of communications and execution services on LME products. at US Trust and before that head of Previously, Rees and Bingley were joint global RBC Dexia has appointed of Padraig Kenny communications for The Private Bank at heads of Base Metals at Bear Stearns. as managing director, Ireland. He was Bank of America. previously investment director at Private Data Explorers has appointed Maria Volpe Wealth Managers Ltd. Standard Chartered has announced as director of business development. Maria in Ireland the appointment of John Paynter as an Volpe joins from Reuters, where she was independent non-executive director with director of ratings and led Reuters’ Machine Tamie Gardner, formerly of Ferox Capital effect from 1 October 2008. Paynter has Readable News from inception. Maria also Management, has joined Brown Brothers experience in the fields of corporate broking helped build and launch Reuters Investment Harriman’s (BBH) securities lending trading and financial advisory, serving 29 years with Banking and Corporates businesses in desk in London as a vice president. She was Cazenove, and latterly JP Morgan Cazenove, EMEA. previously employed in the equity finance where he was vice chairman. group at Citigroup Global Markets. Data Explorers has appointed Ken Read as Paul Abberley has joined Aviva Investors’ its head of sales for the Americas. Joining Philippe Lopategui previously of Morgan executive committee. Previously CIO Data Explorers from Williams Lea, where he Stanley, has joined the Royal Bank of of Fixed Income at ABN Amro Asset led the North American financial services Scotland (RBS) Equity Finance & Collateral Management, Paul will be chief executive of outsourcing practice. Trading (EFCT) team as the global head of Aviva Investors’ actively managed portfolio Equity Finance Distribution. business, Aviva Investors London. BNP Paribas Securities Services (‘BNP Paribas’) has appointed Alan Cameron Temenos has appointed Mike Head as global Société Générale Securities Services (SGSS) as the new head of clearing, settlement & partners director. Prior to Temenos, he was has appointed Jörg Debé as relationship custody (CSC) client solutions. Alan joins responsible for the start up of Pecaso. management director in Germany. Previously from Citibank where he spent nearly 20 years responsible for institutional and fund and was most recently director of business Bernd Knobloch has resigned from the board administration for BNP Paribas Securities development for direct clearing and custody. of managing directors of Commerzbank with Services in Frankfurt, he will be responsible effect from September 30 2008. Knobloch is for handling relations with institutional Jon Anderson has been appointed GlobeOp’s leaving the bank at his own request and by clients. global head of OTC Derivativesand will mutual agreement. be based in the company’s Manhattan ICAP has hired Robert Rees and Steve headquarters office. He will also join Aviva Investors has appointed of Aline Bingley to lead the firm’s new London Metal GlobeOp’s Operating Committee. Sullivan as global corporate affairs director. Exchange base metals broking business. Sullivan will lead the global communication Rees and Bingley’s role will be to build the Wachovia Securities have announced that activities of Aviva Investors. Sullivan firm’s LME business and offer expert sales Craig Overlander, formerly of Bear Stearns,

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pg56-64jc.indd 62 26/9/08 17:37:47 PeoPle Moves

Malcolm Hobday, Rule Financial Mathew Harrison, Rule Financial

will join the firm as managing director and Jon Jodka, founding partner of the hedge of equities for Asia. Peter Hilton joins as head global head of Fixed Income, beginning fund Copper Arch Capital LLC, has joined of Asian equities research and David Sarkis September 15. UBS as managing director and head of US will relocate to Tokyo as head of equities prime brokerage sales within its equities for Japan. CLS Bank International have appointed division. Jodka previously spent 13 years at Roger Rutherford as the new head of product Morgan Stanley. Following Rule Financial’s recruitment management. Rutherford joins from ICAP, of Matthew Harrison, the founder of where he was a global product manager. State Street has hired David Puth to join the Martini, the firm has further strengthened He previously worked for EBS, the global bank as head of State Street’s investment its securities finance practice with the currency and metals e-trading platform research, securities finance and trading recruitment of Malcolm Hobday. Malcolm acquired by ICAP in 2006. activities worldwide. Puth was previously at spent a total of 21 years at UBS, with the JP Morgan until 2006, where he was head past 15 years in SBL on both the trading August of global currency and commodities, sales, and product control sides of the fence, most trading and research, after which he founded recently as head of product development/ RBC Dexia has appointed Nick Emmins and the Eriska Group at the end of 2006. business controls for SBL and Swaps. Conor Hoey as directors, sales & relationship management in RBC Dexia’s London office. Kaupthing Singer & Friedlander has hired Emmins most recently worked with BNP Johannes Brenner within its treasury division Paribas as head of business development where he will be in charge of securities - UK retail. Hoey was previously with finance. He was previously managing Capita Group in the position of business director within Citigroup’s Prime Finance development director. division in London, running Funding & Collateral Trading. Garrett Curran has joined Credit Suisse as a managing director and co-head of European Foppe Zwikstra has left Kas Bank. Roel securities sales. He joins Credit Suisse de Groot who will act as temporary head from Dresdner Kleinwort where he was a of Securities Lending until a new head is member of the Dresdner Kleinwort Executive appointed. Committee. Peter Irvine is now head of ABN AMRO’s Credit Suisse Group has appointed Hans- Asian Equities business, and will relocate Ulrich Meister as CEO Switzerland and a to Hong Kong. Irvine will also continue his member of the executive board. Hans-Ulrich role as head of global equities finance and Meister was previously head of business collateral trading. Kin Cheung will take on banking for UBS. the role of head of trading and deputy head

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pg56-64jc.indd 63 26/9/08 17:37:47 zt

PeoPle Meet the Future Nora Reemts speaks about work, life and aspirations were your impressions of the event? Maximize returns. Control risk. It was our first time at the conference. IMC has grown significantly over the past years and we are continuously exploring related business areas. The conference was very useful in giving us a good overview on the securities lending industry and its participants.

If you were nominated employee of the year, how would you celebrate? I would thank the people around me - friends, colleagues and family - by throwing a big party - there would be no success if they were not around.

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pg56-64jc.indd 64 26/9/08 17:37:48 Maximize returns. Control risk.

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GSL pp01-15 GT2.indd 11 5/8/08 12:06:02 Better process, better price.

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