Securities Lending Market Guide 2009

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EDITORIAL SECURITIES LENDING MARKET GUIDE
SECURITIES LENDING
MARKET GUIDE
2009 electronic systems to drive down cost and improve
efficiency, for risk management, netting, and straight
through processing. Risk management is the legacy
of the credit crunch. Automation and electronic sys-
tems in securities lending and borrowing is seen by
many as a way to achieve this, as well as increase
transparency and competition in a MiFID-like way.
Francisco Gonzalez, head of Eurex SecLend, dis-
cusses the benefits of its electronic market place and
the movement towards the increased use of technolo-
gy (page 36), and Felix Oegerli, an executive com-
mittee member of COMIT assesses how far technol-
ogy can help manage risk (page 42).
The growth in the market over the past 12 months
has been widely acclaimed. There has been an
increase in the demand for securities globally as a
result of the growing size and number of hedge
funds and 130/30 funds as well as the increasing
sophistication of trading strategies used by banks,
proprietary trading desks, and investment managers.
The involvement of emerging markets has also
Welcome to the 2009 edition of Investor Services boosted growth, and Luke McCabe, managing direc-
Journal’s annual Securities Lending Market Guide. It tor at eSecLending discusses this on page 38.
has been a challenging year for global finance, with Liquidity has also been a defining feature of the past
no shortage of press coverage on the credit crunch year. Although the injection of liquidity by central
and its effects on the market. However, securities banks in March tempered markets, indices remained
lending and borrowing has fared well, with contin- unstable. We analyse the impact of volatility on
ued growth in the number of market participants, the securities lending on page 14.
amounts lent and borrowed and its expansion into The FSA’s ruling on short selling concerned many
new markets. This guide aims to bring you up to in the industry, not least David Rule, chairman of
speed with the latest developments and act as a ref- ISLA, who explains the self-correcting nature of the
erence handbook to the vagaries of this ever-chang- markets in his foreword. Further, he explains, only a
ing business. Our special feature profiles Mark small percentage of lent securities are used to cover
Faulkner of Data Explorers, who discusses the directional short sales, and that if institutional
changes to the buyer-seller relationships amid the investors decide not to lend they would not only
credit crunch, the resistance to electronic trading, miss out on that return, to the detriment of their
the complexities of the agreements between parties investors and market liquidity at large. The RMA
and the potential impact of the recent Financial and PASLA have also written forewords for the
Services Authority’s ruling on disclosure require- guide, reviewing the growth of the market in Asia
ments for short positions in the shares of companies and the effects of the market turmoil on securities
undertaking rights issues. He also discusses the lending over the last 12 months.
expansion of securities lending and borrowing into Market experts from APG Investments,
new markets and how successful it has really been Brown Brothers Harriman, CaLPERS, ICGN and
(page 8). OPERS also offer their opinions on securities lend-
Securities lending is a relationship business of high ing as an investment strategy, the credit crisis, using
touch and complex negotiations, making the equity repo for diversification in an illiquid market,
automation of transactions sometimes difficult to fund governance and the affect of cash collateral on
achieve. Liquidity requirements in recent times have securities lending performance measurement,
further highlighted the importance of the symbiotic respectively, starting on page 28.
relationships between broker dealers and their coun- Catherine Kemp
terparts. However, there is great opportunity in using Editor
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 1
FOREWORD RMA
130 participants, representing borrowers, lenders,

New chapter regulators and exchange officials from the region.
Since the conference, there have been many
Tred McIntire, president of follow-up discussions among those of us who
attended, with a focus improving the environment
Goldman Sachs Agency Lending for securities lending in Brazil.
and chairman of the RMA Other markets to watch include Eastern Europe,
Committee on Securities Lending Greece, Israel and a few in in Asia. General
As I sat down to write themes in these markets include the potential to
this article, I couldn't earn significant spreads in the early stages,
help but think about often less well-developed legal, tax and regulatory
the past twelve months regimes, and a shortened market develop-
and the turmoil in the ment cycle.
financial markets. In The push to introduce new products is another
the securities lending important dimension of change. There is, as
industry, however, it expected, continued growth in the hedge fund
was a year in which space, albeit at a somewhat slower pace. Active
many saw solid earn- extension products (also known as 130/30), con-
ings, in large part due tinue to contribute incremental short demand.
to significant reinvest- Indemnified cash reinvestment structures - cash
ment returns resulting reinvestment pools that are indemnified against
from the Federal principal loss - have also drawn attention amid the
Reserve rate cuts. But recent uncertainty in the money markets.
Tred McIntire it was also a year of The industry is not without its challenges, how-
uncertainty in the money markets, which were ever. One major challenges is the ongoing discus-
plagued by credit and liquidity issues related to sion surrounding corporate governance, proxy
subprime mortgages and structured investment voting and securities lending. RMA, in coopera-
vehicles along with a succession of asset write- tion with SIFMA, has recently offered funding to
downs & banks posting losses. work on a project with the Center for the Study of
The difficulties in the credit markets are Financial Market Evolution (CSFME) that we
prompting pension and mutual fund boards to take hope will support the industry's argument that
a closer look at the investment guidelines for the securities lending does not facilitate inappropriate
cash collateral pools related to their securities proxy voting activity on the part of borrowers.
lending programs and to ask questions about bor- RMA, the International Securities Lending
rower exposures. These boards are also asking Association (ISLA) and SIFMA have been vocal
about counterparty credit, fees and relative per- in responding to uninformed, incomplete and, in
formance. Regulators have also been making some case, misleading information in the press.
enquiries, and it all reflects the continuing theme During my two-year term as chairman of the RMA
of increased transparency across the industry. Committee on Securities Lending, I have been
The financial market turmoil has had other far- involved inclarifying information about the corpo-
reaching effects. For lending agents, I believe the rate governance and proxy voting issues. But there
issues underscore the value of credit diversifica- is still more to be done.
tion achievable through an agency securities lend- I am near the end of my term as chairman,
ing structure, where they have the ability to man- although I will still be involved as ex-officio com-
age credit in a more flexible and timely way. mittee chairman. It has been a wonderful two years
The list of new markets continues to grow. Latin and I look forward to a continued involvement in
America, for example, continues as a promising securities lending.
and yet largely under-penetrated region for bor- Tred McIntire oversees Goldman Sachs Agency Lending
rowing and lending. In January, RMA and the in the US and Europe. He is a BA graduate in Economics
Stock Loan Division of the Securities Industry and from Harvard University and an MBA graduate in
Financial Markets Association (SIFMA) co-spon- Finance and Accounting from Columbia University. He
sored the first annual conference on Latin is also president and a director of The Goldman Sachs
American Securities Lending. The conference was Trust Company, a director of Goldman Sachs Cayman
held in January in Florida and attracted around Trust and is a member of RMA's board of directors.
2 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

FOREWORD ISLA SECURITIES LENDING MARKET GUIDE
shares of companies undertaking rights issues,

Timely boost without consultation, and threatened restrictions
on lending of those shares on the basis that 'the
rights issue process provides greater scope for
David Rule, chief executive
what might amount to market abuse'.
officer of ISLA, looks at how Three responses can be made to such argu-
securities lending has ments. First, short selling should have no long-
strengthened the market term net effect on share prices. If short sellers
In last year's fore- caused a share price to fall below its fair value,
word, ISLA chairman other investors would quickly try to buy.
Laurence Marshall Academic research has shown that placing
wrote that securities restrictions on short selling reduces the efficiency
lending is at the heart of price formation, and in particular that share
of the financial sys- prices may overshoot. Second, only a small per-
tem, providing liquidi- centage of lent securities are used to cover direc-
ty to markets and tional short sales. Securities are also borrowed for
touched on how vital many other reasons - for example, to avoid settle-
borrowing securities ment failures. Third, institutional investors lend
was to the services securities in order to earn additional returns at
dealers offer their cus- low risk. If they decide not to lend they not only
tomers. He also men- miss out on that return, to the detriment of their
tioned its core role in investors, and reduced securities lending would
the trading strategies lower market liquidity. That is the last thing any
David Rule of dealers, hedge investor should want.
funds, asset managers, pension funds, insurance The International Securities Lending
companies and banks. Association (ISLA) represents the common inter-
The truth of those statements has been thor- ests of participants in the securities lending
oughly demonstrated over the last year. Securities industry. ISLA has more than a hundred members
lending volumes have remained high, providing comprising insurance companies, pension funds,
liquidity to markets in short supply. For example, asset managers, banks and securities dealers rep-
problems in the unsecured bank financing mar- resenting around 4,000 clients in more than 20
kets led banks and dealers to increase their collat- countries in Europe, the Middle East and North
eralised financing, primarily through the govern- America. ISLA's priorities for 2008 include
ment bond repo markets. The ability to borrow working with regulators to provide a safe and
government bonds against the collateral of other efficient framework for securities lending, open-
securities such as corporate bonds and increasing new markets, providing information to mem-
ingly equities has been critical to the success of bers, developing good industry practices and
such financing strategies, particularly in Europe. good relationships with other associations,
On the supply side, the market's longstanding enhancing the public profile of the securities
focus on risk management - with fully collater- lending industry, completing its review of the
alised, legally robust transactions - helped to GMSLA and promoting use of the Agreement.
maintain the confidence of lenders, such as pen- Finally, ISLA will implementing its model for
sion and investment funds. Many lenders have re- Agent Lender Disclosure in Europe to meet the
examined and, in some cases, tightened collateral needs of securities borrowers under Basel II.
guidelines and cash collateral reinvestment man- Raising the profile of securities lending is to
dates. And the credit crunch has also brought ensure that policymakers, regulators and com-
opportunities for lenders. For example, potential mentators understand its importance to the wider
reinvestment returns on cash collateral have risen liquidity of modern financial markets. We need to
for those able to manage the risks. do more to get the message across.
Falling equity markets raised the familiar criti- David Rule was appointed as ISLA's first chief execu-
cism that facilitating short selling drives equity tive in May 2007. Previously, he was head of Sterling
prices lower. In the United Kingdom, the Markets Division at the Bank of England and has also
Financial Services Authority recently introduced chaired the Securities Lending and Repo Committee
disclosure requirements for short positions in the from 2002 until 2006.

FOREWORD PASLA
investors in lending their Philippine equities.

New horizon Thailand is working to improve the depth of its
domestic SBL market and Indian regulators have
Lawrence Komo, PASLA introduced a SBL platform; PASLA continues to
chairman, and securities finance monitor the further development and evolution of
head at Citigroup AsiaPacific their model.
GTS, looks at the vibrancy of While these are all welcome developments,
PASLA is also acutely aware of the heightened
Asia's securities borrowing and focus on SBL and short-selling amid the current
lending market. downturn in world equity markets.
In March 2008 the Since the beginning of the year, the MSCI World
Pan Asian Securities Index and the S&P 500 Composite are down 12%
Lending Association and 11% respectively, while in Asia, the MSCI EM
(PASLA) elected a Asia Index fell 19%. Stock markets in Australia,
new executive com- Japan and Hong Kong similarly saw declines of
mittee, which included 15%, 10% and 18% respectively, and even the
a change of guard in Asian stars of 2007 were not spared - China has
the Chairman's seat. lost 47% while India has shed 30%.
After three years of The market downturn has created some
leading PASLA, Sunil headwinds for SBL regionally and globally. The
Daswani has relocated UK's FSA has recently announced and introduced
back to London, and disclosure rules for short-selling in companies
PASLA thanks him for engaged in rights issuance, which is already
impacting the investment community.
Lawrence his invaluable contri- Earlier this year, SBL in Australia has also
butions. Sunil leaves
Komo behind both a strong experienced intense scrutiny from investors, regu-
association, as well as a vibrant Asia securities lators and the local media, arising from local retail
borrowing and lending (SBL) market that has seen margin lending incidents. The Australian Master
lendable assets grow to some USD957 billion as at Securities Lending Agreement (AMSLA) was
June 2008, up 16% from the previous year, accord- upheld in a court case testing its enforceability,
ing to figures from Data Explorers. which is a strong positive message to the viability
This increase comes on the back of the high of the SBL industry in Australia.
growth in Asian market-focused hedge funds, The heightened attention being paid to SBL
where Eurekahedge estimates the total size of the accentuates the role of PASLA, as the collective
Asian hedge fund universe at USD160 billion as at group of major industry players in Asia, in cham-
end-2007, up 21% from the previous year, and pioning the growth of Asia SBL markets. PASLA
where Asia has also continued to see positive net remains committed to monitoring these develop-
inflows in recent months (USD 400 million in May ments and in helping the industry navigate the
and USD500 million in April). changing market landscape in the year ahead.
We can expect this inflow of capital to Asia to
continue to help drive industry and regulatory sup- Lawrence Komo is managing director and Asia Pacific
port for SBL and enhanced hedging capabilities, head of securities finance at Citigroup, with responsibil-
as regulators in the region increasingly recognise ity for directing and managing Citigroup's agency secu-
how their capital markets can benefit from an effi- rities lending program in the region.
He has extensive experience in regional and global
cient and effective SBL market.
securities lending markets, particularly from the
In this, we are seeing the result of years of active broker-dealer industry, where he had previously headed
campaigning by PASLA. The opening of new mar- the equity finance desks of Citigroup Global Markets in
kets has been a continuing focus and is expected to London, Tokyo and Hong Kong, as well as managed
gather pace this year. equity finance desks at Goldman Sachs, Lehman
Malaysia looks set to introduce a bilateral OTC Brothers and Daiwa Securities in Hong Kong and Tokyo.
model (similar to Korea and Taiwan), which will Komo earned his BA degree in Economics at
improve access for overseas investors. The intro- Yale University and an MBA from Emory University
duction of guidelines last year by the Philippines in Atlanta.
will similarly provide greater clarity for overseas In March 2008 Komo was elected chairman of PASLA.

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CONTENTS SECURITIES LENDING MARKET GUIDE 2009
contents
Special Features
10 Interview Mark C Faulkner of Spitalfields Advisors talks to ISJ
14 Statistics Lending by numbers
Section One
16 Sec Lending panel debate Six discuss the key issues in securities lending
28 Ask the Experts We put the best to the test
Market view: Features

36 Eurex SecLend If it’s not broken, still fix it
38 eSecLending Growing in sophistication
40 Societe Generale All in one and one in all?

Securities Services
42 COMIT Technology and risk management
44 One Chicago SSFs
46 Northern Trust Risk management in securities lending programmes
Section Two
48 Technology panel debate Five discuss technology in securities lending
54 Securities lending guide For those who want to know but were afraid to ask
64 Glossary The definitive details of definitions
66 Market Update FinTuition

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INTERVIEW MARK C FAULKNER
Lending advice
Author, conference chair
and Spitalfields Advisors
managing director
Mark C Faulkner talks to
Catherine Kemp
Faulkner says the appeal of the industry was as
something fresh and new. He describes the year-on-
year growth of securities lending as a “constant evo-
lution”. One example of change he cites is the death
of the tax trader, and to paraphrase Mark Twain’s
complaint, “the rumours of the death of the tax trad-
er have been greatly exaggerated, time and again.
Every year people talk about it and every year peo-
Mark C Faulkner admits he entered into securi- ple find new ways of trading tax. This is because it's
ties lending almost by accident. With a backgroud an innovative, progressive, growing business that's
in operations, he entered the industry in 1986 in profitable.”
Royal Bank of Scotland in the corporate actions and Faulkner explains that his enthusiam for the
operations department based in Angel, London. industry was sustained when he set up his independ-
His introduction to money broking came about in ent consultancy business - Spitalfields Advisors - in
one crucial conversation with Adrian Tomlinson, an 1994. Like the industry, the firm has undergone
internal customer at the bank. “He said, ‘would you an evolution, progressing from being a consultant to
like to come and be a money broker? I'm leaving the a recruitment organisation, conference organiser,
bank and am going to do that’. I said, ‘What's a author, and now data provider. “It's been such a fas-
money broker?’ and he replied, ‘It's where you bor- cinating journey and remains very fascinating.”
row and lend stock’. I said, ‘does that really exist - I Despite the unprecedented scale of securities
didn't know anything about it!”
But his business origins, he admits, are common
among practitioners of securities lending. “I think “I think it's very difficult for people
quite a lot of people in the industry come from an even inside the industry to under-
operational background, which is why to some
extent the business hasn't really grown and become
stand how big it is. We think it
as high profile, successful and dynamic as perhaps might be an USD80 billion gross
it could be. The gene pool is quite shallow and very revenue business this year.”
operationally focused. And it's only recently,
because of the enormous profitability of the busi- lending, he muses that it is still an underrated area
ness, the global scale and its applicability to capital in the wider financial context. “The scale of the
markets, that people have actually recognised that activity in the industry has always been outstanding.
the more technical, ‘front office’ type people, with I think it's very difficult for people even inside it, to
derivatives expertise and so on, have begun to enter understand how big it is. We think it might be an
the market. USD80 billion gross revenue business this year.
“But the progress has been slightly slower than This is higher than it's ever been, and represents the
expected. So I guess that I'm typical, of what some total cost of borrowing stock by proprietary traders
might call ‘an operations person made good’ and and hedge funds, including the splits that may be
still learning.” taken by prime brokers and agents acting on behalf
© 2008 Northern Trust Corporation. Northern Trust is authorised and regulated in the UK by the Financial Services Authority.
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INTERVIEW MARK C FAULKNER
of underlying beneficial owners. books to maturity and avoid liquidations that might
“The opportunities to continue to develop the result in capital losses.”
mature markets are still there. So why am I interest- Will relationships always be paramount to securi-
ed? Because it's interesting.” ties lending? “I believe that securities lending is a
In establishing securities lending into the main- relationship business, but it's perhaps been too
stream, he says people need independent advice in much of a relationship business in the past. Some
order to understand what this practice is and to have uneconomic things have happened, cross subsidisa-
somebody to bounce ideas and suggestions off. In tion of funds occurs. There's a whole range of issues
this, Spitalfields Advisors has its niche. “They about allocation algorithms, the balances for fees,
couldn't find that from even the more consultative trade-off, a whole range of different things which
counterparties in the market, and certainly not raise questions about the way in which the business
through the more generalist consultancies in the is run.”
market. All we do is focus on securities financing He explains that the operational legacy of the
activity in its broadest sense. We do not roam into business has been the cause of these questions. A
custody, or foreighn exchange, or money market more front office technical approach would have
activity. We aren't generalists, we are specialists. I less of a relationship component. Regulatory imper-
think the market recognises that securities lending is atives and client inquisition will drive for more
a specialist activity and needs specialist advisors transparency, best execution will eventually be
and a specialist data provider. This isn't business as adopted in securities lending. With USD80 billion
usual - this is an unusual business.” worth of fees at stake, it's too much to not have best
Faulkner remembers the firm’s first assignment execution.
was from a major pan European clearing organisa- “To some extent, all business are relationship
businesses. But certainly in the securities lending
“Regulation written in haste is not business the transactional/business element will
necessarily the best regulation.” come more to the fore in the next few years.
Interestingly, current economic conditions have
tion which came about three or four weeks after the reinforced the importance of the relationship side of
firm first opened. Since then the floodgates the business; it has tied firms closer together to
opened - “we've been incredibly busy ever since”. work through the challenges they face. But I view
He says the firm has 65 employees - if things con- this trend more as a way to deal with the current liq-
tinue as planned he estimates that number will grow uidity and credit crunch issues, rather than as a per-
to more than 100 people by June 2009. manent state of affairs.”
In the wake of the credit crunch, Faulkner says Why has there been a resisitance to electronic
the relationship between buyers and sellers has both trading? “I think conceptually, everybody believes
strengthened and changed. He says it is in times of that it will happen in time - it's just a question of
duress that you really find out who you can count when it happens and when the tipping point is
on, and that a number of organisations have devel- reached. At the senior management level, that tip-
oped longer-lasting ties with business partners they ping point has been reached, but at the desk execu-
expected to have only short-term dealings. He says tion level there are a number of different reasons
the relationships have become much higher profile why this hasn't taken off as much as it could have.
than before, and are now even more important to “It's a complicated business. For example, when
their respective organisations. you say you'd like to borrow a stock, there aren't
“The liquidity requirements of the broker dealers normally standard lots for how much is traded, or
are of paramount importance, the pressure that their standard terms for how long. It could be open for
balance sheets are under is critical to them. any length of time, whether, cash or non-cash collat-
Managing this liquidity, managing those balance eral. If cash stock, what currency? If you know the
sheets, and working with partners so that you can currency, what kind of investment terms? If non-
swap out of cash and non cash as you see fit, to do cash - what kind of security? What kind of margin?
term, special transactions, and structured financing Where do you want it delivered? All of these types
during trades, is vital. Similarly, for the agents who of things make for a high touch business. None of
have been managing cash collateral on behalf of these are insurmountable problems but they require
their underlying clients, open dialogue remains crit- addressing.”
ical, along with strong relationships with the broker He says the automated markets that have seen
dealers to facilitate the ongoing financing of these success are for cold securities that demand little dis-

cussion of value. The US, UK and to an extent short sell them and express their view on a compa-
France and fixed income “are starting to move quite ny's performance is important - even during a rights
nicely in this direction” with significant potential issue. There are more significant timetabling issues
volumes. to be addressed and some interesting work done
By contrast, he says when a stock starts to comparing UK rights issues with US placings. And
migrate into the warm/hot space it is often who knows - it might have some short-term posi-
taken off of the broadcast capabilities of the suppli- tive impact on the share prices, which may be con-
ers because they are worried that they are going to strued as a positive impact of the regulations.”
effectively be lifted at the wrong price and He suggests that the shock of the FSA’s
won't be able to re-price at a later stage. This leads requirements might have caused any price rises
to gaps for price discovery, including reference rather than any change in behaviour or scale of
pricing. activity. “Regulation written in haste is not
“The hot, on-the-run securities are almost certain- necessarily the best kind of regulation.”
ly at this stage dealt with on a manual, phone bro- As Asian markets tentatively enter into securities
kered, electronic communication bases, rather than lending, Faulkner says he was struck by a recent
in a fully automated way. But that too will migrate PASLA presentation from a “really fascinating,
to the winning platform or platform over time in amazingly well-educated and dextrous” presenter
due course, all markets digitise over time.” from China. When asked after his 45 minute pres-
He says the market is well within the remit of entation how many lending transactions had been
digitisation, but is hampered by what he calls “his- completed, the speaker first evaded the question.
toric inertia”. He adds that it may need a genera- When pressed, he admitted there had only been a
single transaction. He says developed markts have
“Current economic conditions have so far shown concern with the market structure in
reinforced the importance of the India - “but it’s early days”.
He explains that new countries structure their
relationship side; it has tied firms markets in an esoteric fashion, diligently research-
closer together to work through the ing established markets before “throwing that
research in the bin and do it the way they want to do
challenges they face.” it”. This can mean the countries do not take into
tional change of traders, “the X-BOX generation account risk management, netting, margins toler-
will think it mad and old fashioned to pick up a ances, reporting, which are essential for
phone to do things when you could just transact International investors, this in turn limits their mar-
electronically,” as he puts it, colourfully. “But it's ket's growth.
very normal for this kind of stand off between the Nevertheless, Faulkner is a supporter of variety.
market and electronic transactions. It's surprising to “I'm not saying that every market should be like a
me that there aren't more people looking at it.” mature ‘Western’ market. But this kind of
Electronic systems also face opposition based on reluctance to embrace established global
risk issues, he believes, but adds that a central coun- standards often goes too far for them to be success-
terparty may play a key role in enhancing the stand- ful and some of these markets are effectively ‘still
ing of technology. “I see great opportunity in the born’.” He cites Singapore as having made signifi-
electronic markets not least to drive cost, and cant progress, and is now popular among Asian
improve efficiency, risk management, netting, hedge funds. Australia, by contrast is going through
straight through processing.” a “troubled adolescence”, with
He cites the Financial Services Authority’s snap greater scrutiny once again being a positive long-
decision to impose disclosure requirements for term influence.
short positions in companies undertaking rights But over time, the emerging markets will relax
issues as an example of why the industry is intrigu- and open up, he believes. “When you look at Brazil,
ing. He says the ruling may adversely affect market India and China, those have the most
liquidity, and would not like to see some lenders exciting future ahead of them in the capital markets
making similar snap decisions and withdrawing arena. One would hope that they would be able to
from the market. embrace and develop securities lending functional-
Like others, he emphasises the differentiation ity. Securities lending is the lubricant of the capital
between securities lending and short selling. “An market machine; if you don't have lubricants,
investor or traders' ability to borrow securities and machines don't work.” SLMG
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STATISTICS SECURITIES LENDING
Lending by numbers
Below is a table showing a year on year the value of loanable securities.
snapshot of the industry worldwide, courtesy On loan versus cash collateral refers to the
of the Risk Management Association value of securities on loan in return for cash.
Securities Lending Composite - Averages for On loan versus non-cash collateral refers to
the First Quarter of the value of securities on loan.
2008.Lendable assets refer to LENDABLE ASSET ON LOAN vs CASH ON LOAN vs NON-CASH TOTAL ON TOTAL ON
($m) COLLATERAL ($m) COLLATERAL ($m) LOAN ($m) LOAN (%)
North American Treasuries/Bonds $1,918,074 $546,708 $85,522 $632,230 33%
US Treasuries/UST Strips $512,581 $316,996 $67,755 $384,751 75%
US Agencies $180,837 $75,140 $9,250 $84,390 47%
US Mortgage Backed Securities $186,822 $45,284 $1,019 $46,303 25%
US Corporate Bonds $1,014,888 $108,249 $5,006 $113,256 11%
Canadian Bonds (Gov't & Corporates) $22,945 $1,038 $2,492 $3,530 15%
North American Equities $2,695,899 $274,235 $13,556 $287,791 11%

US Equities (includes ADR’s) $2,637,800 $269,034 $11,565 $280,599 11%
Canadian Equities $58,100 $5,201 $1,991 $7,192 12%
European Equities $1,175,178 $47,834 $65,675 $113,509 10%

French Equities $153,032 $17,146 $6,667 $23,813 16%
German Equities $148,351 $8,405 $8,553 $16,959 11%
Italian Equities $55,114 $3,412 $3,400 $6,812 12%
UK Equities $398,886 $2,328 $18,126 $20,454 5%
Scandinavian Equities $90,990 $5,361 $4,928 $10,289 11%
All Other European Equities $328,804 $11,181 $24,001 $35,182 11%
Pacific Rim Equities (Includes Australia) $496,669 $28,146 $40,360 $68,506 14%
Japanese Equities $264,015 $12,060 $15,034 $27,094 11%
Hong Kong Equities $75,350 $4,302 $7,477 $11,779 16%
Australia $112,329 $10,241 $12,008 $22,249 20%
All Other Pac-Rim Equities $62,975 $1,542 $5,841 $7,384 12%
All Other Equities (Not Previously Listed) $98,366 $13,477 $4,768 $18,245 19%
Total Equities (Aggregate Total) $4,466,112 $363,692 $124,359 $488,052 11%
Euro Denominated Sovereign Bonds $263,452 $66,455 $39,243 $105,698 40%

French Sovereign Bonds $60,664 $16,938 $9,078 $26,016 43%
German Sovereign Bonds $81,988 $25,996 $9,922 $35,918 44%
Italian Sovereign Bonds $42,188 $5,278 $5,065 $10,343 25%
Spanish Sovereign Bonds $12,991 $3,295 $2,695 $5,990 46%
All Other Euro Denominated Sovereign Bonds $65,622 $14,947 $12,483 $27,430 42%
UK Gilts $118,207 $16,872 $43,328 $60,200 51%

Emerging Market Eurobonds** $32,080 $4,793 $398 $5,191 16%
Eurobonds $385,995 $18,575 $37,348 $55,922 14%
All Other Sovereign Bonds † $55,616 $8,025 $9,768 $17,793 32%
Total Bonds (Aggregate Total, incl US) $2,773,424 $661,428 $215,606 $877,034 32%
TOTALS $7,239,536 $1,023,120 $339,966 $1,365,086 19%

Average Number of Lending Markets 17 *(Reported in Aggregate) **(Latin America & E Europe) †(Not Listed Above)
This survey reflects data provided by: Investors Bank & Trust Company PFPC Trust Company
AIG Global Investment Corp JP Morgan Chase & Co. US Bank
Barclays Global Investors M & I Global Securities Lending Union Bank of California
Boston Global Advisors Mellon Financial Corp. The Vanguard Group, Inc.
Brown Brothers Harriman & Co. MetLife Insurance Company Wells Fargo Institutional Investments
Citibank, Frost National Bank The Northern Trust Company Wachovia Global Securities Lending

Volatility of US bonds
The graph demonstrates the
total return of US bonds
from seven months before
the credit crunch up to June
2008. Just prior to April the
injection of cash liquidity by
the US Federal Reserve
served to renovate trading
in different assets and
sharply reduced the price of
bonds. The price has been
declining since.
Averages of lendable assets for Q1 2008 compared to Q1 2007
The graph shows the

decrease in lendable assets
for the first three months of
2008 compared to 2007.
USD
Though the decrease (except
for North American
trasuries/bonds) may appear
at odds with the general
growth of securities lending,
observers have commented
that this may constitute a rise
in the quality of the assets
North American North American European Pacific Rim All Other
being traded.
Treasuries/Bonds Equities Equities Equities (inc Equities
Australia)
Percentage of assets on loan for Q1 2008 compared to Q1 2007

The graph shows the overall
percentage increase of lendable
assets are on loan. The drop in
North American treasuries/
bonds overall for the first quar-
ter of 2008 may be accounted
for by the liquidity injection
mid-way through the period.
Elsewhere, the lending increase
for Pacific Rim (including
Australia) and other equities
hints at the growth of securities
North American North American European Pacific Rim All Other lending in the Far East adn in
Treasuries/Bonds Equities Equities
Equities Equities (inc
Australia)
other new markets.
THE SEC-LENDING PANEL DEBATE
Guy d’Albrand has been global head of liquidity management at Société Générale
Securities Services since June 2004. He began his career in 1988 with Société
Générale as a futures broker in Tokyo, then spent five years in Paris as a junior
auditor before being appointed inspector in 1995. He joined Fimat in 1997 to run
the Tokyo office. In 1999 he was appointed executive vice president and special
advisor to the CEO, for Société Générale, Japan. He subsequently headed-up the
online brokerage operations in Japan as deputy CEO and then CEO. In 2002 Guy
d’Albrand moved back to Paris to become global head of audit for the corporate
investment banking division of Société Générale.
Sunil Daswani is international head of client sales & relationship management,

securities lending at Northern Trust Global Investments. He is responsible for all
Northern Trusts clients outside of North America that participate in securities lend-
ing and leads the sales efforts for any new clients. Previously director and regional
manager of securities lending in Asia for Northern Trust Global Investments he
was responsible for addressing and evaluating securities lending initiatives for
lenders and borrowers and focused on building the supply of Asian assets for
Northern Trust global securities lending program.
Jane Karczewski joined Deutsche Bank as managing director and head of supply
sales in Europe for the global prime finance desks in 2007. Prior to this
Karczewski spent 13 years at Morgan Stanley, spending three years on the equity
finance trading desk before becoming a senior sales person for all outperformance
and yield enhancement products across the European client base. Jane also
worked at Cavendish SAM in Monaco after completing her degree in European
Studies with Combined Languages at Kent University.
Eugene Picone, is managing d irector of global distribution at Wachovia Global

Securities Lending and is a member of the firm’s executive, investment, and cred-
it committees. He is responsible for distribution, client service and product devel-
opment in the western hemisphere as well as expansion of business in Europe
and Asia. Previously he spent 19 years at JP Morgan and in served various senior
roles within the securities lending product during which time JPMorgan and its
heritage firms grew from USD12.5 billion on loan to over USD300 billion in 2006.
Elizabeth Seidel is senior vice president and global head of relationship manage-
ment at Brown Brothers Harriman. She is also one of the founding members of
the BBH’s securities lending program and currently serves as global head of rela-
tionship management for BBH's offices in US, Europe and Asia. She has over 15
years of experience working in the securities lending industry.
James Slater, is senior vice president and head of capital markets, CIBC Mellon.
He is also a member of the company’s executive management committee. James
is responsibile for CIBC Mellon’s capital markets function, which includes global
securities lending, treasury and cash management. He provides strategic client
service engagement in relation to his trading and financial markets responsibilities
and chairs the company’s asset liability committee. Mr. Slater has 20 years of
experience in the financial services industry with CIBC World Markets and CIBC
Mellon. While at CIBC World Markets, he was part of the team charged with the
formation of CIBC Mellon.
1. How is risk managed in your lending management. We use investment and counterparty
programme? risk management using the broader Wachovia fran-
Slater: Risk management is a core focus in all of our chise. Evergreen, our investment management sub-
business activities. In securities lending we carefully sidiary, is utilized for both credit research and overall
manage reinvestment risk, borrower risk, and opera- market risk management. The credit team facing off to
tional risk. The overriding objective of our cash rein- the investment bank is our major source of counter-
vestment risk strategy is the preservation of capital. party risk management. Day to day exposure to risk
We maintain a substantial amount of overnight liquidi- is managed through a combination of the WGSL
ty in our reinvestment pools to reduce the potential for operations and trading teams to ensure that all margin
forced sales. We analyze each issuer for credit quality levels, recalls and entitlements are executed on a time-
and maintain strict portfolio diversification standards. ly basis. Our internal risk and compliance team under-
Our cash reinvestment trading system monitors each goes compliance checks against all lending guidelines,
trade against predefined limits to prevent compliance not just collateral, on a daily basis.
breaches against stated mandates. CIBC Mellon con- Karczewski: Deutsche Bank has stringent risk con-
ducts comprehensive and on-going credit reviews of trols across all of our business platforms.
borrowers, and has established borrower limits that are Counterparty, market and operational risks are
monitored in real-time. We mark-to-market collateral assessed daily. Deutsche Bank borrows on a principal
for each loan on a daily basis to ensure adequate basis so the beneficial owner’s counterpart is
coverage of the value of each loan. We have estab- Deutsche Bank. Our long term ratings are Aa3
lished policies and procedures incorporating daily rec- (Moody’s), AA- (S&P) and AA- (Fitch). Counterpart
onciliation of back-office activities, strict segregation exposures, be it verses our hedge fund clients or our
of duties between operations and trading teams to lenders, are analysed by a dedicated risk team within
maintain adequate internal controls, and rigorous global prime finance and credit. Our models take into
employee training. CIBC Mellon is committed to fur- consideration issuer exposure (earnings warnings,
ther automating our back-office ensuring less manual credit downgrades, mergers/acquisitions and down-
intervention and so reducing the potential for human grades) and macroeconomic risks (sovereign default,
error. energy price shocks, political instability and disas-
Daswani: Risk management is the cornerstone of our ters). The level of risk control at Deutsche Bank has
program. Northern Trust employs stringent approval meant that our lenders are usually happy to accept
processes, including ongoing monitoring by dedicated flexible forms of collateral and margin. Operational
risk management resources and senior managers who risk in securities lending will always exist, even if lim-
are actively engaged in managing business risk ited. Automated recall processing and monitoring,
through committee structures. Both qualitative and coupled with a dedicated client service team who
quantitative measures are used to control and monitor proactively monitor and react to settlement and corpo-
borrower, investment and collateral risk. rate action queries, serve to mitigate operational risk.
Any operation exposures are monitored by operational
d’Albrand: Risk management is a critical part of all controllers and credit officers within the firm.
of our services for securities lending, repurchase
agreements (repo), FX and cash reinvestment. Our Seidel: Our focus is on the main risks inherent
risk and compliance department closely monitors within securities lending: counterparty risk,
counterparty, market liquidity and operational risks collateral risk, reinvestment risk, operational risk and
continuously, with clear reporting flows to risk man- regulatory risk. The management of each of these
agement entities within SG. We aim to avoid market risks involves a detailed set of disciplines we adhere
liquidity risk by increasing collateral quality and rein- to throughout the lifecycle of a loan transaction and
vesting cash within diversified and high quality include our decision to lend to a limited number of
instruments. Counterparty risk is managed initially by top tier borrowers, our focus on extracting maximum
the borrower’s choice, then is mitigated through our intrinsic value in each loan transaction, and prudent
agency lending programmes that offer diversification collateral reinvestment. This set of disciplines has
and indemnification in case of counterparty default. served our clients well during both the recent period
Risk and compliance also plays an important part in of market turbulence and similar challenging periods
the development of new products and activities. in the past.
Picone: Risk management at Wachovia is a 2. How has the credit crunch changed the
firm-wide endeavour. There are internal systems, pro- market?
cedures and individuals responsible for risk Slater: The credit crunch has brought greater oppor-
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SECURITIES LENDING PANEL DEBATE
tunities to enhance returns and has opened the door to accepting forms of non-cash collateral. GC (general
more informed dialogue with clients around the collateral ) is being sourced at discounted levels, and
unique risk/reward characteristics of lending against via synthetic structures. Specials (or hot stocks) are
cash collateral. Higher incremental returns as a result becoming more volatile and costly due to increased
of wider credit spreads have stimulated greater interest sensitivity around corporate governance. It is therefore
in lending against cash. Collateral costs have important to deal with the market leaders who have
increased, so borrowers have increased their use of the appropriate operational infrastructure and detailed
non-cash collateral to mitigate pressure on their bal- market knowledge to maximise the profitability of
ance sheets. This highlights the importance of a flexi- your portfolio.
ble collateral management program, which incorpo- Seidel: In early 2007, the focus was on how to gener-
rates both cash & non-cash collateral. ate higher returns from enhanced collateral reinvest-
Daswani: The credit crunch has changed the securi- ment vehicles and new routes to market. Eighteen
ties lending market in numerous ways. Investment months on, the posture of many beneficial owners has
spreads have expanded, borrowers are de-leveraging, understandably changed. They still value the benefits
and a flight-to-quality has increased demand and of lending but they are much more focused on ensur-
spreads for US Treasuries. With the changes in the ing their principal assets are protected properly.
market environment over the past year, regular com- Owners are zeroing in on the investments in their cash
munication with our clients has been a top priority.
Clients now take a keen interest in refreshing their “The flight towards increased
understanding of securities lending, their program, as quality, along with a normalization
well as specifics such as our approach to fixed income
research, collateral characteristics, borrower reviews, of rates has produced returns that
and the dynamic drivers of demand. are more representative of the risk
d’Albrand: The credit crunch has stressed the impor- the client is taking.”
tance of efficient risk and collateral management.
Affected by uncertainty and credit downgrades, securi- Eugene Picone
ties lending equity markets have, in fact, celebrated
greater returns because of the increased focus on the collateral vehicles, the credit quality of borrowers in
generation of cash collateral and returns through the their program and their contractual protections.
reinvestment of cash. Our clients understandable cau- 3. How has changing liquidity affected
tion about the quality of collateral, requires us to borrowing/lending spreads?
focus on more diversified investment strategies in Slater: In August 2007 liquidity tightened because
order to obtain a certain level of stability. lenders were increasingly reluctant to extend credit to
Picone: We have seen three significant changes. The institutions. This caused credit spreads to widen
flight towards increased quality, along with a normal- across the board impacting all issuers including banks,
ization of rates has produced returns that are more rep- corporations and ABCP conduits. Confidence is now
resentative of the risk the client is taking. Second, in returning to the credit markets in response to the
order to meet balance sheet requirements, dealers have aggressive action of central banks and the willingness
put pressure on agents and our clients to accept not of financial institutions to replenish their balance
only less cash collateral, but also more types of collat- sheets with new capital. These wider spreads have
eral. Third, the market has been re-awakened to risk resulted in greater revenues for our clients. Prudent
and should allow for better differentiation in product. management of our reinvestment process, ensured
Karczewski: Since August last year, various major CIBC Mellon avoided adverse impact on returns from
events including sub-prime, inflation and trader losses more risky, higher-yielding non-bank sponsored
have changed the dynamics of the markets across all ABCP issues. Although credit spreads remain higher
trading activities. Investor’s confidence has been than we have seen historically, they are moderating as
affected and there has been a distinct flight to quality. relative normalcy returns to the credit markets.
Deutsche has seen a marked increase in new client Daswani: As the credit markets deteriorated in late
business over the last 12 months. Fund managers are 2007, there was a flight to buy US Treasuries and US
divsersifying their risk and partnering with organisa- Treasury lending spreads were extremely wide in the
tions with whom they feel safe. In securities lending fourth quarter of 2007 and first quarter of 2008.
and equity financing volumes have increased as bor- After the Federal Reserve provided credit facilities to
rowers have sought to move balances to lenders promote liquidity in the markets, US Treasury lending

spreads tightened significantly. In addition, the Daswani: Regulators have become much more
demand side created liquidity and reduced leverage, knowledgeable about securities lending over the past
which reduced overall loan volumes. A greater few years. They are now operating in a more coordi-
demand for cash in general and we experienced an nated way globally which is vital, as the industry
increase in reinvestment spreads, which benefited our becomes more global. Northern Trust works directly
clients who are willing to accept cash collateral. with regulators and industry associations to stay
d’Albrand: With the changing liquidity there has informed and to work directly on solutions.
been a widening of the spreads, which has required d’Albrand: We expect closer regulatory monitoring
agent lenders to re-examine their lending strategies. At as a result of the MiFID directive, effective in France
SGSS, we are getting away from specials and have since 1 November 2007. MiFID has altered the whole
adopted a general collateral approach, focusing more regulatory landscape for financial services. For
on cash flows to remain as liquid as possible. In order instance, we are now required to file comprehensive
to obtain the best rates however, we need to be able to reports regarding our activities and evidencing our
quickly switch between cash and non-cash trades. compliance with MiFID rules.
Most recently, we have seen some trades which have Picone: Wachovia has always subscribed to a policy
actually been backed by securities collateral as of full transparency when dealing with our counter-
opposed to cash in order to increase the non-cash net parts, clients, regulators and auditors. It will be inter-
balance. esting to see how the regulators of our clients will
Picone: In terms of liquidity of supply, we have seen react, if they tighten scrutiny of programs and if
very little pull back for programs, thus the dealers greater focus is placed on examinations. With Basil II
seem to have no trouble finding securities. What has just around the corner, I am sure the Fed and the OCC
happened is that the early flight to quality put pressure will be watching closely to see what effect this has on
on the high-quality US Treasury market raising intrin- their constituents, both on the securities lending and
sic spreads by 20-75 basis points at times. The lack of the asset management side.
collateral investment product lead to a greater demand Karczewski: Deutsche Bank has always worked
for overnight repo backed by almost any “high quali- closely with market regulators, but has been especially
ty” collateral, pushing up spreads for general collater- close to the FSA, BaFin and similar organisations over
al. Product that does remain is “scarred,” so we see
spreads on 1-3 month CP over 20 basis points or more “Regulators have become much
to Fed Funds.
more knowledgeable about
Karczewski: The spreads in the securities lending
market have certainly been affected by the dynamics securities lending over the past
of the market over the last year. The cost of collateral few years, which is vital, as the
has in some cases driven GC trades into negative prof-
itability; hence GC levels have been subject to great industry becomes more global.”
pressure. The european lenders who accept non cash Sunil Daswani
collateral, especially equities and converts have been
the main beneficiaries, with more of their GC being the last year as part of the firm’s compliance with
lent due to the attractiveness of their collateral profile. Basel II regulations and ALD.
4. Do you anticipate any changes to your relation- 5. What have you found to be the best system for
ship with the regulators - will it be closer? helping beneficial owners manage collateral? Has
Slater: Canadian regulators recognize the importance the last 12 months changed this process?
of securities lending in facilitating the efficient opera- Slater: The steady growth in cash collateral balances
tion of the market, and have expanded the range of over the past few years demonstrates that the
permitted markets for securities lending transactions, Canadian market is moving toward a more balanced
and have worked with industry players to expand the and flexible approach to collateralization.
range of institutions allowed to lend. Regulators have Traditionally Canada was a non-cash (fee-based lend-
also supported the introduction of short strategies to ing) market but now cash collateral loans account for
the retail mutual fund market. Bill C-28, passed around 20% of outstanding loans, which is closer to
December 2007, is expected to drive growth in lend- the 60% seen globally. We have dramatically increased
ing against cash collateral with non-Canadian counter- the amount of resources dedicated to servicing clients
parties. It eliminates cross-border withholding taxes within our cash collateral lending program. We are
on securities lending rebates. having more one-on-one meetings to review our
investment strategy, credit research capability and per- try, beneficial owners are closely scrutinizing the
formance track record. We have also significantly investments made by their cash collateral vehicles and
increased the amount and quality of reporting to meet taking decisions based on their level of comfort rang-
our clients’ governance objectives. ing from moving to a self managed model or a higher
Daswani: We maintain higher levels of overnight liq- level of non-cash collateral.
uidity and allocate investments towards high quality 6. Malaysia & India are two of the newest Asian
issuers such as US treasuries and agencies. Our invest- market opening up to securities lending on a signif-
ment process is also now more selective and has a icant scale. Are you in or do you have plans to enter
deeper focus on principal preservation. into these or neighbouring markets?
d’Albrand: The best way to help beneficial owners Slater: Malaysia and India both have restrictions on
manage collateral is to first determine the right collat- the scope of eligible lending activity for offshore par-
eral type, in accordance to their needs and risk will- ticipants. CIBC Mellon continues to review opportuni-
ingness, and then adapt the collateral structure on a ties for penetrating these markets, although current
day-to-day basis to meet this. Maintaining an appro- activity for offshore lenders is generally limited to
priate split between non-cash and cash collateral is American Depositary Receipts (ADR) or synthetic
critical, as is knowing when to avoid risk. A perma- equity-linked strategies.
nent dialogue with beneficial owners enables us to
offer flexible solutions such as collateral held with us Daswani: Northern Trust was an active lender in the
or another custodian and provide client reporting on Malaysian securities lending market prior to the 1998
regulatory changes that effectively closed this market
“Countries like Malaysia and India to offshore participants, and is currently re-evaluating
its plans for this market. We have been actively work-
present significant opportunities ing with the Bursa Malaysia, closely reviewing their
...these largely untapped markets securities borrowing and lending system, which was
launched in January 2007. India recently, implemented
drive up the demand for securities its long-awaited short-selling and SBL system applica-
lending.” ble to institutional investors, which previously was
only open to retail investors. The new model is heavily
Guy d’Albrand reliant on onshore participants entering into on-
their underlying investments. Liquidity is increasingly exchange SBL transactions with a fixed-term transac-
important, so we aim to stay as liquid as possible by tion (7 days), the mechanics of which can represent a
selecting safer investments, according to maturity and hurdle to offshore entrants. However, the increasing
rating. profile of the Indian economy, means it is important to
explore any opportunities that we can offer.
Picone: Wachovia has always abided by the philoso-
phy that separate accounts are the best system in the d’Albrand: Countries like Malaysia and India pres-
long run. While some preach the benefits of liquidity ent significant opportunities as regulators strive to
via combined funds, the fact is that controlling the increase market liquidity and foreign investment.
parameters and guidelines still falls in the hands of the Especially with the growth of hedge funds, these
agent. Over the last year, our clients have had full dis- largely untapped markets drive up the demand for
cretion over their portfolios. securities lending. With implantations already in Asia,
it is logical for us to expand our securities lending
Karczewski: Choice of counterpart is key in manag- activity into this zone, and timing will have a lot to do
ing collatoral risk. Tri-Party enables borrowers to man- with our business development there. Along with
age their collateral in a cost effective and efficient opportunities come risks - operational, regulatory and
way. Additionally the beneficial owner has assured country stability risks, however, with our
collateralisation at all times through the Tri-Party auto- know-how and experience in more mature markets
mated process. There is now increased use of Tri-Party like the US and Western Europe, we are well equipped
product both on the equity and bond side as the prime to enter new markets at the right time and with the
brokers and broker dealers seek to re-hypothecate right strategy.
internal pools of assets and do collateral upgrade Picone: Like any other agent and any other market,
trades. Wachovia will listen to the market demands, the
Seidel: Our approach has been one of close commu- inventory we have at hand, the risks involved in open-
nication and transparency. Across the broader indus- ing a new market and will make a decision to move
forward or not. The controls often placed on securities
>> 5P ¾OE PVU NPSF MPH PO UP KQNPSHBODPNTFDVSJUJFTMFOEJOH PS DPOUBDU
Western Hemisphere William Smith at 212-623-5664
Europe, Middle East and Africa Michael Fox at 44-207-742-0256
Australia/Japan Stewart Cowan at 61-2-9250-4647
Asia Andrew Cheng at 85-2-2800-1809
lending by the emerging markets can make the process their short obligations. The program, implemented in
quite onerous and un-economical for the agent, if you April, imposed several restrictions (e.g. restricted sup-
don’t have some critical mass in the local assets. As ply to approximately 200 specific stocks eligible for
with everything, we must balance the returns of being trading in the futures and options segment, standard
the first to move into the market with the risk to our tenure of seven days, FII margin/collateral in the form
clients. of non-interest bearing cash), which have so far limit-
Karczewski: Deutsche Bank is a market leader in ed demand for this market. As our due diligence
access products in emerging markets in Asia, Europe efforts unfold in these and other markets, we will pro-
and Middle East. Our Asian platform is one of the vide an update to our clients on the opportunities and
largest in the market and we are in the top 3 with profile of engaging in these markets for their consider-
respect to volumes in both Malaysia and India specifi- ation and approval.
cally. However the majority of this business is still 7. There have been many new electronic platforms
traded synthetically. There has been much interest in and systems developed recently. How have you
the India market for stock loan since SEBI changed its found these and what has been the market uptake?
rules back in October 2007 with respect to the use of
derivatives, however the current proposed structures Slater: The uptake of these systems depends on the
by SEBI (India) and BURSA (Malaysia) are not mak- function they perform in our business. In dealing with
ing the stock loan product particularly viable at this performance measurement, CIBC Mellon was an early
stage. The stock loan market in India is certainly more adopter of Data Explorer’s Performance Explorer sys-
of a fails cover product rather than a developed liquid- tem. This allowed us to provide clients with greater
ity product in the true sense of securities lending. context to their lending activity and to demonstrate
Deutsche Bank continues to work closely with the superior added value. All major Canadian players
onshore regulators to develop the product in both have now adopted this system, which is encouraging
India and Malaysia. Korea and Taiwan continue to be stronger competition and more rational decision mak-
popular markets, and there is still significant out per- ing. As for back-office systems, CIBC Mellon is the
formance linked to either individual trades or cus- first Canadian user of Equilend’s offering. We have
tomised baskets. implemented components of their back-office suite to
enhance efficiencies and reduce operational risks. The
Seidel: As is the case before we enter any new market uptake of trading systems in Canada has been slow
for lending, we are performing the necessary due dili- due to the lack of suitable products that fit our regula-
gence on Malaysia and India to ensure engaging in tory environment. Although these trading systems
activity in these markets would be in our clients best have yet to catch up to our market’s unique require-
interest. Bursa Malaysia has recently implemented ments, we do see the value in using them.
several changes in order to align with international
market practice while adding liquidity to the market. Daswani: Northern Trust has always been a leader in
It has also recently presented the new, over the count- technology. As an owner and significant user of
EquiLend, we have focussed on leveraging EquiLend's
“We have focussed on leveraging standards and global platform to further enhance our
straight-through-processing capabilities. We believe
EquiLend's standards and global that EquiLend brings standardization to the securities
platform to further enhance our lending industry and this standardization brings more
business to the lenders with scale. In addition, we have
STP capabilities... this standard- utilized the front-end trading platform, T20, to allow
ization brings more business to the our traders to extract more value from lending portfo-
lenders with scale.” lios. We are constantly evaluating electronic solutions
to determine if they will generate additional revenue
Sunil Daswani or reduce expenses.
er/negotiated transaction model that will allow securi- d’Albrand: Automated capabilities for securities
ties lending on a bilateral agreement basis. This new lending continue to advance, changing the way in
model would alleviate the risk of buy-in situations which we work. Specialised trading platforms support
which are strictly enforced in Malaysia and allow the growth and demands of the industry, providing
access to offshore investors In the case of India, the more precise portfolio information, increasing market
Central Bank gave approval to Foreign Institutional efficiency and trading volumes, improving process
Investors (FIIs) in late 2007 to short sell and engage in standards and reducing operational risks. However,
stock borrow transactions for the purpose of fulfilling each platform is specialised within a specific market,
making it difficult to find cross-industry standardisa- plexity in loan transactions. These parameters may
tion, and further raising benchmarking issues. At include restrictions on markets, portfolios and asset
SGSS, we offer our clients our Global Performance types as well as authorization of borrowers and
Benchmarking Tool, which analyses their portfolio collateral options. Given the difficulty in solving for
performance and compares it to the market. Overall, these nuances and the need for flexible customization
the use of electronic platforms can optimise returns options, the electronic exchange vendors will
and the uptake has been positive. One cannot ignore, require further enhancement to their current
however, the fact that the value of a service provider technology offerings.
boils down to their ability to know when to make 8. Has there been much development in the use and
judgement calls according to client requirements and popularity of 130/30 funds and exchange traded
market nature on an ongoing basis. funds?
Picone: The two major alternatives to the ICAP plat- Slater: Canada is not isolated from these global
form, SunGard and Equilend, both offer unique capa- trends and we are seeing an upturn in both alternative
bilities, particularly when it comes to US vs. non-US investment products and ETFs, driven by the growing
assets and the ability to execute trades, maintain loans sophistication of investors. According to Investor
and reconcile positions. ICAP is more in the auction Economics in Toronto, Canadian hedge fund man-
or trading end of the spectrum and seems to be mak- agers now control around USD37 billion in assets.
ing some in-roads there but only time will tell if the These hedge funds are primarily available to affluent
market if ready for full transparency. I think what will Canadian investors, or institutions, and are sold
be really interesting, is if one of them can develop and through offering memoranda.Pure hedge funds are
sustain a central counterparty model to help with both only one part of the story and increasingly traditional
supply sourcing and in satisfying demand. While an long-only managers and institutional investors are
argument can be made that the cost efficiencies of driving additional demand for securities borrowing as
some of these platforms could result in more demand, they wade into alternative strategies. Although retail
the platforms themselves do not seem yet to be creat- investors are not permitted to purchase 130/30 funds,
ing exponential demand. shorting has become more common among Canadian
Karczewski: The development of electronic platforms mutual funds. Mutual funds are now permitted to
has substantially increased the efficiency of the mar- hold up to 20% of their funds in short positions, pro-
ket, especially for GC flow. However this does rely
upon there being an STP process at the user end “The development of electronic
which is not always the case. This has been prohibitive
for some of the mid to smaller tier lenders. Equilend platforms has substantially
(for international) and Secfinex (for UK business) increased the efficiency of the
have been the most widely used by Deutsche Bank
with a significant amount of our GC flow being market.”
directed via users of the platform. This allows the Jane Karczewski
traders to concentrate on market analytics, new trading
opportunities, client relationships, specials and alter- vided they receive necessary regulatory exemptions.
native sourcing methods. In two years, this hybrid segment of the market has
Seidel: Electronic platforms are widely utilized in grown from around USD7 billion in assets to USD15
the marketplace for equity general collateral (GC) and billion, according to Investor Economics research.
fixed income lending given the static nature of the Exchange traded funds (ETFs) are also a growing
loan transaction. For example, BBH actively utilizes segment of the Canadian market place bringing with
Equilend and SunGuard’s Loanet platforms for auc- it greater competition and new entrants. There are
tion facilitation, GC lending, and to achieve opera- currently three companies active in the space with
tional efficiencies such as loan marking, contract more entrants anticipated in the coming years.
compare and dividend compare just to name a few. Daswani: Exchange Traded Funds (ETFs) have
However, equity special lending and yield enhance- become a valuable asset class in our securities lend-
ment trading operate more as an over the counter ing portfolio. The number of ETFs available to lend
(OTC) market from a trading perspective than the GC and the demand to borrow the ETFs has grown at a
market. This dynamic, in addition to the increased strong pace. The buzz of 130/30 quieted down a bit
interest of beneficial owners to customize their lend- in the fourth quarter of 2007, however active exten-
ing programs under defined parameters, creates com- sion still represents a near and long term advance-

ment both from the demand and supply side. We con- of the macroeconomic downturn and stock market
tinuously look to strategically partner with our clients conditions. Nonetheless investor demand for the strat-
and counterparties to deliver solutions in this space. egy has been up with a recently conducted survey
d’Albrand: There appears to be no clear develop- saying that over 50% of public pension plans are
ment one way or the other for 130/30 funds. The cur- using, seriously considering, or evaluating 130/30
rent credit crisis is working against innovative devel- strategies. It would seem that investors continue to
opments in general, and it’s a question of timing as to believe that the 130/30 tool has both strong academic
when the 130/30 funds will really catch on. Like any logic and practical implementation efficiency.
fund, the 130/30 extension strategy will only be as Although overall inflows in 130/30 have been slightly
good as the managers running it, keeping in mind more disappointing than many originally predicted a
that this strategy will also generate its own risk and couple of years ago, an asset class experiencing phe-
compliance requirements. From a securities lending nomenal growth over the last 18 months is the ETF.
point of view, service providers should allow access The number of ETFs worldwide rose by 64% to
to both GC and hot stocks, permitting them to keep 1,171 ETFs at the end of 2007. Deutsche Bank
an open dialogue with clients in order to offer a more launched db x-trackers in January 2007 and during
catered global service. At the appropriate time, the 2007 saw the highest inflow in assets among all ETF
130/30 strategy should enlarge the current securities providers in Europe. Not only has this allowed fund
lending market and increase transaction volumes for managers to gain long exposure in a flexible and low
beneficial owners. For those who are able to meet the cost manner, but the ETFs have also acted as a useful
requirements, 130/30 should present a real opportuni- investment tool in volatile markets, as they have
ty to build their overall business. enabled investors to hedge their portfolios without the
use of derivatives. According to Deutsche Bank,
Picone: While it remains a hot topic amongst portfo- turnover in European ETFs increased by 88% in
lio managers and fund boards, in talking to the bor- 2007, with assets under management increasing 22%
rowing and beneficial owner communities, the in the same time period. This escalation of interest
130/30 concept seems to be on simmer. While sell- from investors and traders has also generated further
ing short and then borrowing the securities is a sim- demand for borrowing ETFs, giving investors an
ple concept to position, the mechanics and legal opportunity to add incremental returns through lend-
dynamics can be extensive. Using synthetics and ing their ETFs.
swap transactions as alternatives to a formal prime
brokerage set-up, have also been discussed. That Seidel: Unregistered 130/30 funds continue to pre-
said, one survey group has estimated that by 2009, dominate, although they are growing at a slower pace
86% of all fund managers will have some form of than anticipated. The interest in registered funds con-
130/30 or similar strategy. The inherent quandary is tinues although there are some operational and mar-
that traditional fund managers have worked very hard ket issues that are preventing the interest translating
over the last 5 years to shed expenses, reduce opera- into actual growth. Firstly, under current regulations,
tions and have become very efficient. They have the collateral pledged from a registered fund’s long
burst onto the lending scene as a way of increasing assets to satisfy margin requirements at its prime bro-
returns but overall, that has been a net revenue gener- ker must be held in a tri-party account at its custodi-
ator, not a cost to the funds. Prime brokerage, while an. This means the prime brokers cannot access and
seeing some indications of commoditization, is still re-hypothecate the collateral for funding purposes.
an expensive operation and I believe many of them Until this situation changes, prime brokers will be
are struggling with that concept, thus there is a hesi- reluctant, especially in the current markets, to provide
tancy to use the 130/30 or similar strategies until they managers with the funding they need for the short
can truly estimate demand, pricing, and profitability. component as it is effectively unsecured. Secondly,
the credit crisis has resulted in 130/30 managers fac-
Karczewski: Deutsche Bank estimates the ing increased margin calls from prime brokers on the
ActiveEnhanced Product or 130/30 to currently have long component of their portfolios, forcing some to
USD90bn (although the debate continues to rage on close out existing short positions to cover the calls.
the size of the industry). The EU Active Enhance This has forced upward price pressure on the short
product launches are mainly offering fundamental portfolio, degrading performance on the short com-
strategies, whereas conversely US launches favour ponent and therefore the overall portfolio. In conclu-
quant strategies. Although performance has been dis- sion, we think these strategies are here to stay, but the
appointing with most 130/30 managers underper- timeline to reach predicted levels of critical mass has
forming their benchmarks, much has been as a result been extended beyond initial forecasts. SLMG

ASK THE EXPERTS
ager approach to the latter. Through the trans-

APG parency of auction process we are able to identi-
fy both short and core assets. This has allowed us
to diversify our asset concentration and our man-
Investments agers are able to take longer positions with our
core cash.
Securities Lending: a back office function Our risk management model is a key control in
or a front office investment strategy? the evaluation of our program. We use a variety of
risk management analytics in our formal bi-week-
At APG Investments, ly evaluations of the program. We have standard-
we place the strategy ised the delivery of program data throughout our
of lending securities vendor base to facilitate our reporting tools. We
directly within the analyse exposure on multiple fronts, including
spectrum of our front counterparty, fund and country exposures. APG
office functions. Investments also reviews quarterly counterparty
When our passive credit and, our exposure to unsecured debt and as
securities lending well as Value at Risk, the latter allowing allows us
program netted to monitor the effect of market fluctuations on
USD 43 million in our collateral margins.
2003, we researched We also ensure that our securities
and implemented an lending strategy does not interfere with our other
‘active management’ investment strategies. We have built the program
approach. We apply so that it requires minimal support from our back
the same rigorous office.
investment disci- Over the past decade APG Inverstments has
Mark Linklater plines to our securi- developed a robust corporate governance policy
ties lending program as we would to our other to ensure sound corporate governance. Our secu-
alpha strategies. We use use a diverse range of rities lending desk has followed suit, and now
vendors selection and subject them to monthly monitors on- loan levels, which is particularly
and quarterly performance evaluations. important in the run-up to AGMs.
Our program benefits from a three-vendor APG Investments sees value in both the initiative
diversification approach. Three times a year we that the securities lending desk is attempting to
bring our attractive asset mix to the market achieve and that of our corporate governance
through eSeclending’s auction platform. This pro- team. We have carefully struck a balance
vides transparency unique in the industry, price between the two. The transparency we have devel-
discovery and benchmarking. Our close vendor oped in our program has been the key in striking
relationships have been paramount in allowing this balance.
the growth of the program, and this year we stand By following the same investment management
to generate EUR180. Our robust compliance principles of our other front office investment
infrastructure allows us to manage the size of our strategies we have been able to identify and
a program and we also offer a bundled custody manage risk throughout our securities lending
strategy to ensures that we fulfill our securities program.
lending needs. The program is divided between
our custodians and our third party lenders. Mark Linklater is head of securities lending at
With more than 80% of our assets being distrib- APG Investments. He has 25 years of
uted through our auction program, it provides the investment experience in mergers and
desired vendor diversification and allows us to acquisitions and asset management, both on the
shop for more competitive custody costs. We use sell side and the buy side; He has been with
JP Morgan and State Street for custodial lending. APG Investments for just over seven years. Mark
As our program has grown, our compliance was asked to take over the business of securities
infrastructure has grown with the program. We lending at the end of 2003 with the mandate to
have developed a consolidated reporting network revitalise and enhance performance. Since tak-
covering lending and collateral management, ing over the business the team quadrupled the
which has enabled us to install a multi- style man- return of the program.
28 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009

Single Stock Futures (SSFs)
• A very efficient tool for synthetically getting long and short delta.
• SSFs offer much more attractive financing rates than those offered
through brokerage accounts.
• SSFs offer an attractive alternative to the current stock loan process

as beneficial owners can supply the delta to the market that the
short-sellers want without assuming any counter-party risk.
Increase yields Decrease risk
the exchange for Single Stock Futures
For more Information visit us at

www.onechicago.com
or call David G. Downey, CEO, at 312-424-8520
©2008 OneChicago LLC. All rights reserved. The information in this presentation has been compiled
by OneChicago, LLC for general information purposes only. Although every attempt has been made
to ensure the accuracy of the information, OneChicago assumes no responsibility for any errors or
omissions. Examples herein are hypothetical situations used for explanation purposes only and should
not be considererrors or omissions. Examples herein are hypothetical situations used for explanation
purposes only and should not be consider advice. All matters pertaining to rules and specification
herein are made subject to and are superseded by the official OneChicago rules. The Exchange for
Single Stock FuturesSM is a service mark of OneChicago, LLC.
ASK THE EXPERTS
Recent issues related to counterparty solvency
BBH
What impact will the credit crisis have on
have served to remind the industry of the value
that a third party agent provides from an over-
sight perspective. In the current climate, where
securities lending programs? even the most highly regarded organisations can
A healthy securities quickly become vulnerable, the importance of an
lending market pro- independent third party agent performing critical
tects investors by processes like collateral management and bor-
striking the right bal- rower monitoring cannot be overstated. In this
ance between risk respect, lenders who are financially stable with
and return. Prior to robust operational and risk management proce-
the credit crisis, dures should fare particularly well.
increased competi- Beneficial owners will now have a much better
tion and historically sense of how protected they really are in their
tight credit spreads current program, another short term result of
created an environ- recent events. While lending agents have indem-
ment where, in some nifications and risk management practices in
quarters, there was place to deal with borrower default, it’s not until
too much emphasis there’s an industry crisis that these get stress test-
on chasing returns ed and refined. These protections range from an
and not enough on understanding of the risk management practices
Christine Donovan mitigating risk. of an agent to contractual provisions extended to
As late as the first half of 2007, beneficial the beneficial owner.
owners were exploring all options that could yield Longer term, the securities lending industry
higher returns, including direct routes to market, should emerge from the crisis stronger than ever.
accepting lower grade collateral, and expanding Additional transparency and understanding by the
cash collateral investment guidelines. As the beneficial owner community will translate into
credit crisis emerged, beneficial owners were sud- greater dialogue to understand the exact nature of
denly keen to ensure that their lending providers the risks assumed and the associated returns.
were correctly managing their counterparty risk Furthermore, there is likely to be greater
and prudently investing their collateral. emphasis on diversification from an economic as
Therefore in the short term, we believe there well as a risk perspective, leading to increased
will be a great deal of reflection on the part of demand from beneficial owners for flexible
beneficial owners regarding what their aims are hybrid programs, which can combine the best of
with securities lending and whether these are all routes to market depending upon the composi-
matched by the profile of their program. For tion of the asset portfolio and the prevailing mar-
instance, the primary focus of many securities ket conditions.
lending programs is to lend as much volume as Recent market conditions have provided a great
possible to maximise cash for reinvestment. stress test for the securities lending industry. The
However, with increased volume on loan comes challenges have provided an opportunity for
increased risk, so beneficial owners may consider industry participants - from beneficial owners,
whether they want to shift to a securities lending agents and borrowers - to learn valuable lessons
program that focuses on optimising rather than and enhance their risk management processes. It
maximising returns. It’s a subtle but important is important to note that the volatility of the
difference and involves factoring in the risk pro- broader capital markets has created significant
file of each transaction to the return opportunity. returns from securities lending. These can be
For instance, total return driven by high portfolio captured without introducing unnecessary risk
utilisation has long been held up as the bench- especially in relation to collateral reinvestment
mark of a successful lending program. However, and the providers that win will be those that get
with increased utilisation comes increased risk, this balance right.
so the success of a lending program should be Christine A. Donovan is managing director,
judged upon a broader set of measures including Brown Brothers Harriman Investor Services &
the risk exposure of the program and the intrinsic Markets and founded BBH’s in-house Securities
fee per loan. Lending Program in July 1999.
ment, which uses various types of equities as col-

CalPERS lateral. The capital markets have used repos for
many years, but historically the borrower provided
US government, mortgage backs, and corporate
Using equity repo to diversify a portfolio in securities for collateral.
an illiquid market When establishing an equity repo program, there
Billionaire financier are many things to consider: acceptable equity
Warren Buffett once securities, margin, corporate actions, and rates of
said; “In the business return. The largest categories to choose as accept-
world, the rearview able collateral include the following:
mirror is always - Type of equities (common or preferred stock,
clearer than the wind- ADRs, etc)
shield.” Nothing - Specific indices (S&P 500, Dow Jones com-
could be truer when it posite, etc)
comes to today’s mar- - Pre-determined exchanges (NYSE, NAS-
ket and its effects on DAQ, etc)
cash collateral for Equities with a minimum price per share
securities lending. - Maximum percentage of market value
The credit markets The equity repo market grows daily as more
have surprised most investors are willing to accept equities as collateral
investment managers, and more broker/dealers are starting equity repo
forcing everyone to programs. Using equity repo as another tool to
Daniel Kiefer be on high alert. To add diversification creates a balance between liq-
ensure the most efficient use of cash collateral it is uidity and return; thus making the windshield a bit
important to maintain a balance among diversifica- clearer.
tion, liquidity, and return. Margins for equity repo can range from 105% to
Diversifying a portfolio’s assets should not be 110%. The seller typically receives any income
underestimated in today’s market. It reduces risk paid and maintains the right to vote on securities
and benefit securities lending programs. Broker held as collateral. The rates of return on equity
diversity, the types of securities purchased, and the repo will vary depending on the type of equities
maturity and duration of asset classes are all cate- accepted, required margin levels, and supply and
gories which, when properly managed, will demand. Customarily, equity repo has paid a
improve this. spread above Federal funds. All of these aspects
CalPERS uses two main types of assets to main- would be agreed upon during the negotiation of
tain portfolio liquidity: money market funds and the transaction. Since equity repo is still a fairly
repurchase agreements (repos) using fixed income new product, not all banks and brokers are fully
and/or equities as collateral. While traditional repo engaged in offering this form of collateral.
and money market funds have been around for However, all indications are that this sector of the
many years, repurchase agreements collateralized market will continue to grow as more banks and
by equities are still fairly new to the US market. brokers utilize their equity positions for funding
In the past, equity repo has not been popular purposes.
because fixed income assets were considered the Daniel Kiefer CFA, is opportunistic portfolio man-
most safe, but with the collapse in the structured ager within the fixed income unit, and oversees the
products market and as US markets have expand- securities lending program, credit enhancement
ed, banks and broker dealers have sought to program, as well the member home loan program
increase their financing capabilities by using alter- at California Public Employees’ Retirement
native forms of repo collateral, such as equities. System. He provides direction and oversight for the
Equity repo has become a strong component of securities lending program and has developed an
the overall repo market because of the benefits on-line principal bidding process and in so doing,
provided by transparent pricing, which is a more formed a joint venture with eSecLending. A char-
dependant book of liquidity, and reduced execution tered financial analyst since September 1994 and
risk. Adding equity repo to a portfolio disaggre- holds two degrees from the University of Colorado,
gates risk and makes it more transparent. MBA, accounting and a BSc in finance with a con-
Simply put, equity repo is a repurchase agree- centration in investment and portfolio analysis.
ASK THE EXPERTS
ICGN And they are not alone. While spokespeople decry

the prevalence of ‘short-termism’, many funds
scramble to maximise short-term income at the
“Trustee speak with forked tongue”: expense of the governance programs they claim
The spaghetti western of securities lend- defend the long-term interests of their beneficiaries.
ing governance? In a recent confrontation between outraged portfo-
Fund governance is a lio managers and a European company, it was dis-
subject that has seen closed that more than half the shares owned by the
plenty of attention disgruntled owners attempting to force the compa-
recently, in particular ny to change its anti-minority shareholder policies
pension funds, mutual remained out on loan through the period of the
funds and hedge annual general meeting (AGM).
funds. Seasoned I was involved in an attempt by shareholders to
observers see serious derail a merger detested by the managers who held
conflicts of interest one of the companies. At a meeting to approve the
between the publicly deal, three giant institutional managers arrived with
proclaimed fiduciary around a third of the shares they had threatened to
duties of funds and vote against management - the rest were out on
their actual behavior. loan. Another showdown with a European execu-
If this were a West- tive fashioning a takeover of his own company
ern, the fund man- ended in the same pathetic result, for the same rea-
son. Incremental tens of thousands in revenues
Dr. Andrew Clearfield agers would be wear- were adjudged more important than tens of mil-
ing the black hats.
Many funds now claim to be committed to lions of dollars of capital gains on positions worth
improving corporate governance at portfolio com- hundreds of millions. This is short-termism with a
panies. But many refuse to vote shares against vengeance. Not all directors and trustees are know-
management, no matter how egregious the offences ingly committing larceny with their beneficiaries’
committed against shareowners. If the funds’ retirement coffers. The problem is that the firms are
boards sincerely believe that shareholders ought set up so that no one is in a position to call their
never oppose any decision, they should state this attention to any contradictions in policy.
clearly in their prospectus and website. If not, they Corporate governance is about adherence to prin-
should regularly address the effect of a fund’s actu- ciples and judgments with respect to practice, and
al behavior on shareholder-friendly governance. is a part of compliance. The rest of compliance is
Stock lending is a case in point. about obeying specific laws and regulations. As a
A couple of years ago, a major public pension revenue-generating activity, stock lending has sepa-
fund commissioned a report on its lending activity rate and high-level representation in all such inter-
by external counsel. This lawyer made a presenta- nal debates. At the same time, the law requires that
tion to the board, in which the trustees were told compliance is a watchdog of portfolio management
that they would be violating their fiduciary duties if activities. But nothing is required with respect to
they did not take every opportunity to get even a stock lending a case of the right hand not knowing
few dollars by lending shares. The trustees agreed what the left hand is doing.
to increase their lending program further, without Most pension funds have endorsed the corporate
considering that they might be engaging with port- governance principles set out by the OECD, the UK
folio companies whose policies or governance they Combined Code and the ICGN Code on Securities
disagreed with. Instead, the fund’s corporate gover- Lending. But quite a few have set up management
nance program was eviscerated, and the fund decid- structures in which it is difficult to test the assump-
ed it would never recall or threaten to recall any tions of compliance. Instead, more fund trustees
share for voting purposes. While the fund pro- should examine their own practice with respect to
claimed the acceleration of lending and the corporate governance activity with the same cold
increased income, its stated commitment to corpo- eye they expect exercised by their portfolio man-
rate governance was never reduced, nor was it agers and analysts in evaluating an investment.
noted that the fund was voting far fewer of its
shares, nor that it had reduced the activity of its Dr. Andrew Clearfield is chairman of the International
corporate governance staff. The trustees were clear- Corporate Governance Network’s (ICGN) Secur-
ly trying to have it both ways. itiesLending Committee and a governor of the ICGN.
EXCEPTIONAL RESOURCES,
STRATEGIC SOLUTIONS.
HZXjgî^Zh aZcY^c\ ZmeZgi^hZ WITH WACHOVIA
Wachovia Global Securities Lending, formerly Metropolitan

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short-term fixed-income asset management. Our client base
includes major institutional funds and corporate portfolios, as
well as some of the largest and well-respected public funds.
As a division of Wachovia Bank, Wachovia Global Securities

Lending delivers to you the resources, financial options
and legacy of superior service from one of the largest bank
holding companies in the United States based on assets.
The result is a partnership of superior service relationships
with strategies across an array of asset classes, including:
• U.S. Treasuries • Equities

• ADRs • Exchange Traded Funds
• Corporate Bonds • Agency Securities
• Sovereign Debt • MBS/ABS Securities
With offices in New Jersey, California and London, Wachovia

Global Securities Lending is committed to delivering optimal
risk-adjusted securities lending returns through a balance of
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Approved by Wachovia Securities International Limited, which is authorised and regulated in the UK by the
FSA. Wachovia Global Securities Lending is the trade name of the securities lending services provided by certain
subsidiaries of Wachovia Corporation and marketed by Wachovia Securities International Limited.
©2008 Wachovia Corporation 084192
ASK THE EXPERTS
we look at historical performance of the program

OPERS with allowances made for market conditions or
portfolio changes that have been evident. These
efforts, though, are still not what we would like to
How does cash collateral affect securities
lending performance measurement? see in the final analysis.
I would contend that the most appropriate meas-
This is a quandary that ure of securities lending performance is the tried
has challenged the and proven risk/return formula. The ideal way for a
securities lending beneficial owner or a lending agent to tell if per-
industry for a number formance is adequate is to incorporate the risk that
of years. From a his- has been taken to earn that income. In fact it is the
torical perspective, the only reasonable or intellectually honest way of
development of securi- measuring lending performance.
ties lending perform- If a beneficial owner is able to see the return of
ance measurement has the lending program per unit of risk taken, it
morphed from anec- demonstrates real comparison to peers and histori-
dotal comparisons, cal comparisons that show how the structure of the
industry surveys and lending program, or the cash investment guidelines,
benchmark services. have affected real performance In addition, with a
While all of these hold return per unit of risk measure, analysis can more
some value, and per- easily achieved when comparing other asset classes,
Jerry May haps all should be or investment opportunities, or resource allocation
utilised, as yet none decisions. Cash portfolio managers will also be
fully meet the needs of sophisticated investors. able to better identify efficiencies, or inefficiencies
The reason for this deficiency is the difficulty in as the case may be, in their portfolio construction.
incorporating the reinvestment of cash collateral Guidelines may be drawn up with real risk units
into the equation. The reinvestment of cash collat- desired, rather than subjective measures.
eral is the primary risk of any well-run securities The obvious question that will arise from this pro-
lending program, at least from past experience in posal is, what unit of risk should be used as the
the US. The operational and counterparty risks can denominator in this equation? Here we would look
be mitigated significantly by the observation of to industry participants to help determine the cor-
sound procedures and policies. The risk of cash rect unit of risk. It should obviously incorporate
collateral reinvestment is not so easily mitigated, as counterparty and operational type risks, although,
the cash markets in the past year have shown. as mentioned previously, it doesn’t seem that much
For most US beneficial owners, securities lending differentiation will be made here among industry
performance is predicated upon the concept of participants. And there may be other risks not
investing cash in a conservative manner in order to mentioned here that should be captured in this type
generate incremental income above the liability of measure. The real differentiator, though, will be
incurred or the rebate due to the borrower of the found in the cash guidelines, and specifically, the
assets. As is the case in most investment manage- actual cash collateral portfolio that is used to gener-
ment areas, this investment of cash is sometimes ate the income during the measurement period.
open to wide interpretation as to what constitutes While this proposal may be self-evident, it seems
acceptable risk to the beneficial owner. What is to be time for many market participants to make
acceptable to owner A may not be acceptable to more concrete efforts to characterise, develop, and
owner B, an indication of the divergence in the risk implement a risk/return lending measurement tool
tolerance of various securities lending cash collater- on an industry-wide basis. Perhaps all market par-
al guidelines, and a clue into the difficulty in actu- ticipants will see the benefits from adopting this
ally measuring securities lending performance. type of approach to performance measurement, and
At OPERS we have traditionally looked at all dialogue can begin in earnest to initiate the next
three methods mentioned in the first paragraph of phase of this risk transition for the industry.
this article; anecdotal comparisons, industry sur-
veys, and benchmark. In addition, we compare Jerry May is cash/securities lending officer at Ohio
ourselves to our peers from data that is available to Public Employees Retirement System(OPERS). He
us through annual financial reports. And finally, has been responsible for the securities lending pro-
gram at OPERS since February 2004.

Maximize returns. Control risk.
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ELECTRONIC TRADING EUREX SECLEND
changed, but the Jeremiahs have been proved
If it’s not broken, largely wrong.

But it is important to remember that financial
markets are not homogenous. Those that are sim-
still fix it. ple and highly commoditised, such as futures and
spot foreign exchange, are perfectly suited to
being traded in a front-to-back electronic environ-
ment. Others, such as securities lending and bor-
Francisco Gonzalez looks at the rowing (SLB), have complexities which require
advent of electrontic trading within different and more flexible requirements.
securities lending and borrowing Inevitably though, the benefits of electronic
trading – or perhaps more accurately electronic
processing – are starting to be felt in SLB as
well. But the stark reality remains that from a
technology and processing point of view, SLB is
very backward when compared to many other
market segments.
SLB has well-established bilateral dynamics,
which in many instances have served it extremely
well. Any initiative in electronic trading that does
not take this into account is doomed to failure.
The path Eurex SecLend has taken since it went
live in 2005 is to work hand-in-hand with the
industry to bring about greater efficiency, rather
than trying to foist a new trading paradigm on to
the SLB market that it does not necessarily want
it. In other words, the concept is to deliver evolu-
tion, rather than revolution.
Eurex SecLend now has 25 participants, split
almost evenly between borrowers and lenders.
Many more have expressed a strong interest to
It is not an uncommon emotion to fear change, sign up. It is a fully integrated electronic market
even in the financial markets, where innovation place whose technology is based on the proven
has always been important. One only has to think infrastructure that underpins Eurex Repo. The
of the attitude many futures brokers voiced when front end consists of an electronic trading portal ,
electronic trading, pioneered primarily by Eurex’s which provides direct access to a global lending
forebears, started to really take hold throughout and borrowing pool of international equity and
the 1990s. The move from the pits to the screens, fixed-income securities. This can be deployed in
many proclaimed, would result in widespread job client sites at a minimal cost and it provides
almost instantaneous access to what is effectively
an additional SLB market, providing significant
“The benefits of electronic trading new business and revenue opportunities. There is
– or perhaps more accurately no joining or annual membership fee, and com-
electronic processing – are starting mission is charged on a volume rather than per
trade basis.
to be felt in securities lending and The way Eurex Seclend participants transact
borrowing.” their business can be customised. They can, if
they chose, easily upload their positions automat-
losses amid shallow liquidity and a dysfunctional ically into Eurex SecLend, as well as access the
market. Few would now disagree that the advent platform through Microsoft Excel spreadsheets or
of electronic trading has played a key role in the their drag and drop from Bloomberg terminals.
explosion of activity that has taken place in many Quotes can be made on an individual counterpar-
different asset classes. Of course, staff rationali- ty basis, to defined groups or to all users. This
sation has occurred and people’s jobs have often can also be done anonymously if preferred. Deals

can also be done anonymously if preferred. Deals ket , corporate actions etc. SIS then monitors the
can be transacted on a pre-arranged basis and accounts and provides further security by settling
then entered into the system to benefit from its all transactions on a delivery versus delivery
powerful post-trade efficiencies. Eurex SecLend basis. This effectively eliminates settlement risk,
participants can also define whether or not collat- which in the current credit conscious world has
eral is re-usable, as well as automate the process- become an extremely important consideration.
es as existing trades mature, such as whether or Importantly, Eurex SecLend clients do not have
not to roll them over and return or recall either on to use SIS as their central securities depository
a full or partial basis. (CSD). In most cases they can continue to use
The technology which supports Eurex SecLend’s their existing service provider.
post-trade infrastructure is arguably even more It is clear that SLB will continue to seek an
important than that at the front- end. Europe’s set- increasing level of automation. The ability to
tlement landscape is highly fragmented and this access a more transparent market rapidly on a
has undoubtedly hindered cross border activity. It global basis will become a key business differen-
has also led to the effective creation of many sep- tiator. This is true for prime brokers, custody
arate SLB markets. There is now a real demand lenders and commercial banks but also for asset
from a range of market participants to overcome and pension funds managers who are striving to
these barriers so they can make full and efficient cater for the specific demands for a new breed of
use of their collateral. It is now increasingly investors, such as hedge funds. But in a risk con-
recognised that collateral management can be an scious world, services have to be as secure as
important source of additional revenue for asset possible.
managers and pension funds, and so they start to An electronic market place, underpinned by
use it more innovatively. The relatively recent robust and secure, but also flexible technology
emergence of 130/30 strategies, where funds provides many of the answers to the problems
establish a short position equal to 30% of the that tomorrow’s SLB will need to address. The
portfolio’s value and use the proceeds from the reality is that it is not that difficult to set up a
sale to increase their longs to a 130% of the front- end trading platform, a claim supported by
the proliferation of supposed solutions that exist.
“An electronic market place, In the search for SLB liquidity though, innovation
is the strategic factor that will deliver ultimate
underpinned by robust and success. If innovative post-trade solutions do not
secure, but also flexible technolo- exist, there is no amount of bells and whistles on
the front end that will compensate.
gy provides many of the answers The goal for providers such as Eurex SecLend is
to the problems that tomorrow’s to deliver the tools and services which simplify
all aspects of SLB, such as global locating facili-
securities lenders and borrowers ty, collateral standardisation and re-use and
will need to address.” secure settlement is already long. For the past 18
months, an increase in volatility across many
fund’s value, is one example of the need for effi- asset classes has helped drive volumes on Eurex
cient collateral management. SecLend. Obviously, the degree of volatility is
Eurex SecLend provides its users with unprece- not something which can be predicted with total
dented flexibility post trade, which actually accuracy, but when it is there, efficiency across
enables them to overcome many of the barriers the deal chain becomes of paramount importance.
that have hindered cross border SLB. The plat- SLB will always be a complex business, but
form allows deals to be settled bilaterally if that electronic trading solutions will help to smooth
is required, but additionally it uses out some of its arcane protocols and deliver effi-
SegaInterSettle (SIS) to deliver a degree of ciencies across the entire deal chain. Eurex
unprecedented and extremely secure straight- SecLend has already proved itself capable of pro-
through-processing. Once a deal has been agreed viding these and remains committed to offering
on Eurex SecLend, a first instruction can be sent further services for all of the SLB market’s exist-
to SIS, which confirms the transaction in real ing and future participants.
time back to both counterparties and manages the
trade during its whole lifetime with mark to mar- Francisco Gonzalez, head of Eurex SecLend
GROWTH IN THE MARKET ESEC LENDING
by banks, proprietary trading desks, and investment
Growing in managers; the increased globalisation of financial

markets; and the growth of emerging markets. In
addition to this increased demand to borrow, benefi-
sophistication cial owners are increasingly recognising securities
lending as a valuable source of alpha leading to an
increased supply of lendable securities.
Luke McCabe looks at the growth Growing demand to borrow
in the numbers of market partici- A primary contributor to the growing demand for
pants and lending providers securities services has been a dramatic increase in
hedge fund activity, which in turn has created
greater demand for securities borrowing to support
short positions. Lenders and their agents benefit
from this increased demand as broker-dealers, who
typically provide prime brokerage services to hedge
funds, look to borrow from the agent lenders. At the
end of 2007, hedge fund assets stood at an estimat-
ed USD1.9 trillion; by 2012 hedge fund assets could
reach USD3.5 trillion. 130/30 funds are also expect-
ed to experience robust growth over the next few
years. According to a Merrill Lynch report released
in January 2008, the amount of US-managed assets
employing a 130/30 strategy could increase seven-
fold to USD350 billion over the next three years,
with total global funds invested in 130/30 strategies
topping more than USD1 trillion. Intense competi-
tion from prime brokers to lock up supply has
increased bids for exclusive securities lending
arrangements.
Most of the volume gains during the past decade
While a lack of new entrants and ongoing consoli- in the larger stock markets have been driven by
dation activity among lending agents has reduced quantitative trading. Quantitative trading strategies,
the number of providers, the number of borrowers which include index arbitrage, relative value pairs
and lenders continues to grow globally. trading, and various high-frequency algorithmic
The growth has been driven largely by an increase techniques, are being employed not only by hedge
in the demand from borrowers for both US and inter- funds, but also by proprietary desks of banks and
national securities and the general explosion in trad- broker-dealers. This has equated to significant
demand by fund managers seeking to capture large
“A primary contributor to the grow- positions with certain securities. Additionally, the
boom in synthetic vehicles, including swaps, only
ing demand for securities lending adds to the demand for hedging strategies that
services has been the dramatic require short sales and the associated need to bor-
row stocks. NYSE Euronext statistics show that
increase in hedge fund activity, this trend continues to accelerate, especially in the
which in turn has created greater global markets. US stock trading volume increased
by 23.6% for the first four months of 2008 relative
demand for securities borrowing to to the same period in 2007, and European volume
support short positions.” jumped by 38.6%, despite the recent difficult
ing volumes, which also increases the demand to financing conditions and the NYSE’s continued
borrow. Specifically, the demand can be attributed decline in market share of its own NYSE-listed
to the growth in the size and number of hedge funds stocks.
and newly adopted 130/30 funds; the growth of The greater need for cross-border financing result-
increasingly sophisticated trading strategies utilized ing from corporations expanding their activities
beyond national boundaries and the financial liber-
alisation of markets has driven the increased global- owners are getting involved in securities lending
isation of capital flows. Regulatory arbitrage has globally as they search for alpha while the demand
added to this trend, as the increased cost of to borrow increases due to the evolution of invest-
Sarbanes-Oxley compliance has led to issuers ment strategies.
increasingly seeking alternatives to a US listing. All There is a growing trend toward the unbundling of
told, foreign holdings of US securities grew at a securities lending from custody services as more
19% compounded annual growth rate in the period beneficial owners view lending as an investment
from 2002 through 2007, while US holdings of for- management and trading decision. Beneficial own-
ers are unbundling lending and using multiple
“Various emerging markets are providers, which allows them to choose the provider
introducing securities lending and with the greatest expertise and ability to add value
in each particular market, asset class, or route to
borrowing services to support market.
increased trading strategies and In recent years, the demand for greater transparen-
cy and best execution in the securities lending mar-
opportunities, attract off-shore ket has been fueled by increased regulatory scruti-
investment and provide a competi- ny, as well as changing views and expectations of
beneficial owners. Since beneficial owners are
tive trading environment.” increasingly viewing securities lending as an invest-
eign securities increased at a 28% over the same ment function they are demanding more informa-
time period. As the barriers to global flows of capi- tion from their lending agents so that they can bet-
tal break down, securities lending is expected to ter understand and evaluate the risk, returns and
accelerate. exposures in their programs.
Beneficial owners want to see where returns are
Emerging opportunities being generated from, what risks they are taking to
Emerging markets have also played a role in the achieve these returns. They want to ensure that earn-
increased demand for securities lending services ings are being allocated appropriately and not sub-
abnd have created new opportunities for lending sidising other clients’ accounts. This increased
agents. Countries such as Greece, Israel, India, demand for transparency has been one of the factors
Poland, and Taiwan, have improved their regulatory contributing to the growth of auctions in recent
infrastructure, such as implementing short selling years as the auction process enables lenders to opti-
regulations or relaxing existing restrictions to add mise performance for every portfolio or asset class
liquidity and efficiencies to the local markets. which allows for objective decision making on how
Various emerging markets are introducing securities to best allocate portfolios for lending.
lending and borrowing services to support We expect the demand for transparency to increase
increased trading strategies and opportunities to as lenders look to ensure an objective, regulatory-
attract off-shore investment and provide a competi- friendly, and auditable program that can be easily
tive trading environment. These markets were pre- presented to their management teams, boards, and
viously unattractive given their higher risks and the governing bodies.
lack of infrastructure and/or liquidity; however,
improvements in legal, regulatory, tax and opera- Luke is the head of the client relationship manage-
tional infrastructures are leading to an acceleration ment team at eSecLending. Prior to joining
in activity. eSecLending in 2004, Luke worked for Brown
Brothers Harriman as vice president of client serv-
Beneficial owners viewing securities lending as ice. Prior to joining BBH, Luke worked for State
investment decision Street Corporation for 10 years; most recently he
Beneficial owners are increasingly recognizing was vice president and business head of State
securities lending as an alpha-generating activity Street's Defined Contribution Services Group.
and a valuable source of incremental returns. The Luke's other roles at State Street included time as
securities lending industry is a trillion dollar busi- head of emerging market business and product
ness, estimated to generate more than USD2 billion development (Latin America and Africa).
in revenues for lending agents annually. Since the Additionally, Luke served as the relationship man-
end of 2003, the value of securities for loan in the ager for some of State Street's largest institutional
global markets has grown at an estimated com- clients. team of nine members, including on-site
pound annual rate of 15% to 20%. More beneficial representatives.
INTEGRATION OF ASSET SERVICING SOCIETE GENERALE
Securities lending is a complex activity and no
All in one and two portfolios are alike. Standardisation can be

applied only so far – at some point securities
lenders need to offer flexible options. In tailoring
one in all? options, service providers take into consideration
each portfolio individually and adapt their offers
according to overall market conditions and the
There is an overall push within the client’s investment criteria: their guidelines, con-
straints, risk comfort level and overall asset strat-
market for more integrated asset egy on an ongoing basis. This kind of flexibility
servicing on behalf of service on behalf of service providers paves the way for
providers. Guy d’Albrand discuss- performance maximisation and operational effi-
ciency in the long term. The key lies in being in a
es the extent to which securities constant position to anticipate, make judgements
lending should become integrated and react in an appropriate manner, achieving the
balance between profitability and risk control.
within asset servicing. Securities lending practitioners need to have a
global vision of the industry. With the standardis-
ation of asset servicing, most custodian banks
have integrated securities lending to their core
businesses. They offer beneficial owners, as well
as other services such as foreign exchange, trade
execution and fund accounting. Custodian banks
are able to mobilise large pools of securities
available for lending. Owners and agents split the
revenues, which are based on many factors, such
as the service level and provision. Securities
lending is often part of a much bigger relation-
ship and the split negotiation can become part of
bundled approach to the pricing of a wide range
of services.
For beneficial owners, a custodian as agent is
convenient. Custodians can provide seamless
lending activity, managing client’s collateral in
accordance with their investment guidelines,
while ensuring risk management controls, com-
mitment, global reach, and the added security of
Asset servicing is becoming more streamlined. It indemnification.
is becoming faster, better and more standardised, The advantages of an integrated approach
and is integrating securities lending in the include: existing client relationships, investment
process. This integration is a logical transition, in technology and global coverage of markets, the
yet securities lending needs to remain a stand- ability to pool assets from many smaller underly-
alone business to a certain extent. ing funds, and experience in developed markets.
Standardisation ensures the benefits of consis- Custodian banks can also provide indemnities and
tency. We are seeing the development of a stan- manage cash collateral efficiently: two critical
dardised process for many of our depositories, factors for underlying clients.
however with non-standard fees in the structure The integrated approach of custodial lending
and the amount the cost to the borrower can vary offers a conservative and streamlined means of
significantly. The agreement of a fee needs to combining custody, securities lending and cash
consider the counterparty in particular; what they management through one provider. Some lenders,
do, what they are worth and the potential duration such as Société Générale Securities Services, can
of the relationship, as well as the supply and provide not only agency lending programmes for
demand of a particular security and collateral clients with securities already held in custody by
flexibility. Société Générale, but can also act as a third party

agent for portfolios not in our custody. In the analysis. Diversification and reporting of counter-
case of third party lending, there is no disruption parties is critical in determining where exposures
to the portfolio management from an availability lie.
point of view nor are relationships impacted with Cash reinvestment can generate further
the non-SG securities custodian. income. Beneficial owners should be able to rein-
From custody to securities lending, value-added vest cash collateral in different currencies for var-
services pave the way for more seamless transac- ious durations and to process FX trades. When
tion processing. A comprehensive service direct investment of cash collateral is allowed in
provider offering a complete value chain has a fixed-income products - such as short-term paper,
better grasp of the overall process and is able to debt, asset-backed securities or funds - beneficial
integrate different services efficiently and cost- owners bear a primary risk on issuers as with
effectively, and can offer individualised pro- their underlying portfolio. Thus, the agent lender
gramme enhancements, and include, if needed, needs to approve the proposed guidelines and
some exclusives within the lending programmes. perform constant risk measurement and report-
At SGSS, our Global Performance Benchmarking ing.
Tool provides clients with an online real-time Indemnification provision by the agent lender
tracking method to see how their portfolio per- provides security in the case of borrower default
formance measures up, with regular reporting or when the pledged collateral has become insuf-
updates and commentaries directly from our ficient due to adverse market movements.
traders. Borrower default can be indemnified in various
Operational efficiency is an increasingly impor- ways, but the collateral remains the first level of
tant contributor to overall fund performance. It protection. It is essential to agree on the accepted
keeps users up-to-date while processing and collateral and related haircuts and to understand
checking transactions, monitoring and allocating what insurance an agent provides. Thus, the cred-
itworthiness and operational strength of the agent
is paramount to proper risk control, with regular
“Securities lending is an activity and stringent risk monitoring and efficient mar-
that will continue to stand apart gin calls.
Overall, the integrated asset servicing approach
to a certain extent. A standard presents many attractive benefits to beneficial
offer does not exist .” owners. Sec lending is an activity that will con-
tinue to stand apart to a certain extent. A standard
offer does not exist – securities lending pro-
collateral, processing recalls and reallocation, grammes need to be flexible to enable clients to
coupon payment and corporate actions, allocation implement multiple strategies. A securities
of lending revenues, and measuring exposures lender’s ability to maximise revenue, manage
and risks. For large portfolios, the agent should risk, automate processing and deliver seamless
provide performance benchmarking for market integration with the client’s investment manage-
levels. ment activities are key to differentiating their per-
Constraints such as accepted types of trades, formance. Beneficial owners should be on the
loan periods, counterparties, collateral, percent lookout for integrated asset servicing offers that
on loan limit per issue, overall percent on loan bring the benefits of standardisation, yet is also
limit per fund, and limits per counterparty often tailored to better meet their individual needs.
make each trade a specific transaction. Agent At SGSS, our liquidity management experts
lenders are able to apply these constraints and offer a full range of flexible securities lending
have the market knowledge to enforce stringent programmes, tailored individually and built to
rules, monitor counterparties and verify compli- boost portfolio performance. Backed by strong
ance both pre and post-trade. It is the agent post-trade support and reporting, we offer indem-
lender’s role to ensure that risks are in-line with nities, closely monitor collateral, and rigorously
clients’ investment policies, and promptly miti- benchmark our performance and market access,
gate risks arising from market conditions or regu- while you remain in full control over your assets.
lations and to optimise revenues accordingly, as
well as continually reassess the risk/reward ratio Guy d’Albrand global head of liquidity manage-
and monitor credit risk by in-house counterparty ment Société Générale Securities Services
RISK MANAGEMENT COMIT
pants measure counterparty risk in a more sophisti-
Technology and cated manner. The typical approach to counterparty

risk assessment is to calculate the replacement
value of the difference between the securities
risk management lent/borrowed and the collateral received/delivered
plus risk add-ons reflecting the volatility and liq-
uidity risk of the securities lent or borrowed and the
Felix Oegerli considers whether collateral received or delivered. The risk add-ons
are calculated on a Value at Risk (VaR) basis, for
technology can help with risk example using a close-out risk period of between
management in securities lending. five and ten days and applying a confidence level
of somewhere between 95% and 99.99% (between
two and four standard deviations). In addition, neu-
tral or positive correlations between transactions
and collateral are sometimes assumed within cer-
tain instrument types and indices. The implementa-
tion of such risk management frameworks has
raised the comfort level of market participants and
their risk management departments. Although it is
a very positive development to use VaR-based
models to assess the counterparty risk, these mod-
els may not fully reflect the implications of tail
events. Such events, which in current times are
more realistic, would, for example, trigger a fire
sale of the relevant collateral assets with the follow-
ing negative effects on the assumed replacement
values including the risk add-ons.
Credit spreads will result in rapid widening of
The continuing financial crisis has impacted the the fixed income credit spreads.Liquidity squeeze
securities lending industry in different ways. Most in the financial markets will widen the bid/offer
lenders are probably able to benefit from the high- spread on certain fixed income asset classes dra-
er demand for good quality General Collateral matically and further negatively impact liquidity in
(GC) securities such as central bank-eligible fixed bond trading markets.Dramatic volatility in the
income instruments. End-users and prime brokers, equity capital markets, however with a potential
however, may be hit by the higher cost of liquid correlation between the equities lent/borrowed and
high-quality collateral. The market turbulence has received as collateral.
also raised awareness of risk versus return and Depending on the structure of the fixed income
subsequently also of internal risk management transaction and collateral book possible negative
processes. correlation (eg, loans in bonds with short-maturi-
Let us first define the main risk in securities ties and low credit-spreads and collateral with long
lending. The key risk factors are counterparty and maturities with wide credit spreads), the market
operational risk. I have intentionally left out the crisis could lead to problems with other financial
cash reinvestment risk because from my perspec- market participants and therefore further increase
tive this is a separate risk category, which is not the financial sector counterparty risk exposure.
directly related to the securities lending process. Therefore static VaR-based counterparty risk may
not be sufficient to measure counterparty risk. Just
Counterparty risk calculating a risk equivalent amount based on stat-
Counterparty risk is mitigated by collateral, which ic VaR based counterparty risk is not good enough.
is typically cash or different security instrument We should not forget that concentration and con-
types such as bonds and equities. In the past most solidation in the financial sector has also had a big
lenders have allocated counterparty risk limits on a impact on the securities finance and collateral
market value basis mainly due to a lack of internal management market. It is therefore important to
credit and risk frameworks and system support. understand that collateral mitigates counterparty
These days most securities lending market partici- risk and reduces systemic risk to a certain extent,

but at the same time it also takes systemic risk to lack of key data in the securities master.
the next level.
The risk management unit and the business Short comings in business standards
should therefore know where the counterparty risk Some of the business standards do not make a lot
comes from (e.g. FX mismatches, credit spreads, of sense from a risk standpoint, although this is
exposures to equity indexes etc.) and should also now slowly changing. I often find simple collater-
conduct stress tests. The results of the stress tests al rules, which state that the margin is, for exam-
should then be the basis of potential changes in ple, 10% for equity collateral and 2% for fixed
the business mix or collateral rules and haircuts. income instruments. Under these business stan-
Although stress testing is long established in other dards, lending equities and receiving bonds as col-
parts of the financial markets, it is still not very lateral would result in a positive net replacement
common in securities finance. value of 2% and lending bonds and receiving
Although it would be beneficial for day-to-day equities would result in a positive net replacement
business control, this type of sophisticated risk value of 10%, although the risk is exactly the
management process does not necessarily need to same in both transactions. Some of the securities
be supported within a securities finance system. It lending systems cannot add different margins on
is possible to upload the transaction data from the the loan side as it would haircut collateral.
securities lending system to a risk system.
Process breaks
Operational risk From a processing standpoint, securities lending is
From my perspective, the bigger area of concern a complex business with a lot of potential process
from a risk management standpoint is the opera- breaks. However, certain processing gaps in risk
tional risk which directly and indirectly impacts and collateral management are often just accepted
securities lending counterparty risk. Some of the as business process facts, which may lead to addi-
most import risk elements are the following: tional operational and subsequently counterparty
-Legal documentation risk. The obvious process with a high degree of
-Data granularity and quality risk is the intra-day or even overnight settlement
-Shortcomings in business standards risk, which is often the case for non-cash collateral
-Process breaks securities lending transactions. Because of this,
and also for process efficiency reasons, tri-party
Legal documentation
collateral agents are used, thereby mitigating the
Comprehensive legal documentation should con-
settlement risk.
tain the right to modify important risk drivers such
However, it could well be that the collateral data
as the business mix and, in particular, the collater-
imported via file from the tri-party collateral agent
al schedule. Furthermore, it is also important to
and the exposure calculation from the lending
have clearly defined default processes in place
intermediary may not always be in-sync. This may
depending on the nature of the legal agreement.
be because of a lack of integration of the tri-party
We often find that this is not the case.
collateral data and a sub-optimal mapping of the
internal collateral management processes with the
Data granularity and quality
tri-party collateral management process for collat-
When undertaking business consulting work we
eral re-hypothecation.
are often confronted with system functionality,
The crisis in the international financial markets
which cannot cope with the business rules such as
has triggered internal securities lending risk
highly granular collateral agreements. Further, the
reviews which will then hopefully lead to process
lack of granularity of available securities master
improvements. The key to this is the risk and col-
data (eg, no exclusion of sector risk such as finan-
lateral management frameworks, which should
cial institutions, possible missing rating mapping
then be implemented with the required data and
table between rating agencies, missing daily
IT-functionality. To define a risk framework,
turnover in equities) or price feeds (e.g. different
which cannot be supported on the IT-side does not
bid/offer prices for transactions and collateral) can
make sense - IT is a risk process enabler and the
increase the operational risk substantially. Spot-
key is the risk framework and the availability of
checks or tactical batch-fed collateral and risk sys-
the base data.
tems are not sufficient to make up for the missing
functionality in the securities lending system or Felix Oegerli is a member of the executive com-
mittee at COMIT.
SINGLE STOCK FUTURES ONE CHICAGO
on their assets under management.

SSFs explored and explained by Off-balance sheet transactions such as equity swaps, total
David Downey return swaps and contracts for difference (CFD) produce
Securities lending is the same economic effect as securities lending that do not
effectively the lending of involve any securities being exchanged. But unlike SSF
mutual and pension these products still entail some counterparty risk.
funds’ assets with an
agreement that they will SSF Pricing SSFs are the simplest derivative product. An
be returned at some SSF’s price is the forward value of today’s stock price,
point in the future. They which is derived by multiplying today’s price by the risk-
receive additional com- free rate of interest out until expiration of the future, then
pensation for participa- subtracting any dividend that is paid (if any) during that
tion and will not lose time period.
economic exposure to the
position. This transaction For stocks that do not pay a dividend:
is substantially similar to
an EFP (exchange future
for physical) transaction Where r is the effective federal funds rate, tx is the expira-
using single stock futures (SSF) but with some very impor- tion date of the future and t0 is the date of evaluation.
tant differences. The SSF EFP is a trade on a regulated
exchange and trades in a competitive For stocks that pay a dividdend:
environment where multiple market participants establish
market rates. There is transparency in pricing and no coun-
terparty risk as all trades are cleared through the AAA rated Where r is the interest rate prevailing starting at the ex-div-
Options Clearing Corporation (OCC). idend date, tx is the futures expiration date and td is the ex-
Securities lending has two sides. The first is cash driven, dividend date.
whereby institutions finance their operations by borrowing So, for a USD100 stock that pays no dividend in a 2%
cash in return for securities. The second part is securities- interest rate environment the six-month SSF will have a
driven, whereby hedge funds firms employing short delta fair value of UD101. If the stock paid a 20 cent dividend
strategies such as the 130/30 are required to borrow securi- then the six month future would have a fair value of
ties prior to shorting. This activity is increasing the approximately USD100.80 (approximate only because a
demand for the available supply of stock to borrow. Hedge higher resolution fair value could be obtained by taking the
funds look to the brokerage firm to service the request. The present value of the future dividend stream into considera-
brokerages can meet some of the demand from their own tion but for simplicity, deducting the full value works.)
inventory, but must look to the beneficial owners (the pen- The physical settlement of the SSF means that upon expi-
sion and mutual funds) to satisfy the total demand. These ration the fund holding the long SSF will receive the
owners make securities available by contracting with either CUSIP as the future expires and the party holding the short
a custodian or the brokerage firms for the wholesale distri- SSF will be required to deliver. Unlike other futures prod-
bution of all or some of their portfolio. For this they receive ucts where the positions are offset prior to expiration, more
a guaranteed fee and/or a split of the reinvestment of the than 95% of the SSF positions traded on OneChicago actu-
cash collateral the contracted party receives. ally make or take delivery upon expiration. So for funds
The disadvantages to this arrangement are the concentra- who invest by buying and holding there is no difference in
tion of credit risk with a sole counterparty and the ceding the two transactions of either buying today at one price or
of potential profits to these agents. The funds can provide buying a SSF for delivery of the underlying at expiration,
the market with the assets they need but not have to split except that they may be able to purchase the SSF at a lower
the profits with a third party. Funds argue that securities net cost and therefore reduce the price they pay for the
lending involves a variety of complex administrative, opera- resulting position.
tional and accounting activities, including credit evaluation
and cash management, which may be better handled by Pricing of the EFP An EFP trade allows for the substitu-
specialists in that field. Fair enough. However, with SSFs tion of a long or short stock position for a long or short
they can participate in this process and earn higher returns SSF position. EFPs allow one to decrease finance charges

for long stock positions or increase the interest received on Basis Points Paid = r x 10,000
short stock positions. That is because the interest rate is
built into the price of an SSF and hence its EFP is competi- An approximation formula for Basis Points Paid is
tively determined by numerous market participants rather
than by a single broker who can set less advantageous mar-
gin loan and stock borrow rates. Further, EFP’s can be used
as a synthetic stock loan transaction as funds can offer This formula is valid when (r Nexp) is small compared to
their long stock out in return for a SSF that will expire back 360.
into long stock at expiration but with greater returns than
those received for lending the stock to an intermediary. Price of selling an EFP
An EFP is a combination order to sell (buy) an amount of The amount received on selling an EFP also takes into
stock and simultaneously buy (sell) a proportionate number account the estimated dividends in the period and is shown
of SSFs. Taking a long position in the EFP involves buying on an annualised basis. The cost of selling an EFP in basis
the SSF and selling the underlying stock. The stock position points is calculated by solving the equation below for the
becomes flat due to the sale of the existing long stock posi- interest rate that gives us the implied SSF Bid price from a
tion and the position now holds a SSF with the same eco- known stock ask price & estimated dividends in the period.
nomic exposure. The EFP is priced in interest rates as there
is no underlying price risk since the stock and the SSF are
equivalents. Hopwever, it does involve interest rate risks as
the two parties are simply engaging in a loan as they switch Where,
positions. Selling the EFP has the opposite positioning as SSFiBid = Implied SSF Bid Price, which is the sum of the
the SSF is sold and the underlying is purchased. Hedge EFP Bid Price and Stock Ask Price
funds and other short sellers who are currently short and Stock Ask = Stock Ask Price
paying for the privilege would be able to lower their costs of r = Interest Rate
financing this position by executing an EFP at a much more Nexp = Number of days from the day of trade to the expiry
favorable rate without changing their economic position vis- of the futures contract
à-vis the stock moves. Ndiv = Estimated number of dividends from the time an
EFP is entered into till expiry
Cost of buying an EFP The cost of buying an EFP in basis Di = Estimated dividend in the current period
points is determined by solving the following equation for Ni = Number of days from the day on which the dividend
the interest rate (r) that reproduces the EFP ask price from is received till expiry
the stock trade price given certain dates and dividend
amounts. Once the interest rate is known the received basis points are
calculated as:
Basis Points Received = r x 10,000
An approximate calculation can be obtained by using :
F - Price at which the SSF is bought. This price is deter-
mined by the price at which the stock is sold plus the
EFP Ask Price.
S - Price at which the stock is sold.
r - The average bank year, exponential interest rate that Lending is essentially the exchange of an asset for a
reconstructs the EFP and stock trade prices. short term Lenders can deliver the asset to the borrowers
Nexp - No. of calendar days to expiration of the SSF. through an SSF transaction by either purchasing outrights
Di - The ith stock dividend payment that goes ex-divi- for future delivery or pricing the EFPs in such a way to
dend between now and the expiration of the SSF. increase the basis points received for the ‘loan’. Funds have
Ni - Number of calendar days to the ex-dividend date for a fiduciary responsibility to their participants to maximise
the ith stock dividend payment returns without exposing the assets to unnecessary risk.
and exp{x} = ex. The competitive, transparent trading of an SSF without
Note that F = S + EFP Ask Price. counterparty risk exposure is a viable alternative.
Once the Interest Rate is known the Basis points Paid is cal-
culated as follows- David G. Downey is CEO of OneChicago

RISK MANAGEMENT NORTHERN TRUST
becomes impaired or decreases in value.
Risk Interest rate risk relates to the possibility of nega-
Management tive spreads on securities lending transactions due

to the rebate rate owed to borrowers exceeding the
income earned from the reinvestment of cash.
Sandra Linn on risk management Trade settlement risk occurs when a beneficial
in securities lending programs owner or their investment manager sells an on-loan
security and the borrower is unable to return the
security to the agent lender to settle the trade.
How are these risks mitigated?

Borrower default risk can be mitigated in several
ways. The practice begins with a borrower
approval process in which the agent lender reviews
and selects borrowers to participate in the agent
lender’s program. This should be completed by a
group independent of securities lending. The agent
lender should then set exposure limits on each bor-
rower. After approval is set, the agent lender
should have a process in place for continuously
monitoring the borrower’s financials, credit ratings,
performance, overall credit risk, and usage towards
the exposure limits. Borrowers are required to
pledge collateral in excess of the value of securi-
“Collateral risk can be managed
Securities lending can usually be tailored to a ben-
through investment research,
eficial owner depending on the level of risk they portfolio management expertise
are willing to accept. However, with the turbulence and guidelines that reflect the
in the market over the past year, beneficial owners beneficial owner’s risk.”
and consultants are delving deeper into the risks in ties out on loan. Agent lenders should complete a
securities lending and how these risks are mitigat- mark-to-market on the loan and the collateral posi-
ed in their program. Below are the primary risks in tions for each borrower daily to ensure the proper
securities lending, how these risks can be mitigat- amount of collateral is held. Agent lenders often
ed, questions that beneficial owners should be ask- offer borrower default indemnification to protect
ing their agent lender, and how beneficial owners their clients should a default occur.
can monitor their own program. Collateral risk can be managed through invest-
ment research, portfolio management expertise and
What are the primary risks in securities guidelines that reflect the beneficial owner’s risk
lending? and reward objectives. Agent lenders should have a
There are four primary risk areas in securities team dedicated to investment research and moni-
lending; borrower default, collateral, interest rate, toring. It is important to monitor the credits and
and trade settlement. the short and long-term ratings of each security
that cash is invested in. Agent lenders should have
Borrower default risk is an event in which the a portfolio structure to review the following limits:
borrower does not return the loaned securities and total dollar exposure, percentage of the portfolio,
there is insufficient collateral to buy in the security. maturity and country exposure. It is important that
the investment portfolio remains diversified and
Collateral risk occurs when the investment in the does not skew to any one type of security.
cash collateral option or the non-cash collateral Compliance with guidelines is another important

factor in mitigating collateral risk. Agent lenders about the strength of their securities lending
should have a process in place for monitoring provider such as credit ratings and capital available
compliance with investment guidelines, as well as to support lending. It is not enough for beneficial
credit quality, maturity, liquidity and diversifica- owners to be aware of their investment guidelines.
tion within the guidelines. To manage non-cash Beneficial owners should understand the approach
collateral risk, it is necessary for the agent lender to the research on investments for their cash collat-
to complete a mark-to-market on a daily basis to eral, if this is independent of securities lending,
ensure that the amount of collateral held is higher what approach the portfolio manager takes within
than the amount of collateral that would be needed the guidelines and how much experience these
to replace the security on loan. people have. They should also understand their
Interest rate exposure is managed by the agent agent’s approach to cash investment; outside of the
lender. Close coordination between the trading guidelines, what is their practice and philosophy.
team negotiating terms with the borrowers and Beneficial owners should be aware of what their
portfolio managers investing the cash collateral is indemnification covers and what it does not. Agent
necessary. The agent lender should take an lenders typically offer two types of indemnifica-
asset/liability management approach towards lend- tion, operational and borrower default. Operational
ing activity. Agent lenders should use statistical indemnification covers direct losses when the
and objective duration risk measures to determine agent lender is unable to recover borrowed securi-
interest rate sensitivity. Portfolio structure should ties and distributions, such as dividends and inter-
be based on relative sensitivity of the underlying est, as a result of the agent lender’s negligence.
loans and interest rate forecasts. Portfolios should Borrower default indemnification covers direct
be stress tested to assure that the structure is losses when the agent lender is unable to recover
appropriate and revenue should be measured for securities and distributions due to borrower insol-
risk and market value sensitivity. Agent lenders vency or default. Indemnification varies by agent
should have models that show the effects of rising lender.
and declining interest rates on the portfolio.
Trade settlement risk can often be managed by What should beneficial owners do to monitor
security substitution. Agent lenders with a large their program?
diverse pool of lendable assets can frequently sub- Beneficial owners should proactively monitor
stitute one client’s security for another client’s their program through reporting, periodic due dili-
security when a loan is recalled. Recalling a loan gence reviews, and access to knowledgeable staff
requires timely notification by the client. The agent at their agent lender. Agent lenders supply clients
lender’s agreement with the borrower should clear- with daily and monthly reports that contain infor-
ly state the time period allowable for the return of mation on borrower utilization, account utilisation,
securities. It is important to note that securities in collateral by security type, collateralisation levels
high demand will likely all be out on loan, which and earnings and performance comparisons.
can make substitution difficult. Some agent Beneficial owners should actively review reports
lenders provide trade settlement protection in the to know who is borrowing their securities and
event a trade does not settle due to securities lend- what collateral they are receiving in turn.
ing. Agent lenders can also penalise borrowers for Beneficial owners should ensure that they under-
failing to return securities, such as reducing the stand their legal agreement and make sure that it is
rebate rate paid to borrowers until the trade settles. up to date. They should ask questions of their
agent lender if they have concerns or want more
What should beneficial owners be asking their information on their program.
agent lender? Sandra Linn, is a senior vice president at The
Beneficial owners should review their program Northern Trust Company, Chicago and is head of
parameters with their agent lender to learn more sales and relationship management for North
about the processes and procedures in place for America in the Global Securities Lending
managing each of the above risks. Questions that Division. She is a member of the global strategic
should be asked include: how are borrowers select- management team. Sandra has held various man-
ed and monitored, how are guidelines monitored, agement roles, including securities lending risk
who makes up the shortfall if any of these risks manager and head of global cash management in
occur, does the risk I am taking match my toler- the London office. She is a member of the RMA
ance level? Beneficial owners should also ask Committee on Securities Lending.
TECHNOLOGY PANEL DEBATE
THE TECHNOLOGY PANEL DEBATE

David Downey is chief executive officer of OneChicago. He began his career in the
securities and futures industry in 1983 on the American Stock Exchange in New
York. In 1985 he joined Timber Hill Inc., a firm specialising in the business of
market-making on the floors of various stock, future and derivative exchanges
around the world. After moving to Chicago in 1985 he began trading as a member
of the CBOE and over the years held memberships at the CBOT and the CME. In
1995, Mr. Downey turned his attention to the development of Interactive Brokers
where he served as EVP Operations.
Benjamin Glicher is chief technology officer of Equilend and is involved with

building a scalable, secure, and highly available technology platform. Prior to join-
ing EquiLend in January 2002, Benjamin was the managing director of financial
services technology at PricewaterhouseCoopers. Earlier in his career, he was chief
technology officer at Global Market Information, a subsidiary of Track Data
Corporation.
Francisco Gonzalez is head of securities lending at Eurex and is responsible for

market management regarding business and product development of the electron-
ic market place for international securities lending and borrowing. Before joining
Eurex in 2001, he was head of systems development and in charge of the systems
design for the electronic stock market at SWX Swiss Exchange.
Felix Oegerli is member of the executive committee of COMIT. He was the founder
and CEO of IFBS, which was recently sold to COMIT. Prior to launching IFBS, Oegerli
worked at UBS in Zurich, New York, and London for over 20 years in different func-
tions, including creating and expanding of the securities lending, repo and prime
brokerage business at UBS Zurich.
Christopher K. Poikonen is managing director and head of auctions & trading at

eSecLending and is primarily responsibile for managing eSecLending’s auction
and trading strategies and global borrower relationships. He is one of the original
members of eSecLending and has worked to further develop and refine the auction
model. He has over 15 years of international financial services experience focus-
ing on securities lending, asset management, and global custody.

1. Electronic trading is in its infancy within question why it needs to be changed. However,
securities lending. Why has there been little there really is no doubt that more efficient pro-
penetration and what needs to change for cessing right along the deal chain is something
there to be a greater uptake? that most SLB players want to see and there is a
Oegerli: It is important to consider that changes growing acceptance that electronic trading solu-
in market demand drive the business model tions offer the best way of achieving this.
transformation and not vice versa. Until the pric- Downey Electronic trading solves the time and
ing structure for specials and large, price sensi- space dislocation between buyers and sellers.
tive general collateral(GC) trades is fully trans- Prior to the technology being available buyers
parent (ie, does not just consider supply and and sellers had to go through intermediaries for
demand, but also takes into account the detailed access to the exchange floors so that another
collateral quality and the overall relationship group of intermediaries could match the two
between lenders and borrowers), electronic trad- sides and of course take a profit from that activi-
ing will cover mainly smaller shorter-term, GC ty. Securities lending markets are very similar
tickets. except that there is no centralized floor to auto-
Glicher: The reason is behavioural. Securities mate, instead it is a complicated arrangement
lending is one of the last areas of financial serv- between a relatively few firms who find the
ices to automate. The automation first initiated activity profitable.
in the post trade environment then worked its In order for the process to change it would take
way towards trading GC. Now it’s starting to find a liquid, centralised and transparent marketplace,
its way to warm or hot stocks. Attitudes need to where the beneficial owners and the hedge funds
change, however. Securities lending is a relation- could trade with each other. Single Stock
ship-oriented business, but people will have to Futures at OneChicago offer such a market, in
find ways to maintain relationships while that short delta seeking hedge funds can transact
automating technology is integrated. with revenue seeking beneficial owners without
taking any counterparty risk as all trades clear
Poikonen: Electronic platforms have certainly through the AAA rated Options Clearing
created significant efficiencies and increased the Corporation(OCC). Both sides would benefit as
level of automation for many participants in the hedge funds would get the delta at a lower cost
securities lending marketplace. The use of these and the beneficial owners would receive greater
systems has enabled firms to increase their distri- returns on their lent assets. But the middlemen
bution, increase their volumes, and reduce their who currently controls this process will be slow
costs. However, the majority of the value-add to to embrace this.
date has been realised post-trade. Despite recent
developments on the pre-trade side, electronic 2. What are the benefits of embrace trading
methods of negotiation have only realized a mod- technology and what are the risks?
est uptake by the majority of industry partici- Oegerli: There is a potential reduction in unit
pants. Given the increased focus on best execu- cost on the trading side if the relevant trading
tion and transparency, we expect this to change platform is fully integrated into its internal pre-
and see a more rapid progression towards screen trade and post-trade processes. However, every
based trading. firm needs to conduct its own business case
Gonzalez: SLB is backward in terms of its trad- analysis comparing the potential unit cost reduc-
ing technology. There are several reasons why tion with the possible investment cost of integrat-
this is the case. There is a lack of standardisation ing the platform. They will also need to consider
in SLB – there are thousands of different issues, the possible indirect opportunity cost on the trad-
which can trade in unique ways. This requires a ing side.
degree of human intervention that is far greater Glicher: The benefits of straight-through pro-
than in many other markets. Change is not cessing and integration into proprietary systems
always embraced. It is often perceived that the is the mitigation of risk and increased efficiency
efficiencies brought about by electronic trading of trade life-cycles.The most largely perceived
come at a human cost, especially in terms of risk is that people will feel that they will lose
jobs, and it is natural that if a market is seeming- control over their inventory – this is a miscon-
ly functioning well, its participants will naturally ception because it is possible to build con-
straints/restrictions/logic to simulate these rela- on technology will lead to systems that provide
tionships. greater transparency of the inner workings of a
Poikonen: From a pure volume perspective, trad- firm’s books and records. This should provide
ing technology has increased efficiency of pro- the tools for a more comprehensive analysis.
cessing and has reduced operational risk and Poikonen: As our business continues to grow, we
costs. remain focused on implementing industry stan-
Gonzalez: The main benefit that electronic trad- dard solutions to further increase our operational
ing brings is an overall improvement in efficiency efficiencies and scalability, we make significant
and an additional source of trading opportunities investments in technology as part of this. In
with existing and new counterparties. There is January of this year, we added EquiLend to our
ample evidence of this from all the other markets list of operational and administrative system
that have embraced it. It has to be remembered service providers to enable us to communicate
that this greater efficiency covers almost all and facilitate operational processing and trade
aspects of what takes place in a market, starting instructions with other EquiLend participants.
with price discovery, agreeing trades, through to This has enhanced our straight through process-
processing and then settlement. ing with our borrowing counterparties. In addi-
Electronic trading generally leads to greater tion to EquiLend, we incorporate the use of
transparency. Some participants will be wary that industry standard tools such as SWIFT, 4Sight,
this tends to lead to spread compression, but the Loanet, and Pirium.
evidence from those other assets where electronic Gonzalez: There is no definitive answer to this,
trading has been embraced is that volumes rise to but all costs are being very closely scrutinised by
such a degree that this potential negative is more many institutions. There is no single factor that
than offset. can be cited as having caused the financial crisis,
The overall benefits, including the potential to but the inability to accurately mark-to-market
mitigate counterparty and settlement risk, are far was an important element. This has increased the
greater than any of the negatives. desire for transparency, even in SLB, which has a
Downey: The benefits can be simplty stated - long tradition of trading bilaterally and some-
higher returns for their customers’ assets. times being opaque. The financial crisis has
Beneficial owners have a fiduciary responsibility revealed all the problems of credit risk and it has
to maximise returns under acceptable risk param- been well documented that at times the tradition-
eters. Today they lend the assets for a modest al money markets either became extremely tight
return but cede the majority of the benefit to the or even completely dried up. It is not surprising
custodians and the prime brokers. They could in that in such an environment secured financing
fact participate but realize much higher returns became a far more attractive proposition. So for
without taking any counterparty risk and avoid many companies there is now a much clearer
the administrative hassles associated with stock rationale of why they should invest in their trad-
lending today. The risk is that they do not do this. ing technology across the entire deal chain
3. Has the recent financial crisis had any because they realize that if they penny pinch
affect on companies’ willingness to invest in now, they are likely to have to spend pounds
technology? later.
Oegerli: The recent financial crisis has led to Downey: I think the recent crisis has raised the
more complex collateralization and risk measure- spectre of counterparty risk to a higher level.
ment rules, which cannot always be supported in Funds do not want to expose their customer’s to
an automated manner by the current system a situation where they won’t get their assets back,
infrastructure. This may certainly lead to further which is reasonable and justified. On the other
investment in technology, mainly focused on data hand they can actually increase their participa-
quality and on the creation of flexible rules for tion while reducing this counterparty risk with
risk and collateral management functionality. just a little education on the alternative paths to
market that they use today.
Glicher: With lay-offs and budget cuts, institu-
tions are more willing to consider investment in 4. Is the ‘hard to borrow’ market ready to be
technology. On the other hand, people that have traded through an automated electronic mar-
understood what led to this crisis and know how ket place?
to minimize risk in the future. Increased spend Oegerli: The market is still not mature enough to

trade the hard to borrow stocks via an electronic 5. With the vast number of solutions and sys-
exchange. The distribution of hard to borrow tems out there, do you think we will see much
stocks is still mostly dependent upon the overall consolidation with some of systems disappear-
relationship between lenders and borrowers. ing within the next twelve months?
Glicher: There are existing services that trade Oegerli: I presume that market service providers
hot and warm stocks, but this process is not com- and vendors have medium to long-term business
pletely automated. It is a combination of elec- plans. Therefore I do not anticipate consolida-
tronic trading tools and people directing them tions within the next 12 months. That said, the
(EquiLend service Trade2O) consolidation process for the electronic
Poikonen: There is no reason why hard to borrow exchanges may start within the next three to five
securities cannot be successfully negotiated and years. There will be a “survival of the fittest” test
confirmed over an electronic trading platform whereby the platforms, which can attract the
today as the technology to facilitate these transac- most liquidity in their market niche, will have an
tions currently exists. That said, one can easily see important market impact and others will disap-
why this has been slow on the uptake. Most of the pear over time.
hard to borrow securities are still negotiated bilat- Glicher I would challenge this question in that
erally over the phone or via a Bloomberg terminal there are not a “vast” number of solutions out
so until the majority of the supply side changes there.
their trading behaviour and utilizes these new for- Poikonen Competition is good for any industry.
mats the progression will remain slow. Should the It forces firms to consistently improve their prod-
supply side actively embrace electronic trading as uct and service offerings, and to continually
a primary method of distribution, the demand side innovate. There is certainly room for multiple
will adapt accordingly. technology platforms to exist and thrive within
Gonzalez: It is a false argument to say that spe- the securities lending marketplace. In many
cial issues can only be traded on the telephone. If cases the various systems can be seen as comple-
something is special, it makes sense to advertise mentary and used interchangeably, they provide
its availability to as many bidders as possible. clear and relevant advantages to users. It is diffi-
Trading it on screen makes this far easier than cult to speculate on whether further consolidation
ringing around laboriously to try and find the will occur in this space. Also, from a long-term
best bid. Also, once a trade has been agreed, it is perspective, consolidation in this space is not
more efficient to process it if it has been done necessarily in the best interests of the greater
electronically. It is not envisaged that Europe is community.
going to have a single Central Securities Gonzalez The SLB ‘pie’ is big enough to provide
Depository(CSD) in the near future, so trading a decent meal for lots of different providers.
on a market place which has the technology to Ultimately, the SLB market will determine how
link all of the major custodians is a very attrac- many marketplaces it wants to support. The mar-
tive business proposition. This facility enables ket has not yet reached the stage where it is like-
users of Eurex SecLend to manage and utilise ly to see consolidation. In fact, the existing chal-
their collateral far more efficiently. lenges that exist probably make it more likely
Downey: Hard to borrow markets are a bit tricky that new platforms will emerge to try and pro-
and represent the bulk of the profits generated by vide some of the solutions that Eurex SecLend is
securities lending. The beneficial owners may not already offering.
even be aware of the mark-ups that are being Downey Competition is always good but none of
charged to the hedge funds when the prime bro- the systems out there today address the issue of
kers allocate the lent asset. If the beneficial transparency for the entire marketplace or the
owners knew what types of returns are being issue of counterparty exposure. As seen in the
generated they would be motivated to do the Bear Stearns melt down, there is no safe haven
trade themselves and reap more of the profits. when your counterparty is a single point of fail-
Since the trading of single stock futures (SSF) do ure. A centralised clearing organisation such as
not represent counterparty risk exposure they the OCC is the answer to the problem.
may even be willing to expand the percentage of
their portfolio they are willing to lend, which is 6. Is MiFID best execution changing market
all good for the marketplace. behaviour?
Oegerli: Although this may not occur “formally”
MiFID will certainly increase the awareness of costs.

lending fees and split arrangements between Glicher: There will be more willingness to use
lending intermediaries and beneficial owners. automated trading tools. Potentially there will be
Glicher: The focus of MiFID is to provide a move towards an exchange or utility model.
increased transparency, which in turn will change There will be increased automation, particularly
market behaviour. in trading.
Poikonen: Regulation has increased the demand Poikonen: The number of market participants
for transparency, which has accelerated the trend continues to grow globally as more non-tradition-
of unbundling and use of multiple routes to mar- al borrowers and lenders are entering the market.
ket. While securities lending transactions have This growth has been largely driven by the
been excluded from Europe’s MiFID trade and increase in the size and number of hedge funds,
transaction reporting requirements, there remains asset managers, and 130/30 funds, the increased
continued uncertainty as to whether MiFID’s best focus on emerging markets and their economies,
execution requirements will or can be applied to and the emergence of sovereign wealth funds as
securities lending activity. We believe an auction more dominant players in the global financial
is a well-positioned response since it enables markets. As a result, the market should expect to
lenders to optimise performance for every portfo- see new lending and borrowing opportunities,
lio or asset class through an objective process. increased volumes, and new sources of supply
Auction results for each lender’s program form and demand.
the objective basis for how lending activity is Gonzalez: The efficient use of collateral is
best allocated and awarded to approved borrow- already recognised as a potential business differ-
ers. Award decisions are well documented and entiator. Increasingly though, this has to be
easily explained to management, boards, regula- looked at from a global perspective. Global trade
tors and auditors alike. is increasing and the way that financing and liq-
Gonzalez: MiFID does not cover SLB at the uidity management is conducted will change to
moment. However, most financial institutions reflect this, which will inevitably lead to an
tend to work on the basis that they need to be increase in electronic trading. As this occurs,
able to demonstrate best execution to their spreads will tighten and margins will decrease.
clients. The reality is that it is easier to do this in SLB participants will look to offset their fixed
an electronic trading environment. Every aspect costs by increasing their volumes and overall
of a trade can be time stamped, from the point of efficiency. The use of a central counterparty will
order submission through to execution and then emerge, because not only does it remove counter-
settlement. Electronic trading makes it easier to party risk but it also facilitates straight through
conduct pre- and post trade transaction analysis. processing. Electronic trading will never fully
Buy-side firms are increasingly monitoring all of replace personal communication in SLB, but it
their trading costs and their sell-side counterpar- will grow and eventually account for approxi-
ties have to be willing to help them analyse them mately a third of activity.
in all markets, including SLB. So a MiFID-like Downey: The cost of securities lending in terms
environment is developing in SLB, even if it is of the fees that hedge funds pay and the returns
not compulsory. that the beneficial owners are forgoing will bring
7. Where do you see the market going within about change. Once the buyer and the seller
the next five years and what are your predic- realise that they can meet directly without
tions for the future? accepting each other’s credit risk, the volume will
Oegerli: The demand for securities lending will move and both sides will benefit. The beneficial
increase further mainly based on the growth of owners must move securities lending out of the
the alternative investment industry and the emer- operations sphere and into the investment
gence of new securities lending markets in Asia, managers’ field of responsibility. One of the
Eastern Europe and Latin America. On the other beneficial owners will catch-on and their returns
hand, because of the ongoing commoditisation, will differentiate them from their peers. At that
the business will be managed increasingly via a point the transition will accelerate, as they will
more sophisticated approach to the management see that they can increase their yields
of risk and capital, post-trade process improve- substantially, without lowering risk.
ment and cost efficiency, including distribution SLMG

“ Securities Lending is an
essential utility that satisfies
a myriad of investor and
internal demands; deploying
the most effective technology
for our business is essential “
Chris Donald,
Global Prime Finance, Japan,
Deutsche Securities Inc
SECURITIES FINANCE
Enhancing Profitability
Download SunGard’s whitepaper on how automation and integrating the front and back office can
bring about process efficiencies and significant cost reductions thoughout the securities
lending lifecycle. Go to www.sungard.com/securitieswhitepaper.
Over 150 customers manage $11 trillion in securities financing on SunGard's solutions for equity finance-
and repo: Loanet, Global One and Martini. Through our products and services, we provide comprehen-
sive trading and operations solutions with worldwide reach for equities and fixed income securities
finance. SunGard has enhanced its suite of solutions for Securities Finance by the recent acquisition of
Astec Analytics providing market data and analysis for the global securities lending industry.
www.sungard.com/loanet • www.sungard.com/globalone • www.sungard.com/martini • www.astecgroup.com
©2008 SunGard
Trademark information: SunGard, the SunGard logo, Loanet, Global One and Martini are trademarks or registered trademarks of SunGard Data Systems Inc. or its
subsidiaries in the U.S. and other countries. All other trade names are trademarks or registered trademarks of their respective holders.
GUIDE SECURITIES LENDING
SECURITIES LENDING GUIDE

A guide to the essentials of the securities lending market
Securities lending began as an informal practice against the possible default of the borrower. This col-
among brokers who had insufficient share certifi- lateral can be cash, or other securities or other assets.
cates to settle their sold bargains, commonly because
their selling clients had mislaid their certificates or (a) Transactions collateralised with other
just not provided them to the broker by the settle- securities or assets
ment date of the transaction. Once the broker had Non-cash collateral would typically be drawn from
received the certificates, they would be passed on to the following collateral types:
the lending broker. This business arrangement was * government bonds - Issued by G7, G10 or Non-
subject to no formal agreement and there was no G7 governments
exchange of collateral. * corporate bonds - Various credit ratings
Securities lending is now a significant business * convertible bonds - Matched or unmatched to the
that describes the market practice whereby securities securities being lent
are temporarily transferred by one party (lender) to * equities - Of specified Indices
another (borrower). The borrower is obliged to * letters of credit - From banks of a specified cred-
return the securities to the lender, either on demand, it quality
or at the end of any agreed term. For the period of * certificates of deposit - drawn on institutions of
the loan the lender is secured by acceptable assets a specified credit quality
delivered by the borrower to the lender as collateral. * delivery by value (DBV)1 - concentrated or
Under English law, absolute title to the securities unconcentrated - of a certain asset class
“lent” passes to the “borrower”, who is obliged to * warrants - matched or unmatched to the securi-
return “equivalent securities.” Similarly the lender ties being lent
receives absolute title to the assets received as collat- * other money market instruments
eral from the borrower, and is obliged to return
“equivalent collateral.” The eligible collateral will be agreed between the
parties, as will other key factors including:
Definitions * Notional Limits - The absolute value of any asset
Transactions are collateralised and the “rental fee” to be accepted as collateral
charged, along with all other aspects of the transac- * Initial margin - The margin required at the outset
tion, are dealt with under the terms agreed between of a transaction
the parties. It is entirely possible and very common- * Maintenance margin - The minimum margin
place that securities are borrowed and then sold or level to be maintained throughout the transaction
on-lent. * Concentration limits - The maximum percentage
There are some consequences arising from this of any issue to be acceptable, for example less than
clarification: 5% of daily traded volume - The maximum per-
- Absolute title over both the securities on loan and centage of collateral pool that can be taken against
the collateral received passes between the parties. the same issuer, ie, the cumulative effect where
- The economic benefits associated with ownership, collateral in the form of letters of credit, CD, equi-
for example, dividends, coupons etc are “manufac- ty, bond and convertible may be issued by the same
tured” back to the lender, meaning that the borrower firm
is entitled to these benefits as owner of the securities
but is under a contractual obligation to make equiv- The example in the diagram (top left) shows collat-
alent payments to the lender. eral being held by a tri-party agent. This specialist
- A lender of equities surrenders its rights of owner- agent (typically a large custodian bank or interna-
ship, for example, voting. Should the lender wish to tional central securities depository) will receive only
vote on securities on loan, it has the contractual right eligible collateral from the borrower and hold it in a
to recall equivalent securities from the borrower. segregated account to the order of the lender. The tri-
- In the United Kingdom appropriately documented party agent will mark this collateral to market, with
securities lending transactions avoid stamp duty cap- information distributed to both lender and borrower
ital gains tax. (in the diagram, dotted “reporting” lines). Typically
the borrower pays a fee to the tri-party agent.
Different types of securities loan transaction: There is debate within the industry as to whether
Most securities loans in today’s markets are made lenders that are flexible in the range of non-cash col-
against collateral in order to protect the lender lateral they are willing to receive are rewarded with

ment to repurchase the same securities (or equivalent
TRANSACTIONS COLLATERALISED WITH OTHER securities) at a specific price on an agreed date in the
SECURITIES OR ASSETS future. It is common for the terms ”seller” and
Borrower
“buyer” to replace the securities lending terms
Lender
“lender” and ”borrower”. Most repos are governed
Reporting by a master agreement called the TBMA/ISMA
Reporting Collateral Global Master Repurchase Agreement (GMRA)2.
Repos occur for two principal reasons – either to
Tri Party transfer ownership of a particular security between
Loan Commences Agent the parties or to facilitate collateralised cash loans or
funding transactions.
The bulk of bond lending and bond financing is
Lender Borrower
conducted by repo and there is a growing equity repo
market. An annex can be added to the GMRA to
facilitate the conduct of equity repo transactions.
Collateral Repos are much like securities loans collateralised
against cash, in that income is factored into an inter-
Tri Party est rate that is implicit in the pricing of the two legs
Agent of the transaction.
Loan Terminates At the beginning of a transaction, securities are val-
ued and sold at the prevailing “dirty” market price
correspondingly higher fees. Some argue that they (including any coupon that has accrued). At termina-
are, others claim that the fees remain largely static tion, the securities are resold at a predetermined
but that borrowers are more prepared to deal with a price equal to the original sale price together with
flexible lender and therefore balances and overall interest at a previously agreed rate (the repo rate).
revenue rise. In securities-driven transactions (where the motiva-
tion is not simply financing) the repo rate is typical-
(b) Transactions collateralised with cash ly set at a lower rate than prevailing money market
Cash collateral is, and has been for many years, an rates to reward the “lender” who will invest the funds
integral part of the securities lending business, par- in the money markets and thereby seek a return. The
ticularly in the United States. The lines between two “lender” often receives a margin by pricing the secu-
distinct activities. rities above their market level.
Securities lending and cash reinvestment have In cash-driven transactions, the repurchase price will
become blurred and to many US investment institu- typically be agreed at a level close to current money
tions securities lending is virtually synonymous with market yields, as this is a financing rather than a
cash reinvestment. This is much less the case outside security specific transaction. The right to substitute
the United States but consolidation of the custody repoed securities as collateral is agreed by the parties
business and the important role of US custodian at the outset. A margin is often provided to the cash
banks in the market means that this practice is “lender” by reducing the value of the transferred
becoming more prevalent. The importance of this securities by an agreed “haircut” or discount.
point lies in the very different risk profiles of these
increasingly intertwined activities. (b) Buy/sell backs
The revenue generated from cash-collateralised Buy/sell backs are similar in economic terms to
securities lending transactions is derived in a differ- repos but are structured as a sale and simultaneous
ent manner from that in a non-cash transaction. It is purchase of securities, with the purchase agreed for
made from the difference or “spread” between inter- a future settlement date. The price of the forward
est rates that are paid and received by the lender. purchase is typically calculated and agreed by refer-
ence to market repo rates.
Other transaction types The purchaser of the securities receives absolute
Securities lending is part of a larger set of interlinked title to them and retains any accrued interest and
securities financing markets. These transactions are coupon payments during the life of the transaction.
often used as alternative ways of achieving similar However, the price of the forward contract takes
economic outcomes, although the legal form and account of any coupons received by the purchaser.
accounting and tax treatments can differ. The other
transactions include: Lenders and intermediaries
The securities lending market involves various types
(a) Sale and repurchase agreements of specialist intermediary which take principal
Sale and repurchase agreements or repos involve and/or agency roles. These intermediaries separate
one party agreeing to sell securities to another the underlying owners of securities – typically large
against a transfer of cash, with a simultaneous agree- pension or other funds, and insurance companies –

from the eventual borrowers of securities tody services, and a number of specialist third-party
agency lenders have established themselves as an
1. Agent intermediaries alternative to the custodian banks.
Securities lending is increasingly becoming a vol- Their market share is growing from a relatively
ume business and the economies of scale offered by small base. Their focus on securities lending and
agents that pool together the securities of different their ability to deploy new technology without refer-
clients enable smaller owners of assets to participate ence to legacy systems can give them flexibility.
in the market. The cost of running an efficient secu- 2. Principal intermediaries
rities lending operation are beyond many smaller There are three broad categories of principal inter-
funds for which this is a peripheral activity. mediary: broker dealers, specialist intermediaries
Owners and agents “split” revenues from securities and prime brokers
lending at commercial rates. The split will be deter- In contrast to the agent intermediaries, they can
mined by many factors including the service level assume principal risk, offer credit intermediation and
and provision by the agent of any risk mitigation, take positions in the securities that they borrow.
such as an indemnity. Distinctions between the three categories are blurred.
Many firms would be in all three.
(a) Asset managers In recent years, securities lending markets have
It can be argued that securities lending is an asset been liberalised to a significant extent so that there is
management activity – a point that is easily under- little general restriction on who can borrow and who
stood in considering the reinvestment of cash collat- can lend securities. Lending can, in principle, take
eral. Particularly in Europe, where custodian banks place directly between beneficial owners and the
were perhaps slower to take up the opportunity to eventual borrowers. But typically a number of layers
lend than in the United States, many asset managers of intermediary are involved.
run significant securities lending operations.
What was once a back office low profile activity is The added value of intermediaries
now a front office growth area for many asset man- A beneficial owner may be an insurance company or
agers. The relationship that the asset managers have a pension scheme while the borrower could be a
with their underlying clients puts them in a strong hedge fund. Institutions are often reluctant to take on
position to participate. credit exposures to borrowers that are not well recog-
nised, regulated, or who do not have a good credit
(b) Custodian banks rating, which would exclude most hedge funds.
The history of securities lending is inextricably In these circumstances, the principal intermediary
linked with the custodian banks. Once they recog- (often acting as prime broker) performs a credit
nised the potential to act as agent intermediaries and intermediation service in taking a principal position
began marketing the service to their customers, they between the lending institution and the hedge fund.
were able to mobilise large pools of securities that Intermediaries also take on liquidity risk. Typically
were available for lending. This spurred the growth they will borrow from institutions on an open basis –
of the market. with the option to recall the underlying securities if
Most large custodians have added securities lend- they want to sell them or for other reasons – while
ing to their core custody businesses. Their advan- lending to clients on a term basis, giving them cer-
tages include: the existing banking relationship with tainty they will be able to cover their short positions.
their customers; their investment in technology and In many cases, as well as serving the needs of their
global coverage of markets, arising from their cus- own propriety traders, principal intermediaries pro-
tody businesses; the ability to pool assets from many vide a service to the market in matching the supply
smaller underlying funds, insulating borrowers from of beneficial owners that have large stable portfolios
the administrative inconvenience of dealing with with those that have a high borrowing requirement.
many small funds and providing borrowers with pro- They also distribute securities to a wider range of
tection from recalls; and experience in developing as borrowers than underlying lenders, which may not
well as developed markets. have the resources to deal with a large number of
Banks also have the capability to provide indemni- counterparts.
ties and manage cash collateral efficiently – two crit- These activities leave principal intermediaries
ical factors for many underlying clients. The custodi- exposed to liquidity risk if lenders recall securities
ans can also provide a range of additional services, that have been on lent to borrowers on a term basis.
including foreign exchange, trade execution, securi- One way to mitigate this risk is to use in-house
ties lending and fund accounting. inventory where available. For example, proprietary
trading positions can be a stable source of lending
(c) Third-party agents supply if the long position is associated with a long-
Advances in technology and operational efficiency term derivatives transaction.
have made it possible to separate the administration Efficient inventory management is seen as critical
of securities lending from the provision of basic cus- and many securities lending desks act as central

clearers of inventory within their organisations, only providers have a significant advantage. Some of the
borrowing externally when netting of in-house posi- newer entrants have been using total return swaps,
tions is complete. contracts for difference and other derivative transac-
This can require a significant technological invest- tion types to offer what has become known as “syn-
ment. Other ways of mitigating ‘recall risk’ include thetic prime brokerage”.
arrangements to borrow securities from affiliated
investment management firms, where regulations Beneficial owners
permit, and bidding for exclusive (and certain) Those beneficial owners with portfolios of sufficient
access to securities from other lenders. size to make securities lending worthwhile include
On the demand side, intermediaries have historical- pension funds, insurance and assurance companies,
ly been dependent upon hedge funds or proprietary mutual funds/unit trusts and endowments.
traders that make trading decisions. But a growing When considering whether and how to lend secu-
number of securities lending businesses within rities, beneficial owners need first to consider the
investment banks have either developed “trading” characteristics of their organisations and portfolio.
capabilities within their lending or financing depart-
ments, or entered into joint ventures with other 1. Organisation characteristics
departments or even in some cases their hedge fund (a) Management motivation
customers. The rationale behind this trend is that the Some owners lend securities solely to offset custody
financing component of certain trading strategies is and administrative costs. Others are seeking more
so significant that without the loan there is no trade. significant revenue.
(a) Broker dealers (b) Technology investment. Lenders vary in their
Broker dealers borrow securities for different rea- willingness to invest in technological infrastructure
sons, including market makingand to support propri- to support securities lending.
etary trading on behalf of clients
Many broker dealers combine their securities lend- (c) Credit risk appetite. The securities lending mar-
ing activities with their prime brokerage operation ket consists of organisations with a wide range of
(the business of servicing the broad requirements of credit quality and collateral capabilities.
hedge funds and other alternative investment man- A cautious approach to counterpart selection
agers). This can bring significant efficiency and cost (AAA only) and restrictive collateral guidelines (G7
benefits. Typically within broker dealers the fixed Bonds) will limit lending volumes.
income and equity divisions duplicate their lending
and financing activities. 2. Portfolio characteristics
(a) Size. Other things being equal, borrowers prefer
(b) Specialist intermediaries large portfolios.
Historically, regulatory controls on participation in
stock lending markets meant that globally there were (b) Holdings size. Loan transactions generally
many intermediaries. Some specialised in intermedi- exceed USD250,000. Lesser holdings are of limited
ating between stock lenders and market makers in appeal to direct borrowers. Holdings of under
particular, e.g. UK Stock Exchange Money Brokers USD250,000 are probably best deployed through an
(SEMB). With the deregulation of stock lending agency programme, where they can be pooled with
markets, these niches have almost all disappeared. other inventories.
(c) Prime brokers (c) Investment strategy. Active investment strategies
Prime brokers serve the needs of hedge funds and increase the likelihood of recalls.
other ‘alternative’ investment managers. The busi-
ness was once viewed, simply, as the provision of six (d) Diversification. Borrowers want portfolios where
distinct services, although many others such as cap- they need liquidity. A global portfolio offers the
ital introduction, risk management, fund accounting greatest chance of generating a fit, although there are
and start up assistance have now been added: markets that are particularly in demand from time to
time and there are certain borrowers that have a geo-
Services provided by prime brokers graphic or asset class focus.
Securities lending is one of the central components
of a successful prime brokerage operation, with its (e) Tax jurisdiction and position. Borrowers are
scale depending on the strategies of the hedge funds responsible for "making good" any benefits of share
for which the prime broker acts. Two strategies that ownership (excluding voting rights) as if the securi-
are heavily reliant on securities borrowing are ties had not been lent. They must pay the economic
long/short equity and convertible bond arbitrage. value of dividends to the lender. An institution's tax
The cost associated with the establishment of a full position compared to that of other possible lenders is
service prime broker is steep, and recognised therefore an important consideration.

There is a lot more information on the long side of
(f) Inventory attractiveness the market than the short side. Securities lending
‘Hot’ securities are those in high demand while gen- activity is not synonymous with short selling. But it
eral collateral or general collateral securities are is often, although not always, used to finance short
those that are commonly available. The ‘hotter’ the sales (see below) and might be a reasonable and
portfolio, the higher the returns to lending. practical proxy for the scale of short selling activity
Having examined the organisation and portfolio in the absence of full short sale disclosure. It is there-
characteristics of the beneficial owner, we must now fore natural that issuers would want to understand
consider the various possible routes to market. how and why their securities are traded.
The possible routes to the securities lending market: Reasons to borrow
(a) Using an asset manager as agent. A beneficial Borrowers, when acting as principals, have no obli-
owner may find the asset manager they have chosen gation to tell lenders or their agents why they are bor-
already operates a securities lending programme. rowing securities. In fact they may well not know
themselves as they may be on- lending the securities
(b) Using a custodian as agent. This is the least to proprietary traders or hedge funds that do not
demanding option for a beneficial owner. share their trading strategies openly. Some prime
brokers are deliberately vague when borrowing secu-
(c) Appointing a third party specialist as agent. rities as they wish to protect their underlying hedge
fund customer’s trading strategy and motivation.
(d) Auctioning a portfolio to borrowers.
Borrowing to cover short positions
e) Selecting one principal borrower. Many borrowers
effectively act as wholesale intermediaries using (a) Settlement coverage
their expertise and capital to generate spreads Historically, settlement coverage has played a signif-
between two principals that remain unknown to one icant part in the development of the securities lend-
another. These principal intermediaries are some- ing market. Going back a decade or so, most securi-
times separately incorporated organisations, but ties lending businesses were located in the back
more frequently, parts of larger banks, broker-dealers offices of their organisations and were not properly
or investment banking groups. Acting as principal recognised as businesses in their own right, particu-
allows them to deal with organisations that the typi- larly for less liquid securities such as corporate
cal beneficial owner may choose to avoid for credit bonds and equities with a limit free float.
reasons; for example, hedge funds.
(b) Naked shorting
(f) Lending directly to proprietary principals. A ben- Naked shorting is borrowing securities in order to
eficial owner that is large enough in its own right, sell them in the expectation that they can be bought
may wish to explore the possibility of establishing a back at a lower price and returned to the lender.
business “in house”, lending directly to a selection of Naked shorting is a directional strategy, speculating
principal borrowers that are the end-users of their that prices will fall, rather than a part of a wider trad-
securities. The proprietary borrowers include broker- ing strategy, usually involving a corresponding long
dealers, market makers and hedge funds. position in a related security.
Naked shorting is a high risk strategy. Although
(g) A combination of the above. Deciding not to lend some funds specialise in taking short positions in the
one portfolio does not preclude lending to another; shares of companies they judge to be overvalued, the
similarly, lending in one country does not necessitate number of funds relying on naked shorting is rela-
lending in all. Choosing a wholesale intermediary tively small and probably declining.
that happens to be a custodian in the US and Canada
does not mean that a lender cannot lend Asian assets (c) Market making.
through a third-party specialist, and European assets Market makers play a central role in the provision of
directly to a panel of proprietary borrowers. two-way price liquidity in many securities markets
around the world. They need to be able to borrow
The borrowing motivation securities in order to settle buy orders from customer-
If securities were not issued, they could not be lent. s and to make tight, two-way prices.
When Initial Public Offerings are frequent and cor- Making markets in illiquid small capitalisation
porate merger and acquisition activity is high, the securities is sometimes hampered by a lack of access
securities lending business benefits. At the begin- to borrowing, and some of the specialists in these
ning of this decade the fall in the level of such activ- less liquid securities have special arrangements to
ity depressed the demand to borrow securities lead- enable them to gain access to securities, such as
ing to a depressed equity securities lending market guaranteed exclusive bids with lenders.
and issuer concern about securities lending. Borrowing is typically short term for an unknown

period of time. The need to know that a loan is avail- comes in one of two ways: either a higher fee for
able tends to mean that the level of communication lending if they require a lower manufactured divi-
between market makers and the securities lending dend, or a higher manufactured dividend than the
business has to be highly automated. A market maker post-tax dividend they would normally receive (quot-
that goes short and then finds there is no loan avail- ed as an “all-in rate”).
able would have to buy that security back to flatten (b) Dividend reinvestment plan arbitrage
its book. Many issuers of securities create an arbitrage oppor-
(d) Arbitrage trading tunity when they offer shareholders the choice of tak-
Securities are often borrowed to cover a short posi- ing a dividend or reinvesting in additional securities
tion in one security that has been taken to hedge a at a discounted level.
long position in another. Income or index tracking funds that cannot deviate
from recognised securities weightings may have to
(i) Convertible bond arbitrage choose to take the cash option and forgo the oppor-
Convertible bond arbitrage involves buying a con- tunity to take the discounted reinvestment.
vertible bond and simultaneously selling the underly- One way that they can share in the potential prof-
ing equity short and borrowing the shares to cover itability of this opportunity is to lend securities to
the short position. borrowers that then take the following action:
1) borrow as many guaranteed cash shares as possi-
(ii) Pairs trading or relative value “arbitrage” ble, as cheaply as possible,
This is an investment strategy that seeks to identify 2) the borrowed securities to receive the new dis-
two companies with similar characteristics whose counted share,
equity securities are trading at a price relationship 3) the new shares to realise the “profit” between the
that is out of line with their historical trading range. discounted share price and the market price,
The strategy entails buying the apparently under- 4) the shares and manufacture the cash dividend to
valued security while selling the apparently overval- the lender.
ued security short, borrowing the latter security to
cover the short position. Market mechanics
Focusing on securities in the same sector or indus- This section outlines the detailed processes in the life
try should normally reduce the risks in this strategy. of a securities loan including:
(iii) Index arbitrage Loan negotiation
In this context, arbitrage refers to the simultaneous Traditionally, securities loans have been negotiated
purchase and sale of the same commodity or stock in between counterparts (whose credit departments
two different markets in order to profit from price have approved one another) on the phone, and fol-
discrepancies between the markets. lowed up with written or electronic confirmations.
Stock index arbitrage involves buying or selling a Normally the borrower initiates the call to the lender
basket of stocks and, conversely, selling or buying with a borrowing requirement. However, lenders
futures when mispricing appears to be taking place. may also offer out in-demand securities to their
approved counterparts. This would happen particu-
(2) Financing larly where one borrower returns a security and the
As broker dealers build derivative prime brokerage lender is still lending it to others: they will contact
and customer margin business, they hold an increas- them to offer additional securities.
ing inventory of securities that requires financing. There is an increasing amount of bilateral and mul-
This type of activity is high volume and is between tilateral automated lending whereby securities are
two counterparts, eg, one has cash that they would broadcast as available at particular rates by email or
like to invest on a secured basis and pick up yield, other electronic means. Where lending terms are
and the other has inventory that needs to be financed. agreeable, automatic matching can take place.
An example of an electronic platform for negotiat-
(3) Temporary transfers of ownership ing equity securities loan transactions is EquiLend,
(a) Tax arbitrage. Tax driven trading is an example of which began operations in 2002 and is backed by a
securities lending as a means of exchange. consortium of financial institutions. SecFinex offers
Markets that have historically provided the largest similar services in Europe.
opportunities for tax arbitrage include those with sig-
nificant tax credits that are not available to all Confirmations
investors – such as Italy, Germany and France. Written or electronic confirmations are issued,
The different tax positions of investors around the whenever possible, on the day of the trade so that any
world have opened up opportunities for borrowers to queries by the other party can be raised as quickly as
use securities lending transactions, in effect, to possible. Material changes during the life of the
exchange assets temporarily for the mutual benefit of transaction are agreed between the parties as they
purchaser, borrower and lender. The lender’s reward occur and may also be confirmed if either party

wishes. Collateral adjustments or collateral substitu-
tions are two examples. The parties agree who takes How are loans settled?
responsibility for issuing loan confirmations. Securities lenders need to settle transactions on a
Confirmations would normally include contract and shorter timeframe than the customary settlement
settlement dates, details of loaned securities, identi- period for that market. Settlement will normally be
ties of lender and borrower (plus any underlying prin- through the lender’s custodian bank and this is likely
cipal), acceptable collateral and margin percentages, to apply irrespective of whether the lender is con-
term and rates and bank and settlement account ducting the operation or delegating to an agent. The
details of the lender and borrower. lender will usually have agreed a schedule of guaran-
teed settlement times for its securities lending activ-
Term of loan, and selling securities while on loan ity with its custodians. Prompt settlement informa-
Loans may either be for a specified term or open. tion is crucial to monitoring a lending programme.
Open loans are trades with no fixed maturity date. It In most settlement systems securities loans are set-
is more usual for securities loans to be open or “at tled as ‘free-of-payment’ deliveries and the collater-
call”, especially for equities, because lenders typical- al is taken quite separately, possibly in a different
ly wish to preserve the flexibility for fund managers payment or settlement system and maybe a different
to be able to sell at any time. Lenders are able to sell country and time zone. This can give rise to “day-
securities despite their being on open loan because light exposure”, a period during which the loan is not
they can usually be recalled within the settlement covered as the lent securities have been delivered but
period of the market concerned. Nevertheless open the collateral securities have not yet been received.
loans can remain on loan for a long period. To avoid this exposure some lenders insist on pre-
collateralisation.
Term trades – fixed or indicative?
“Term trade” is used to describe differing arrange- Termination of the loan
ments in the securities lending market. The parties Open loans may be terminated by the borrower
have to agree whether the term of a loan is “fixed” returning securities or by the lender recalling them.
for a definite period or merely “indicative” and The borrower will normally return borrowed securi-
therefore the securities are callable. If fixed, the ties when it has filled its short position. A borrower
lender is not obliged to accept the earlier return of will sometimes refinance its loan positions by bor-
the securities; nor does the borrower need to return rowing more cheaply elsewhere and returning secu-
the securities early if the lender requests it. Securities rities to the original lender.
on a fixed loan should not be sold while on loan.
Where the term discussed is intended to be “indica- Redelivery, failed trades and legal remedies
tive”, it usually means that the borrower has a long Securities lenders must consider how certain they
term need for the securities but the lender is unable can be of having their securities returned on time
to fix for term and retains the right to recall the secu- when called, and what remedies there are under the
rities if necessary. legal agreement in the event of a failed return.
Procedures to be followed in the event of a failed
Putting securities on hold (“icing”) redelivery are usually covered in legal agreements or
Putting securities “on hold” is where the lender will otherwise agreed between the parties at the outset of
reserve securities at the request of a borrower on the the relationship. Financial redress may be available
borrower’s expected need to borrow those securities to the lender if the borrower fails to redeliver loaned
at a future date. This occurs where the borrower must securities or collateral on the intended settlement
be sure that the securities will be available before date. Costs that would typically be covered include:
committing to a trade that will require them.
While some details can be agreed between the par- Costs reasonably and properly incurred as a result of
ties, it is normal for any price quoted to be purely the borrower’s failure to meet its sale or delivery
indicative, and for securities to be held to the follow- obligations. Total expenses reasonably incurred by
ing business day. The lender does not receive a fee the lender as a result of a “buy-in” (ie, where the
for reserving the securities and they are generally lender is forced to buy securities in the open market
open to challenge by another borrower making a following the borrower’s failure to return them).
firm bid. In this case the first borrower would have Costs that would usually be excluded are those aris-
30 minutes to decide whether to take the securities at ing from the transferee’s negligence or wilful default
that time or to release them. and any indirect or consequential losses, eg, when
the non-return of loaned securities causes an onward
“Pay-to-hold” arrangements trade for a larger amount to fail.
“Pay-to-hold” is where the lender does receive a fee
for putting the securities on hold. As such, they con- Corporate actions and votes
stitute a contractual agreement and are not open to The basic premise underlying securities lending is to
challenge by other borrowers. make the lender “whole” for any corporate action

event – such as a dividend, rights or bonus issue – by the collateral is typically greater than that of the
putting the borrower under a contractual obligation lent portfolio. This margin is intended to protect
to make equivalent payments to the lender, for the lender from loss and reflect the practical costs
instance, by “manufacturing” dividends. However a of collateral liquidation and repurchase of the lent
shareholder’s right to vote as part owner of a compa- portfolio in the event of default. Any profits made
ny cannot be manufactured. When securities are lent, in the repurchase of the lent portfolio are normal-
legal ownership and the right to vote in shareholder ly returned to the borrower’s liquidator. Losses are
meetings passes to the borrower, who will often sell borne by the lender with recourse to the borrower’s
the securities on. Where lenders have the right to liquidator along with other creditors.
recall securities, they can use this option to restore
their holdings and voting rights. The onus is on the Risk management with cash collateral
borrower to find the securities, by borrowing or pur- Because of its wide acceptability and ease of man-
chasing them in the market if necessary. agement, cash can be highly appropriate collateral.
The SLRC’s code of guidance states in section However, the lender needs to decide how best to
2.5.4 that lenders should make it clear to clients that utilise this form of collateral. A lender taking cash
voting rights are transferred. A balance needs to be as collateral pays rebate interest to the securities
struck between the importance of voting and the borrower, so the cash must be reinvested at a high-
benefits derived from lending the securities. er rate to make any net return on the collateral.
Beneficial owners need to ensure that any agents This means the lender needs to decide on an appro-
they have made responsible for their voting and priate risk-return trade-off. Reinvesting in assets
stock lending act in a co-ordinated way. that carry a higher credit risk (chance of loss in the
Borrowing securities in order to build up a holding event of defaults or a longer maturity in relation to
in a company to influence a shareholder vote is not the likely term of the loan) expect higher returns.
necessarily illegal in the United Kingdom. However, Many of the large securities lending losses over
institutional lenders have recently become more the years have been associated with reinvestment
aware of the possibility, and tend not to see it as a of cash collateral.
legitimate use of securities borrowing. Typically, lenders delegate reinvestment to their
agents although agents do not usually offer indem-
UK tax arrangements and LSE reporting by nities against losses on reinvestment activity.
member firms
London Stock Exchange rules require lending Taking securities as collateral
arrangements in securities on which UK Stamp Compared with cash collateral, taking other secu-
Duty/Stamp Duty Reserve Tax (SDRT) is chargeable rities as collateral avoids reinvestment risk. In
to be reported to the Exchange. addition to the risks of error, systems failure and
This enables firms to bring their borrowing and fraud always present in any market, problems then
lending activity ‘on Exchange’ and to allow them to arise on the default of a borrower. In such cases the
be exempt from Stamp Duty/SDRT. lender will seek to sell the collateral securities in
Firms which are not members of the Exchange but order to raise the funds to replace the lent securi-
which conduct borrowing and lending through a ties. Transactions collateralised with securities are
member firm are also eligible for relief from stock exposed to a number of different risks:
lending Stamp Duty/SDRT. On Exchange lending 1) Reaction and legal risk. If a lender experiences
arrangements are evidenced by regulatory reports delays in either selling the collateral securities or
transmitted to the Exchange by close of business repurchasing the lent securities, it runs a greater
on the day the lending arrangement is agreed. risk that collateral’s value will fall below that of
the loan in the interim.
Transparency in the UK market
CREST provides time-delayed information on the 2) Mispricing risk. The lender will be exposed if
value of securities financing transactions in the top either collateral securities have been over-valued
350 UK equities. or lent securities under-valued because the prices
used to mark-to-market differ from prices that can
UK Takeover Panel actually be traded in the secondary market.
If it is proposed that any securities lending should
take place during an offer period for a UK compa- 3) Liquidity risk. Illiquid securities are more like-
ny, the Takeover Panel should be consulted to ly to be realised at a lower price than the valuation
establish whether any disclosure is required and used. Valuation “haircuts” are used to mitigate this
whether there are any other consequences. risk (eg, collateral is valued at 98% or 95% of the
current market value). The haircuts might depend
Risks, regulation and market oversight upon the proportion of the total security issue held
Financial risks are primarily managed through the in the portfolio; the security’s average daily traded
use of collateral and netting. The market value of volume or sometimes the volatility of the security.

value of the obligations owed by the other, and it is
4) Mismatch risk. If the lent and collateral portfo- the net balance that is then due in cash.
lios were identical, there would be no market risk.
In practice, the lent and collateral portfolios are UK regulation
often very different. The lender’s risk is that the Any person who conducts stock borrowing or lend-
market value of the lent securities increases but ing business in the United Kingdom would general-
that of the collateral securities falls before rebal- ly be carrying on a regulated activity under the terms
ancing can be effected. Provided the counterpart of the Financial Services and Markets Act 2000
has not defaulted, the lender will be able to call for (Regulated Activities) Order 2001.
additional collateral on any adverse collateral/loan The stock borrower or lender would, as an autho-
price movements. However, following default, it rised person, be subject to the provisions of the FSA
will be exposed until it has been able sell the col- Handbook, including the Inter-Professional chapter
lateral and replace the lent securities. of the Market Conduct Sourcebook. They would also
The size of mismatch risk depends on the expect- need to have regard to the market abuse provisions of
ed co-variance of the value of the collateral and the Financial Services and Markets Act 2000, and
lent securities. The risk will be greater if the value the related Code of Market Conduct issued by the
of the collateral or the lent securities is more Financial Services Authority (FSA). The Conduct of
volatile or if their values do not tend to move Business Sourcebook requires a beneficial owner’s
together. consent to carry on stock lending on its account. The
Many agent intermediaries will offer beneficial FSA Handbook is relevant to the conduct of the firm
owners protection against these risks by agreeing in relation to the FSA’s High Level Standards.
to return (buy-in) lent securities immediately for
their clients following a fail, taking on the risk that Stock borrowing and lending code
the value of the collateral on liquidation is lower. In addition to the essentially prudential standards set
by the FSA, market participants have drawn up a
Realistic valuations code, the Stock Borrowing and Lending Code. This
The first consideration is whether the valuation is a code that UK-based participants in the lending
prices are fair. Assuming the portfolios have been markets of both UK and overseas securities observe
conservatively valued at bid and offer (not mid) as a matter of good practice.
prices, then the lender might require some adjust-
ment (haircut) to reflect concentration and price Securities lending and repo committee
volatility of the different assets. The Stock Borrowing and Lending Code was pro-
Haircuts might be based on the average daily liq- duced by the Securities Lending and Repo
uidity for the asset class, its price volatility and the Committee (SLRC), that is a UK-based committee
residual risk on individual securities. consisting of market practitioners, members of bod-
Using the adjusted portfolios, the lender can then ies such as CREST, the United Kingdom Debt
calculate the risk of a collateral shortfall in the event Management Office, the Inland Revenue, the
of the borrower defaulting. Broadly, this will need to London Clearing House, the London Stock
assess the volatility of each asset class, the correla- Exchange and the FSA. It liaises with similar market
tion between them and the residual risk of securities bodies and trade organisations covering the repo,
within them to derive a range of possible scenarios securities and other financial markets, both in
from which probabilities of loss can be estimated. By London and internationally.
increasing the volatility assumption or reducing the The SLRC complements the work of the various
liquidity assumption, the probability and scale of market associations, including the International
expected losses increase. Securities Lending Association (ISLA). The objec-
tives of ISLA include representing the common
Netting interests of securities lenders and assisting in the
Netting is an important part of risk management as orderly, efficient and competitive development of the
market participants will often have many outstand- securities lending market. ISLA has helped to pro-
ing trades with a counterpart. If there is a default the duce standard market agreements, including the
various standard industry master agreements for Overseas Securities Lending Agreement (OSLA
securities lending should provide for the parties’ var- 1995 version), the Master Equity and Fixed Interest
ious obligations under different securities lending Securities Lending Agreement (MEFISLA 1999
transactions governed by a master agreement to be version) and the Global Master Securities Lending
accelerated, payments become due at current market Agreement (GMSLA May 2000).
values. So instead of requiring the parties to deliver
securities or collateral on each of their outstanding Securities lending and corporate governance
transactions gross, their respective obligations are Corporate governance has increased in importance
valued (given a cash value) and the value of the obli- over recent years. It deals with the rights and respon-
gations owed by one party are set off against the sibilities of a company’s management, its board,

shareholders and various stakeholders. Good corpo- 1) Voting (and therefore recalling) securities at every
rate governance is therefore essential for companies opportunity. This is quite a rare position to take and
that want access to capital and for countries that want is often only made in a subset of markets that are
to stimulate private sector investment. The exercising very important to the owner.
of a right to vote is the ultimate sanction that a share-
holder has and can be seen as a major step in mean- 2)Voting (and therefore recalling) securities only
ingful engagement with the company. when the vote is deemed important enough, for
Avoiding conflict example when a takeover is being considered.
The legal position
“The word ‘lending’ is in some ways misleading. In Not voting securities at all
law the transaction is, in fact, an absolute transfer of There are still organisations that choose, for their
title against an undertaking to return equivalent secu- own reasons, not to vote. This is their decision
rities.” This results in some important consequences: although increasing pressure in the UK from the
- Absolute title over both lent and collateral securi- government and others with regulatory responsi-
ties passes between parties, meaning that these secu- bility may well encourage greater voting over time.
rities can be sold outright or “on lent”.
- Once securities have been passed, the new owner Buffers of at least one share in all holdings
can sell or lend them and vote in the AGMs/EGMs if To ensure that the beneficial owner or asset man-
they are the holder at the record date. ager receives direct advice on voting and all corpo-
- The lender of equities no longer owns them and rate actions the retention of at least one share in
has no entitlement to vote. But they are still exposed their account is advisable.
to price movements on them since the economic
exposure to owning those securities is not passed. Market practice
Typically lenders reserve the right to recall equiva- The majority of lenders of securities do not recall
lent securities from the borrower and must exercise securities for voting except for the more con-
this option if they wish to vote. tentious votes. Typically a lender of securities
would let their counterparts know their position
Shares should not be borrowed for voting regarding corporate governance and propensity to
As Paul Myners writes in the March 2005 Report to vote before joining a lending programme.
the Shareholder Voting Working Group, ‘Review of The scale of securities lending does not typically
the Impediments to voting UK shares’: “Borrowing exceed the voluntary disenfranchisement one sees
shares for the purpose of acquiring the vote is inap- at typical AGMs. In other words more investors
propriate, as it gives a proportion of the vote to the choose not to vote (for whatever reason) than
borrower which has no relation to their economic choose to lend (and not recall).
stake in the company.”
Collateral held, which can be of equal or greater Possible solutions
value than the shares lent, should also not be voted. 1) Transparency. All stakeholders should under-
stand the established legal framework underpin-
The right to recall ning the lending arrangement, that securities must
Securities on loan cannot be voted by the lender. be recalled to vote and the exact notice required to
Should they wish to exercise their right to vote, they recall the shares to vote.
need to recall these securities by the pre-determined
time, ie, record date. 2) Consistency. A clear policy is required so that
But not all votes on lent shares are lost. Some bor- the inherent conflict between the securities lending
rowed shares will be delivered into the market to set- income forgone and the “value” of recalling to vote
tle sales and end up with buyers. These buyers will is addressed explicitly.
be oblivious that these shares have been borrowed
and will view them as their property and choose to 3) Communication. It is imperative that all stake-
vote as they see fit. holders have access to all necessary information in
There may be some loss of votes associated with time to make informed decisions.
collateral positions or positions sitting long in trad-
ing books because shares held as collateral or in trad- 4) Timing. Given the scale of lending activity
ing books are not normally voted. around the dividend record date it is constructive to
The right to recall any security on loan is enshrined maintain the separation of the record date from the
in the legal agreement underpinning this activity and AGM. However, the issuers should ensure that the
typically the lender recalling securities must provide necessary documentation regarding the meeting
their agent or borrower with “standard settlement are distributed prior to the record date.
period notice.” At all times it is the owner who deter-
mines what can be done with their securities. 5) Guidance. It is clear from the SLRC Code of
Guidance and the Myners reports on the subject of
The lenders’ choices securities lending and voting that the practice of
GLOSSARY SECURITIES LENDING
Accrued interest: Coupon Free-of-payment delivery:
interest earned on a bond Close-out (and) netting: An Delivery of securities with no
from the last coupon date to arrangement to settle all corresponding payment of
the present date. existing obligations to and funds.
All-in dividend: The sum of claims on a counterpart General Collateral (GC):
the manufactured dividend falling under that arrange- Securities that are not "spe-
plus the fee owed by the ment by one single net pay- cial" in the market and may
borrower to the lender, ment upon a default. be used, typically, simply to
expressed as a percentage Collateral: Securities or collateralise cash borrow-
of the dividend on the cash delivered by a borrower ings.
loaned stock. to a lender to support a loan Global Master Securities
Bearer securities: of securities or cash. Lending Agreement
Securities that are not regis- Conduit borrower: A party (GMSLA): A market stan-
tered to anyone on the that borrows a security in dard legal agreement drafted
books of the issuing compa- order to on-deliver it to a with a view to compliance
ny and hence are payable to client, rather than borrowing with English law.
the party that is in posses- it for its own in-house needs. Haircut: Initial margin on a
sion. Corporate event: An event repo transaction. Generally
Beneficial owner: A party in relation to a security as a expressed as a percentage
entitled to the rights of own- result of which the holder of the market price.
ership of property. In securi- will be or may become enti- Hold in Custody (HIC)
ties, the term is usually used tled to either a benefit (eg, repo: Repo whereby the
to distinguish this party from dividend) or securities other borrower of cash segregates
the registered holder of the than those held prior to that collateral in a specific inter-
securities. event. nal account for the cash
Buy-in: The practice where- Coupon date: The date lender, rather than delivering
by a lender enters the open upon which the issuer of an out collateral.
market to buy securities in interest paying security Icing/putting stock on
order to replace those that makes an interest payment hold: The practice whereby
have not been returned by a to the registered holder (as a lender holds securities at a
borrower. Strict market prac- of the ex-coupon date) of borrower's request in antici-
tices govern the buy-in that security. pation of that borrower tak-
process. Daylight exposure: The ing delivery.
Carry: The difference period when one party to a vIndemnity: A form of guar-
between interest return on trade has a temporary credit antee or insurance, frequent-
securities held and financing exposure to the other due to ly offered by agents.
costs. one side of the trade having ISLA: The International
Cash trade: Where a pur- settled before the other. Securities Lenders
chase or sale of securities is Dividend date: The date Association.
made for a purpose other upon which the issuer of the ISMA: The International
than financing. share pays the dividend to Securities Market
Central Securities the owner of the security. Association.
Depository (CSD): an Equivalent: The securities or LIBA: London Investment
organisation which holds collateral returned must be Banking Association.
securities either in certificat- of an identical type, nominal Manufactured dividends:
ed or uncertificated form, to value, description and The borrower of the securi-
enable book entry transfer of amount to those originally ties is generally contractually
securities. provided. obligated to pass on any
cash dividends to the lender. or a specific agreement parties agree to adjust the
Margin, initial: The excess between counterparts that amount of securities or cash
of cash over securities or allows a part-delivery in a transaction accordingly.
securities over cash in a against an obligation to Reverse repo: A transaction
repo/reverse repo, sell/buy- deliver securities. whereby one party purchas-
buy/sell, or securities lending Pay for hold: The practice es securities from another
transaction. Fixed-income of paying a fee to the lender party and agrees to resell
transaction margins normally to hold securities for a par- the securities at a future
ranges from 1% to 3%. ticular borrower until the date at a fixed price.
Margin, variation: Refers to borrower is able to take Securities lending: The col-
the band within which the delivery. lateralised (usually) borrow-
value of the security used as Prime brokerage: A service ing and lending of securities,
collateral may fluctuate offered by both bank and allowing large investors (eg,
before triggering a margin non-bank financial institu- pension funds) to generate
call. tions to support customers' more income from their
Margin call: A request by proprietary trading, invest- investments.
one party in a transaction for ment and hedging activities. Short squeeze (bear
the initial margin to be rein- Principal: A party to a loan squeeze): Where one or
stated or to restore the origi- transaction that acts on its more market participants
nal cash/securities ratio to own behalf or substitutes its reduce liquidity by withhold-
parity. own risk for that of its client ing “special” (ie, in demand)
Mark-to-market: Revaluing when trading. securities.
the securities collateral in a Proprietary trading: A secu- Specials: Securities that for
repo or securities lending rities firm trading for its own any of several reasons are
transaction to current market account rather than for its sought after in the market by
values. clients. borrowers.
Matched/mismatched Proxy voting: delegation to Substitution: The ability of a
book: The interest rate arbi- another member of a voting lender of general collateral to
trage book that a repo trader body of that member's recall securities from a bor-
may run. power to vote in his rower and replace them with
Moving average: A statisti- absence. other securities of the same
cal measure that reports the Rebate rate: The interest value.
average of the previous stat- paid on the cash side of a Term transactions: Trades
ed number of day's data in securities lending transac- with a fixed maturity.
preference to the actual tion. A rebate rate of interest Third party lending: The
value for that day. implies a fee for the loan. system whereby an institu-
Net paying securities: Recall: Request by a lender tion lends directly to a bor-
Securities which interest or for the return of securities. rower and retains decision-
other distributions are paid Repo: A transaction where- making power, while all
net of withholding taxes. by one party sells securities administration is handled by
Open transactions: Trades to another party and agrees a third party (eg, custodian).
with no fixed maturity. to repurchase the securities
Pair off: The netting of cash at a future date at a fixed An edited extract from 'An
and securities in the settle- price. Introduction to Securities
ment of two trades in the Repricing: Occurs when the Lending' by Mark Faulkner,
same security for the same market value of a security in prepared with Mr Faulkner's
value date. a repo or securities lending permission.
Partialling: Market practice transaction changes and the © Spitalfields Advisors
MARKET UPDATE FINTUITION
THE IMPORTANCE OF FINANCIAL

THE DOWNTURN TUITION
FinTuition as a leading provider for securities
related training programs and offers a variety of
& LENDING courses covering today’s challenges:
TIMEWARP TO THE 1970s. With the Collateral management

economy expected to slow dramatically Post credit crunch custodians face new chal-
and inflation worse than it has been in lenges. Is my counterparty engaged in Alt-A or
over two decades, we maybe in for a bit leveraged loans? Do my assumptions concerning
the probability of default differ from the rating or
of a time warp back to the days of
models? How can I improve my collateral posi-
polyester shirts, when spiraling inflation tion and how will collateral be affected in a con-
joined forces with economic stagnation - tinuation of the downward spiral?
slow to no growth, combined with rising
unemployment - leading to a stagflation. Securities Lending
Understanding the mechanics of a securities
Status Quo loan is challenging. You have to understand the
Oil and other basic commodities are surging in relationship between the risks and returns and
price to new heights, with double digit growth the risks are complex. We all know the devil is in
rates. At the same time the growth picture is just the details. These are two simple examples how a
as bleak. Now that consumer power has been small mistake can corner you in these volatile
weakened by the credit crunch some economists markets:
are predicting anemic growth for 2008, and a - Using the wrong day-count convention
growing number of experts are even predicting a trading with a foreign counterparty will
recession. Sectors like automotives, airlines or probably delay the settlement.
retail which are sensitive to oil prices, consumer
confidence and – due to high leverage – to inter- - Marking to market every month or week
est rates, are facing fresh downgrades by analysts. can prove lethal as collateral fluctuates and
the longer the period of time you mark to
How will the future look? market you are more exposed to risk.
Slowing economic growth and the insatiable need
for liquidity has been triggering the Federal Collateral margining is a common way to avoid
Reserve’s policy of lowering interest rates but it mishaps but the question of whether counterparti-
seems as if this time is now over. Bernake could eties under these circumstances will do business
not be in a worse position. The Federal Reserve with you is a different matter. Understanding you
now has to fight inflation and at the same time and your counterparties’ collateral can give you
stabilise the deeply disturbed financial markets, better risk- adjusted returns.
which means that the liquidity drain will stay and
asset values should face more write-downs at Hedge funds are your clients
least until next year. Understanding the motivations, strategies and
needs of hedge funds, trading desks and asset
Custodian banks are the winners managers is key to improving your products and
Global custody banks have experienced unprece- processes and to maximising your fee income.
dented growth in their securities lending busi-
nesses in the past year thanks partly to the global New experts need fresh courses
credit crunch. The explosion in revenues can be As market conditions are changing we are adapt-
put down to the impact of the credit crisis, which ing our courses to ensure that they are practical
has pushed up collateral reinvestment returns. and relevant. We have also expanded our trainer
This anomaly has not only affected returns but pool with Jens Ebinger, head of short term prod-
also inherent risk profiles have changed signifi- ucts structuring and sales at Dekabank, Grant
cantly. On top of this, we have learnt from clients Saunders, head of short term products trading at
that some banks have earned the best margins by Dekabank, and Alex Krunic, senior sales custody
lending cash internally. client services at citigroup.
Global Collateral Management

FinTuition Upcoming Courses
15-16 October 2008 – London Equity Finance & Structured Products
Trainer: Alex Krunic /Kathleen Tyson-Quah 23-24 July 2008 – London
16-17 September 2008 – Hong Kong
This course explains the rationale and current 9-10 October 2008 – New York
best-practice functioning of collateral management 5-6 November 2008 – London
programmes for financial institutions. It is designed Trainer: Grant Saunders
to build up a sufficient level of expertise to give
attendees a good grasp of the legal, technical, Moving on from plain vanilla stock borrowing and
process and economic issues and drivers affecting lending, this intermediate-level course examines the
the profession. It is therefore suited to individuals expanded product range that comprises equity
who are either starting up a collateral management finance, including collateral swaps, repos, structured
function or seeking to improve their unit’s capability repos, and derivatives. The course explains how
to add value to the front and middle offices through these structures are used to reduce dealer funding
adoption of more efficient collateral management costs and enhance yields through tax and balance
processing. sheet management. Ample hands-on opportunities
are provided through the use of exercises and case
studies to develop participants’ understanding of
International Securities Lending how and why trades are structured using various
9-10 September 2008 – London economically equivalent derivative instruments.
18-19 September – Hong Kong
7-8 October 2008 – New York Bond Financing (REPO)
Trainer: Walter Kraushaar / Jens Ebinger 8-9 July 2008 – New York
12-13 November 2008 – London
This course explains the mechanics of securities Trainer: Paul Carroll
lending as well as the motivations of the various
market players. The focus is on how the economic This course provides a comprehensive overview of
benefits of securities ownership are retained even as the fixed income repo product. You will be introduced
legal title is transferred. Lending and collateral to the economic motivations of market players and
options are outlined and assessed. We then examine learn the main trading structures, delivery methods,
the borrowers perspective and the trading strategies risk elements and documentation. As part of a small
that drive securities lending. Why borrowers reward group, you will employ alternative trading structures
lenders for collateral flexibility will become clear. in an extensive case study using SunGard’s Personal
Following a review of the risks incurred in a securi- Martini trading software. You will gain an under-
ties lending programme, and the protection offered standing of the role of the repo desk as the ‘hub’ of
by good documentation, the course explains the dif- the fixed income trading floor. You will learn what
ferent routes to the lending market and provides a factors drive demand to borrow specific securities
comparative review of the main electronic securities and create ‘specials’ in the market through a review of
lending exchanges and their impact on the industry. the main bond trading strategies.
Christine Donovan
Company Brief: banks, trusts, VEBA, defined contribution, not-for-
A global leader with close to 200 years of experi- profits, and insurance companies.
ence, BBH helps many of the world’s most sophisti- www.bbh.com
cated mutual funds, investment managers, banks and Christine Donovan is managing director at Brown
insurance companies achieve their international busi- Brothers Harriman Investor Services & Markets.
ness objectives. BBH provides specialist services She founded BBH’s in-house Securities Lending
and innovative solutions to clients in close to 100 Program in July 1999. She currently oversees BBH’s
markets for custody, accounting, administration, lending business globally.
securities lending, foreign exchange, and brokerage
services. Combining entrepreneurial thinking, inno- Key Locations:
vative technology, and award-winning client service, London:
BBH is consistently ranked among the world’s top Brown Brothers Harriman Ltd
global custodians and maintains a presence in each Veritas House
of the principal financial centers around the globe. 125 Finsbury Pavement
BBH Global Securities Lending leverages these London EC2A 1PN
resources to provide award winning, customized
securities lending solutions to sophisticated global Boston:
institutional investors. Our independent, privately- Brown Brothers Harriman & Co
owned structure means our clients can be assured of 40 Water Street
a tailored program which combines compelling eco- Boston, MA 02109
nomics with an unwavering focus on their long-term
best interests. BBH wraps the following benefits into Key Services:
a single service offering underpinned by our long- - Award-winning custodial and third party
standing reputation for service excellence: agency lending
- Traditional Agency Model: Custodial and - Auction/exclusive platform
Third-Party Lending. A tailored program com- - In-house cash collateral reinvestment option
bining multiple routes to market: including -Relationship excellence
auctions and borrower exclusives. Experienced -Critical market intelligence provided via daily
traders focused on thoughtfully optimizing the trading summaries, specials lists, newsletter
value of our clients’ portfolios.
- Transparent, integrated, web based reporting. - Key Contacts:
Cutting edge technology and automation. Americas/Europe/Middle East:
- Thorough risk management, legal and tax
resources dedicated to protecting our clients’ Andrew Pettit
assets and reputation. +1 617.772.6553
- An experienced and dedicated relationship andrew.pettit@bbh.com
management team.
- Multiple routes to market. Keith Haberlin
- Our long standing reputation for relationship +1 617.772.1190
excellence, transparent reporting, operational keith.haberlin@bbh.com
efficiency and a strong risk management
discipline. Asia:
BBH has extensive experience in managing both Richard Meek
custodial and third-party programs and have auto- +44.20.7614.2489
mated links in place with the major custodians glob- richard.meek@bbh.com
ally. Our clients include mutual funds, pension plans,
SERVICE PROVIDER PROFILES
Eugene Picone
Company Brief:
Wachovia Global Securities Lending (WGSL) is an Eugene Picone is managing director of global
investment advisory firm specializing in securities distribution and is responsible for distribution, client
lending and short-term fixed-income asset manage- service and product development in the Western
ment. Fully focused on servicing clients, we have Hemisphere. He works with WGSL and the rest of
emerged as one of the largest, most respected third- the Wachovia franchise to expand business in Europe
party securities lending firms in the country, with a and Asia. He is a member of the firm's executive,
client base consisting of major institutional funds investment, and credit committees. Prior to joining
and corporate portfolios, including some of the WGSL Picone spent 19 years at JP Morgan and had
largest and most respected public funds. WGSL various senior roles within the securities lending.
operates as a division of Wachovia Bank, N.A., and
is a part of the bank's long-standing tradition to meet Key Contacts:
the needs of customers with new and exciting finan-
cial options. Wachovia is one of the largest bank Robert R. Womack, Jr.
holding companies in the United States based on Managing Director
assets. Additionally, Wachovia Global Securities +(1) 310 979-6300
Lending is a NASD member. Rob.Womack@WGSL.com
Key Locations: Christopher Fay

Senior Vice President
LOS ANGELES +44 (0) 20 7149 8365
11440 San Vicente Blvd. Christopher.Fay@Wachovia.com
Los Angeles, CA 90049
NEW JERSEY
LONDON Gene Picone
3 Bishopgate Managing Director
London EC2N 3AB +(1) 973 921-5000
Gene.Picone@WGSL.com
NEW JERSEY
51 JFK Parkway
Short Hills, NJ 07078
WGSL provides securities-lending services across

an array of asset classes including, U.S. Treasuries,
Equities, ADRs, Exchange Traded Funds, Corporate
Bonds, Agency Securities, Sovereign Debt, and
MBS/ABS securities. Throughout our history we
have utilized our technology, and market savvy and
client specific distribution strategies to continually
meet or beat market expectations and minimize
client risks. We continue to offer the same dedica-
tion that has allowed us to flourish over the past
decade with the value added support of a premier
and growing financial institution.

Francisco Gonzalez
Company Brief:
Eurex is one of the largest derivatives exchanges and Francisco Gonzalez is head of Eurex SecLend is
the leading clearing house in Europe. Wherever you responsible for the market management regarding
are located, we provide you with access to the business and product development of the electronic
benchmark futures and options market for European market place for international securities lending and
derivatives. Eurex also offers short term funding borrowing at Eurex. Before joining Eurex in 2001,
products, such as Eurex Repo. Eurex Repo is among Francisco was head of Systems Development, in
the forerunners in providing integrated trading and charge of the systems design for the electronic stock
clearing for repo transactions. Eurex's latest innova- market at SWX Swiss Exchange.
tive marketplace is called Eurex SecLend, which is
playing a pioneering role in the SLB market's devel- Key Services:
opment. By delivering efficiency across the deal
chain and providing innovative solutions to the needs Eurex SecLend and Eurex Repo are electronic mar-
of all SLB market participants, Eurex SecLend help kets for collateralized funding and financing prod-
volumes grow for the benefit of all its clients. ucts such as securities lending and borrowing and
repo.
Key Locations:
Key Contacts:
Zurich Office
Eurex Zürich AG, Selnaustrasse 30, Francisco Gonzalez
8021 Zurich, Switzerland Flavio Morganti
+41 58 854 20 66 Malcolm Stevens
Markus-Alexander Flesch
Frankfurt Office
Eurex Repo GmbH, Neue Börsenstrasse 1, Samuel Akermann
60487 Frankfurt/Main, Germany
+49 69 211 14193 info@eurexseclend.com
London Office www.eurexseclend.com

+44 207 862 7243
Paris Office
+33 1 5527 6769

Christopher R. Jaynes
Company Brief:
eSecLending is a global securities lending manag- across separately-managed accounts and
er focussed on treating securities lending as an commingled products.
investment management function. Offering Securities Finance Trust Company, a Maryland
institutional investors highly-customized securities USA trust company, Securities Finance Global
financing solutions while providing greater Advisors LLC, an SEC registered investment
transparency and higher returns relative to the advisor and/or eSecLending (Europe) Ltd.,
programs offered by other securities lending authorized and regulated by the Financial Services
providers. eSecLending's clients include some of Authority, perform all regulated business
the world's largest and most sophisticated activities.
institutional investors, including pension funds,
mutual funds, investment managers, and insurance Key Location:
companies. eSecLending
eSecLending offers full-service securities 175 Federal Street, 11th Floor
financing solutions, including trading, risk man- Boston, MA 02110
agement, operations, reporting, collateral manage- United States
ment, and legal/compliance. Within +1.617.204.4518
eSecLending's program, each client is treated as a cjaynes@eseclending.com
separate book of
business rather than being combined in a pooled Christopher R. Jaynes serves as president of
lending structure. The use of specialists, multiple- eSecLending and is a member the firm's executive
managers, unbundling, price transparen cy, and committee. His primary responsibilities are prod-
competition ensures best execution and also uct strategy and execution which includes over-
provides clients with greater control over their sight of the company's global trading, collateral
programs, allowing them to more effectively management, business development and relation-
monitor and mitigate risks and counterparty rela- ship management with clients and borrowers. He
tionships. is one of the founding members of eSecLending
It provides significantly increased returns for and was part of the team that developed the auc-
lenders within a transparent and auditable process. tion model and built the firm's service capabili-
For borrowers, eSecLending provides exclusive ties. Prior to eSecLending, he served as senior
access to desirable securities by an equitable auc- vice president at UAM Global Securities Lending.
tion process based on price rather than relation- Before that, he served as vice president and com-
ships or the loan volume-driven methodology. pliance officer for UAM Trust Company and as a
Managing over USD500 billion in lendable client service manager at State Street Bank. Chris
assets with USD120 billion on-loan, eSecLending is a CFA charter holder and received his Bachelor
is one of the largest lending agents in the market. of Science from the University of Vermont.
eSecLending has a dominant position in the secu-
rities lending exclusives market globally and has Key Contact:
auctioned over USD1.5 trillion in lendable assets Christopher R. Jaynes
across all lendable market sectors since inception. president
eSecLending also manages approximately eSecLending
USD50 billion in cash collateral for its clients

Brian Lamb
Company Brief:
EquiLend is the leading provider of trading and As CEO, Brian Lamb is responsible for all global
post-trade solutions for the securities finance operations for EquiLend, its affiliates and sub-
industry. Owned by eleven preeminent financial sidiaries. He brings 20 years of hands-on experi-
firms, EquiLend revolutionizes straight-through ence and a deep knowledge of the global securi-
processing by using a common standards-based ties finance industry with an emphasis on tech-
protocol and infrastructure, which automates for- nology solutions.
merly manual business processes. Used by bor- Prior to joining EquiLend, Brian spent 17 years
rowers and lenders throughout the world, the with Barclays Global Investors (BGI). Brian
EquiLend platform creates efficiency and pro- spent many years in securities finance while at
vides access to additional liquidity. BGI. His roles in that area ranged from product
EquiLend's end-to-end solutions reduce the risk manager for Fixed Income Securities Lending, as
of potential errors and eliminate the need to well as program manager and alternate board
maintain costly point-to-point connections. They member of EquiLend. He is one of the thought
include Availability, AutoBorrow, Trade2O, leaders among the initial ownership group that
EquiLend AuctionPortSM, Contract helped design the EquiLend platform.
Comparison, Mark-to-Market Comparison,
Returns, Recalls, Billing Comparison and Brian is a graduate of the University of Notre
Delivery, Dividend Claims Comparison, and Dame, and holds a BS in business administration
Agent Lender Disclosure (ALD). The EquiLend with a concentration in finance.
platform also supports the execution of payment
and delivery instructions through the DTCC. www.equilend.com
Key Locations:
New York
17 State Street, 9th Floor
New York NY 10004
+1 212 901 2200 Key Contacts:
Brian P Lamb, CEO
London Benjamin Glicher, Chief Technology Officer
14 Devonshire Square
London EC2M 4TE
+44 20 7426 4426

Company Brief:
Deutsche Bank is a leading global investment
bank with a strong and profitable private clients
franchise. A leader in Germany and Europe, the
bank is continuously growing in North America,
Asia and key emerging markets. With 78,275
employees in 76 countries, Deutsche Bank offers
unparalleled financial services throughout the
world. The bank competes to be the leading glob-
al provider of financial solutions for demanding
clients creating exceptional value for its share-
holders and people.
Key Locations:
Deutsche Bank AG
Theodor-Heuss-Allee 70
60486 FRANKFURT
(for letters and postcards: 60262)
GERMANY
+49 69 910-00
Deutsche Bank AG
60 Wall Street
NEW YORK, NY 10005
USA
+1 212 250 2500
Deutsche Bank AG
1 Great Winchester Street
EC2N 2DB LONDON
GREAT BRITAIN
+44 20 754 58000
Deutsche Bank AG
One Raffles Quay
South Tower Level 17
SINGAPORE 048583
+65 6423 8001

Felix Ogerli
Company Brief:
COMIT offers the financial industry a wide range Felix Oegerli is member of the executive commit-
of consulting services, individual software devel- tee of COMIT, a consulting, IT solutions and inte-
opment and standard software solutions such as gration partner of the finance industry. He was
FINACE. FINACE is the leading modular and the founder and CEO of IFBS, an IT application
fully integrated solution in the area of securities solutions and consulting firm specialising in
lending, repo and collateral management covering securities lending, repo and collateral manage-
front to back processes. ment, which was recently sold to COMIT.
Prior to launching IFBS, Oegerli held a

Key Locations number of business leadership roles at UBS in
Austria, Germany, Luxembourg and Singapore Zurich, New York, and London for over 20 years
in different functions. Between 1990 and 1999, he
Key Services: was responsible for the
FINACE is the leading modular and fully inte- creation and expansion of the securities lending,
grated solution in the area of securities lending, repo and prime brokerage business at UBS
repo and collateral management covering front to Zurich, was deputy global head of securities
back processes. lending and repo, global head of prime brokerage
and head of global product management collater-
al trading and
management. Oegerli holds a degree as Swiss
federal certified banking expert, and is a frequent
conference speaker and industry expert on securi-
ties lending, repo and
collateral trading and management.
Key contacts:
Felix Oegerli
member of the executive management of COMIT
Email: felix.oegerli@comit.ch
+41 44 298 92 00
Igor Salzgeber,
FINACE product manager
Email: igor.salzgeber@comit.ch
+41 44 298 92 00

Guy d'Albrand
Company Brief:
Société Générale Securities Services (SGSS) liq- Guy d'Albrand has been global head of
uidity management division offers several cash liquidity management since June 2004. Guy
and securities liquidity programmes through its d'Albrand began his career in 1988 with Société
various teams. Our product range includes securi- Générale as a Futures broker in Tokyo. He then
ties lending and borrowing services, middle and spent 5 years in Paris as a junior auditor before
back office securities lending in-sourcing, cash being appointed Inspector in 1995, joined Fimat
collateral reinvestment services, intraday liquidity in 1997 to run the Tokyo office, was appointed
and foreign exchange. executive vice president and special advisor to
SGSS has built an expertise in securities lending the CEO, for Société Générale, Japan, then head-
and borrowing, cash reinvestments arrangements ed-up the online brokerage
and FX related trades that has made us a leading operations in Japan as Deputy CEO and
industry participant. With a global presence, our then CEO.
dedicated and market independent customer-ori-
ented liquidity programmes are entirely customer- Key location:
driven and tailored to individual client needs. PARIS
Through our Global Customer Service Unit, in Société Générale Securities Services
charge of operational support, we help set a fully Liquidity Management
customised monitoring and reporting for your 52, rue de la Victoire
lending activity. Our cash reinvestment pro- 75009 Paris
grammes are diversified yet remain fully compli- France +33 (0) 1 53 21 68 21
ant within your guidelines.
Our international client base includes major Key Services:
international blue-chip financial institutions with-
in all market segments, from pension funds and -Securities lending and borrowing
asset managers to banks, including large corpora- -Securities lending and borrowing middle and
tions, investment funds, insurance companies, back office in-sourcing
banks and brokers, and central banks/public -Excess cash and cash collateral reinvestment
authorities. -SG short term paper programmes
Société Générale's financial strength and com- -Intraday liquidity
mitment to the securities services field make -Foreign exchange
SGSS a strong agent. Moreover, our safe and
flexible technology will help make the most of Key contacts:
your assets with flexibility and dedication. Denis Tréboit
+33 (0) 1 53 21 68 21
denis.treboit@socgen.com
www.sg-securities-services.com
James Wolff
+ 33 (0) 1 53 21 68 22
james.wolff@socgen.com

David Downey
Company Brief:
OneChicago is the exchange for Single Stock David G. Downey serves as chief executive offi-
Futures (SSF) in the United States. Using SSF cer of OneChicago. He began his career in the
trader can reduce their finance cost of carrying securities and futures industry in 1983 on the
their position on margin and get their short delta American Stock Exchange in New York. In 1985
without having to locate stock and pay the associ- he joined Timber Hill Inc., a firm specializing in
ated fees. Over 800 SSF on individual equity the business of market-making on the floors of
names and 35 ETF products all traded electoni- various stock, future and derivative exchanges
cally via either the CBOEDirect matching engine around the world. After moving to Chicago in
or the OneChicago BLock and EFP Trading 1985 he began trading as a member of the CBOE
System (BETS) which is used for institutional and over the years held memberships at the
transactions. All trades clear at the AAA rated CBOT and the CME. In 1995, he turned his
Options Clearing Corporation eliminating any attention to the development of Interactive
counterparty credit exposure. Brokers where he served as EVP Operations.
Key Contacts:
Key Location:
David G. Downey CEO
141 W. Jackson Boulevard Thomas McCabe COO
Suite 2240 Donald Horwitz General Counsel
Chicago, IL 60604 Mark Esposito MD Sales
Phone: 312-424-8500
Toll Free: 800-752-4100
Fax: 312-424-8529

Alastair Chisholm
Company Brief:
4sight Financial Software is a leading supplier of Alastair Chisholm is managing director of 4sight
innovative software solutions to the securities Financial Software. 4sight was formed in 2003
finance, settlement and connectivity markets with when he led an MBO of the Securities Finance
offices and clients worldwide. and Settlement business units from OM
4sight Securities Finance is a flexible modular Technology, where he was general manager.
solution that empowers financial institutions of all Chisholm has been involved in software develop-
sizes, from the smallest direct lender to the global ment for the financial markets for the last 18
custodian, broker or intermediary on an agency or years in a variety of roles, both with software
principal basis. It supports borrowing, lending, houses and financial organisations. Prior to join-
repo, swaps and collateral management across the ing OM in 1999, he was a director at TCAM
equity and fixed-income markets and provides 24 Systems and held senior positions with Accenture,
hour continuous operation, inter-desk trading, a NatWest Markets and Wood Mackenzie.
‘global book’, real-time value dated position keep-
ing and a powerful web reporting module, allow- Key Services:
ing full front to back office processing. - Highly configurable software solutions to
4sight Securities Finance also integrates seam- meet each client’s unique individual require-
lessly with external systems and employs a data ments.
model that enables quick and easy real time access - Quick and easy integration with third party
to your data, with the ability to import and export solutions.
data in any required format. - A professional implementation, ensuring a
As a company 4sight delivers: minimum of disruption to business during
- Ground breaking securities lending software system changeover.
at the cutting edge of technology - Many years of expertise in our chosen
- Expert industry knowledge fields.
- Outstanding responsiveness to our clients - A strong focus on development and cus-
- The reliability of a company that has tomer service to ensure our products stay at
worked with the world’s largest financial the forefront of market requirements, and
institutions to deliver successful projects our clients continue to remain happy.
Visit www.4sight.com for further details
Key Contacts:
Key Locations: Judith McKelvey, Global Sales Director
4sight Financial Software Ltd T: +44 (0) 207 043 8319
Conference House judith.mckelvey@4sight.com
152 Morrison Street
Edinburgh, EH3 8EB Jason Hayes, North American Sales Director
United Kingdom +44 (0) 131 557 5522 +1 416 548 7922
jason.hayes@4sight.com
4sight Financial Software Ltd
11-29 Fashion Street Peter Sanders, Asia Pacific General Manager
London, E1 6PX +61 (0) 2 90378416
United Kingdom +44 (0) 207 043 8300 peter.sandlers@4sight.com

James Slater
Company Brief:
CIBC Mellon Global Securities Services James Slater is senior vice president and head of
Company is a specialist Canadian asset servicing capital markets at CIBC Mellon. He is also a
provider. We help institutional investors increase member of the company's executive management
their efficiency, while minimizing operational risk committee. Mr. Slater has overall leadership
and enhancing portfolio returns. responsibility for CIBC Mellon's capital markets
CIBC Mellon is backed by The Bank of New function, which includes global securities lending,
York Mellon, the world's largest asset servicing treasury and cash management. Mr. Slater's
provider with assets under administration of more accountabilities also include providing strategic
than USD23 trillion. We are well-placed to deliver client service engagement in relation to his trad-
the benefits of global scale, long-term stability, ing and financial markets responsibilities. He
geographic reach and product innovation to the also chairs the company's asset liability commit-
Canadian marketplace. tee. He has 20 years of experience in the finan-
As the largest lender of Canadian securities cial services industry with CIBC World Markets
offering a cash collateral product, and the number and CIBC Mellon. While at CIBC World Markets,
one relationship manager to securities borrowers he was part of the team charged with the forma-
(ISF Magazine), we strive to: tion of CIBC Mellon. He has an MBA from
- Consistently outperform our peers in terms Queen's University.
of revenue generation
- Clearly demonstrate superior value by
using the third-party Performance
ExplorerTM analytics service Key Contacts:
- Respond quickly to borrower needs James Slater
- Leverage our integrated lending and collat- Senior Vice President & Head of Capital Markets
eral management system for reduced risk +1 (416) 643-5130
and seamless integration with clients Email: james_slater@cibcmellon.com
- Control cash reinvestment risks through
oversight by asset/liability and credit com- Rob Ferguson
mittees. Vice President, Product & Client Service
+1 (416) 643.5260
CIBC Mellon is 50-50 jointly owned by Email: rob_ferguson@cibcmellon.com
Canadian Imperial Bank of Commerce and The
Bank of New York Mellon Corporation Jeffrey Alexander
Performance Explorer is a trademark of Data Director, Business Development
Explorers Limited. CIBC Mellon is a licensed +1 (416) 643-5773
user of the CIBC and Mellon trademarks Email: jeffrey_alexander@cibcmellon.com
www.cibcmellon.com

Mark Van Grinsven
Company Brief:
Northern Trust Corporation (Nasdaq: NTRS) is a Mark Van Grinsven is senior vice president and
leading provider of investment management, head of global securities lending at The Northern
asset and fund administration, fiduciary and Trust Company. As head of global securities
banking solutions for corporations, institutions lending, Mark oversees all lending activity
and affluent individuals worldwide. Northern worldwide and is responsible for the risk and
Trust, a multibank holding company based in return profile of all market-related activity. In
Chicago, has a growing network of 85 offices in addition, he is responsible for client sales and
18 US states and has international offices in 12 relationship management, product development
locations in North America, Europe and the Asia- and technology strategy for securities lending.
Pacific region. Securities lending trading locations currently
Since 1981, Northern Trust has offered securi- include Chicago, London, Hong Kong and
ties lending to clients whose assets are custodied Toronto. Mark has worked at Northern Trust for
at Northern Trust and elsewhere. Leveraging its 31 years.
superior investment management capabilities,
Northern Trust Global Securities Lending is a
leader in the industry, operating trading centers Key Locations:
throughout the United States, Europe, Canada
and the Asia/Pacific region to take advantage of Chicago: 50 S. LaSalle Street, 12th Floor,
markets throughout the world 24-hours a day. Chicago, IL 60603
Northern Trust's Global Securities Lending
program is consistently recognized as a top London: 50 Bank Street, Canary Wharf, London,
lender by beneficial owners and borrowers; con- GB E14 5NT
tinuously outperforms the Risk Management
Association's Aggregate Composite; holds top Hong Kong: One Pacific Place, 88 Queensway,
positions at the ISLA, PASLA and RMA industry Suite 703-4, Hong Kong, HK
organizations; maintains an exceptional 27-year
track record; and is a founding member of Toronto: 145 King Street W, Suite 1910, Toronto,
EquiLend, the open, global, standards-based ON CA M5H 1J8
securities lending platform focused on standardi-
zation and maximizing efficiencies in the global
securities lending industry. Northern Trust's Key Contacts:
Global Securities Lending program is focused on International: Sunil Daswani +44 20 7982 3850
relationship management, performance and risk North America: Sandra Linn +1 312 557 2908
management. We strive for the highest level of
risk-adjusted performance, understanding the
customization necessary to enhance each
client's portfolio.
www.northerntrust.com

Time to change?
Choose a flexible Securities Finance solution

that integrates seamlessly
4sight Securities Finance provides a full front • Software with the flexibility to be tailored to your
to back office system for lending, borrowing, unique business requirements
repo, swaps, and collateral management of
• Maximise efficiency through quick and seamless
both Equities and Fixed Income Securities.
integration with your existing systems
4sight Securities Finance is a proven solution
used globally by a wide range of financial • Quick and easy real time access to your data,
institutions, and can be used on an agency with the ability to import and export in any
or principal basis. required format.
email: info@4sight.com www.4sight.com
Financial Markets Solutions EDINBURGH • LONDON • TORONTO • SYDNEY

Crowded Pool or Exclusive Access?
Crowded Pool or Exclusive Access?
The choice is yours.
eSecLending takes an active

approach to securities lending by
managing customized programs for
institutional investors. Unlike the tra-
ditional agency approach, where
many lenders’ portfolios are grouped
together and their securities sit in a
pool waiting to be borrowed,
eSecLending markets each client’s
or portfolio individually and awards
lending rights to the optimal bidders.
Our clients receive more lending

revenue compared to traditional
programs, because eSecLending
introduces objective competition via
a blind auction process. eSecLending
clients achieve all this while main-
taining conservative risk parameters,
retaining close control over their
lending programs and receiving
superior, customized client service.
United States +1.617.204.4500

Europe +44 (0) 207.469.6000
info@eseclending.com
www.eseclending.com
eSecLending provides services only to institutional investors and other persons who have professional investment experience. Neither the services
offered by eSecLending nor this advertisement are directed at persons not possessing such experience. Securities Finance Trust Company, an
eSecLending company, and/or eSecLending (Europe), authorised and regulated by the Financial Services Authority, performs all regulated business
activities. Past performance is no guarantee of future results. Our services may not be suitable for all lenders.

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SECURITIES LENDING

£10 - UK, ROW

130 participants, representing borrowers, lenders,

2 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

shares of companies undertaking rights issues,

SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 3

investors in lending their Philippine equities.

4 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

14 Statistics Lending by numbers

28 Ask the Experts We put the best to the test

Market view: Features

38 eSecLending Growing in sophistication

40 Societe Generale All in one and one in all?

42 COMIT Technology and risk management

44 One Chicago SSFs

46 Northern Trust Risk management in securities lending programmes

64 Glossary The definitive details of definitions

66 Market Update FinTuition

6 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

For more details, please contact: Denis Tréboit James Wolff

time spent worrying time spent focusing on

Asset Management | Asset Servicing | Wealth Management

10 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

North American Equities $2,695,899 $274,235 $13,556 $287,791 11%

European Equities $1,175,178 $47,834 $65,675 $113,509 10%

Euro Denominated Sovereign Bonds $263,452 $66,455 $39,243 $105,698 40%

UK Gilts $118,207 $16,872 $43,328 $60,200 51%

TOTALS $7,239,536 $1,023,120 $339,966 $1,365,086 19%

14 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

Averages of lendable assets for Q1 2008 compared to Q1 2007

The graph shows the

Percentage of assets on loan for Q1 2008 compared to Q1 2007

Sunil Daswani is international head of client sales & relationship management,

Eugene Picone, is managing d irector of global distribution at Wachovia Global

FINACE® is a product of COMIT, Buckhauserstrasse 11, CH-8048 Z

20 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

26 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 27

ager approach to the latter. Through the trans-

28 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009

• SSFs offer an attractive alternative to the current stock loan process

Increase yields Decrease risk

the exchange for Single Stock Futures

For more Information visit us at

Recent issues related to counterparty solvency

ment, which uses various types of equities as col-

ICGN And they are not alone. While spokespeople decry

HZXjg^i^Zh aZcY^c\ ZmeZgi^hZ WITH WACHOVIA

Wachovia Global Securities Lending, formerly Metropolitan

As a division of Wachovia Bank, Wachovia Global Securities

• U.S. Treasuries • Equities

With offices in New Jersey, California and London, Wachovia

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we look at historical performance of the program

34 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009

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changed, but the Jeremiahs have been proved

If it’s not broken, largely wrong.

36 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009

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