GSL

Markets
Global Germany, Mexico
Securities
Industry InsIght
Lending Traders, RMA, Pirum

ProfIle
KAS BANK

gsl Issue 06 Q4 2009

Share &
Share Alike
Is equity collateral
a viable option?
Plus: etfs - collateral innovation gBP 50
hedge funds - rising amid changes usd 85
eur 60
gsl on the road - amsterdam summit 2009
GSL06 Cover.indd 1 29/10/2009 10:46
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GSL06 Cover.indd 2 26/10/2009 12:08

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GSL06 1-17 final.indd 1 26/10/2009 11:59

 QUICK QUARTERLY VIEW

German
market
analysis

Patrick
Avitabile
Robbert Wijgerse, Citi
GSL News Robeco
Auctions 26
Exchange traded
funds

Hedge funds

Geert-Jan Kremer
KAS BANK

Lend an ear
Improved conditions in global
finance have brought more lenders
back, but with a caveat in line with
the findings of RBC Dexia Investor
Services: there will be programme
changes ahead.
It seems a fair trade off, and with
so much discussion cross-continents
about the education and engagement
of beneficial owners, their return
should be unanimously welcomed.
Agent lenders with non-cash
collateral programmes can
understandably feel satisfied. Cash had
in some quarters become a by-word
for risk, illiquidity and loss through its
reinvestment. A non-cash philosophy
has helped companies – particularly
the big European players – to convey
their strong risk management in this
space to new clients.
But let’s not swing from one extreme
to another. Cash is still good in
itself, still dominant in the world’s
biggest securities lending market, and
reinvested in the right conditions can
2 | Global Securities Lending Magazine | 2009
produce the kind of returns that can
make the difference between portfolios
when the relative performances are
racked up.
Our panel on reinvestment weighs up
these considerations, and our Q+A on
European securities lending also gives
insight into how far the industry has
developed. On the subject of Europe,
GSL also made its first excursion to
mainland Europe with its one-day
event in Amsterdam on 8th October. It
was a successful and informative start
to the magazine's international tours
- with such a sophisticated market for
pension funds and stock lending it
seemed like a good place to start.
The last quarter has vigorously
reinforced a simmering trend from
this year. Prime brokerage market
share seems entirely up for grabs. Since
2008, which brought the removal of
one of America’s biggest brokers – the
milestone collapse of Lehman Brothers
– and the effective extinction of Merrill
Lynch and Bear Stearns as independent
entities, competition has intensified
further. How the innovations in prime
brokerage will affect the remaining
'ruling class' of providers is yet to be
seen, as will the range of services that
brokers will cease to do for free.
At the same time the successful hedge
funds will perhaps be more discerning
with the services provided by their
prime broker, or brokers.
Many of you might have read
about the SEC's two-day summit on
short selling, which featured many
representatives of the industry in
securities lending, which showed its
sustained importance as an issue.
Mary Schapiro, SEC chairman,
explained that the regulator was open
for what seems a rather ominous new
debate concerning short selling and
any future restrictions.
Now is the ideal time for regulators
to continue the recent positive views
they have expressed for securites
lending, and the distinction between it
and short selling. Z

GSL06 1-17 final.indd 2 26/10/2009 11:59

 Predictability in an unpredictable world.

Depend on us for market

insight, flexibility and
unwavering commitment
to service.

Expertise in securities lending. You face unpredictable markets and must respond to the evolving strategies of your clients
and competitors. CIBC Mellon offers you flexibility through innovative thinking, market knowledge and open dialogue. You can
depend on us for solid execution, professionalism, and a stable growing supply of lendable assets.

For more information on Securities Lending, please contact:

James Slater
Senior vice president & head of capital markets
+1 416 643 5130

Robert Chiuch
Executive director, global securities lending
+1 416 643 5400

cibcmellon.com

©2009. A BNY Mellon and CIBC joint venture company. CIBC Mellon is a licensed user of the CIBC trade-mark and certain BNY Mellon trade-marks.

GSL06 1-17 final.indd 3 26/10/2009 11:59

 CONTENTS

Contents

News 26 | Panel: Reinvestment Companies featured in GSL

Risk, mark-to-market and
Editor-in-chief liquidation are just three of
Roy Zimmerhansl
6 | News 4Sight Financial Software 34,44
the issues considered by
roy.zimmerhansl@2i.tv Top industry stories. our panel regarding cash Aviva Investors 38, 48

reinvestment. Barclays Capital 7, 38

Features editor 8 | News analysis BBH 6,40
Ben Roberts 32 | From the Trading
Research and results that Floor BBVA Bancomer Mexico 20
ben.roberts@2i.tv
have held a mirror up to RBC Dexia and Robeco Bear Stearns 8
Reporters the lending and borrowing provide analysis from the BGI 38, 44, 45
Craig McGlashan world. desks. Cantor Fitzgerald 7
craig.mcglashan@2i.tv
Callan Associates 26
10 | Across the Atlantic
Kimberley Ferguson Conferences CIBC Mellon 6
Quarterly updates from
kimberley.ferguson@2i.tv Citi 19, 21, 28, 38
trade associations, including 34 | GSL Lending For Credit Suisse 36
Contributing editor new ISLA CEO Kevin Liquidity Summit Data Explorers 17,18,19,20,34
Anthony Harrington McNulty. GSL hosted an event in Deutsche Bank 44
Account managers People Amsterdam, a key country ED-HEC Risk 34
Patricia De La Grange
in Europe for pension funds Equilend 6
trish.delagrange@2i.tv 12 | Executive profile
and stock lending. eSecLending 35
GSL talks to Geert-Jan
Cicely Lewis Kremer of KAS BANK. Fortis Nederlands 36
cicely.lewis@2i.tv 36 | London event
ING 35
GSL dropped in on a
Front Cover Morgan Miller Collateral ISLA 4, 37, 41
London conference to pick
Digital media producer JP Morgan 7, 35, 37
up the key points
Peter Ainsworth 14 | Shares for shares KAS BANK 12
peter.ainsworth@2i.tv The use of equities as Laven Partners 36
40 | Panel: European
Operations manager
collateral for stock loans Lehman Brothers 9, 27, 33, 40
has divided opinion in the securities lending Noster Capital 22
Nicolette Whittaker
nicolette.whittaker@2i.tv industry. Anthony Harrington Four participants answer Omgeo 6
weighs the views. GSL's questions. Options IT 6
Managing director: peterevans 7
Jon Hewson 44 | ETFs
jon.hewson@2i.tv 16 | Market Profile: Pirum 24
Germany Europe's biggest The use of exchange traded Prudential Capital 38
CEO: economy has struggled funds as collateral has been RBC Dexia 26, 44
Mark Latham with liquidity issues in its increasing in the market, Rabobank 34
mark.latham@2i.tv
securities lending finds Craig McGlashan. Robeco 33, 36, 38
RMA 10
GSL 46 | Directory
Global
Securities
Lending 18 | Market Profile: Mexico Rule Financial 37
A profile of the country. The service provider listing. Sophis 7
SPF Beheer 34, 36
2i UK, 16-17 Little Portland Street, 21 | Hedge funds: Rising 48 | Lender Profile SunGard 5, 12, 13, 15, 34, 35
London W1W 8BP, UK
T: +44 (0) 20 7299 7700
amid changes Sarah Nicholson of Aviva TABB Group 7, 8, 21, 22
F: +44 (0) 20 7636 6044 The sector's resurgence Investors talks to GSL.
comes amid huge
2i USA, 410 Park Avenue,
15th Floor, New York, NY 10022 changes in its brokerage
T: +1 212 231 8421 relationships, finds Ben
F: +1 212 231 8121
Roberts. “Liquidity risk would best be mitigated if
© 2009 2i Media
Industry Insight
appropriate short-term investments are
All rights reserved.
No part of this publication may be given proper considerations regardless of
24 | Operational comment
reproduced, in whole or in part,
without prior written permission from - Pirum market environment"
the publishers. Rupert Perry outlines Who said this?
ISSN 1759-0728 Printed in the UK the benefits of real-time
processing.
Find out, page 28

4 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 4 29/10/2009 11:21 !"#$%&%

 The financial information
you need when you need
it. Because there’s no
pause button in business.

Considering the current economic environment, staying on top of your securities lending program and managing
risk has never been more important. So Northern Trust has launched a specialized securities lending technology
and reporting platform designed to provide you with transparent, targeted and timely information. Just one
of the reasons we’ve been named the top Connectivity and Automation provider.* For more information,
visit northerntrust.com/securitieslending or call Chris Doell at +1 312 444 7177 or Sunil Daswani at
+44 (0)20 7982 3850.
*International Securities Finance borrower survey 2009

Asset Servicing | Asset Management | Wealth Management

© 2009 Northern Trust Corporation, 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the United States. Northern Trust operates in Canada as The Northern Trust Canada, Branch which is an authorized
foreign bank branch under the Bank Act (Canada) and as The Northern Trust Company, Canada which is an authorized trust company under the Trust & Loans Companies Act (Canada). Deposits with Northern Trust and its affiliates are not insured
by the Canada Deposit Insurance Corporation. Northern Trust, London Branch (reg. no. BR001960) registered in England & Wales each with their registered office at 50 Bank Street, Canary Wharf, London, E14 5NT. Where Northern Trust’s UK
entities undertake regulated business, they are authorised and regulated in the United Kingdom by the Financial Services Authority. Northern Trust (Guernsey) Limited, Northern Trust Fiduciary Services (Guernsey) Limited, Northern Trust Fiduciary
Company (Guernsey) Limited and Northern Trust International Fund Administration Services (Guernsey) Limited are licensed by the Guernsey Financial Services Commission. Northern Trust International Fund Administrators (Jersey) Limited and
Northern Trust Fiduciary Services (Jersey) Limited are regulated by the Jersey Financial Services Commission. Northern Trust International Fund Administration Services (Ireland) Limited and Northern Trust Fiduciary Services (Ireland) Limited are each
authorised by the Irish Financial Services Regulatory Authority pursuant to section 10 of the Investment Intermediaries Act, 1995 (as amended). Northern Trust Global Services is authorised and regulated in the Netherlands by De Nederlandsche
Bank. Northern Trust Global Services Limited Luxembourg Branch and Northern Trust Luxembourg Management Company S.A. are authorised and regulated in Luxembourg by the Commission de Surveillance du Secteur Financier. Northern Trust
Global Services Ltd (UK) Sweden Filial is a BCD Passported branch of Northern Trust Global Services Ltd a firm authorised and regulated in the UK by the Financial Services Authority (‘FSA’).

GSL06 1-17 final.indd 5

!"#$%&%'()*+()*,-./01234!55666, 26/10/2009 11:59
,%7,17%&666-8926$:
 NEWS
News Round-up
Securities Lending
CIBC Mellon Global
Securities Services
implemented EquiLend's
AutoBorrow and Trade20
software, in its aim to boost
efficiency and client returns
in its securities lending. The
deal followed EquiLend’s
earlier success when it gained
regulatory approval in the
country as an alternative
trading system (ATS).
Securities lending participants
are holding firm or adjusting
their risk parameters rather
than suspending their
programmes, according
to the latest survey of
beneficial owners and market
intermediaries. Despite
purported large-scale
programme suspensions
amid market volatility, only
17% of 86 respondents to the
survey by RBC Dexia stopped
lending. The majority, 60%,
made no changes to their
programmes at all.
Standard & Poor’s (S&P)
launched an index series to
6 | Global Securities Lending Magazine | 2009
GSL06 1-17 final.indd 6
cover the securities lending
market, in an effort to boost
transparency and provide a
benchmark for the sector. The
S&P Securities Lending Index
Series has been designed to
measure the average cost
of borrowing US equities,
reflecting the average lending
rate for the members of the
S&P 500, S&P MidCap 400
and the S&P SmallCap 600.
The US financial regulator,
the Securities and Exchange
Commission (SEC) hosted
a roundtable discussion
focused on the opacity of
securities lending as well as
the practice of short selling.
SEC chair Mary Schapiro said
that the financial crisis has
changed attitudes towards
securities lending and short
selling "has undoubtedly
produced more letters from
investors and brokerage
firms, more enquiries from
congress and more questions
from reporters than any other
topic."
People Moves
Keith Haberlin moved
across the pond from Brown
Brothers Harriman’s Boston
office to run the Europe and
Middle East securities lending
division from London. Mr
Haberlin, who joined the
company in 2004, has been
part of the securities lending
team since March 2008.
Lombard Risk announced a
series of new appointments
to bolster its global collateral
management team. Solution
technologist Narasimha
Kodihalli has joined the firm’s
Top industry stories at deadline.
For daily updates go to www.gsl.tv
operations in the Americas,
while collateral management
expert Joanne Meaney joined
in the UK. John Shield has
rejoined Lombard to take on a
leading role in ongoing senior
level account management
of the firm’s collateral and
regulatory clients. Keith
Butcher and Joanne McGarry
have also joined the company
as finance director and
group financial controller
respectively.
Cantor Fitzgerald hired Bob
Sherry and David Kim as
COO for prime services and
director of prime services
technology, respectively.
Sherry has worked in the
financial sphere for more than
a quarter of a century, filling
roles at ING, ABN Amro and
Furman Selz among others.
Kim joins Cantor Fitzgerald
from Citigroup, where he
was senior vice president of
prime finance technology,
in charge of management
and oversight of Citi’s hedge
fund technology services.
Before Citi, Kim worked at
Lehman Brothers, where he
was involved with a number
of products, including the
now-defunct firm’s client web
portal, LehmanLive.
Sandra A Urie of Cambridge
Associates is set to take a
place on the board of 100
Women in Hedge Funds,
the non-profit organisation
for investment management
professionals. Urie has
worked at Cambridge
Associates since 1985 and
is currently president and
CEO of the firm, which
provides investment research
and advice for investors and
private clients.
Market Infrastructure
Twenty-six leading financial
institutions have been
approved as members of
Quadriserv’s AQS securities
lending platform. New
members include Bank of
America-Merrill Lynch,
Citigroup Global Markets,
Mitsubishi UFJ Securities,
Calyon Securities (USA),
Interactive Brokers LLC,
ITG, Jefferies & Company,
Newedge USA, LLC, Pershing
LLC, Susquehanna Financial
Group, LLP, Virtu Financial
BD, LLC and Wedbush
Securities.
Important initiatives and
market exercises surrounding
liquidity and bank stability
from the UK's Financial
Services Authority are in the
pipeline for the final quarter
of this year. In the midst of
a wider global reform, that
was discussed by the G20
finance ministers in London
last month, the FSA will
implement its Liquidity
Reporting Regime and a
market-wide analysis of
Resilience Benchmarking.
More shares issuances by
banks are expected if plans
among the G20 finance
ministers to enforce higher
capital reserves come into
effect. Discussions in London
led to an overall consensus
that tougher regulatory
sanctions on bank capital
reserves, funded by a sale
of new shares, needed to be
enforced.
26/10/2009 11:59

The International Organisation
of Securities Commissions
(IOSCO) published a series
of regulatory standards for
the funds of hedge funds
market. According to IOSCO,
the regulations are aimed
at protecting the increasing
number of retail investors who
partake in hedge funds through
funds of funds. The paper
follows a document released in
June 2008 which identified two
main areas of concern; namely
how managers of the funds
deal with liquidity risk and the
structure of the due diligence
process used by managers.
Technology
Omgeo, the post-trade
automation specialists, hired
three new associates for its
collateral management product
Omgeo ProtoColl. Steve Anglin
joined from JP Morgan Chase
to provide pre-sales market
analysis. Greg Ballesty joins
from Thomson Reuters and is
to expand the offering in the
Asia Pacific region. Antony
Cure joins from Credit Suisse
and will fulfil a sales support
role for the EMEA region.
Options IT, a provider of IT
infrastructure to hedge funds
and prime brokers, bought the
hosted colocation business of
BNP Paribas’ prime brokerage
division. As a result of the
deal, some of BNP Paribas’
hedge fund clients will use IT
infrastructure provided by
Options IT’s Core solution,
although all of these customers
will continue to receive prime
brokerage services from BNP
Paribas and will stay on the
BNP Paribas platform.
Sophis and JP Morgan’s prime
GSL06 1-17 final.indd 7
brokerage arm unveiled a
product which aims to help
hedge funds manage their
portfolios and risk across
a range of prime brokers.
iSophis allows funds to see
a consolidated view of their
positions, providing reports,
performance attribution and
risk exposure, all from any
standard internet connection.
Funds will also be able to use
the software for stress testing
if they decide to boost trading
volumes or expand their
portfolios to include other asset
classes.
peterevans, the financial
technology provider, launched
a new product for managing
and calculating daily margins.
xanite Margin Engine (xanite
ME) aims to provide greater
transparency for the trading
risk profile of non-clearing
members and reduced margin
risk exposure. A leading
global investment bank – still
unnamed by the firm – is
already a customer.
SunGard launched ‘SunGard-
as-a-Service’, its fully managed
‘private cloud’ service in the
UK.
Borrowers
TABB Group, the New York
research firm, estimated that
prime brokerage would hit a
USD10 billion profit next year,
with hedge funds achieving
an estimated USD1.5 trillion
in assets under management.
The company's latest research
comprised of interviews with
62 US-based hedge funds,
concluded from current
performance that next year
would see a return to profits
similar to levels in 2007.
The research concluded that
changes in the relationship
between hedge funds and their
prime brokers would continue
as funds explore more options,
including the development
of using multiple prime
brokers and non-prime broker
affiliated custodian banks.
The UK and US financial
regulators announced plans
to work together on joint
regulatory requirements
for hedge fund reporting.
In particular, the Financial
Services Authority (FSA) and
Securities and Exchange
Commission (SEC) hope to
agree a “common, coherent set
of data” to collect from hedge
funds, in order to help the
watchdogs identify potential
risks to their own particular
goals. FSA chief executive
Hector Sants and SEC chair
Mary Schapiro revealed the
decision, following the fourth
meeting of the SEC-FSA
Strategic Dialogue.
JP Morgan created a Prime-
Custody Solutions Group,
to focus on delivering the
company’s integrated custody
and prime brokerage platform.
The team will work with
asset managers and hedge
funds which are looking for
a combined prime brokerage
and securities services offering.
JP Morgan opted for the
move because of current
prevailing trends, under
which hedge funds are opting
for long-only funds and are
seeking custodians for their
assets, while traditional asset
managers are looking for prime
brokers to finance long/short
strategies.
Ashley Wilson from Barclays
2009 | Global Securities Lending Magazine | 7
NEWS
Capital predicted that the
traditional “duopoly” of prime
brokers is to be broken, with
five or six major players to
populate the landscape in
the future. He was speaking
at a London conference on
securities lending last month.
Wilson was a recent recruit
from Bank of America Merrill
Lynch to serve as head of
prime brokerage services
for Europe, Middle East and
Africa. He now oversees the
investment banking divisions
Prime Services franchise, which
includes equities and fixed
income financing, futures and
its cross-asset prime brokerage
platform. At BofA Merrill
Lynch he served as a managing
director.
New York University's Stern
School of Business found
that a fifth of hedge funds
misrepresented elements of
their funds during investor
due diligence. The amount of
money they had entrusted to
their funds, their performance
and their regulatory and legal
histories, were three key areas
in which inaccurate accounts
were given.
Repo
Transaction volumes in the
European repo market have
increased since the start of
the year in a sign the sector is
stabilising. The latest survey
from the International Capital
Markets Association (ICMA)
shows that outstanding
repo trades increased from
EUR4,633 million to EUR4,868
million from December 2008 to
the end of June, a rise of 5.1%.
Turn to page 9 for an analysis of
the ICMA report.Z
26/10/2009 11:59
 NEWS ANALYSIS
News Analysis
As markets 'come back' and GSL makes its Summit debut in continental Europe, there
have been many notable reports and studies that provide useful insight into today's
securities lending industry.
Ch-ch-ch-Changes
RBC Dexia’s recent survey on
securities lending participants shows
that beneficial owners and market
intermediateries are more likely to
adjust risk parameters than suspend
their programmes amid the current
market volatility.
Whilst 60% made no changes at all
to their programmes, only 17% of the
86 respondents to the survey actually
stopped lending.
An overwhelming theme of the
outcome of the survey was the increase
of focus on risk mitigation and capital
preservation, with 80% of respondents
rating these areas as ‘highly important’.
Blair McPherson, head of technical
sales, global market products and
services at RBC Dexia, told GSL:
“Where as it used to be returns, risk is
now the number one priority. It’s not
that people didn’t consider risk (prior
to the financial crisis), it’s just that the
understanding from an education stand
point wasn’t as prevalent as it is now.”
For those whom had undergone
alteration to their programmes, the
most common adjustment was in
relation to borrowing counterparties,
cited by 38%, closely followed by 35%
who had made adjustments to the type
of collateral accepted.
“For example, we are seeing a lot less
cash being accepted as collateral. Whist
it has traditionally been widely used,
due to its ease of management, when it
comes to reinvestment, it can be quite
risky,” Mr McPherson said.
The main drivers precipitating
alterations included: less confidence
in counterparty stability (65%), lower
risk tolerance (59%), desire for greater
levels of indemnification and provider
strength/stability (44%), short selling
8 | Global Securities Lending Magazine | 2009
GSL06 1-17 final.indd 8
restrictions (32%), and fear of cash
reinvestment losses (9%).
“Whilst these results show that in
the short term, market practitioners
are reviewing their structures and their
routes to market, in the long term, I
think the focus on risk will remain. The
great thing about securities lending is
that it is always changing. As emerging
markets become mature markets, and as
globalisation continues, it will continue
to grow.”
RBC Dexia’s survey also sought to
explore the perceived link between
short selling and the movement of
share prices. 92% said it had some
influence, but it was not regarded as a
deterrent to securities lending.Z
Lending by
numbers
Source: RBC Dexia Investor Services
Key figures:
60% made no
programme changes
17% stopped lending
38% of those who
made changes altered
their list of borrowers
10% ranked
securities lending as
'highly important'.
Prime time to reassess
Prime brokerage revenue will hit
USD10 billion in 2010, with their hedge
fund clients expected to return to form
with an estimated USD1.5 trillion in
assets under management, according
to New York based research firm TABB
Group.
Following extensive interviews with
62 US-based hedge funds, next year
would see a return to profits similar to
levels in 2007.
Until then, the research concluded
that the relationship between hedge
funds and their prime brokers would
continue current changes, including the
development of using multiple prime
brokers and non-prime broker affiliated
custodian banks.
The report highlighted September
2008 as a turning point for hedge funds.
The collapse of Lehman Brothers, just
a few months after the rescue of Bear
Stearns – two companies that claimed
around 30% of the brokerage market
– was the catalyst for many funds to
reassess the counterparty risk inherent
in their relationships.
"Typically we were talking to the
head trade, CIO, portfolio manager, so
the funds range from those who were
less than USD500 million, which we
consider small, from USD500 million
to USD3 billion," Matt Simon, a TABB
analyst, told GSL.
"We found a few major things this
year which fall into the whole landscape
and industry change in prime brokerage
in the US particularly, post Lehman
[Brothers] and Bear [Stearns] and the
bankruptcy of Merrill [it] had all been
changed due to counterparty risk and
counterparty diversification.
In particular, 66% of the single-
primed hedge funds interviewed were
26/10/2009 11:59
 NEWS ANALYSIS

Source: TABB Group

considering a move to a multi-prime
strategy, allowing fast movement of
assets between service providers.
The sector remains at a crossroads,
the report concludes. Nearly 80% of
hedge funds have the same or fewer
assets under management (AuM),
leverage remains low, and scrutiny from
investors and legislators has intensified.
This has had a knock on effect on prime
brokerage. But while AuM is still down
from all-time highs, significant net
inflows and performance-related asset
increases are expected.
The prime brokerage landscape
may appear very different by the time Key figures:
it hits the USD10 billion mark. Adam
66% of funds
Sussman, TABB Group head of research,
posited that if new asset increases come
from new fund launches it could lead to considered multi-prime
opportunities for small prime brokers.
45% added at least
“If a new crop of hedge fund
managers is going to be responsible for
a renewal of industry assets, it could one extra prime broker
very well be the smaller prime brokers
that gain in market share,” he said.
“Then, the challenge will be to hold USD127 billion -
onto those relationships as today’s AuM of hedge funds
Davids become tomorrow’s Goliaths.” Z
interviewed

Repo returns up quite a lot. At the same time you see the two desks merging together."
the fees coming down for European Responses from the survey were
The September survey from G10 debt." collected from 61 offices of 54 financial
the International Capital Markets Godfried De Vidts, chairman of institutions, mostly banks, including
Association (ICMA)reported good the ICMA’s European Repo Council a number of tri-party agents and
news for the repo market as a chief credited the “inherent stability” of automatic repo trading systems and
sign that the sector is stabilising. the European repo market despite the London-based Wholesale Market
Outstanding repo trades fragmented settlement infrastructure, Brokers’ Association. The survey asked
increased from EUR4,633 million comparing favourably with the uneven for the value of the cash and reverse
to EUR4,868 million from infrastructure in the US market. He repo contracts outstanding as at 10th
December 2008 to the end of June, added that as the European Central June 2009.
a rise of 5.1%. Bank gradually reduces its involvement Undocumented buy/sell backs
Although this figure is down in repo to recapitalise markets, there decreased in volume, indicating
20% against the June 2008 figure, would be an increase in wholesale repo. the greater importance of legal
the results of the influential survey ICMA EUROPEAN
The amount of securities documentation
lending on REPO in the
MARKET SURVEY wake2009
JUNE of the I 11
show that the wider money lending repo desks also increased, up to 19.1% Lehman Brothers default, increased
freeze and deleveraging activity from a record low of 12.5%. The trader concern around counterparty risk
– quickened by the default of added that this was part of an increased and the implementation of the
Lehman Brothers almost a year ago Counterparty
merging of equity analysis
and fixed(Q1.1)
income Global Master Repurchase Agreement
– is starting to lessen. desks. "There has been a lot of uptick in (GMRA).
Government bond collateral fell Table 2.2 – Counterparty analysis
from 83.6% to 81.2%, close to the
record 81% rate reached in June. June 2009 Dcember 2008 June 2008
The share of government bonds users share users share users share
in a tri-party setup increased, direct 61 52.1% 61 51.6% 61 51.7%
however, to 53%, with the tri- of which tri-party 31 11.1% 31 9.4% 30 10.1%
party market generally increasing voice-brokers 50 19.3% 48 20.2% 46 23.1%
to 11.1% of the market, up from ATS 46 28.5% 48 28.2% 47 25.2%
9.4%.
The The sharp
graph recovery
shows seen
how the in the to execute
methods December
repo2008 was
trades consolidated.
have changed
The increase of corporate share of electronic repo trading in Triparty activity recovered.
bond locates has been visible as little in 12 months. The proportion of automated trading systems
government bond use declines. remained at the level of the increase at the end of last year. other
Table 2.3 – Numbers of participants reporting particular types of business
A trader at RBC Dexia said:
statistics in the survey found that direct bi-lateral trading stood at
"Corporate bond locates have Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09
definitely increased. We've noticed 41.1%; domestic trading rose to 34% from 32% and anonymous trading
ATS 51 56 48 47 48 46
in the last few months it has picked gained fromATS
anonymous 12.7%33
to 14.5%.39 35 33 Source: ICMA
38 33
voice-brokers 54 54 51 46 48 50
tri-party repos 37 45 36 30 31 31
total 73 2009
77 | Global
68 Securities
61 Lending
61 Magazine
61 | 9

GSL06 1-17 final.indd 9 The principal automatic Figure 2.1 – Counterparty 26/10/2009 11:59
trading systems (ATS) operating in analysis
 NEWS ANALYSIS

Model citizens Across the Atlantic

Research by Bank of New York Trade association news and comment from
Mellon and Casey Quirk found a rise in either side of the pond.
revenues generated from the intrinsic
value of loans, rather than from cash
reinvestment.
Revenue from intrinsic loan value RMA: Michael
usually means a rise in cost for the
borrowers, particularly when the
beneficial owners' portfolio contain
McAuley
numerous 'hard-to-borrow' securities.
International Capital Framework for
These extra costs may combine, the
Banking Firms,” or “the Principles.” In
report notes, with additonal outlays
the statement, the Treasury “sets forth
based on a change of a prime brokerage
the core principles that should shape
model and balance sheet constraints
a new international capital accord to
"that make pre-borrowing for
better protect the safety and soundness
anticipated loans more difficult".
of individual banking firms and the
The report also highlights the
In my previous columns, I have stability of the global financial system
increase in hard-to-borrow rates
focused on the financial crisis and and economy,” according to its website.
paid by hedge funds since last year.
the ensuing changes to the securities There are eight core principles
At March 2009, 26 stocks on the S&P
lending industry. Now, however, as we focusing on capital sufficiency.
500 were borrowed at hard-to-borrow
continue to see positive signs that the Treasury considers these core principles
rates, compared with five stocks a year
industry is moving toward recovery, “essential to enhance the resiliency
before. This produced the usual effect
I would like to turn to the topic of of the global financial system". Core
of making S&P 500 stocks almost as
regulation. principal 4 focuses on capital charges
expensive as the small-cap S&P 600.
Regulation is one of the major risks for securities finance transactions.
A closer relationship between agents
facing our industry. There are several The implication is that more
and beneficial owners could also cause a
proposals coming from the regulators capital will need to be allocated to
rise in quality, rather than quantity.
designed to address specific issues and securities lending transactions and
"Brokers can no longer commit
reform in the financial markets. current methodologies in the Basel
large portions of their balance sheet to
Many of these regulations could II framework will be revised. The
general collateral borrowing and must
have a significant impact on the future increased capital requirements and
instead focus on the immediate needs
of the securities lending business. We the expense of revising internal risk
of the underlying client. This dynamic
strongly support the regulators in their models could lead to more industry
means less lending overall but also a
efforts to eliminate naked short selling concentration and a change in pricing
heightened focus on the value of specific
and reduce systemic risk. models.
securities in the market on any
Naked short selling has been a thorn Recently, the Securities and
given day."
in the side of our industry for years, as Exchange Commission (SEC), in
The study considered lending in
it has been incorrectly associated with finalising amendments to Regulation
the context of MiFID. 'Intrinsic value'
securities lending. However, it is our SHO, took another step toward its
is in some ways a combination of
hope that regulation focuses on those goal of reducing fails to deliver and
market norms and values, rather than
areas that need improvement and does permanently adopted Rule 204T.
a strict definition, and "in many ways
not attempt to reengineer the aspects According to the SEC, the amendments
is similar to seeking best execution in
of the securities lending business that are intended to help address abusive
an equity trading market but without
worked extremely well and efficiently “naked” short selling in all equity
consolidated rates or prices flashing on
both before, during and after the securities. The SEC is also proposing
a screen". As MiFID demands traders
financial crisis. approaches to restrictions on short
take into account the client's best
One of the most significant selling: a price test that would apply
interest regarding price, cost, and the
proposals is the US Treasury on a market wide and permanent
likelihood of trading settlement, "this
Department’s policy statement, basis (“short sale price test” or “short
may well point to the future of securities
“Principles for Reforming the US and sale price test restriction”) and one
lending". Z

10 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 10 26/10/2009 11:59


that would apply only to a particular
security during severe market declines
in that security (“circuit breaker”).
At our annual Conference on
Securities Lending on October 12-16
in Miami, Florida, RMA will most
likely discuss the Treasury and SEC
proposals. There is also a proposal
from a group of US senators that the
SEC and The Depository Trust &
Clearing Corporation develop a central
database of stock loan information and
require identification of actual shares
to be borrowed to cover a short sale —
a “hard locate” requirement that will
be discussed. I believe there may be
even more developments by the time
of the conference.
“Many clients that
have either stopped or
restricted their lending
programs are lending
again, but they are
doing so with more
specific lending and cash
collateral reinvestment
guidelines"
Michael McAuley, RMA
RMA is hopeful that regulatory
agencies will work together so that the
changes made by one regulator do not
shift liability from one set of regulated
entities to another. As an industry,
we understand the need to reduce
systemic risk in the market, but we
want to maintain a vibrant securities
lending industry that can continue to
provide liquidity to the marketplace. Z
Mike McAuley is writing as the
Chairman of the Risk Management
Association's securities lending
committee. He is also senior managing
director and chief product officer in
State Street Corporation’s securities
finance division.Z
GSL06 1-17 final.indd 11
ISLA: Kevin
McNulty
As with any new role, the first
couple of months have been
incredibly busy as I try to get on top of
everything that’s going on.
So far, I am hugely excited to see the
tremendous amount of engagement
with our member firms, who seem
really enthusiastic with what ISLA is
doing.
And in securities lending, there
is a lot going on. We have recently
published the Global Master Securities
Lending Agreement 2009, which
is designed to replace the previous
version, produced in 2000.
Although the agreement was due
to be updated, we have ensured that
the new version incorporates some
important changes that derive directly
from lessons learned by our members
over the past 18 months.
We have included what we think
is an improved default valuation
methodology for loans and collateral
which is designed to better protect the
non-defaulting party.
We have also been busy on the
regulatory front and have been
involved in several consultation
exercises including the CESR short
selling disclosure paper issued in the
summer.
2009 | Global Securities Lending Magazine | 11
INDUSTRY BODY COMMENT
"I am hugely excited
to see the tremendous
amount of engagement
with firms, who seem
really enthusiastic with
what ISLA is doing"
The GMSLA 2009 is up and
accessible on our website, and we are
currently producing a set of guidance
notes for users. This and an ongoing
workload supporting our member
firms, dealing with a host of other
initiatives related to tax, operations
and things like agent lender disclosure
have been keeping me busy.
My assumption is that ISLA will
carry on functioning similarly to the
way it has in the past, but something
we are taking a closer look at is the
association’s role regarding education.
We want more people
understanding what securities lending
is all about- from beneficial owners,
to the regulators, to the media. Whilst
its early days, and this is still very
much at a conceptual stage in terms
of how we go about this, I think it
is a very important thing for a trade
association to foster such education
and awareness.
I also plan to spend time working
more closely with beneficial owners.
From recent meetings with a number
of them, some have expressed concerns
about their awareness of risk, and
others believe there should be more
transparency.
We have started the process of
maintaining a regular dialogue with
these institutions to try and ensure
they stay up to date with developments
in securities lending. Z
26/10/2009 11:59
 EXECUTIVE PROFILE

Geert-Jan Kremer, KAS BANK

The head of treasury at
the 'pure play' custodian
KAS BANK talks to Ben
Roberts about the
vindicated success of
a non-cash, principal
programme and the pros
and cons of a central
counterparty
Geert-Jan Kremer covers a number
of different areas at KAS BANK as the
head of treasury, though he is at the
same time typical of the pride the
company has in offering a specific
range of securities services.
He oversees the clients’ business
with the bank in the foreign exchange
and money markets, and securities
lending – primarily as a non-cash
bank’s clients have lost money in
their securities lending programmes
with the bank during the financial
crisis.
Another quarter of his time is
spent on the operational aspects,
including exploring new products for
clients. But it does not compromise
his description of the firm as a “pure
play custody bank”. “Everything we
do is custody related. For instance, we
don’t have our own money market
funds. Some prospective clients in
the past were unhappy that we did
not have our own money market
funds nor reinvest cash. Now that
discussion has changed.”
He is adamant about the cash-free
profile of KAS BANK’s lending, and
that this view has been vindicated
throughout the struggles of the
financial markets. “We feel that
accepting cash as collateral is mostly
a sub-optimal solution. It is not that
we’re against cash as collateral as
such, but there were no economically
efficient proposals in that case. We did
not believe that the economics of the
trade could simply be found in the
reinvestment of the cash collateral.
“If a customer asks for a cash
reinvestment possibility, then they can
find a provider for that and we will
help them implement that solution,
but we won’t offer that actively,” he
adds.
Mr Kremer’s career in Treasury
began with PVF, the Dutch asset
manager that later merged with
Achmea Global Investors, which
subsequently merged into F&C. In
2000 he moved to Achmea, running

“If you are a small fund

it will not be worth your
costs setting up a lending
programme yourself. You
need a specialist volume
handling front office
desk to execute lending
successfully - that's what
we offer"

principal lender – is integral. “Acting

as principal entails managing the
risk positions for our customers in
conformity with our arrangement
with them and our position in the
market,” he says.
He adds that around a quarter
of his time is focused on risk
management, and says none of the

12 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 12 26/10/2009 12:00


the Treasury in its main insurance arm
in the areas of retail, mortgages and
private banking.
In 2008 he moved to the swiftly-
developing KAS BANK. He points
to the selling of its private banking
arm as an example of how it has
retained its focus on custody, along
with some administration – the latter
demonstrated by its purchase of the
administration business of Deutsche
Postbank in July. But it is decidedly
not an asset manager: “It is not in our
genes to be all things to all people.”
Mr Kremer has seen the kind of
stock value decreases in the Dutch
market that have been common
“We did not believe
that the economics
of the trade could
simply be found in the
reinvestment of the cash
collateral"
to other countries. He says that
discussions with beneficial owners
wishing to restrict or stop their lending
activity run along three lines.
Firstly, he says the bank is still
fielding questions about short selling.
Secondly, beneficial owners are still
concerned about the perceived risk of
lending in comparison to the relatively
low returns.
Both of these perceptions are
not correct, Mr Kremer believes.
“Securities lending is a low-risk
business as people can see from their
own portfolios, during the credit
crisis and the returns from all over the
portfolio quite interesting.”
Thirdly, he says some beneficial
owners often have had other, more
immediate concerns than their
securities lending activities, which
has led to the indefinite suspension of
some programmes.
As with a number of beneficial
owners and agent lenders at the last
GSL Summit in May, Mr Kremer
believes securities lending is a front-
GSL06 1-17 final.indd 13
office activity, and that is how it is
marketed by KAS Bank. “We take the
execution of lending very seriously. It
needs very special attention and you
need qualified people to execute it,
so you need considerable size to do it
effectively.
“You can compare it to currency
hedging activities or treasury
activities in general. If you are a
small fund it will not be worth your
costs setting it up yourselves. You
need a specialised volume-handing
front office desk to execute lending
successfully – and that’s what we
offer.”
He is also in support of a central
counterparty. The Netherlands was one
of the four ‘Euronext’ markets to be
included in SecFinex’s groundbreaking
central counterparty, launched in June
this year. “We are open to a central
counterparty because we feel that if
it works along very clear guidelines
it makes the market operate better, it
will solve a number of counterparty
analysis headaches for us, it can
uniform collateral schedules.
"It also gives a lot of additional
tools to work with to optimise a risk
management of our clients and opens
up a number of other areas to explore.”
He adds, however, that a central
counterparty will only be as strong as
its members. “Operationally, a central
counterparty must be very strong,
it must be a centre of excellence –
otherwise it will not work.”
However, he also understands the
critics of a CCP model who would
rather retain the bi-lateral element
of transactions. “If I have as one
counterparty a highly-rated bank
that is solid. That would be fine with
me, and if it defaulted I would still
have the collateral. I understand the
discussion about the CCP but I would
rather have one bilateral triple-A
rated counterparty than a CCP that
is built on number of weak market
participants."
Do you think lending and
borrowing volumes will increase next
year? “Yes I do. A lot of customers
2009 | Global Securities Lending Magazine | 13
EXECUTIVE PROFILE
"If you are a small fund
it will not be worth
your costs setting it
up yourself. You need
a specialised volume-
handling front office
desk to execute lending
successfully"
will see that when executed properly,
and executed for its own economic
reasons – and not for other reasons
such as cash reinvestment returns –
securities lending will be an interesting
proposition.”
He adds that the level of demand
will be critical to the growth of the
industry, though he is also positive
about this volume. Whether securities
lending returns will be as high as pre-
crisis levels is still to be decided, he
adds. Z
KAS BANK - an overview
Specialism: wholesale securities
services
Main target clients: Institutional
investors - pension funds,
insurance companies,
investment funds and asset
managers - and financial
institutions (banks and brokers)
Key offerings: Brokers - clearing,
settlement, sub-custody
Value-added services: for
treasury, risk management and
investment management
Global custody: 90 markets
Offices: Amsterdam, London,
Wiesbaden
26/10/2009 12:00
 COVER FEATURE

Shares for shares

In a future dominated by risk-adjusted programmes, there is a detailed and healthy
debate around equities as collateral for stock loans, finds Anthony Harrington

One of the more esoteric market

changes that the default of Lehman
Brothers might yet bring about is a
shift in the securities lending industry’s
fixation on cash collateral. This hasn’t
happened yet, though a shift to equities
as collateral is now visible in Europe
with additonal signs in the US.
Slow changes might be
understandable given that the
first impulse for many involved -
particularly beneficial owners of
the shares - was to step back from
securities lending. As Cédric Gillerot,
director in Euroclear’s Collateral
Services Product Management
Division, observes, the risk-versus-
return equation seemed to have caused
many to focus intently on the former.
“There is little doubt about
this. The data clearly shows that
from September 2008, volumes in
all the securities lending markets
plummeted,” he says.
While market participants had
some months to ponder the problem,
“As a beneficial owner Gillerot points out that in essence The obvious advantage
people came to three conclusions. The
of a security, our first was a renewed urgency about that equities bring to
experience suggests that making sure that all exposures were the table is the ready
if you were pushing for fully collateralised, particularly in availability of pricing
securities lending.
a bit more than 5% as a The second point was a much more information
haircut you might well careful analysis of the liquidity of the
in a cost effective and efficient way
get it. In fact, up to 7% collateral being taken. People only felt
for both sides of the transaction,
comfortable taking collateral that was
might be achievable" highly liquid - that could be sold in
encompassing the collateral used in the
management of the loan. Ultimately,
the case of default of the counterparty
this mandates the need for highly
Ed Oliver, Data Explorers - and judgements about the liquidity
efficient back-office procedures and
of the collateral became critical. As
systems.
Gillerot puts it, “Liquidity of assets
the conclusions drawn across the repo Though the securities lending
became a parameter of the utmost
market, the tri-party OTC market market was already fully collateralised,
importance”.
with collateral management, and the as was the repo market, the focus fell
The third conclusion was that
securities lending market were similar. on the quality and type of collateral
securities lending had to be achieved
T
t
14 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 14 26/10/2009 12:00 JPM_Se

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GSL06 1-17 final.indd 15

JPM_SecLend_2i_ad_8.26.indd 1 26/10/2009
8/26/2009 12:00
2:33:57 PM
 COVER FEATURE
being taken.
“Major lenders started to think
about the respective merits of fixed
income, cash and even equities as
collateral. The US is historically cash
collateral orientated, but lenders
studied collateral management in the
repo market where fixed income and
equities are deemed to be valid types
of collateral, and are starting to think
about their use in securities lending,”
Gillerot says.
With liquidity as a fundamental
driving criterion, the obvious
advantage that equities bring to
the table is the ready availability of
pricing information, and the fact that
good quality corporate equities can
be turned into cash very easily, in a
very transparent way. Much the same
argument can be made for some fixed
income, particularly highly liquid
government bonds.
In fact, as Gillerot notes, once
lenders start exploring this avenue it
quickly becomes obvious to them that,
in a sense, the only really important
feature about the collateral they are
taking is whether or not it is available
for efficient, seamless realisation.
“The most appropriate questions to
ask of a piece of equity collateral are: Is
this the right quality equity? Is it easy
to sell and do I have enough of it?”
Of course, the volatility of equities
can vary from moment to moment,
depending on what is happening in the
market and what is happening at the
level of the particular issuer.
However, if the collateral is being
marked- to-market and the margin on
the collateral is managed in near real
time, there should always be sufficient
collateral for the lender’s purposes.
Again, as Gillerot notes, where this
takes us is that it is not the quality
of the collateral per se, but rather
the quality of the processing of the
collateral that matters.
“This is where we definitely see
ourselves making an impact. Euroclear
Bank has a fully automated tri-party
collateral management service which
caters for a variety of fixed income or
16 | Global Securities Lending Magazine | 2009
GSL06 1-17 final.indd 16
equities collateral. In fact, we have the
capacity to process transactions in over
400,000 different securities,” he says.
Gillerot points out that there are
a number of proxy measures which
give a very good guide as to how liquid
a particular security is at any given
moment.
“All these parameters can be
monitored and manipulated and
the impact on the sufficiency of the
collateral assessed.
"Clients entering into a
collateralised deal using Euroclear
Bank’s triparty collateral management
service have complete control over the
assets accepted or pledged, via the use
of sophisticated eligibility screening.
“Major lenders started
to think about the
respective merits of
fixed income, cash and
equities as collateral"
Cedric Guillerot,
Euroclear
For example, a taker of collateral can
restrict or expand the total percentage
of equities received by sector or
market,” he says.
If the rise of equities as collateral
is being driven by liquidity issues, it is
also being driven by the fact that, from
a borrower’s perspective, major dealers
are in the throes of consolidating their
fixed income and equities desks.
Once this is done, it becomes
essential for the dealer to be able to
manage equity and fixed income pools
from the same desk. “Such dealers are
sitting on large pools of collateral that
they have to finance and exploit.
"We have a very compelling offering
here. Although traditionally known
as a fixed income house, we have an
equities service, EquityReach, that
provides wide access to many domestic
markets,” he says.
Euroclear provides equities services
to 27 markets, 18 of which are in
Europe, and the service range is being
extended.
It is a 'chicken-and-egg' situation
of sorts: dealers will be more relaxed
about offering equities - and lenders in
taking equities - if there are services to
make the mark-to-market side work in
a fluid and seamless way.
“What we are seeing a good deal
of right now in Europe is borrowers
consolidating systems to manage their
cash securities business, with fixed
income and equities being managed
in combination, and both being used
to collateralise the dealer’s exposure
in the securities lending market or
to borrow cash in the repo market,”
Gillerot says.
He points out that the risk
monitoring associated with adding
equities to the mix is predicated on
the idea that both parties will have
transparent and granular reporting
which will demonstrate to each of
them that there is the right amount of
collateral in place at any point in time.
The collateral management service
provider will not make judgements
about the liquidity position. That is for
the lender, and also, by implication, the
borrower, to agree.
They will do so using efficient
proxies for the liquidity of the
collateral and because these proxies
will be agreed in advance, and that
agreement will be part of the securities
lending contract, there will be no room
for disagreement between the parties.
What the collateral manager will do
is simply provide the data stream that
enables each party to see where they
are with respect to the sufficiency of
the collateral at any point.
Gillerot points out that in an
important way, this post-Lehman
focus on liquidity has added new
criteria to the collateral management
process. “It is our role, as a service
provider supporting all the collateral
management tasks, to provide the
parties with tools that will enable them
to implement pre-agreed parameters
26/10/2009 12:00

between the trading parties,” he says.
Clearly all of the usual equity
services, such as corporate events
management, will also be part of
the mix. The collateral management
service agreement will define, in
advance, how corporate events will be
processed.
While mandatory events are subject
to automatic collateral substitutions, in
the case of option events, the borrower
will decide whether it will take that
particular security back into its own
account and replace it with a similar
eligible stock, so that it can exercise its
option as the beneficial owner in the
most advantageous manner.
In any case, both the borrowers
and the lenders will have previously
received relevant corporate events
reporting on the securities used as
collateral.
Ed Oliver, global head of consulting
at market data providers Data
Explorers, and Leslie Gaynor, head of
consulting for North America each
have considerable experience in the
securities lending market globally.
Oliver says that given that liquidity is
now a major issue for both sides in a
securities lending transaction, equities
now make a great deal of sense as part
of the collateral mix.
This is especially true, Oliver argues,
where they are being correlated with
a lent security that is in the same
currency.
“If you are lending the CAX
versus the DAX for example, with
both sets of securities denominated
in euros, then provided you are
talking about mainstream equities
within the right parameters, and with
appropriate diversification, then the
case for exploring the use of equities as
collateral is compelling.”
Borrowers and lenders, he says, will
have to work out between themselves
what constitutes an appropriate level
of diversification. For lenders, a diverse
basket of ten different company stocks
would probably make sense in an index
like the FTSE 100.
Another issue that they will have
to grapple with is the acceptable level
GSL06 1-17 final.indd 17
of “haircut” to be applied to equities
being offered as collateral. Lenders will
be pushing for quite severe haircuts
and borrowers for the lightest possible
discounting.
However, Oliver argues that given
that borrowers in Europe would
generally like to be able to include
equities in the mix of securities they
offer as collateral, they will generally
demonstrate at least a degree of
flexibility.
“As the beneficial owner of a
security, our experience suggests that
if you were pushing for, say, a bit more
than 5% as a “haircut” you might
well get it. In fact up to 7% might be
achievable. If, however, you wanted
to be ultra conservative and were to
“Right now, equities as
collateral is definitely
a step too far for US
beneficial owners"
Leslie Gaynor, Data
Explorers
demand 20%, then the probability is
that you would not shift any of your
securities at all. The borrowers just
would not stand for it.”
Oliver says that in his view, we can
expect to see haircuts being much
more proactively used as a tool, as
the use of equities as collateral moves
forward.
“It follows from this that as more
and more beneficial owners come to
the market and show a willingness to
take equities as collateral, there will be
more competition and borrowers will
be able to drive down the level of the
haircut viewed as acceptable by the
market,” he says.
However, the additional security
offered by a haircut goes back to how
closely the two sides are prepared
to monitor their securities lending
programme.
If you are a pension fund using
an agent to mark-to-market you will
2009 | Global Securities Lending Magazine | 17
COVER FEATURE
go into a pooled programme and
will have to live with the standard
parameters of that programme. If,
however, as an owner you strike an
exclusive arrangement where a single
particular borrower gets the exclusive
use of the portfolio for a period of
time, that will generate a premium
return of at least 25 basis points to the
lender, Oliver says.
It all comes down to how closely the
pension fund as the beneficial owner
wants to be involved in the process.
“Do you just want to get a cheque
for the use of your assets, or are
you actively looking for trading
opportunities to maximise returns?
"Asset managers tend to be much
more proactive because they treat
securities lending as a portfolio
management style of investment and
will always look to squeeze a bit more
out of a trade. They will apply this to
equities as much as to anything else,”
he says.
Leslie Gaynor says that the
discussion, under the surface, to
change the US cash collateral model
has really heated up since the default of
Lehman Brothers.
“People are now much more aware
of the counterparty risks associated
with cash management and with
the investment risk issues, since the
borrower wants a return on the cash
he/she is putting up,” she says.
The initial steps in this market
might be a move to take more US
treasuries instead of cash. If the US
does finally start to take equities
as collateral, she says, it is a racing
certainty that beneficial owners will
apply the biggest haircuts they can get.
“Right now, equities as collateral
is definitely a step too far for US
beneficial owners to get their heads
around.
"However, if you are lending
equities versus equities on the same
index, with no currency risk involved,
then you have the same volatility on
both sides of the balance sheet and that
might be a more attractive place for US
lenders to begin to add to the collateral
mix,” she concludes. Z
26/10/2009 12:00
 MARKET PROFILE
Germany
Lending is down despite big investment into the economy, writes Kimberley Ferguson.
As an open economy with
strong foreign trade links, Germany’s
market is swiftly returning after one
of the most difficult economic times
experienced in many decades.
To manage the crisis, the Financial
Market Stabilisation fund was set up
to offer a range of financial support
to safeguard the stability of banks,
insurance companies, pension funds
and other financial institutions
domiciled in Germany.
After the EUR480 billion invested
in the stabilisation fund, the federal
government contributed a further EUR
90 billion as an attempt to strengthen
internal growth and domestic demand.
Germany has also tried to
enhance the resilience of the financial
system by initiating structural
changes regarding regulation,
transparency and accountability.
An example of this is the 2009
Financial Standard Reform Act
(Bilanzrechtsmodernisierungsgesetz)
which aims to reduce bureaucracy in
pension accounting and bring local
GAAP (General Accepted Accounting
Principles) standards closer to
International Financial Reporting
Standards.
In securities lending, Germany
experienced the biggest short
squeeze of 2008 with Volkswagen
and Porsche shares. In October of
that year, Volkswagen’s shares more
than doubled in value after Porsche
unexpectedly disclosed that by using
derivatives it had increased its stake in
VW from 35 to 74.1%, forcing hedge
funds and proprietary traders to cover
short positions by buying stock from a
shrinking pool of shares in free float.
In addition, Germany is one of the
next venues for SecFinex, the securities
lending platform, to establish a central
counterparty in November 2009.
The volume of securities lending
transactions, this has changed
18 | Global Securities Lending Magazine | 2009
GSL06 18-38.indd 18
significantly over the last two years.
As of September 2009 the total value
of German equities on loan is down
roughly 44% since the same time a
year ago.
There was a seasonal peak in
value on loan in May, but this was
significantly below the levels seen in
previous years. A German borrower,
who chose not to be named, explained
that “the cost of finance, balance sheet
restrictions, counterparty risk, reduced
supply and restrictive lending are all
factors that affect liquidity and have
reduced demand”.
Torten Biesel, global head of
securities financing at Landesbank
Baden-Württemberg (LBBW)
confirms that volume has indeed
decreased. “During the banking and
liquidity crisis the overall lending
volume was significantly affected
because some of the direct and agent
lenders decreased their lending
volume. And whilst it is difficult
to calculate the exact extent of this
decrease, it is safe to say that the
German banks with greater economic
troubles were more affected by the
changed landscape.”
Mr Biesel adds that this decrease
has affected the types of collateral now
being accepted in German securities
Top five companies - percentage of
stock outstanding on loan
Q-Cells Ag 21%
Solarworld Ag 18.88
Bilfinger Berger Ag 18.51%
Thyssenkrupp Ag 8.68%
Tui Ag 8.68% Source: Data Explorers
lending. “The quality of collateral has
become far more important than it
used to be. In the past, unsecured bank
bonds were viewed as the standard
collateral in trades with agent lenders.
"Now, covered bonds as well as
government or agency bonds are the
norm. Even if unsecured bank bonds
are accepted as collateral, they are
subject to an in-depth analysis with
regards to their liquidity, ratings and
pricing in the secondary market -if one
exists.”
One source adds: “Borrowers are
more likely to collateralise trades
with their cheapest form of collateral,
normally assets- non-cash or cash-
they are long of. It pays to be flexible,
as a lender who is more open in their
collateral profile can receive a broader
audience”.
Cash collateral remains a viable
option for some lenders. “At LBBW, we
are definitely still accepting cash,” says
Mr Biesel. “LBBW is not a classic agent
or direct lender. We have a combined
repo and securities financing desk, so
all of the collateral coming in through
securities lending is reinvested in our
other trading activities. On the other
hand, if we are long of cash, we invest
it in the tri-party market and feel
comfortable doing so.”
BaFin, Germany’s market regulator,
extended a ban on the short-selling of
shares in 11 financial sector companies
until 31st January, 2010.
The ban applies to shares in Aareal
Bank AG, insurer Allianz SE, AMG
% shares outstanding on loan
5.00
4.00
3.00
2.00
1.00
0
Sept 08
June 09
May 09
Mar 09
Aug 09
Dec 08
July 09
Nov 09
Feb 09
Oct 08
Apr 09
Jan 09
26/10/2009 12:12

Generali Holding AG, Commerzbank
AG, Deutsche Bank AG, Frankfurt
stock exchange operator Deutsche
Boerse AG, Deutsche Postbank AG,
reinsurers Hannover Re AG and
Munich Re AG, Hypo Real Estate
Holding AG and MLP AG.
However, as Mr Biesel explains:
“The short selling ban applies to
uncovered short positions. This means
that one can short a position as long
as the stock is borrowed for settlement
purposes. We believe that the ban will
be lifted towards the end of the year
when the crisis calms down a little
further.
"In Germany, the crisis is no longer
a liquidity crisis but rather a money-
lending crisis. As a result, the need
to protect banks from short selling is
no longer there. Furthermore, since a
lot of European banks are now partly
government-owned or are receiving
help from the governments, the bans
are no longer as relevant.”
Just over a year ago there was no
securities lending market for corporate
bonds and unsecured bank bonds.
Prime brokers had to trade on a
commitment basis with their clients;
however, refinancing those assets in
the inter-bank market was nearly
impossible.
“Even the spot market was not
functioning properly,” Mr Biesel
reflects. “As of today, the spot market
is once again extremely liquid and
even the repo market has seen big
improvement. For about four to five
months we have been seeing decreasing
haircuts as well as a much broader
range of accepted collateral. Although
there has been no full recovery, the
German market is definitely picking up
again.”
The graph is based on the average
of shares out on loan in relation to
shares outstanding, for 182 German
companies. To meet the criteria to be
included in this graph, the company
had to have market capitalisation of
over USD100 million. The spike in
between April- May reflects dividend
season, suggests Len Welter, chief
technology officer of Data Explorers. Z
GSL06 18-38.indd 19
Mexico
Market pressures have not
prevented a gradual growth
in Mexican securities
lending, finds Kimberley
Ferguson.
Wider economic pressures in Mexico
have stunted the growth of the
securities lending industry. Between
April to June, 2009, Mexico’s economy
shrank by 10.3%.
The outbreak of swine flu
driving tourist numbers down was a
contributing factor to this extreme
decrease, as was the global downturn
affecting demand for exports. With
approximately 80% of the country’s
exports sent to the US, it has been
hugely affected by the fall in US
consumer spending- particularly in the
industrial and services sectors.
The US recession is also thought
to be a huge factor in the sharp drop
in the amount of money sent home
by migrant workers. Mexico, which
is Latin America’s second largest
economy, went into recession in the
first quarter of 2009, when it saw GDP
drop by 8.2% compared with the same
period in 2008.
On the securities lending side,
albeit being slow to get underway,
Mexico now has an active market. Up
until 1994, the only foreign bank in
operation in Mexico was Citibank,
before the North American Free
Trade Agreement (NAFTA) opened
the securities markets to the US and
2009 | Global Securities Lending Magazine | 19
MARKET PROFILE
“We have seen the
volume of securities
lending incrasing about
25% in the last two
years”
Patrick Avitabile,
Citigroup
Canadian firms.
Large international banks, such
as BBVA (Spain), Banco Santander
(Spain), HSBC (UK) and Scotiabank
(Canada) along with Citibank (US)
acquired most of the largest Mexican
banks and began lending.
In 1995, more foreign banks entered
the market, including ABN Amro,
Fuji and Societe Generale. Tokyo
Commercial Bank began participating
in 1997 and Deutsche Bank in 2000.
Despite the industry being over a
decade old, many lenders are only now
establishing a presence in the country.
A move in 2005 by Banco De
Mexico to open up the local markets
to foreign entities and to encourage
mortgage companies to start lending
gave the market a boost; however this
was stilted when ambiguities around
tax regulations caused many of these
new lenders to pull out of Mexico.
Len Welter, chief technology officer
of Data Explorers provided the graph
on the next page, which represents
the average of shares out on loan in
26/10/2009 12:12
 MARKET PROFILE
“At the end of last year,
securities lending was
affected by the global
financial crisis, which led
to a loss of participation
of many market makers”
Manuel Torres Barajas,
BBVA Bancomer Mexico
relation to shares outstanding from
September 2008 to August 2009. To
fit the criteria for this graph, market
capitalisation of the country had to be
over USD100 million.
In Mexico, this equated to 54
companies, including Telefonos de
Mexico and Wal-mart de Mexico.
Mr Welter, who traded securities at
Morgan Stanley for ten years before
joining Data Explorers last year, said:
“Whilst in Mexico there is a bit of
flow, in comparison with some of the
western markets, it’s not big at all.
This is reflected in the graph, which
bounces between 40.4 and 40.5%.
This is pretty indicative of not a lot of
liquidity in the market”.
Manuel Torres Barajas, the
executive director of treasury and short
term interest rates for BBVA Bancomer,
Mexico, notes that the volume of
securities lending transactions has
decreased over the last two years. “At
the end of last year, securities lending
was affected by the global crisis, which
led to a loss of participation of many
market makers. Before this, the daily
average was MXN50 billion, compared
to MXN35 billion at which it currently
stands.”
Patrick Avitabile, managing director
and global securities finance head
of equity trading at Citi’s Global
Transaction Services in New York,
disagrees. “Within Mexico, we have
seen the volumes of securities lending
increasing about 25% in the last
two years,” he says. “The short sells
are increasing, and therefore, the
20 | Global Securities Lending Magazine | 2009
GSL06 18-38.indd 20
market need for securities lending has “Whilst in Mexico
grown. Offshore, we have witnessed there is a bit of flow, in
an increase of roughly the same
magnitude. comparison with some of
“The increase is mainly an the Western markets, it’s
offshoot of additional borrowers not big at all”
participating in the Mexican market.
We now trade with in excess of a dozen Len Welter,
counterparties, where that number was Data Explorers
two-to-three two years prior.”
And what about collateral? “In
Mexico, eligible collateral is set out
by the Mexican authorities,” says Mr rules and regulations don’t include
Barajas. “Whilst corporate bonds are accepting cash as collateral” explains
still being accepted, the global crisis Mr Barajas.
has highlighted that these bonds have In addition, people are becoming
lower liquidity than federal bonds. far more cautious in terms of the types
Therefore, the acceptance of corporate of collateral they accept. “Locally,
bonds depends on their own liquidity clients lending securities are being
ratios and credit worthiness. more careful about the collateral
Typically, federal bonds have far they will accept, they usually ask for
higher levels of acceptance in regards government bonds or liquid shares.
to collateral. And in spite of the For example, in the past they were
advantages of cash, for example, no more open to receive mutual fund
haircuts or interest accrual, the current shares,” said Mr Avitabile. Z
Mexican wave
The Mexican market has seen a steadier rate in the availability of stock for
borrowing. July saw the highest rise in 12 months with a sharp dip to August.
Separately, at the beginning of that month, the Maxico Bolsa index reached
27692, up from 23359 after the first week in July.
Since May the index has seen one of the most impressive rises in world mar-
kets, from 23014 on 4th May to 30881 on 14th October.
% shares outstanding on loan
Source: Data Explorers
5.00
4.00
3.00
2.00
1.00
0
Sept 08
June 09
May 09
Mar 09
Aug 09
Dec 08
July 09
Nov 09
Feb 09
Oct 08
Apr 09
Jan 09
26/10/2009 12:12

Hedge funds - rising amid
change
Past models and assumptions as to the workings of funds
and brokers have changed, finds Ben Roberts.
Hedge funds have been dealt a mix-
ture of tough luck and tough love in
the last two years.
Declines in hedge fund asset values
have run parallel with much of the hard
times felt by asset managers worldwide,
currently around USD1.34 trillion in to-
tal assets under management, down from
USD1.95 trillion, according to Eureka
Hedge. But their mainstream brethren
have not experienced such acute scrutiny
from regulators, investors and politicians
to add to these losses.
Deleveraging, both in anticipation and
realisation of market declines, further
reversed the enormous growth that hedge
funds achieved for much of this decade.
Those who still sought leverage expe-
rienced a shrinking pool of resources as
fears of counterparty risk prevented such
funding. Short selling restrictions pre-
vented the possible gains from a declin-
ing market, though this could be argued
as a temporary blip in an otherwise open
season for short sellers – particularly
regarding financial stocks.
As pressures on leverage and stock
borrowing - the classic offering by prime
brokers to funds – grew, changes and a
re-evaluation in the relationship between
fund and brokers became inevitable.
The tough love appears in what has
been termed the ‘institutionalisation’ of
its sector. Greater transparency, more
third party administration and a greater
emphasis on asset segregation – often
safely separated in a custody account –
have been three examples of the enforced
drive away from its supposed secretive
world. The decline in its wealthy private
clientele also spurred the need to widen
its marketing net to retain investment.
Such changes, some would conclude,
are timely. The European Commission’s
GSL06 18-38.indd 21
HEdGE FundS
businesses. I think [the draft proposals
are] just creating a layer of bureaucracy
that’s unnecessary.
“Wouldn’t it be much simpler to
regulate the prime brokers - the top 10
prime brokers probably account for
the vast majority of hedge fund assets
- rather than regulating 9,000 different
hedge funds?”
Extra bureaucracy will hit small
funds particularly hard. But at the
same time hedge funds might accept
the extra administration that comes
from diversifying their spread of assets
– both between different brokers and
in setting up custody accounts. The key
is to reduce exposure to any one prime
broker.
Gavan McGuire, director of Alter-
native Investment Services Sales for
draft proposal for stricter legislation EMEA, Citi, said: “Some of the bigger
on alternative funds, released earlier players are looking towards multiple-
this year, has hung around the neck prime broker relationships to help
of the industry. Despite the under- spread counterparty risks and give in-
stood calls for improved parameters vestors more comfort. People are look-
concerning leverage and liquidity, ing deeper and evaluating the benefits
industry practitioners, the industry of the traditional long-only custody
body – AIMA - and even a handful of model for their unencumbered assets.”
politicians have voiced their concerns This can add operational cost to the
as to the weight of regulation on a fund. Hedge fund managers will have
sector largely blameless sector. to bear in mind, if they have additional
Pedro Noronha, managing part- custodian relationships, be it prime
ner at Noster Capital, is particularly brokerage or traditional custody it will
incensed by the proposals, especially add to the underlying costs - but this
as hedge funds largely outperformed may simply be the cost of doing busi-
global indices. Partly, he says, it is ness in the changing regulatory.
down to erroneous perceptions of the The trend for multi-primes and sepa-
sector. “People were looking at hedge rate accounts was played out in recent
funds like they were absolute return. comprehensive research by New York-
They have to realise there will be based research firm TABB Group. In
every now and then a one-year event its study of 62 US-based hedge funds,
where the industry takes a hit. Unfair “Prime Brokerage 2009: The Hedge
attention is give hedge funds rather Fund Perspective”, 66% of respondents
than banks. that used a single prime broker said
“I would say the majority of the in- they were considering a multi-prime
dustry operates well within the lever- strategy.
age restrictions and operates honest At the same time, the study ex-
2009 | Global Securities Lending Magazine | 21
26/10/2009 12:12
 PIRUM

HEdGE FundS

“From our perspective we are will- have become used too.

pected more ‘mini primes’ to grow and
ing to work with managers who have “The traditional custody model re-
increase their market share, breaking
potential, of which there are many,” he quires different infrastructure require-
the strangle hold on the market by US
says. “Talented managers need to be ments for hedge funds,” he says.
brokers such as Goldman Sachs and the
nurtured and given time to build out “Hedge funds will need people with
‘bulge bracket’ European players such
their track record and develop their experience of working in a the tra-
as UBS, Credit Suisse and Deutsche
business.” ditional custody process, for a small
Bank.
Perhaps ironically, a hedge fund that hedge fund with five or six people, it’s
Matt Simon, an analyst at TABB
seeks to lessen its risk and shore up its another resource.” In such changing
Group, told GSL: “There have been a
future by separating some assets into a market dynamics, the measure of a suc-
number of new offerings, particularly
custody account could lose their lustre cessful brokerage could be minimising
from the introducing prime brokers
to prime brokers. Fewer assets on the the perception of change. Noronha says
and the mini-primes, as well as the
broker’s books means fewer assets for stock borrowing costs and availability
reshuffle of client assets.”
the prime broker to rehypothecate. has barely altered in the downturn due
But he added that the idea of ‘multi-
Noronha believes this is too much to to the strength of the broker.
prime’ needed clarity when assessing
ask. “If a hedge fund says: ‘I’ll use you But the ban on short selling did alter
this trend in the industry.
as prime broker, but I’ll use a separate the perception of both the strategy
“Multiple prime meant ‘if you’re
itself and its practitioners. It also meant
a hedge funds and you have many “People were looking at ‘covered’ short selling was conflated
brokers, you’re multi-prime’. That’s not
necessarily true for everyone. Depend- hedge funds like they with ‘naked’ shorting – selling into a
were absolute returns” market without the prior stock bor-
ing on where the fund is located, many
row. “In the US, naked short selling
hedge funds may have multiple funds
and each fund may be located at one Pedro Noronha, was a big thing. I think naked shorting
Noster Capital should be a criminal offence. If you
prime versus another. So the number
don’t have the borrow, you shouldn’t be
of hedge funds who have true ‘multi
able to short.”
prime’ relationships was not that many.
custodian’, you’re basically saying you’re He denies the occasional charge that
The idea of splitting assets within a
not allowing the prime broker to run naked shorting is necessary for market
fund between primes was not as com-
their business as they used to,” he says. makers, such as in the options market.
mon as a lot of people in the industry
“The reason why someone like Gold- “There’s only options in securities you
thought it was.”
man Sachs is a great provider to borrow can short. You cannot buy a put on
Just as hedge funds are re-evaluating
stock is because they’re the leader for a security where there are short sell
their services, prime brokerage is also
prime brokerage. They have a lot of cli- restrictions, as the person who writes
reassessing the counterparty risk – as
ents with a lot of securities with them, the put off to you, they need to hedge
well as the returns – in the relation-
so when you have to borrow certain everyday and short or maybe buy
ships. Smaller, or less successful hedge
securities, it’s easy. depending on the delta of his option,”
funds that have brought in less money
“If you start segregating accounts he says. “If there are no shorts allowed
for the broker are now more likely to be
for fund A, B or C, the broker as a for the security, there won’t be a put
shown the door by providers that must
whole loses part of the attraction of option. It’s that way, not the other way
adhere to the bottom line.
its business model. Either they would around. If the cost-of-borrow is very
This played out in TABB Group’s
have to charge higher fees or charge for high, it’s implied in the price of the
research. Prime brokers, says Simon,
something else. option.”
claim that a lot of hedge funds “‘are
That “something else” could be many Also changed is the ease of identifying
becoming too expensive to have on our
of the additional services provided by stocks to borrow and short. “After 2007
technology platforms and we’d rather
brokers that came for free when money there were many easy shorts where
stay focused on the largest clients.” Me-
from rehypothecation rolled in. These you could make a substantial amount
dium sized funds pose more risk and
include trade settlement, the manage- of money with a pretty high probabil-
might not be profitable.
ment of margin, and payments, as well ity of being right. Now it’s different.
This compares starkly with the boom
as the swift execution of corporate Through my career most of the time
years earlier this decade, when prime
actions where necessary. the short book was an insurance policy
brokers would have the resources to
McGuire at Citi points out that the and it was a drag on performance that
nurture small and start-up hedge funds
custody product is very different from enabled us to smooth the performance
on the back of future growth, McGuire
the traditional prime brokerage opera- and to try and deliver absolute returns,
at Citi notes this is still happening to
tional model that hedge fund managers month in, month out.” Z
an extent.

22 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 22 26/10/2009 12:12

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 TEcHnOLOGy

Operations comment: Pirum

Rupert Perry of as part of an overnight batch, this to call in the returns to the lender by
Pirum Systems straight forward approach is not viable e-mail, fax or telephone call. When the
outlines the for the International market, as the lender receives this request, it has to
required data is simply not available identify the correct trade(s) and book
next generation overnight. Marking international the required returns in their system.
of post-trade securities in Europe (as per ISLA’s best Using real time data feeds, the
automation practice guidance) requires market complete process of calling in returns
participants to use same day closing can be fully automated, happening
- real-time prices for Asian markets and previous within minutes of the borrower
processing. day closing prices for European and booking the return in their own system.
Not many years ago, post trade North American markets. In Europe, Validation logic is applied centrally,
processes in the international securities this generally dictates that marks must before returns even reach the lender, so
lending market were mostly manual be processed early in the afternoon, that any which fail to meet the lender’s
and often very time consuming. Today, once the closing prices for Asia for the pre-defined validation criteria can
many of the more straightforward same day are available. either be rejected immediately or else
operational processes, such as contract Unfortunately, the requirement to held in a queue for manual review.
comparison and billing comparison, process marks in the middle of the A real time version of contract
benefit from extensive automation. This business day creates a new issue relating compare is an essential part of this
allows higher volumes to be processed to timing differences. It is very difficult process, as it automatically determines
with much tighter risk control. to find a consistent time during the the correct translation between specific
But the job of automating all post business day when the timings of each borrower and lender trades in each
trade activity is not yet complete, as party’s internal updates to settlements security, so that when a return is
many other processes are still very of new loans and returns, market prices booked by the borrower it is always
manually intensive and require careful and foreign exchange rates are in synch booked against the correct transaction
coordination and communication with each other. If marks are generated on the lender’s side. This avoids the
between borrower and lender. A couple and processed when the data is not common contract compare breaks
of good examples are the daily mark to in synch, this tends to cause a large that often result from returns being
market and returns processes, but there number of mismatching marks which booked against a different trade in the
are many others too. require further manual investigation/ same security than was intended by the
So, why have these processes generally processing. borrower.
not benefited from automation Using real time feeds to update a set As the industry moves forward, it
already? Whereas contract and billing of proposed marks for both parties is increasingly apparent that further
comparison are based on daily/monthly is a much better approach, as it is automation of post trade processes
data feeds generated by overnight batch more tolerant of the daily variances will increasingly rely on real time
processing, the nature of processes in the timings of settlement updates feeds. It provides both parties with
like marks and returns is that they or problems that can occur with a continuously updating view of the
require much more up-to-date data market data feeds. With real time matching state of the transactions in
to work effectively and this ultimately reconciliation, market participants their respective books and records
requires real time feeds and real can immediately identify differences throughout the business day. Real time
time reconciliations, which are more requiring investigation or more simply, processing also enables any corrections
complex and have not been available if more time is needed for the updates identified on the reconciliations to be
until more recently. to flow through from the underlying entered in source systems and then
Furthermore, to successfully systems. When the marks are ready and fed through to update and correct the
automate marks and returns, you in synch, they are automatically posted reconciliation, ensuring that exceptions
first need to have clean and matching by both parties in their own books and are minimised and STP is maximised.
positions within contract compare, records. Z
as there will otherwise be too Today’s returns process is another About the author: Rupert Perry is a
many exceptions requiring manual good example of a post trade process founding director of Pirum, the leading
processing. It is only within the last few which currently requires considerable provider of post-trade automation
years that most market participants manual effort from both the borrower services to the international securities Look
have got on board with this first and lender to be processed. While lending and repo markets. Services is sa
essential step. borrowers will usually have internal provide include real time processing for For
While automated marks in the US automation to identify when a loan is contract comparison, marks, returns,
or vi
Domestic market are usually processed ready to be returned, they usually need prepay and exposure reconciliation.
24 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 24 26/10/2009 12:12 Clearstr

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12/8/09 11:03:04
 Global Securities Lending 2009

PAnEL: REInVESTMEnT

Panel: Reinvestment
Taking cash as collateral has divided market opinion and is for some the epiome of the
risk-return evaluation. GSL quizzes the experts.

Virgilio “Bo” Abesamis, III, senior vice president and manager of the Master Trust,
Global Custody, and Securities Lending Group. Bo joined Callan Associates in 1987,
initially working in the Capital Markets Research Group with responsibilities involving
asset/liability modeling, manager structure, benchmark and database reviews, style
analysis, and research.

Sonja Spinner is senior associate at

Mercer Investment Consulting. She has
previously acted as European invest-
ment reporting manager at Canada Life,
as well as senior internal auditor at the
firm.

Brian Staunton is managing director, Securities Finance, EMEA, at Citi. He is

responsible for the securities finance business within the EMEA region. Before
re-joining Citigroup in October 2004, Brian worked for Deutsche Börse Group in
London, formerly Clearstream Banking, for seven years as Regional Manager for the
UK, Ireland and Scandinavia. Prior to that, Brian was at Citigroup in London where he
was securities lending sales head in Europe. NB. Additional comment from Steve Beill,
director, securities finance at Citi.

1. For some agent lenders, there has value vs. reinvestment of cash collateral 20% than usual.
been an increased focus on the profits would definitely have an impact. We
that can be derived from the intrinsic believe that this shift away from cash SPINNER: I consider that the
value of the loan itself – rather collateral reinvestment could mean intrinsic valueisofhead
Tony Baldwin loansofshould be the
short term
than returns from cash collateral a 40% to 60% reduction in revenues. interest
driver ofrates andactivity
lending fundingasatopposed
Daiwa
However, we also believe that those Securities
to SMBC
cash yields. Europe.
Many The
of the firm is
issues
reinvestment. How significant do you based out of London and its op-
think this shift will be to overall cash clients with real inventory of intrinsic which have
erations areimpacted
currently beneficial owners
split into four
taking and reinvestment levels? value securities would be paid in agent lending programmes arose
different areas: equity, fixed income,
commensurately and should achieve because the focus
investment banking was
andonderivatives.
an aggressive
ABESAMIS: The focus on intrinsic better demand spreads of at least 10% to cash reinvestment programme as

26 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 26 26/10/2009 12:12


opposed to prudently managing
securities lending programme risks.
Whilst money market yields remain
low it is difficult to make a case
for accepting cash collateral as the
incremental spreads over a non-cash
programme are not outweighed by the
additional reinvestment risks. Recent
market events have also highlighted the
issues associated when collateral pools
are shared by multiple lenders. I always
steer clients with the risk appetite to
accept cash collateral to a segregated
cash fund.
STAUNTON: I think it’s important
to reiterate why we take cash. Some
brokers prefer to give cash as they’re
long cash, and it must be then re-
invested to earn a yield.
In addition to the yield the broker
will want compensation in the form of
a rebate The interest rate earned from
the re-investment should always be
higher than the rebate level, and that
yield is very much a function of what
re-investments are permitted.
The more conservative the re-
investment profile, the lower the
revenue will be. Our view is that we
generally lend assets out which do have
some form of intrinsic value – whether
equity or fixed income. We’re not
‘pumping out’ securities to generate
cash. There’s generally a level of intrinsic
value in the loan itself.
BEILL: After the default of Lehman
Brothers there was a pull back from
cash as a form of collateral. There may considerable discount.
be lenders that hadn’t really understood
all the potential risks and downsides
of having cash. That said, we’ve been
through a re-education process with
lenders and now I think lenders are
returning back into cash as a form of
collateral.
2. At the height of the financial
crisis, many beneficial owners did
not seek to liquidate their cash
reinvestments due to the loss they
would incur. Should the status of these and at less cost.
reinvestments be marked-to-market?
GSL06 18-38.indd 27
ABESAMIS: Before any talk of
liquidation or exit strategy, we believe
that the prudent approach is to have
those reinvestments be marked to
market to determine “real” valuation
levels and the potential market impact
of a forced sale, especially in this
environment
SPINNER: The use of a constant
dollar net asset valuation (NAV) is
common industry practice for cash
collateral reinvestment pools. I don’t
think that there is a requirement to
amend this when computing revenues
and fee splits. Beneficial owners would,
however, gain additional transparency
“Now the vogue is tri-
party, and it’s fantastic
- you can work with the
tri-party agents and set
your risk parameters
around a very finite set of
categories”
Brian Staunton, Citi
if mark to market valuations were also
published. Many beneficial owners
had no transparency regarding the
performance of commingled cash
reinvestment pools until agent lenders
informed them that the fund could
no longer support a constant dollar
NAV and that funds were trading at a
This is clearly inappropriate as
mark to market valuations gradually
decreased over the later part of
2007 and 2008 and then decreased
substantially following the collapse of
Lehman Brothers.
Sharing mark to market valuations
with beneficial owners would have
alerted them to the issues facing some
cash reinvestment funds and enabled
them to make the decision whether to
fund losses and suspend lending earlier
STAUNTON: Some lenders in the
2009 | Global Securities Lending Magazine | 27
PAnEL: REInVESTMEnT
industry faced a situation where they
wanted to suspend lending because
of the market volatility, but to do so
would have incurred a loss on the
cash collateral re-investments. So the
question they ask is: ‘do I liquidate and
take a loss or maintain the positions
until final maturity in the hope they’d
maintain their value?’ I don’t know if
the investments should be marked to
market.
If they were – perhaps if there was
a shortfall in collateral value – who’s
going to post the additional margin? In
a classic mark to market process you’re
marking the loan and collateral whereby
you’re taking more collateral if need
be. But marking the cash re-investment
isn’t a classic mark to market, as you’re
marking an investment that’s possibly
lower than the value you bought it
for. So whose responsibility is it to
top up the value? Under the current
legal arrangements it is the lenders’
responsibility.
3. Will the last quarter’s improved
market conditions have encouraged
beneficial owners to stick with the
reinvestment plan – or would this
be the time to get out on the back of
potentially smaller losses?
ABESAMIS: Depending on client
considerations (i.e. liquidity needs,
rebalancing, asset allocation, etc.) and
risk assessment, this is the time to assess
the investment policies and guidelines
governing the reinvestment of cash
collateral. Within that construct,
it would also give a client a way to
evaluate the profile of their program
and if needed “clean-up” or employ
a “controlled un-wind or work-out
solution” that would bring the program
into compliance.
SPINNER: Beneficial owners in
lending programmes with losses in
their cash reinvestment pools are not
yet out of the woods. Where losses
have resulted from mark to market
losses on asset backed securities the
lack of money market liquidity, and
26/10/2009 12:12
 PAnEL: REInVESTMEnT
investor appetite, means that the losses
can still be substantial. Some owners
have decided to fund losses or to take
vertical slices of cash reinvestment
pools in order to facilitate an exit from
lending. However, I think that it’s fair
to say the majority, albeit reluctantly, are
remaining in their lending programme.
STAUNTON: A lot of these assets
are very illiquid and difficult to price.
If there was a mark-to-market process,
would you have sufficient security that
the mark-to-market is pricing that
investment adequately. In reality, if you
have an illiquid asset, you don’t know
the real value until you sell it; it’s not
like index equities.
BEILL: the sort of products we’re
talking about that incurred the big mark
to market losses are in the ABS space.
Citi EMEA stopped buying short-based
asset-backed commercial paper a long
time before the default of Lehman
Brothers. I’ve seen a few reports
suggesting that liquidity is returning to
the ABS sector, and it’s difficult to say if
it will encourage lenders to pull out or
stay.
4. Some call the reinvestment a
front office activity and an ‘investment
management overlay’. Will this
evolution of cash reinvestment into
the asset allocation space help the
understanding of risk, liquidity and
returns?
ABESAMIS: This is a very good
question. We believe that a client should
assess securities lending from both
direct lending (i.e. custody, a third party
agent or principal) and indirect lending
(i.e. mutual funds, commingled funds,
index funds, etc.) viewpoint.
Those that participate via indirect
lending should take into consideration
that seclending is already embedded
in the asset allocation, especially those
using index funds as the core exposure
to asset classes.
In the area of direct lending, the issue
is not that simple. Two factors have to
be given proper consideration- wherein
(a) securities lending is utilised as a fee/
28 | Global Securities Lending Magazine | 2009
GSL06 18-38.indd 28
cost offset or (b) securities lending is
employed as an alpha generator. As a
fee/cost offset, the client has to weigh
the merit of securities lending as a
front-office or investment management
overlay activity. This could be
problematic for those clients because a
fee/cost offset approach does not align
well with risk taking.
On the other hand, if a client believes
that this is an alpha generator, then
this needs to be factored in the risk
budgeting exercise and in what context
of the asset allocation should it be
carved out.
SPINNER: Cash reinvestment
absolutely is a front office activity.
Beneficial owners choosing securities
“Lenders are effectively
stuck in their lending
programme as a result
of inappropriately
constructed portfolios
which have failed to
consider an investment
basic: to match assets
with liabilities”
Sonja Spinner, Mercer
Consulting
lending programmes with cash
reinvestment need to apply the same
due diligence process and monitoring
of managers to cash reinvestment
funds that they apply to other manager
mandates. I would encourage all
owners lending securities against cash
to view their lending programme as
a cash fund investment, with all the
same risk and return considerations
as any other money market fund
investment. I would also encourage all
beneficial owners lending against cash
to reflect whether they really consider
that the additional revenues they may
receive if they lend against cash really
are sufficient to compensate for the
additional risks.
STAUNTON: That’s a good question,
and it is one of education. If you’ve
appointed an agent lender for a specific
role, that lender should have the
capability to manage, calculate and
record risk and provide a very good and
professional level of cash reinvestment
as good as any money manager. I think
there are players who can do that very
well. As a firm we have that capability
so we agree with the statement – it is a
front office function.
I would go a step further too: because
it’s defined as front office it needn’t go to
a traditional fund management firm – if
you have the capability in-house it’s a
good situation.
5. Where might cash be most
commonly reinvested next year – will
there be a weight towards short-term
investments?
ABESAMIS: Callan does not have
a crystal ball on the future. Market
participants in securities lending
should understand the risk/reward
and asset/liability issues inherent in
the transaction. Liquidity risk would
best be mitigated if appropriate short
term investments are given proper
consideration regardless of market
environment.
SPINNER: There are considerable
risks associated with running cash
reinvestment plans with duration
mis-matches between loans and cash
reinvestment.
Long term investments are not
suitable for cash collateral reinvestment
pools, even if they benefit from interest
rate resets, as they lock owners into
lending programmes in the event of
a liquidity shortfall. In response to
increased investor risk awareness,
increasing numbers of agent lenders
are investing maturing assets in
instruments eligible under Rule 2a-7
of the United States Securities and
Exchange Commission.
The combination of these factors will
results in weightings towards shorter
term investments.
GSL pp0
26/10/2009 12:12
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26/10/2009 12:12
 PAnEL: REInVESTMEnT

STAUNTON: The bigger shift is going

to be towards secured investments – tri Statistically speaking
party repo, for example.
That gives you the double protection
of counterparty risk and that’s backed Cash reinvestment Reasons given for G
by the securities you’ve taken as losses have by now changing programme: w
collateral with any margin. In the m
been well-documented.
unsecured space, banks have been
getting their funding from the central But the recent study 65% reported a
banks that have pumped so much by RBC Dexia Investor less confidence in
money into economies that they often
do not want to issue in to the market, Services found that the counterparty stability
and except for the three-to-six month issue is still far down
space you won’t see decent returns.
Now the vogue is tri-party, and
the list as a specific 59% cited lower risk
it’s fantastic - you can work with the topic when beneficial tolerance
tri-party agents and set your risk owners across four
parameters around a very finite set of
categories.
continents were 44% sought
asked for reasons for greater levels of
6. What regulatory changes or changing their lending indemnification
developments might be influential on
programmes, despite a
the cash reinvestment space?
decline in risk appetite 9% looked to avoid
ABESAMIS: The most significant overall. cash reinvestment
regulatory driver to the speed limit
of cash reinvestment would be the
Source: RBC Dexia Investor Services losses.
fine tuning of SEC Rule 2a-7. This
is currently being evaluated by the
government and the industry in terms “Liquidity risk would
of acceptability of certain types of market losses between 3-5% of their T
securities, maturity considerations,
be best mitigated if portfolios before they were alerted to
credit, issuer limits and liquidity. Once appropriate short-term issues with their programme. a
the dust settles on this important investments are given y
guideline, the industry would have STAUNTON: I think there’s a i
a better sense of the speed limit and
proper consideration, need for greater transparency of cash
have a sense of the potential risk (up regardless of the market reinvestment, reporting to all parties i
or down) if they decide to push the environment” all the investments. What will be a
reinvestment guideline. interesting is what comes out of the SEC w
Bo Abesamis, Callan meeting that took place last month.
I think it’s important to remember
T
SPINNER: I would welcome
increased scrutiny of commingled cash
Associates that this industry was around USD14 c
reinvestment pools. trillion in available securities in 2008 i
Some agent lenders ran very which have failed to consider an with USD4 trillion on loan - a huge
aggressive cash reinvestment investment basic: the matching of assets amount of liquidity. For the most part
programmes with substantial to liabilities. securities lending worked extremely
allocations to asset backed securities. Moves to force greater transparency well. In that sense we have to put the
Additionally, some “cash funds” can only be welcomed. Additional problems that have arisen around cash
with apparently low weighted average regulation or guidance on the in perspective. Z
maturities were running bar bell differential between a fund market
strategies with a proportion of short to market NAV and constant dollar Next issue panel topic: ‘Regulation’.
dated assets and a rump of assets with NAV that can be permitted before If you would like to be part of the
years to final maturity. investors must be informed that cash next Q+A, contact Ben Roberts (ben.
Lenders are effectively stuck in their reinvestment funds have broken roberts@2i.tv) or James Olweny (james.
lending programme as a result of these constant dollar NAV would also be olweny@2i.tv).
inappropriately constructed portfolios welcome. Many investors had mark to

30 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 30 26/10/2009 12:12 GSL su

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GSL06 18-38.indd ad.indd

GSL subscriptions 31 1 26/10/2009
08/10/2009 12:12
18:11
 TRAdInG
From the trading floor
Jeroen Bakker gives an
insight into the trading
operations of RBC Dexia,
including its plans to de-
velop its agency lending
platform.
The global coverage of RBC Dexia’s
securities lending business means that
we’re working with our colleagues
around the world, particularly with
the other trading desks in Sydney
and Toronto –there is information
flow across regions and coordination
globally.
Trading is around 50-60% of
my day-to-day job, I am involved
with other projects, qualifying
various trade structures and
deal opportunities and product
development initiatives Next to this
there is a lot of interaction with other
departments such as operations and
risk.
Collateral
Our collateral schedule is non-cash,
and primarily G10 paper. Given
events such as the default of Lehman
Brothers and the credit crisis, I would
say our non-cash programme has
benefited well compared to a non-
cash programme. Borrowers ask for
collateral flexibility and the ability to
change the collateral based on their
access being either G10, equities,
corporate bonds or cash. This would
allocate additional baskets, additional
balance or higher fees to those agents
or principal lenders.
However, I would say that changing
the collateral framework is not a
process you want to do overnight.
RBC Dexia has a prudent risk
management framework and so doing
the due diligence and making clients
comfortable with additional paper or
collateral must be ensured prior to
launching a new collateral instrument.
32 | Global Securities Lending Magazine | 2009
GSL06 18-38.indd 32
“With a CCP, there are
potentially two hundred
borrowers behind it - but
who are they?”
However, we’ve expanded our
collateral schedule to accept additional
OECD government bonds, German
and French agencies to meet borrower
demand.
Our clients come in many different
kinds. Some just are interested in just a
monthly cash flow. Some would like to
see the breakdown of the revenue that
is being generated. In these cases, every
month the trading desk will inform
those clients via our technical sales
department what might be happening
in the US, the Far East and other
regions, which securities are specials,
and so on.
CCP
When it comes to trading using a
central counterparty, I think a key
question still needs to be answered:
where is my risk? Is it with SecFinex, or
Eurex? It is difficult to see ‘behind’ the
platform.
With my current bi-lateral
transactions, our risk department will
fully assess the counterparty risk. They
will check what are the outstanding
loans versus the collateral received and
calculate the value at risk (VaR).
With a CCP, there are potentially
two hundred borrowers behind it – but
the question is: who are they? What
would happen if one of them got into
trouble – would it trigger a domino
effect whereby the entire CCP goes
bust? So if I used a CCP, then as a
lender with a duty towards my clients
I would have to say: I would have to
better understand how to measure my
risk.
From now on
At this stage in the year, we have seen
less market activity regarding M&A
and rights issues compared to the first
half of the year which saw a decent
number of rights issues and takeovers.
This being said, we are seeing
increased amounts of GC month after
month and the trading desks have been
setting up these trades. Our balances
are growing, and not only due to the
rise in the stock markets. So we’re
keeping ourselves busy despite that
it has been more quiet than others’
summers. Z
26/10/2009 12:12

Robbert
Wijgerse
at Robeco
highlights
the promi-
nent changes
to lending programmes
and the company’s
collateral guidelines.
It has almost been a year since
the default of Lehman Brothers. Since
September 2008 beneficial owners
have reacted differently with regard to restricted because of a lack of
market and credit risk.
Some beneficial owners have made
small adjustments to their securities
lending programme, while others have volatility in the market and increased
stopped lending altogether. Another
group wanted to pull out but could not risk has been decreased by receiving
do so due to unrealised losses on the
cash reinvestment in money market
funds or directly in commercial paper.
As a non-cash collateral taker,
we have had no issues with regard
to unrealised losses related to cash
reinvestments. It has been our policy
not to create more leverage by
reinvesting.
The rationale is that the income
from securities lending must come
from the intrinsic value of the
GSL06 18-38.indd 33
securities lending trade and not from
the cash collateral reinvestment
opportunity.
Obviously non-cash collateral has
risks too. It is important to be aware
of the correlation between the loans
and the collateral; especially the
liquidity of all these securities.
In the weeks following Lehman
Brothers’ default we amended our
non-cash collateral guidelines.
Firstly, corporate bonds and
convertible bonds have been
liquidity in these securities.
Secondly, collateral margins have
been increased because of a high
counterparty risk. Thirdly, settlement
pre-paid collateral. And lastly,
financials were removed.
Currently we are seeing that
borrowers are, once more, pushing
for more flexible collateral grids.
Some lenders are accepting financials
and investment grade corporate
bonds again as collateral.
As exchange traded funds (ETF)
become more and more traded, there is
an increased need to finance these
as well.
2009 | Global Securities Lending Magazine | 33
TRAdInG
“It is important to be
aware of the correlation
between the loans ad
the collateral; especially
the liquidity of all these
securities.”
Another trend is financing swaps
where the stock is sold and hedged
with a total return equity swap. Some
beneficial owners, who only accepted
cash collateral in the past, are starting
to accept non-cash collateral.
On the other hand, more
borrowers are looking to pledge
cash as collateral as some of them
experienced a lack of non-cash
collateral.
As the collateral preference from
borrowers can change from cash to
non-cash, lenders have to become
more flexible in accepting both types
of collateral.
Robeco, for instance, is starting
to look at accepting cash collateral
and reinvesting that cash through an
overnight reverse repo.
Whether it is cash or non-cash
collateral that is being accepted, it is
important that the risk-return profile
is understood and professionally
managed.
It will be interesting to see how
beneficial owners will act when they
can pull out of the money market
funds. Will they move to a trading
model based on intrinsic value or will
they stop as the risk/return was not
what they expected it to be? Z
26/10/2009 12:12
 GSL SuMMIT - REVIEw

GSL Summit - on the road

Amsterdam
Dutch Securities Lending Summit, October
Venue: Krasnapolsky Hotel
Sponsors: Fortis Bank Below: the second panel: (l-r) Sander
Nederlands, Robeco, ING, Baauw, Fortis; Simon Lee, eSecLending
J.P. Morgan, eSecLending. Sonja Spinner, Mercer Consulting;
Rogier Buurman, Robeco

Additional sponsors: 4Sight

Financial Markets Solutions,
Rabobank.

The GSL “Lending for Liquidity”

summit in Amsterdam on 8th October
attracted some of the main players in
the Dutch securities lending market
and beyond. Discussion topics of the
day involved whether securities lending
was now a front office activity along
with the risks involved in the market,
he said. Van Roekel revealed that SPF Beheer
but on a micro level one of the most
Jean René Giraud, from EDHEC withdrew from its lending programmes
popular issues was cash reinvestment.
Risk, provided an academic overview after the financial crisis, but that it
Mark Faulkner, founder of Data
of the industry. Giraud criticised the plans to begin the process again next
Explorers, opened with an overview
media’s condemnation of short selling, year – although with more focus on the
of the current state of the industry.
which had been seen to be driving collateral side.
In contrast to some media reports,
down the prices of firms. He said He also agreed with chairman Roy
Faulkner stressed that securities lending
long investors – given their far greater Zimmerhansl’s suggestion that this
is still a profitable enterprise, although
number – were more responsible for pullout was not to do with securities
the credit crunch has led to changes,
the fall in stock prices, and also revealed lending itself, but more because it’s “a
particularly in the attitude towards risk
some of the benefits of short selling. weird old market out there” and he’d
management.
“Short selling is important for the rather be risking nothing.
He described risk as the new “key
portfolio management process on “The people on the floor are
metric” in the industry, something
the one hand,” he said. “But it’s also convinced about the product,” van
which was also agreed upon at the
important for the market itself, in Roekel said in reference to securities
recent roundtable discussions on
terms of liquidity, because it allows for lending, but suggested that the board
securities lending and short selling
increased quality of price discovery.” of directors were not as convinced – so
at the US Securities and Exchange
The first panel comprised of Paul SPF Beheer decided to “not take the
Commission, where Faulkner was in
Wilson from J.P. Morgan, ING Asset chance” of giving securities lending
attendance as an advisor.
Management’s Bert Mekes, Hans van a bad reputation just because of the
“It’s not just about return anymore,
Roekel of SPF Beheer BV and Paul current market.
it’s much more about risk, and I
Wilson from 4sight Financial Markets This volatile and changing market
think this is long overdue. I just hope
Solutions. is also having an impact on the
that collectively the industry and
The panellists discussed if technology sector, 4sight’s Wilson
organisations can keep to that thought
securities lending is now a front-office revealed. “There is a great demand
going forward over the next few years,”
investment. just now for change in the technology

34 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 34 26/10/2009 12:12

 GSL SUMMIT - REVIEW

industry, and nowhere more so than in
the Dutch market, where we support
agency lenders who are probably
amongst our most active clients,” he
said.
“There’s also been an obvious
change in the way that technology has
been used since the credit crunch and
that’s all about collateral in large neon
lights. As a vendor our focus became
almost entirely collateral-based about
12 months ago.”
Mekes, from ING, suggested that the
use of cash collateral would allow his
firm – which in the past only accepted
non-cash collateral – to better its cash
management processes. “Securities
lending is a tool I can use in my cash
management,” he explained. “It is not
only about earning more money but
also about managing cash better.”
Mekes suggested that firms could
benefit from the extra cash that would
be available through securities lending
programmes, which would allow them
to gain access to cash without being
required to sell assets.
Meanwhile, J.P. Morgan’s Paul
Wilson suggested that the return of
SPF Beheer to the securities lending
market is indicative of a larger trend.
Most of those who had suspended their
programmes have now re-entered the
market, while some bodies which have
never lent before are now doing so.
Wilson also mentioned a disparity
between the European and US markets
in terms of governance. He said: “For
the most part we still see in Europe
that the oversight, governance and
responsibility for securities lending still
very much resides in the operational
division of beneficial owners, while
substantially in the US, particularly on
the asset management side, there has
been an overnight shift of responsibility
to the CIO.”
Rogier Buurman from Robeco,
Sander Bauuw of Fortis, eSecLending’s
Simon Lee and Sonja Spinner from
Mercer Consulting were the members
of the second panel.
This group focused on a subject that
had already been mentioned heavily
– risk. Issues such as collateral choices
and short selling limitations were on
the agenda, but cash reinvestment
seemed to be what everyone wanted to
talk about.
Cash collateral has received a bad
press of late, but Lee, responding to a
question from the audience, explained
that it is important to distinguish the
many possible reinvestment options,
and the risks involved with each.
For instance, he pointed to the
difference between reinvesting cash
collateral in asset-backed securities and
overnight government repo – the latter
of which may be much the same in risk
terms as taking government debt as
collateral in the first place.
“It’s something that lenders have
to be very, very aware of because it
does make a fundamental difference

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GSL06 18-38.indd 35 27/10/2009 13:34

 cOnFEREncES
to the risk and revenue dynamics of
their programme,” he said. “Lenders
shouldn’t necessarily be dismissing cash
collateral out of hand. Cash collateral
managed in a risk-averse fashion
can help significantly in terms of
programme performance.”
This move towards cash collateral
was echoed by Buurman. His firm has
traditionally taken non-cash collateral,
but Buurman revealed that Robeco
is beginning to accept cash collateral
“more and more” – but in a risk-averse
fashion.
Robeco now accepts cash “not in a
way that has caused other companies
to have losses or any other type of
problems, but in a way that cash
collateral is used as a measure to
mitigate credit risk and not as an
investment opportunity”. Buurman
added that the Lehman default required
Robeco to undertake a number of
changes, including to its collateral
policy.
However, Sander Baauw suggested
that further changes are underway for
the industry as a whole, particularly
given the possible introduction of
central counterparty (CCP) models
into the sector. “I think that CCP is
going to change this world,” he said.
“Maybe next year and otherwise in
two years, and then the risk profile of
many counterparties will look totally
different.”
Sonja Spinner compared the Dutch
securities lending industry and that
of the UK. She described the Dutch
market as “very well-educated” and
revealed that many people in the
Netherlands decided to suspend their
programmes after the near-collapse
of Bear Stearns in 2008. Her Dutch
colleagues estimated that 40%-60%
of Mercer’s pension fund clients in
the Netherlands suspended their
programmes after the events of Bear
Stearns, while in the UK clients only
began cancelling after the Lehman
collapse.
However, Spinner did add that
people were coming back to the
securities lending market. Z
36 | Global Securities Lending Magazine | 2009
GSL06 18-38.indd 36
London
Securities lending forum,
September
Discussions around
brokerage opportunities,
regulation and the new-
found fame of the industry
kept panellists busy in
London last month.
The securities lending summit
in London on 21st September was a
detailed and energetic overview, and
given the improved market conditions
seemed well-timed for a market
cautiously expecting better times
ahead.
Summaries, statistics, anecdotes and
conjecture from the ‘floor’ all played
their part.
Rob Mirsky, a partner at Laven
Partners and leader for the first
discussion, opened with a telling figure,
that hedge fund assets have declined to
USD1.3 trillion from around USD2.6
trillion at the start of the crash.
Robert Maloney at Credit Suisse
acknowledged the huge redemptions
in the sector, and pointed to a brighter
future for the rest of this year as DJ
Euro Stoxx 50, Nikkei and other indices
have risen by about 55%-60% from
market lows.
Credit Suisse clients’ concern has
been to protect capital, he said, though
“one key element will be hedge funds
meeting their ‘high water mark’,” which
is linked to the fees they charge. 9%-
10% of funds are still 30% below their
high water mark, he said.
Confidence has also been growing
in the sector recently, he said.
Convertible arbitrage has been the
most successful strategy and strategies
with a short interest have performed
very well, though investors are also
looking at longer-term strategies, such
as market neutral. He added that the
UCITS fund structure – which has
been growing in take up for hedge
fund managers seeking a wider pool
of investors – is very useful to many
funds, as it gives their end clients
fortnightly liquidity. “If you’re a
hedge fund looking at UCITS and can
reach out to investors, it’s a powerful
product. You can reach out and there is
regulatory support and approval.”
Leverage has been low – since
December the average fund has
perhaps been two times leveraged, and
this has increased to two-and-a-half.
Separately others in the industry said
a more telling statistic would be the
median, rather than mean average.
This makes sense: if the overall
average is 2.5 yet there are a number of
funds in London or Cayman around
the six or seven mark, it might say
more to look at those higher-leveraged
funds.
Charlotte Wall, managing director
at Data Explorers, showed with slides
how institutional investors are starting
to buy again, and Ashley Wilson at
Barclays Capital pointed out there had
been a drop off in lending activity due
to regulatory requirements, including
26/10/2009 12:12

disclosures.
“The question is: has there been a
transformation in prime brokerage?
Yes. Investors are taking the lead and
want more information as to how the
prime brokers are working.”
The two key areas for this disclosure
are how to hold assets and how are
they being hypothecated, and the
prime brokers have had to respond.
Further, prime brokers have put their
highest rated entities to face the hedge
funds; US investors have pushed prime
brokers to move to a model more akin
to broker dealers for better protection;
and there has been a shift to using
custodians to hold assets.
He finished by saying that the
“duopoly” of prime brokers would be
broken, with five or six major players
to populate the landscape in the future.
Maloney agreed, and said there
was a more “level playing field”, with
some prices offered to end clients –
such as pension funds – beginning to
change. He said that pricing is a critical
issue regarding the success of brokers
up to this point and for the future.
“We believe in holding the line – if
we’ve missed the biggest problems it’s
because often we believe that people
should be paying market premium.
We’d rather lose market share and
GSL06 18-38.indd 37
From left: Robert Mirsky, Laven Partners; Charlotte Wall, Data
Explorers; Ashley Wilson, Barclays Capital;
make a decent profit.
Does a multi-prime broker strategy
affect pricing, asked Mirsky. Maloney
said that counterparty risk is key
and not all market players are equal.
He added that brokers would not be
“Regulators understand
a lot but perhaps not
all of the nuances of
the benefit of securities
lending”
Kevin McNulty, ISLA
earning their wage if they went to
clients: trade with us, we give the best
price.
In the second talk, which focused
on the regulatory and tax changes
that affect securities lending, Richard
Steele of JP Morgan acknowledged that
regulators had to act fast in the midst
of the global crisis, and some countries
saw particularly stringent reactions
from authorities, notably Spain and
Italy.
However, he added: “Regulators
understand a lot but perhaps not all of
the nuances of the benefit of securities
lending.” Kevin McNulty, into his
2009 | Global Securities Lending Magazine | 37
cOnFEREncES
Robert Maloney, Credit Suisse
second month as CEO of ISLA, joked
that after taking the last 18 months off
he returned recently to ask colleagues:
“Has anything interesting happened?”
He reiterated that anyone getting
into securities lending must be able to
understand it, including its regulations.
There are regulatory risks, he added,
and it is important to see where they
are. Further, the reaction of regulators
made it seem like they thought short
selling was a “dodgy practice”, though
there were also encouraging signs
recently that regulation is now more
coordinated.
David Little of Rule Financial, the
consultant, said that Corporate Social
Responsibility, a self-regulating policy,
was a “bit of a failure” as it only existed
within Europe.
“As politics enters the fray the
thinking gets very much narrower.” He
added that liquidity can mean different
things. For FSA-regulated firms the UK
watchdog frequently means payment
liquidity as payments fall due. This
is different from liquidity regarding
assets. “The FSA is trying to bring the
two together and manage across the
bank – not just cash but how to bring it
down for less liquid assets.”
Changes ahead for banks,
spearheaded by the FSA, will include
26/10/2009 12:12
 cOnFEREncES
daily reporting, stress tests, the
active management of liquidity, with
supervisors wanting to see good
management. However, this could lead
to a great decline in ‘sequential duty’:
money used other night for other
collateral.
Further, liquidity buffers may
lead to a shortage of collateral, and
there might be a demand from banks
to get beneficial owner assets for
collateral purposes. Regulators want
also for banks to charge for liquidity
usage. However, he reiterated a point
made in the RMA/ISLA conference
in Barcelona, that the FSA is leading
the way internationally, which could
leave the UK out in the cold if they do
not get sufficient support from other
regulatory bodies.
In the afternoon, Tim Smith, senior
vice president at SunGard Securities
Finance, gave a global market update
for the industry. Using slides he showed
that shares per value levels in fact
remained fairly stable.
He added that historically, securities
lending has fiercely divided opinion. As
a colourful illustration, he said that in
his experience, almost all French asset
managers were called Bruno. “Bruno A
would be for securities lending; Bruno
B would tolerate it; Bruno C would
hate it”.
He added that the availability of
shares remained steady in recent years,
though in the US there had been
activity concerning a way out for many
lenders for cash collateral programmes.
This has pressurised fees, he said.
Further, a lot of hedge funds are
beginning to negotiate deals, becoming
prime brokers in their own right.
Sectors for the most expensive shorting
interest included automotive, financial,
health and telecom. He added – visible
through another slide, that the shorting
of Citigroup had a significant influence
on the level of shorting activity in
shorting generally.
In the next panel – ‘Cash Collateral:
What Does The Future Hold?’ –
panel leader Olivier Grimonpont of
38 | Global Securities Lending Magazine | 2009
GSL06 18-38.indd 38
Euroclear said that a rule of thumb
had been: “Don’t do anything you
wouldn’t want to see on the front page
of the Financial Times.” Referring
to the unprecedented profile of
securities lending, Andrew Dyson at
Data Explorers pointed out that stock
loans have even made it onto Radio
2, the BBC channel. He added that on
a weighted basis lending remained a
“vibrant industry”, particularly around
dividend season, particularly the latest
round of company pay-outs.
Further, he said there had been a lot
of talk about lenders moving into non-
cash collateral, such as equities, but this
has not happened. “Equities had been
traditionally a ‘no-no’,” he said, “but we
feel with the right haircuts it can be a
“The question is:
has there been a
transformation in
prime brokerage? Yes.
Investors are taking the
lead and they want more
information as to how
the prime brokers are
working.”
Ashley Wilson, Barclays
Capital
viable option.”
Charles Lowe of Prudential Capital
suggested there was a focus on how
good risk models were in the crisis.
“Lehman Brothers’ default was not
predicted. The questions we have to
ask ourselves is: ‘how good are these
risk models?’ The jury is out and it’s
something we’re working on.”
Dyson said one of the challenges is
how best to communicate the risks to
agent lenders. He said one of the most
effective methods was to demonstrate
how many months’ revenue a company
has at risk. A single view of risk
management is no longer sufficient.
“It’s all about having information at
people’s desks so they can take action.”
BGI’s Stefan Kaiser added that it’s
important to have one group in a firm
to oversee all risks in a holistic way. The
company’s model is based on statistical
value-at-risk: the model hasn’t changed
but the data has. “Liquidity was down
and we had to react to that, and we
stopped taking corporate bonds based
on the liquidity.”
He added that if trading volumes go
down on a particular security then the
firm doesn’t accept that security, and
that equities vs equities in distressed
situations has been “the way to go. It
makes sense to go government bonds
but also the equities route.”
In the following discussion, on the
suspension of lending programmes,
Joyce Martindale of Railpen said that
the fund didn’t accept cash as collateral.
Specifically, she said there was always a
danger that the manager of the cash for
reinvestment could be appointed “by
stealth” by the custodian, which didn’t
sit well regarding the accountability to
trustees.
Hans Van Roekel at SPF Beheer BV
in the Netherlands said that the fund
only takes G7 or G10 government
bonds. He added that there had
been also time taken to look into the
collateral schedule, including analysis
on the high concentration of bonds of
certain countries, including bonds of
30-year maturities or longer.
John Poole, panel leader, asked if
the fund had stopped taking equities,
and Mr Van Roekel said yes. Rogier
Buurman of Robeco said he took
equities as collateral and that it had
been “extremely liquid to sell when
Lehman Brothers fell.” He added that
margins for loans were raised to 115%.
Sarah Nicholson of Aviva Investors
said her scheme had also increased
margins across the board to between
110-115%. “It became apparent that
credit ratings were not the be-all and
end-all and so we’ve taken to using the
CDS market [in our analysis].” Z
26/10/2009 12:12
 Global Securities Lending 2009

COnferenCes

Miami
26th Annual RMA conference
flow for the lenders.”
The RMA conference in Miami Blount added that the debate
was a timely event on the back of concerning a central counterparty
the two-day Summit on short selling in the US was timely, particularly
and securities lending by the SEC the regarding the need to clarify certain
previous month. Central counterparty, areas. “Most borrowers want to know
cash collateral, capital requirements who their counterparties are. When
and counterparty risk all found there you have a CCP, your counterparty is
place in discussion amid an industry the CCP, so there’s no visibility on the
visibly increasing in confidence and back end of the trade. That’s a source
open to discuss the answers to market of some concern, even though there
challenges. would be capital efficiencies due to the
Ed Blount, executive director at netting of credit risks.”
the Center for the Study of Financial In the panel, the representative
Mark Evolution, told GSL of the upbeat from the OSFI remarked that there’s
mood from the delegates within a a zero capital charge for a broker
This included equal, related
positive time for the market overall. dealer involved in a CCP structure
interest from the SEC as to the rules
“I think there was a fair amount of - an attractive proposition on the
which influence the attractiveness of
optimism among the attendees. The borrowing side but not for the lenders
cash collateral and its links to capital
reports presented from the panels as the guarantees are those of the
requirements.
suggested that profitability on a broker dealer. Agents operating with an
The structure of tri-party repo
broader base was improving, although indemnity plan would have to decide
was also discussed – another area that
the handful of extremely profitable whether they or the CCP is to provide
the Federal Reserve, separate to the
trades that have driven lending the indemnity.
conference, is currently examining.
profits over the last few years might James Slater, senior vice president
“There’s a lot of intraday exposure
have disappeared and the market is and head of capital markets at CIBC
in the tri-party repo market that the
returning to a more conventional profit Mellon and a conference co-chair,
Federal Reserve wants to contain. That
model.” said: “I was very impressed, not only
could have a bearing on collateral
Mr Blount moderated the panel with the number of people attending
management for securities lending,”
on regulation (‘Financial market sessions, which were record numbers,
explains Blount.
regulation - What does the future hold but the also the number of senior level
The future profit dynamic was
for us?’) which included representatives people taking in the sessions - both of
also important to the participants,
of the SEC, the New York Federal which speak volumes.
highlights Blount. “Participants of
Reserve Bank and the Canadian Office I thought the quality of the panels
course want to know if they’re going to
of the Superintendent of Financial was very high, bringing great insight
make most of their money on specials,
Institutions (OSFI). This talk included and clarity on some very complex
or if they’re going to be able to live off
feedback as to the considerations that issues. Our industry is at a critical point
the GC trade.
the international community had in its maturation; the timing for this
“To a large extent, that’s going to
concerning how changes in capital conference was excellent as it came at a
be a function of the slope of the yield
requirements would affect the securities time when so many of us trying to get
curve. There’s an expectation among
lending industry. clarity on so many different issues.”
cash managers that short term rates
The audience appeared to triple Vic Chilelli, COO of LocateStock.
will remain low for a while longer, but
from the beginning to the end of the com, which provides transparency and
there’s no telling when those rates will
session, reveals Blount, as “attendees access to the hard-to-borrow market,
go up. When that happens, lenders
in the exhibit areas came to listen to agreed that there was a decent turnout
will have to pay higher rebates to
a discussion with really significant and was a good opportunity both
brokers, putting pressure on their cash
implications for borrowers’ capital to bring people together and as an
managers, especially those with longer
charges, as well as how the industry is industry to be able to react to the SEC’s
durations on the asset side of the cash
being viewed by the regulators”. discussion. Z
pool. That could create negative cash

2009 | Global Securities Lending Magazine | 39

GSL06 39-48.indd 39 26/10/2009 12:01

 Panel: eurOPean seCurities lending

Panel: European Securities Lending

Central counterparty and regulation are among the discussion topics for our panellists
analysing the European market.

Jane Milner is a market
specialist for securities
finance at SunGard
Oliver Madden is in
technical sales, securities
lending at RBC Dexia.
Maria Carina is director,
product management at
Euroclear.
Keith Haberlin is head
of securities lending for
Europe, Middle East and
Africa at Brown Brothers
Harriman.

lending central counterparty, and risk concerns. We also appreciate that

1.The launch of a central counter-
tied closely to that is exchange-traded the multi-lateral netting role of a CCP
party by SecFinex was a water-
securities lending, is a sound one. is of less interest as securities lending
shed for European securities
The challenge for everyone is how it is a one-way market - ie, between the
lending. But some claim that the
will work in practice. To some extent lender and the borrower only. So, it will
additional, anonymous counter-
the industry is still at a formative be necessary to adapt CCP business
parties mean that it is difficult to
stage in this regard. models to accommodate the specific
know where a lender’s risk lies,
The high level benefits are clear and needs of lenders and borrowers. For
that it could be with the CCP.
understood from their use in other fi- example, CCP admission criteria and
What is your interpretation of the
nancial markets; what isn’t clear yet is collateral requirements might need to
use of a central counterparty?
exactly how it can work in a securities be reviewed in order to make CCPs ac-
lending environment, which markets cessible to beneficial owners.
MILNER: There are now multiple
or asset classes will lend themselves
trading platforms on which there is an
more easily to the model, and which HABERLIN: The goals and drivers of
option for trades to be agreed with the
providers will have the depth of the central counterparty are not cur-
central counterparty (CCP) rather than
participation to create the liquidity rently clear to the industry. The benefit
bi-laterally.
needed. of central counterparty structures in
Where the option to use the CCP
We can though expect the debate other markets is chiefly to mitigate
is selected, the risk of the transaction
to progress quite fast. In this current counterparty risk; however, this risk
is between the lender and the central
environment where regulators are is already managed extremely well by
counterparty, rather than with the
looking at securities lending with the securities lending industry through
ultimate borrower of securities. As
great scrutiny the relative transparen- collateralisation, borrower credit limits,
the central counterparty is a different
cy and well-defined risk management contractual provisions and other risk
construct (shared ownership across
procedures that exchange traded management procedures.
multiple institutions), this results in re-
products and central counterparties Further, beneficial owners receive
duced risk to the lender. Counterparty
offer versus OTC products are attrac- additional protection against counter-
risk is never eliminated. The CCP has
tive attributes of the model. party default risk through indemnifi-
exposure to the borrower and in the
cation from their lending agent. The
event of a default the market exposure
CARINA: We believe that the credit securities lending industry just faced
is ultimately shared by the larger group
risk intermediation function of a the ultimate counterparty failure stress
of participants utilising the CCP.
CCP is useful in the lending world, test when Lehman Brothers defaulted
especially in view of borrower bal- last year, and the procedures set by
MADDEN: The concept of a securities
ance sheet constraints and credit the industry to mitigate counterparty

40 | Global Securities Lending Magazine | 2009

GSL06 39-48.indd 40 26/10/2009 12:01


default were proven to work. At BBH,
we feel our clients are very confident
in our list of borrowers and how we
manage the associated risk. They
would need to be assured that a central
counterparty would not undermine
that confidence level while limiting the
flexibility beneficial owners have come
to expect.
2.Some lenders in the Euronext
markets have remained resolute
to a non-cash collateral pro-
gramme, especially as reinvest-
ment has been a key concern
of the beneficial owners they
service. Are there still any appro-
priate circumstances for taking
cash and chances for this collat-
eral to grow in the near future?
MILNER: The key issues around the
acceptance of cash collateral are to do
with potential additional risks, and the
need for relevant expertise, associated
with the re-investment of the collateral.
In some instances the beneficial own-
ers/asset managers may outsource this
responsibility to their agent lender, or
alternatively, where the lender has the
expertise in-house, they may choose to
manage the cash re-investment them-
selves in compliance with their risk
guidelines. This ‘unbundling’ of cash
re-investment may, over time, lead to
an increased acceptability of cash in the
Euronext markets.
MADDEN: Cash remains a legitimate
option for lenders to consider as col-
lateral – but it is just that, an option,
with its own specific risk-return profile
that must be clearly appreciated and
understood.
Cash is not intrinsically a safer or
riskier choice as collateral as a secu-
rity. The risk involved in cash col-
lateral centres on how conservative or
otherwise that cash is reinvested – for
what tenures, in what instruments, on
a segregated or pooled basis, etc. If a
lender accepts cash as collateral their
cash reinvestment parameters must be
very well defined but ultimately cash
reinvestment risk is a risk lenders do
GSL06 39-48.indd 41
Panel: eurOPean seCurities lending
not have to take if they don’t want to.
CARINA: We are seeing continued
use of non-cash collateral in securities
lending transactions. The advantage of
using this type of collateral is that there
are no risks related to cash reinvest-
ment.
The management of securities used
as collateral can be outsourced to a
triparty agent to ease the securities
selection and substitution process,
among other administrative burdens.
Euroclear provides different tri-party
collateral management service levels
to meet the varying needs of
clients, specifically allowing lenders to
focus on market opportunities instead
of operational, back-office tasks.
“Moving forward,
success will be judged
more as a balanced
blend of risk against
reward than was
considered previously ”
Jane Milner, SunGard
HABERLIN: It is important to separate
the acceptance of cash as collateral with
how that cash is reinvested. Accepting
cash in itself may be seen by many as
the best possible form of collateral as
it provides the greatest flexibility for
lending opportunities.
However, as we’ve seen, that collateral
can be compromised if it is reinvested
in strategies and instruments that are
not committed to principal preserva-
tion and attempt to generate more
aggressive yields than may be appropri-
ate for a securities lending programme.
Providing prudent investment guide-
lines are created and then monitored to
achieve the aims of capital preservation
and liquidity, lenders should continue
to consider cash as a collateral option.
As the industry continues to evolve and
lenders become increasingly sophisti-
cated in their management of securities
2009 | Global Securities Lending Magazine | 41
lending programmes, the adoption of
cash collateral will likely increase.
3.Some European lenders are
also resolutely staying with lend-
ing on a principal basis. From an
operations perspective, includ-
ing risk management and client
reporting, how different is this
from acting as an agent?
MILNER: The principal and agency
lending models achieve the same result,
that is generation of incremental reve-
nues from lending ‘dormant’ securities,
but the risk of the transaction lies in a
completely different place, depending
on whether the trade is carried out on
an agency or principal risk basis.
In an ‘agency’ risk trade the lending
agreement, and associated risk, is be-
tween the borrower and the end lender,
with the agent standing in the middle
to facilitate the transaction.
In this type of transaction it is com-
mon for the lending agent to indemni-
fy the lender against borrower default.
Under this arrangement the collateral
that the borrower is prepared to give
must comply with the collateral guide-
lines of the individual lender.
Where the lending agent is acting as
principal, there will be a borrow (or
series of borrows) carried out to fulfil a
corresponding loan.
In each of these transactions the
lending agent will be the principal
counterparty, and therefore the risk on
both sides is with the lending agent,
and collateral requirements on the loan
will be according to the agent lenders
restrictions.
Where ‘agency risk’ lending is per-
formed, the Agency Lending Disclosure
rules mean that the borrower now
needs to know who the end/principal
lender is, in order to measure the risk
relating to the collateral given. Where
principals are not disclosed in this way
there is a greater capital implication of
carrying out a stock loan transaction.
MADDEN: A principal model ar-
rangement is where the owner of the
26/10/2009 12:01

Panel: eurOPean seCurities lending
securities has direct relationships with
borrowers. They may trade exclusively
with a single borrower or they could
have multiple direct relationships.
Revenue generation, risk management
and operational responsibilities remain
with the owner of the securities.
In an agency model, responsibility for
revenue generation, risk management
and operations is effectively “out-
sourced” to an intermediary typically in
return for an agreed percentage of the
gross revenues generated.
The intermediary facilitates securi-
ties lending on behalf of the beneficial
owner but is not the borrower of the
securities themselves.
Counterparty risk therefore remains
between the beneficial owner and the
borrower and the beneficial owner
retains full responsibility for deciding
which borrowers their securities may
be lent to, against specific parameters.
In turn, the agent has accountability
to the beneficial owner to undertake
securities lending in accordance with
the beneficial owner’s risk policies and
lending parameters.
There is nothing in theory to prevent
the owner of securities (eg, a UCITS
fund, pension fund, or insurance
company) lending directly to borrow-
ers. In practice though, few do, and for
legitimate reasons. Securities lending is
a multi-trillion dollar market and few
beneficial owners have the critical mass
inventory size that borrowers prefer.
Securities lending also involves sig-
nificant operational and infrastructure
costs – a key consideration in particular
in the current environment where dif-
ficult markets and reduced returns have
resulted in asset managers needing to
manage their costs very tightly.
Lastly, and possibly most significantly,
securities lending is not the institu-
tional investor’s or beneficial owner’s
primary or core focus – managing
assets is.
For these reasons, intermediaries play
a vital role. They have the size, resourc-
es and commitment to make securities
lending worthwhile and they enable
42 | Global Securities Lending Magazine | 2009
GSL06 39-48.indd 42
beneficial owners with all portfolio
sizes to participate in, and earn incre-
mental returns from securities lending.
Custodians, as intermediaries, typi-
cally best fulfill these criteria and have
a large pool of lendable assets at the
disposal – although they are not the
only intermediaries. Specialist non-
custodial agents also exist that offer a
similar service.
Whilst these types of intermediar-
ies could run their securities lending
programs using a “principal model” it
is more common for them to operate
agency lending programs. They do so
primarily for capital and credit reasons
and because their business models are
such that they are not natural borrow-
“Few beneficial owners
have the critical mass
inventory size that
borrowers prefer”
Oliver Madden, RBC
Dexia
ers of securities other than on behalf of
their clients. The agency model allows
them to bring together their clients’
assets and lend them on a pooled basis
– optimising and enhancing returns
through scale and through the fact
that no one borrower has the strongest
demand for every asset class.
HABERLIN: The biggest difference be-
tween the principal and agency models
is that in a principal arrangement, ben-
eficial owners forego additional lines of
defense against counterparty risk.
While principal lenders will ensure
appropriate collateralisation levels,
collateral is only one line of defense
against a counterparty default.
The role of an agent includes ensur-
ing risk is diversified across a broader
range of counterparties, and an agent
can shift balances among borrowers
should specific concerns arise with a
particular borrower. This provides an
Global Securities Lending 2009
additional layer of oversight and sup-
port to a beneficial owner’s own proce-
dures. Perhaps the best example of this
was the expertise and resources agents
were able to deploy in unwinding expo-
sure to Lehman Brothers. Following the
Lehman Brothers default, we have seen
principal lenders recognise the value in
working with a lending agent and many
have shifted into agency programs.
4.The ‘perception’ of the industry
has been cited as critical to its
growth, and partly this comes
down to how it is viewed and
regulated by authorities. How do
you assess the industry’s rela-
tionship with the European Com-
mission and national regulators
after the worst of the financial
crisis?
MILNER: Securities lending, and its
relationship to short selling, is probably
under more scrutiny now that it has
ever been in its entire history.
Part of the issue for regulators is
how to be ‘experts’ in all aspects of the
financial markets, and how to avoid
unintended consequences from any
regulations that they introduce.
The danger of this was well illustrated
by the negative impact that recent short
selling bans demonstrated. Subsequent
analysis on the impact of the bans,
highlighted the fact that they had done
more harm than good, particularly in
further restricting market liquidity at
a time when it was needed the most.
It may be that events such as this will
mean that regulators recognise the
need for a greater understanding of
securities lending and hopefully this
will lead to a more collaborative ap-
proach between market participants
and regulators.
MADDEN: The industry’s relation-
ship with regulators wouldn’t have
necessarily been impacted because of
the financial crisis but the fact that
securities lending is being discussed
by regulators globally perhaps more so
26/10/2009 12:01
 Global Securities Lending 2009

Panel: eurOPean seCurities lending

and how they can best be managed. crisis with their reputations enhanced
than at any recent time has to be seen will be those with strong balance sheets,
The securities lending industry has
as a good thing. who retained open, proactive dialogues
been presented with the opportunity to
Regulators, by definition, have to take with their clients and who are able to
develop a much closer, more transpar-
into account and consider the interests demonstrate track records of robust
ent relationship with international
of many different financial market par- and prudent risk management and
regulators. Through ISLA, RMA and
ticipants so opportunities to have direct controls.
PASLA we need to maintain an effective
dialogues with regulators, such as the
and honest dialogue with global regula-
recent SEC roundtable, are priceless. CARINA: In Europe, success will be
tors, including the European Commis-
It allows the industry to improve its evaluated on the extent to which non-
sion.
profile still further and present itself cash collateral has been optimised, and
in a clear, objective and transparent when cash collateral has been used,
5.How will the success of securi-
manner. Ultimately the better informed how the risks relating to cash reinvest-
ties lending by European players
regulators are about the industry the ment have been managed. Hence, we
be assessed in a global perspec-
more appropriate their regulations will believe risk aversion and asset optimi-
tive: will it be based on returns,
be. sation will be the key factors determin-
the scarcity of losses, or some
other means of comparison? ing success.
CARINA: During the crisis, when regu-
lators examined the securities lending HABERLIN: Generally speaking, prior
MILNER: The way in which the suc-
business, they focused on short selling, to the credit crisis, securities lending
cess of European players is measured
having issued short-selling bans in providers were judged using mea-
will vary depending on the reviewer’s
many markets. surements such as utilisation, overall
standpoint. Moving forward, success
Market participants were then returns, and fee splits. The detail of
will be judged as more of a balanced
challenged to ascertain and obey the how risk was managed or how returns
blend of reward against risk than was
rules defined by the various national were being generated was overlooked
considered previously.
regulators, as nearly all of the countries in some cases. Now, the industry has
Comparisons are always difficult to
issued different regulations. ISLA, the turned 180 degrees, and while returns
do, as it is not necessarily clear whether
securities lending market association, are still the primary reason lenders en-
apples are being compared against
took on the central role of distributing gage in securities lending, risk manage-
apples or pears.
information on the different regula- ment has become the top concern for
Due to the complexities involved I
tions, and lobbied different regulators beneficial owners.
do not see there being a simple form
to distinguish between ‘naked’ short The process by which agents are
of measurement in the near future,
sales and those covered by borrow- selected has changed with recent RFPs
however, another outcome from recent
ing securities, for example. Regulators containing more detailed questions
events, the recognition of the need for
are still focusing on securities lending about exactly how each provider man-
greater transparency, can do much
practices a year after the crisis. aged the Lehman Brothers default and
to assist in facilitating performance
measurement. how each provider’s cash collateral
HABERLIN: The regulators now have reinvestment vehicles performed.
a much better understanding of the Beneficial owners are looking more
MADDEN: Unquestionably risk is the
securities lending business, the risks closely into any pending litigation
pre-eminent measure by which securi-
inherent in securities lending, and against their providers. Every provider
ties lending providers are benchmarked
the role securities lending plays in the is now talking about intrinsic value
today. Securities lending is a demand-
broader financial markets. lending and focusing on risk-adjusted
driven product so by definition there is
In many ways, the initial short selling returns.
an element of return generation that is
restrictions and their unintended con- As a result, lenders need to look at
outside the control of lenders.
sequences have helped to shine a light past evidence and how each provider
That is not the case with risk manage-
on the benefits of responsible short performed during the credit crisis in
ment. Lenders have full control over
selling and securities lending. order to fully understand their provid-
how securities lending programmes
At BBH, we have made a concerted er’s philosophy and risk management
are managed, controlled and how risk
effort to engage with regulators to practices. Success will be judged on the
is appropriately mitigated in order to
ensure they receive a balanced perspec- ability to provide programmes which
both ensure no impact to a manager’s
tive on the business and to ensure any are transparent, put the clients’ interest
investment management process or,
future regulations are based upon a first, and which get the balance right
worse still, realise any actual losses.
full understanding of the risks involved between risk and return. Z
The lenders that will come through the

2009 | Global Securities Lending Magazine | 43

GSL06 39-48.indd 43 26/10/2009 12:01


exChange traded funds
New moves into ETFs
Craig McGlashan explains the popularity of exchange traded funds and their potential
in securities lending in the search for flexible collateral.
There is no doubting the in-
creasing popularity of exchange-
traded funds (ETFs).
According to a report released in
October by Barclays Global Investors
(BGI), global ETF assets reached a
record high of USD 891 billion at the
end of August 2009 – 3.9% above the
previous high set in July 2009, and
10.6% above the figure for April 2008,
which was a record at the time.
Companies like Deutsche Bank,
meanwhile, now provide more than
100 ETFs which can track a large
variety of asset classes, from equities
to commodities, currencies to hedge
funds. The bank announced in April
that db x-trackers, its ETF platform,
passed EUR 20 billion in assets under
management.
This growth in popularity has meant
that more and more traders have ETFs
on their books, which has led to grow-
ing numbers of securities borrowers
offering the instruments as collateral.
This is part of a wider trend, of
course – many borrowers in the in-
dustry report that they are seeking to
diversify the collateral they receive and
move away from cash collateral, given
its perceived poor performance during
the credit crunch.
For instance, at the latest meeting of
the Bank of England’s Securities Lend-
ing and Repo Committee in September,
Joyce Martindale from the National
Association of Pension Funds com-
mented that larger securities lenders
were looking at segregated collateral
pools and revising the collateral they
would accept.
Stefan Kaiser, a business strategist at
BGI’s securities lending team, has also
seen this trend develop. He explains
that over the past two years his col-
leagues have increasingly looked at the
44 | Global Securities Lending Magazine | 2009
GSL06 39-48.indd 44
possibility of using ETFs as collateral,
in addition to more traditional forms
such as cash, equities and government
From the borrower
perspective, any possible
new form of collateral
is likely to be seen
as welcome, as it will
provide extra flexibility
debt. Kaiser works closely with iShares,
Barclays’ ETF provider, and says that
the use of ETFs as collateral has cre-
ated even more opportunities to work
closely together.
However, this increase in use is not
just down to BGI trying to encour-
age the use of ETFs in the industry
as a whole, Kaiser explains. “It’s also
because the brokers that are borrow-
ing from us are increasingly active in
iShares so they have a lot of ETFs that
they want to finance, meaning they
want to pledge them as collateral. A lot
of the time they approach us and say
they would like to pledge these securi-
ties as collateral.”
Global Securities Lending 2009
Clearly, the securities lending indus-
try is beginning to take notice of ETFs
and their possibilities.
In August this year, 4sight Financial
Software announced that it was extend-
ing its 4sight Securities Finance (4SF)
software solution to include support
for the borrowing and lending of ETFs.
Jason Hayes, the firm’s North Ameri-
can sales director, said at the time that
the move had been taken to reflect the
fact that ETFs are becoming “a more
prominent feature of the securities
lending landscape”.
In addition, a number of conferences
this year, including the International
Securities Lending Association’s work-
shop at the end of September, have
discussed the issues involved with using
ETFs as collateral. These developments
came after other events in 2008 that
indicated a positive future for ETFs in
securities lending, including ICAP, the
interdealer broker, announcing that
it was expanding its i-Sec electronic
securities lending platform to include
provisions for ETFs and exchange-
traded commodities.
So what are the advantages of using
ETFs as collateral? From the borrower
perspective, any possible new form of
collateral is likely to be seen as wel-
come, as it will provide extra flexibility.
Even those borrowers who are less
active in the ETF field are often likely to
be trading ETFs or will have exposure
to them at some point.
For lenders, however, the advantages
are more precise. In standard equities-
as-collateral practice, lenders provide
a security that is part of one index and
take in a security that is part of another.
“Liquidity, volatility and correlation”
between these two indices is vital to
this process, Kaiser explains, but the
correlation between the two securities
26/10/2009 12:01

may not be as strong as the correlation
between the indices.
“But if you take ETFs as collateral the
advantage that you have is that, at least
on the collateral side, you get that index
exposure that the ETF represents, so
from a modelling and risk perspective
they are actually superior,” he says.
Additionally, ETFs offer an inherent
diversification, providing reassurance
for those investors who were stung by
the credit crunch. “Just because you
have a perfect slice of that index al-
ready, you’re better off than having just
one security as collateral,” Kaiser adds.
The liquidity argument also has a
geographical element. Lenders hold-
ing collateral made up of – for instance
– Chinese shares would be unable to
liquidate them during late London
trading, as the Chinese market would
be closed for the night.
However, collateral could be made up
of ETFs tracking a Chinese index but
listed on a UK-based index – allow-
ing the shares to be liquidated during
working hours.
But the world of ETF collateral is not
as simple as whether or not lenders
accept them and borrowers can offer
them.
GSL’s Amsterdam Summit on 8th Oc-
tober saw a large period of discussion
on the various types of cash collateral
reinvestment and the pros and cons of
each, and the ETF sphere is similarly
complex.
Broadly speaking, there are two
main types of ETFs: the in-specie (or
in-kind) model and the swap-based
model. The in-specie structure sees
investors hold a basket of securities
from the index that they seek to track,
resulting in returns similar to the index
in general.
The swap-based model on the other
hand also requires a basket of securi-
ties, but these do not necessarily have
anything to do with the index being
tracked.
Instead, the fund enters an index
swap agreement with a counterparty
which ensures the performance of the
GSL06 39-48.indd 45
underlying fund to the ETF.
Currently, BGI only takes in-specie
ETFs as collateral, Kaiser says. This
again comes down to the issue of
transparency. Various studies suggest
that swap-based ETFs more accurately
track indices, but Kaiser believes that
their structure impacts their ability to
be used as collateral.
“With physically-replicating ETFs
we know exactly what its structure is.
Other kinds of ETFs are much harder
to know what is really there once you
want to liquidate it,” he says.
Additionally, swap-based ETFs intro-
“Just because you have
a perfect slice of that
index already, you’re
better off than having
just one security as
collateral”
Stefan Kaiser, BGI
duce counterparty risk, as holders have
exposure to the bank which writes the
swap, although UCITS rules limit this
exposure to 10% of the fund’s net asset
value.
Despite these advantages, ETFs
currently take up a very small percent-
age of total collateral in the securities
lending market. While this may change
as the popularity of ETFs in general
increases, other changes may be needed
to boost the market – including regula-
tory ones.
“There are some regulatory hurdles to
the growth of ETFs as collateral,” says
Kaiser. “ETFs cannot be pledged as col-
lateral in jurisdictions, for instance in
Ireland.” This is because of the way the
UCITS rules are interpreted in different
countries – in the UK, regulators view
ETFs as equities, allowing them to be
used as collateral, while other countries
consider ETFs to be funds.
However, there are more practical
2009 | Global Securities Lending Magazine | 45
Global Securities Lending 2009
exChange traded funds
obstacles to the increased use of ETFs,
according to Kaiser. In normal circum-
stances, borrowers are able to say they
will take securities from an index, for
example the FTSE 100. But in the case
of ETFs, this is not possible – instead,
each ETF offered as collateral must
be observed on a “case by case basis”,
which is obviously far more time
consuming than accepting standard
equities.
There are also difficulties in under-
standing the trading volumes of ETFs,
Kaiser adds, which can impact on their
liquidity. “The trading volume that you
see on exchange is not always a good
measure for the true liquidity of trad-
ing that ETF,” he says.
“For example, if you have a FTSE
100 ETF, and there’s only a few million
pounds of trading during a particular
day, that doesn’t mean that’s all trading
that you could do. Looking at how
much was traded of an ETF is not a
good estimate of what you could trade.”
The use of ETFs as collateral seems
set to grow in popularity as the instru-
ments themselves become increas-
ingly accepted by the financial world –
something that the Barclays report and
similar studies over the past year have
indicated is already happening.
There are obstacles in the way,
whether they are a reluctance among
investors to alter strategies, regulatory
constraints or a prevailing “wait and
see” approach.
However, the fact that borrowers
are always looking for extra flexibility
could be the clinching factor, at least
when it comes to the first point – a
reluctance to change – especially given
the current move to new strategies and
away from practices that stung lenders
during the credit crunch.
“A lot of the changes in the securities
lending industry are borrower-driven,”
SOURCE: Data Explorers
says Kaiser. “If borrowers need to fi-
nance certain securities then they’ll ask
the lender to take those as collateral. If
the lender sees an opportunity for their
clients to get additional lending bal-
ances, they will do that.” Z
26/10/2009 12:01
 direCtOrY

Consulting

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Lending Client Service
technology; and maintains a strong 28-year track record.
+44 (0)20 7982 3850

46 | Global Securities Lending Magazine | 2009

GSL06 39-48.indd 46 26/10/2009 12:01


C: Judith McKelvey
T: +44 (0) 207 043 8319
E: judith.mckelvey@4sight.com
C: Jason Hayes
T: +1 416 548 7922
E:jason.hayes@4sight.com
C: Peter Sanders
T: +61 (0) 2 90378416
E: peter.sanders@4sight.com
W: www.4sight.com
A:EquiLend Europe Ltd.
14 Devonshire Square,
London EC2M 4TE
UK
T: 44-207-426-4426
C: Michelle Lindenberger
E: michelle.lindenberger@
equilend.com
A: 17 State Street, 9th Floor
New York, NY, 10004
T: US- +1 212 901 2224
W: www.eurexseclend.com
T: +41 58 854 2066
F: +41 58 854 2455
E: info@eurexseclend.com
Eurex Zurich Ltd.,
Selnaustrasse 30,
Zurich, CH-8021,
Switzerland
T: +44 20 7220 0961
F: +44 20 7220 0977
C: Rupert Perry
E: rupert.perry@pirum.
com
A: Pirum Systems
Limited
37-39 Lime Street
London, EC3M 7AY
W: www.pirum.com
Visit SunGard at
www.sungard.com
GSL06 39-48.indd 47
Global Securities Lending 2009
direCtOrY
technology
4sight Financial Software is a leading supplier of innovative software solutions to the
Securities Finance, Settlement & Connectivity markets with offices and clients world-
wide. 4sight Securities Finance (4SF) is a flexible modular solution that empowers
financial institutions of all sizes, from the smallest direct lender to the global custodian,
broker or intermediary on an agency or principal basis. 4SF contains market leading
functionality that provides greater automation, faster trading, improved risk man-
agement, and enhanced relationships with clients and counterparties. It supports
borrowing, lending, repo, swaps and collateral management across the equity and
fixed-income markets and provides 24 hour continuous operation, inter desk trading,
a ‘global book’, real-time value dated position keeping and a powerful web reporting
module, allowing full front to back office processing.
EquiLend is a leading provider of trading services for the securities finance industry.
EquiLend facilitates straight-through processing by using a common standards-based
protocol and infrastructure, which automates formerly manual trading processes.
Used by borrowers and lenders throughout the world, the EquiLend platform allows for
greater efficiency and enables firms to scale their business globally. Using EquiLend’s
complete end-to-end services, including pre- and post-trade, reduces the risk of
potential errors. The platform eliminates the need to maintain costly point-to-point
connections while allowing firms to drive down unit costs, allowing firms to expand
business, move into different markets, increase trading volumes, all without additional
spend. This makes the EquiLend platform a cost-efficient choice for all institutions,
regardless of size.
Eurex is one of the largest derivatives exchanges and the leading clearing house in
Europe. Wherever you are located, we provide you with access to the benchmark
futures and options market for European derivatives. Eurex also offers short term fund-
ing products, such as Eurex Repo. Eurex Repo is among the forerunners in provid-
ing integrated trading and clearing for repo transactions. Eurex’s latest innovative
marketplace is called Eurex SecLend. Eurex SecLend. Europe’s leading investment
banks participate as borrowers in the Eurex SecLend marketplace, acting as principal
brokers, dealers and intermediaries. They all benefit from Eurex’s leading state-of-the-
art trading and processing services. For Eurex, service and technology innovation is
not just a buzzword. New trends are being transformed into inventions through the
adoption of advanced trading practices.
Find out more on www.eurexseclend.com.
Pirum provides a full suite of automated reconciliation and straight through processing
(STP) services supporting Operations within the global securities finance industry. The
company’s on-line SBLREX service encompasses daily contract compare, monthly
billing comparison, mark-to-market & exposure processing, pending trade compari-
son, income claims processing and custody reconciliation. Subscribers to Pirum’s
services significantly increase their operational efficiency and reduce their risk by
using Pirum’s solutions, as staff are able to focus on fixing the exceptions instead of
using their time to check and process routine business. These automated processes
are more scalable and risk controlled too, allowing significantly higher volumes to be
managed without corresponding increases in operations headcount.
With annual revenue of USD5 billion, SunGard is a global leader in software
and processing solutions for financial services, higher education and the
public sector. SunGard also helps information-dependent enterprises of all
types to ensure the continuity of their business. SunGard serves more than
25,000 customers in more than 50 countries, including the world’s 50 larg-
est financial services companies.
2009 | Global Securities Lending Magazine | 47
26/10/2009 12:01
 lender PrOfile
Lender Profile - Aviva Investors
Sarah Nicholson, head of
securities finance, talks to
GSL.
1. What is your fund’s activity
in securities lending?
Aviva Investors lend on behalf of a
number of underlying insurance and
pension funds. The UK based activity
is predominantly non-cash collateral,
capturing the intrinsic value of long
holdings, or versus cash collateral,
which is re-lent on a collateralised ba-
sis, not re-invested directly in the mar-
ket, to capture the liquidity premium.
2. A recent survey by RBC
Dexia suggests that beneficial
owners are focusing more on
risk rather than suspending
programmes. Is this the case
with Aviva, and if so, how are
Now clients want to understand risk
these changes affecting the
models, see outputs and have an op-
securities lending programme
portunity to question what they mean
of the fund?
Our underlying clients have always
been very engaged in the business and
fully ware of the potential risks.
We have always had a robust risk
mitigating framework, but clearly.
over the last twelve months we have
reviewed this with our clients, as I am
sure everyone has.
We have looked at how the frame-
work has stood up to the challenge and
whether we can strengthen it further.
There are always lessons to be learned
from experiencing events such as those
over the last 12 months or so.
The key change for us has been more
in the reporting of the business from a
risk perspective, more so than funda-
mental changes to the risk management
of the activity. Historically reporting
has been focused on counterparties,
balances, revenues etc, and the risk
analysis has been more an internal pro-
cess to manage the programme within
the client’s risk appetite.
48 | Global Securities Lending Magazine | 2009
GSL06 39-48.indd 48
“There are always
lessons to be learned
from experiencing events
such as those over the
last 12 months”
more readily. This level of transpar-
ency and information is exactly what
is needed across the industry: clients
who are engaged in a business activity
they fully understand and that is within
their risk appetite and that they are
comfortable with.
3. What is your collateral
profile, and do you see this
changing?
The UK business is predominantly
non-cash, although we do take cash if
there is an opportunity to re-lend on
a collateralised basis. The analysis we
undertook post the Lehman default
enabled us to model how assets classes
behaved and their correlations in a real
default situation, which led to some
tweaks in the profile but nothing very
significant. In respect to changing in
the future, we are always open to new
opportunities driven by collateral sup-
ply, but ultimately collateral is there for
the protection of our client so we need
to be confident it will stand up to the
rigours of a counterparty default.
4. How would you assess the
overall contribution of securi-
ties lending to the fund?
Securities lending is an overlay invest-
ment strategy, allowing the fund to
realise intrinsic value held within assets
they have invested in. It does not drive
the investment decision or process,
but still provides a low risk perfor-
mance enhancement that shouldn’t be
ignored.
5. How do you perceive the
challenges in the communica-
tion of securities lending’s
risks and opportunities?
There are a number of different aspects
of communication that need to be
addressed.
To me communicating with the
underlying fund owners is the most
important. The liquidity they provide
by participation in this activity is fun-
damental to the markets and yet many
are not given full transparency to the
information they need to make truly
informed and robust decisions.
It is a challenge for large agent lenders
to engage with all their clients fully,
and a challenge to many of the funds to
give the activity sufficient time to really
understand the detail.
The industry also needs to engage
with the national press, so that when
short selling or stock lending are
featured the views are at least informed
and balanced, although this won’t make
for such a good story though so it’s
always going to be an up-hill battle.
This role of educating in calmer
times is very much a role that ISLA
can help with, both with the national
press, regulators and the industry more
broadly. Z
26/10/2009 12:01
Bottom line:
We don’t offer you endless possibilities. Just one solution
It can take 50 good ideas to lead to one bright solution. At ING Global Securities Finance,
our commitment to clients is all about delivering optimal strategic solutions. We help you
succeed by leveraging our expertise to keep you and your business empowered.
Contact us at gsf@ing.com

ING Wholesale Banking is a marketing name of ING Bank N.V. ING Bank N.V. is registered by the Authority for the Financial Markets. Copyright ING Wholesale Banking (2009).
 Enhance
your returns

You know that in current market environment it takes more than good fortune to
enhance your portfolio’s returns while managing risks. In order to make strategic
decisions, you need relevant market research and sound investment
recommendations in the borrowing and lending of domestic and international
securities. With our innovative skills and support, you have a reliable team on your
side.

For more information please contact Wouter van der Ploeg, Managing Director
Sales Securities Financing: +31 20 527 1637.

Merchant Banking

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