GSL| Global

Securities
Lending Issue 1

Emerging Markets
In transition
Plus
Technology: A Full Diagnostic
Lending and Borrowing: Climate for Change
Lender Profile: Harold Bimpong, Morley
Anzeige SecLend ISJ 406x267 04.06.2008 10:50 Uhr Seite 1
AD DPS Right EUR-
EX
EDITORIAL

Lend an ear
“Securities lending is the missing building block for market completeness”
Javier Duclaud, director of operations, Banco de Mexico

Welcome to this launch issue of Global Securities Lending (GSL).

MARKETS We join the market at a very exciting time. RMA and SIFMA held their first Latin American
Asia, Latin America, South Africa Securities Lending conference, regulatory bodies have made decisions some consider rash,
Opes Prime rocked Australia and the RMA celebrate their 25th Anniversary of the ‘original’
INFRASTRUCTURE securities lending conference. There is also the continued knock on effect of the credit crunch
Tri-party collateral management, that still shows no sign of abating with further write downs announced by several large
130/30, Transparency investment banks. However, with all this going on, good and bad, there is so much to write on,
discuss and to read about. From initial “back room” roots, securities borrowing & lending has
become an integral investment function. Originating from the United States in the early 80’s, it
PROFILES has expanded into what is now a 24hr global activity.
Morley, Eurex, Fintuition, Lendex
Within this inaugural issue of GSL Joe Corcos looks at the rapidly expanding Latin American
Editorial: SBL market. The motto across the Brazilian flag “Ordem e Progresso” (Order and Progress)
Joseph Corcos (Joseph@2ipartners.com) is particularly relevant as we focus on the progress made in the established capital markets of
Catherine Kemp (Catherine@2ipartners.com) Brazil and Mexico and how they have got their houses in order. Additional to this feature in
Ben Roberts (Ben@2ipartners.com) the Emerging Markets section where Ben Roberts speaks about the developments within Asia,
Giles Turner (Giles@2ipartners.com) we also have a lenders view on South Africa penned by Carina Saunders of Sanlam Capital
Markets. Our cover story looks at the advances made in technology with Brian Bollen writing
about the emergence of new systems and platforms ranging from the European based ICAP
Contributors:
iSec to the US focussed Quadriserv. GSL also speaks with John Tabacco founder of LendEX
Brian Bollen,
and Francisco Gonzalez Head of Eurex SecLend on the shape of the market.
Anthony Harrington

Elsewhere we have Giles Turner talking on the never-ending calls for transparency and
Design: Catherine Kemp of GSL looks into the changing world of European Repo. We look forward to
David Copsey your thoughts, comments and feedback on this inaugural issue and any suggestions for future
issues. In the next issue of Global Securities Lending you can look forward to features on the
Operations Manager: US market, Canada, emerging European markets, collateral flexibility, cash reinvestment and
Sue Whittle (Sue@2ipartners.com)
much more. GSL aims to provide in depth coverage of securities borrowing & lending, repo
and collateral markets. Investigating and profiling new and developing geographical markets,
examining key industry concerns from transparency to technology and raising important
Publishing Manager: issues effecting the market today.
Monique Labuschagne
(Monique@2ipartners.com)

Publisher:
Justin Lawson
(Justin@2ipartners.com)

CEO: Mark Latham

(Mark@2ipartners.com)

16-17 Little Portland Street,

London W1W 8BP
T: +44 (0) 20 7299 7700
F: +44 (0) 20 7636 6044
© 2008 Investor Intelligence.
All rights reserved.
No part of this publication may be reproduced,
in whole or in part, without prior written permission from
the publishers. ISSN 1755-8700.
Printed in the UK

2 | GSL
 Japanese Textile Stencil, 1900 — Mulberry paper with dye

The Art of Relationships

At JPMorgan, we invest in what’s really important—whether protecting priceless works JPMORGAN SECURITIES LENDING

of art for future generations or building client relationships that stand the test of time. A full spectrum of global capabilities,
We take our relationship with you very seriously, to help you achieve your business including discretionary, principal
and directed lending, as well as
goals, enhance efficiency and mitigate risk. auctions and exclusives

When you’re passionate about your business, the right relationship is essential. Financial strength

JPMorgan clients benefit from the expertise of our entire global franchise. Through Disciplined risk management
this holistic approach, we harness innovative technologies and firmwide resources Innovation in product development
to offer clients more choices, greater customization and unmatched flexibility.
Access to resources and expertise of
a leading financial services franchise
Innovation with superior results.

To find out more, log on to jpmorgan.com/securitieslending, or contact:

V
V

Western Hemisphere William Smith at 212-623-5664

Europe, Middle East and Africa Michael Fox at 44-207-742-0256
Australia/Japan Stewart Cowan at 61-2-9250-4647
Asia Andrew Cheng at 85-2-2800-1809

The products and services featured above are offered by JPMorgan Chase Bank, N.A., a subsidiary of JPMorgan Chase & Co. JPMorgan Chase Bank, N.A.,
is registered by the FSA for investment business in the United Kingdom. JPMorgan is a marketing name for Worldwide Securities Services businesses of
JPMorgan Chase & Co. and its subsidiaries worldwide. ©2008 JPMorgan Chase & Co. All rights reserved.
DETAILS

Contents
News
6 News updates
8 News analysis
12 Across the Atlantic
60 People moves
64 RMA/ISLA Securities Lending Conference round up

Emerging markets
16 Asia
19 Latin America
22 South Africa

Industry insight
36 Exchange traded funds - Barclays Global Investors
40 Tri-party collateral management
43 European repo
45 130/30 funds - RBC Dexia
47 Transparency
54 Securities lending statistics

Technology
24 Securities lending technology
31 Technology profiles

People
14 Harold Bimpong - head of operations, securities finance, Morley
23 John Tabacco - founder, LendEX
34 Francisco Gonzalez - head of business and product development, Eurex
63 Meet the future - Will Duff Gordon

4 | GSL
Ad Merrill Lynch

5 | GSL
NEWS
Around the World
New York - eSecLending, an-
nounced the establishment
of Securities Finance Global
Advisors (SFGA), a registered
investment advisor, to support
US mutual fund cash collat-
eral management for securities
lending. “As our firm continues
to grow, we remain focused on
broadening our product and
capabilities to best service our
expanding client base,” says
eSecLending’s president, Chris
Jaynes.
New York - The Bank of New
York Mellon has been selected by
Goldman Sachs and Rabobank
to serve as collateral agent for
the first domestic Korean equity
tri-party financing trade. This
is believed to be the first time
the tri-party structure has been
used to complete a Korean
equity financing. This new
mandate spotlights a service
used extensively by The Bank
of New York Mellon’s clients
outside of Korea to support
the financing of a wide range
of collateralized transactions,
including stock loans, derivative
transactions, and equity and
fixed income repos, including
Korean securities.
Puerto Rico - Northern Trust has
been selected to provide asset
servicing for the Employees’
6 | GSL
Retirement System of the
Puerto Rico Electric Power
Authority (ERS-PREPA), a
public pension plan covering
more than 18,000 active and
retired members. Services
include custody, accounting,
compliance monitoring and
securities lending for the USD1.5
billion fund. “Northern Trust
has proven expertise with the
public sector and a strong client
service model that was made
evident throughout the selection
process,” says Otoniel Cruz,
administrator for ERS-PREPA.
London - ICAP has expanded
the range of securities available
on its electronic securities
lending platform i-Sec to
include exchange-traded funds
(ETFs) and exchange-traded
commodities (ETCs). This is
the first time European ETFs
have been made available on
an electronic lending platform,
bringing together supply and
demand into a single central
marketplace. Currently, i-Sec
facilitates screen-based access
to securities lending in equities
from France, Germany, Italy,
The Netherlands, Spain,
Sweden, Switzerland, the
United Kingdom and Japan.
“This initiative is the result
of strong demand from the
ETF community”, says Roy
Zimmerhansl, head of Securities
Lending at ICAP.
London - The Financial Services
Authority (FSA) has said
that because current market
conditions create increased
potential for market abuse
through short selling during
rights issues, they are requiring
that market participants disclose
significant positions (which
they define as exceeding 0.25%
of the issued shares) to the
market by means of a Regulatory
Information Service by 3.30pm
the following business day. It’s
view is that severe volatility
in the shares of companies
conducting rights issues is
potentially damaging not only
to the issuers in question but
also to confidence in the overall
fairness and quality of the
UK market. It is particularly
prejudicial to the interests of
small investors. The problem is
compounded by the length of
time taken to complete rights
issues.
London – JP Morgan has been
selected by the London Pensions
Fund Authority (LPFA), the
largest local government pension
scheme in London, to provide
portfolio administration and
performance reporting for
their alternative investment
JPMorgan expands to Lima
portfolio. The mandate
represents JPMorgan’s first
alternative investment portfolio
administration outsourcing
agreement in the UK. JPMorgan
Private Equity Fund Services
(PEFS) will provide LPFA with
a set of comprehensive services
to give greater insight on the
performance, concentration
and risk across the alternative
investment portion of their
assets. The services include cash
management, cash flow tracking,
performance measurement and
analytics. There is also a board-
quality reporting capability.
Canberra - The completion
of the mutual recognition
agreement on securities
and managed or collective
investments between Australia
and New Zealand has been
welcomed by the IFSA. IFSA
CEO, Richard Gilbert says:
“This is a major step forward
that will remove unnecessary
regulatory barriers and lower
the cost of capital-raising in
both the Australian and New
Zealand markets. Issuers
will now be allowed to offer
interests in managed or
collective investment schemes
in both countries, using a single
disclosure document approved
in the country in which it is
domiciled.
NEWS
Lima - JPMorgan has
announced that it will be
providing securities services to
Cavali, Peru’s central securities
depository. The contract is the
latest in a string of wins the
firm has had in Latin America.
JPMorgan Securities Company
(SC) will be providing custody
and asset administration services
to Cavali for its portfolio of
global securities. JPMorgan
also provides services to several
other central depositories,
central banks, commercial
banks, government institutions
and corporations in the Latin
America region. “We selected
JPMorgan due to its strong
commitment, experience
and focus in Latin America.
JPMorgan’s modern technology
and online reporting as well
as local language capabilities
will help us improve operating
efficiencies and allow us to
capitalize on new opportunities
in the market,” says Francis
Stenning, president and CEO
of Cavali. In addition to Cavali,
JPMorgan has also recently been
awarded custody business by
CEDEVAL (Central Securities
Depository of El Salvador).
Brussels - Euroclear Bank is
taking a regional approach in
helping clients to access local
counterparties and securities
in Central and Eastern Europe.
Clients active in Central and
Eastern European markets
with which Euroclear Bank
has created a link to the local
central securities depository,
will benefit from having a single
settlement tariff to apply to all
eligible markets and securities.
In addition, safekeeping fees will
be determined based on the ag-
gregated holdings of all Central
and Eastern European domestic
securities. The model applies to
the Czech Republic, Hungary,
Poland, Slovakia and Slovenia,
and will be extended to other
Central and Eastern European
countries in the future. The new
structure results in an average
safekeeping fee reduction of
62%. A similar approach was
implemented by Euroclear Bank
for Euro-zone markets in 2008.
London - Research conducted
by Sophis has revealed that
the securities finance industry
expects to increase spending on
trade and risk management tech-
nology over the next 12 months.
volatility on the securities and
finance market.
The Sophis study surveyed 100
professionals at the recent Lepus
seminar. 69% of respondents
said that their trading and risk
management requirements have
changed as a result of current
RUNNING
hEADER
market volatility. 63% said their
firms have increased spending
on trading and risk manage-
ment technology over the past
12 months and 57% expect to
increase spending over the next
12 months.
New York - JPMorgan an-
nounced an agreement with
Shell Asset Management Compa-
ny (SAMCo), the asset manage-
ment arm of Royal Dutch Shell,
enabling a global provision to
service Shell corporate pension
and insurance plans with total
assets in excess of USD70 billion.
With this relationship, JPMorgan
launches a range of services for
SAMCo and participating Shell
pension funds, including fund
accounting, fund administration
and certain securities lending
services.
7 | GSL
NEWS ANALySIS
Comment
AIG sails storm as Sullivan walks the plank
It’s not been a good year for New York-based
AIG, the world’s largest insurer.
On 15th June AIG’s CEO, Martin
Sullivan, was forced to resign after the com-
pany was buffeted by quarter after quarter
of losses on sub-prime investments. Stock
prices have fallen steadily and were hovering
just above USD30 per share in mid July. The
recent decline in fortunes is startling for a
firm used to announcing sky-high earnings
and rampant growth.
Now the company has said that it
will absorb USD5 billion in losses on its secu-
rities lending accounts. This is after a dozen
of the company’s insurance units have been
hit by USD13 billion in writedowns. AIG had
previously committed to absorbing USD500
million of the losses, but reality has dictated
that the outfit must take a heavier financial
blow.
Three of the insurers under the
AIG umbrella that have collectively suffered
60% of the write-downs are supervised by
the Texas Department of Insurance, which
said that it was totally unaware that AIG was
investing cash collateral from its securities
lending operation into assets linked to the
sub-prime market because the whole thing
was off balance sheet. Now the department is
afraid that AIG did not squirrel enough away
to cover possible losses.
Now AIG has said that it is to fun-
nel capital into some of its subsidiaries. How
much? “Undisclosed” the company says, a
term which does not bode well.
Too bad things haven’t gone as AIG
rather presumptively said they would back
in March, when the company predicted that
at worst it would have to absorb losses of
USD900 million over several years. Back to
the drawing the board.
In May AIG flogged USD20.3 billion worth
8 | GSL
of stock and debt in a gambit to protect itself
from its increasingly sizable write-downs. But
investors are probably now wondering if this
is going to be enough. What is obvious is that
any capital advantage AIG once possessed is
gone – perhaps never to return.
The company’s new CEO Robert
Willumstad has said a turnaround plan is to
be announced by September and that no part
of the company will be immune to a cull.
Precisely what the turnaround plan
will consist of is unclear, but there are few
options open to AIG besides divestiture and a
scramble to keep as many other of its subsid-
iaries afloat as possible.
Willumstad is in an unenviable
position. It will take more than simply a sure
hand to rejuvenate AIG, and it is yet to be
seen whether Willumstad is up to the job.
He takes over from Martin Sullivan who in
turn took from Maurice ‘Hank’ Greenberg,
the company’s charismatic CEO of 40 years
who was forced out after being accused of
securities fraud of major proportions by
Eliot Spitzer (client number 9) in 2005. It is
now up to Willumstand to reassure investors
by taking major action. He won’t relish the
fact that Greenberg is still chief among those
investors and has recently verbally eviscerated
AIG’s board and management. Greenberg,
who helped liberate Dachau during WWII,
will no doubt have strong views about what
should happen next.
Meanwhile, rating agency Moody’s
recently downgraded AIG’s credit ratings and
has continued to judge its outlook negatively.
America’s major banks and mort-
gage outfits are undergoing a nightmarish
period at the moment, so sympathy for AIG’s
plight will no doubt be sparse. But many will
no doubt be paying close attention and will
garner some lessons about not what not to do
from the company’s situation. Be more care-
ful how you invest your sec lending collateral
is probably the first lesson.
Damn lies
and statistics
The 2008 Vodia group institutional survey
threw up interesting figures as to the growing
importance of cash reinvestment. From its
survey of 40 institutional investors and data
from 107 public pension plans, the revenue
and the profit from securities lending are
dramatically inverse to each other. Though
in 2006 there was a 466% increase in the rev-
enue from securities lending (USD127, 835,
960 up from USD 28,638,177), the profits to
be made have dropped, from 23.5% in 2004
to 6.6% in 2006. The report summarised that
the figures were linked to the growth in cash
reinvestment revenues – despite this occa-
sionally meaning higher risk strategies.
Since 2004 and 2006 the lending of do-
mestic and international equities rose while
fixed-income decreased. Of institutions using
custodians as lenders, 75% were confident
that their revenues would increase over the
next five years compared to 38% of those
using agency lenders. Of those who expect a
decline in revenue, the most common reason
given was a lack of inventory supply. The
rise in derivatives such as single stock futures
was also cited as a cause of the expected hit
to revenues. The survey revealed that many
beneficial asset holders would only invest in
collateral pools which do not contain deriva-
tives – so-called “conservative” pools.
Interestingly, although only 34% of the
institutions used agent lender rather than
their custodian, the plans of these institutions
was twice the size of those using a custodian
– USD46.8 billion against USD21.3 bil-
lion. However – statistics being statistics – it
acknowledged that this difference is distorted
by the size of the biggest funds. What cannot
be distorted, it seems, is the issue of satisfac-
tion: 100% of institutions using agent lenders
approved the service; approvals for custody
limped over halfway (59%).
But custodians and agents do not appear
to be indispensable. Direct lending – from a
fund to borrowers, with a broker in between
– is viewed as increasing in the opinion of the
institutions. Fifty-three percent of institu-
tions believed a direct lending trend was
emerging; 35% thought intermediaries were
indispensable and 12% said it depended on
the size of the fund.
 Some think
something extra.

We think
customized
securities
lending.

AD
CIBC

Customized securities lending.

Credit Suisse specializes in bespoke innovative solutions which better capitalize on changing markets and improve
performance opportunities. A major lender in equity and xed income markets, Credit Suisse has expertise on a global scale.

For more information please call:

Zurich: +41 44 335 11 21
New York: +1 212 325 76 25
www.credit-suisse.com

Thinking New Perspectives.

NEWS ANALySIS
SEC runs the rule over short selling
Industry view:
eSeclending
“If extended, we expect the new SEC policy
regarding short selling to be beneficial for
the overall securities lending market be-
cause there will be an even greater demand
to borrow securities by brokers to comply
with the new rule. Short selling provides
an essential mechanism in the market as it
helps create liquidity and pricing efficiency.
This new policy will require brokers to
pre-borrow securities before executing a
short sale, or otherwise have the securi-
ties available. We also expect that if this
directive is extended it will make exclusive
arrangements more valuable. In an
exclusive, a borrower is guaranteed access
to available securities in a portfolio so it is
easy for brokers to demonstrate that they
have securities available to borrow.”
Christopher Jaynes, president
10 | GSL
The emergency SEC order on short selling in July, which places restrictions on the shorting of
shares of certain major financial firms, was another interesting turn of events for the volatility.
The shares of 17 investment banks as well as mortgage companies Fannie Mae and Freddie
Mac were protected by the order from “naked” short selling, where shares aren’t borrowed in
advance of a short sale and which can result in botched deals and market instability. The ruling
was extended on 30th July until 12th August.
It comes at a time when confidence in the stability of the financial system and the future of
the economy is low and swirling rumours about the strength of financial institutions through
naked short sales, which some see as an abusive practice.
It also echoes Financial Services Authority’s (FSA) ruling in June that introduced a disclosure
regime for short selling of companies undergoing a rights issue. Both announcements were
made during steep falls in shares across stock markets, with the authorities keen to protect
vulnerable companies.
The SEC press release cites the events preceding the sale of the Bear Stearns as illustrative
of the market impact of rumours, and describes events “during the week of March 10, 2008,
when rumors were spread about liquidity problems at Bear Stearns, and which eroded investor
confidence in the firm.” The FSA’s regulation came just after HBOS’s share prices saw a massive
slump.
However, while rumours may decrease the value of shares, are rumours the cause of the
instability in the first place? Shorting, when you bet that a company’s shares will fall in value,
may seem like a malicious activity, but it is ultimately a legitimate activity and ensures pricing
discovery and creates liquidity. Bear Stearns fell because on the verge of bankruptcy, others
refused to extend it credit or do business with it, because they knew fundamentally that Bear
had been an overly aggressive investor in mortgage backed securitised products and had lost
large sums of money.
The SEC already has rules against abusive naked short selling, and when it checked all the
financial institutions it identified as vulnerable, only one was deemed affected. The SEC has
said that “unbridled” naked short-selling of financial stocks has “not occurred”, and according
to The Economist it has not shown as much concern for car manufacturers where short-sellers
have been far more active.
The SEC had taken other actions to secure stability in the market, including charging the
trader Paul S. Berliner with securities fraud and market manipulation for spreading false
rumours concerning the Blackstone Group’s acquisition of Alliance Data Systems Corp (ADS).
The regulator has apparently given out 50 subpoenas. Maybe one of those subpoenas will
uncover market abuse, but apart from one case against Berliner there have been no
other charges.
Maximize returns. Control risk.

$*#$
.FMMPO
JT
SBUFE
BNPOHTU
UIF

XPSMEqT
NPTU
SFTQFDUFE
TFDVSJUJFT
MFOEFST

)PX
EJE
XF
HFU
UIFSF



8JUI
B
EFUFSNJOFE
GPDVT
PO
UIF

TUSVDUVSF
BOE
EFUBJMT
PG
FBDI
MPBO

#Z
UBJMPSJOH
MFOEJOH
QSPHSBNT
UIBU
BSF

USBOTQBSFOU
UP
ZPVS
USBEJOH
BOE

WBMVBUJPO
QSPDFTT

#Z
QSPWJEJOH
GMFYJCMF
DVTUPNJ[FE
TPMVUJPOT

#Z
PGGFSJOH
BO
VOSJWBMMFE
DMJFOU

SFMBUJPOTIJQ
FYQFSJFODF















7JTJU
VT
BU
XXXDJCDNFMMPODPN
'PS
NBYJNJ[FE
SFUVSOT
"OE
DPOUSPMMFE
SJTL

Go forward.
TM

$*#$
.FMMPO
JT
B
MJDFOTFE
VTFS
PG
UIF
$*#$
BOE
.FMMPO
USBEFNBSLT
REGULATION
Across the Atlantic
Tred McIntire, RMA Committee on Securities Lending
The securities lending industry has seen solid
earnings over the last twelve months, in large
part due to significant reinvestment returns
resulting from the Federal Reserve rate cuts.
But it was also a year of turbulence in the
money markets, which were plagued by credit
and liquidity issues related to subprime mort-
gages and structured investment vehicles,
causing asset write-downs and bank losses.
Pension and mutual fund boards are looking
closer at the investment guidelines for the
cash collateral pools and are asking questions
about borrower exposures, cash collateral
investment, counterparty credit, fees and
relative performance. Mutual fund boards
are also subject to increased scrutiny of their
securities lending by regulators.
I believe the financial market turmoil
underscores the value of credit diversification
achievable with an agency lending structure,
where clients have the ability to manage
credit in a more flexible and timely way.
David Rule, chief executive, ISLA
Falling equity markets have brought the
familiar criticisms of securities lending by
those who claim that it facilitates short sell-
ing which in turn drives equity prices lower.
While genuine market manipulation is clearly
unacceptable, three responses can be made to
such arguments. First, short selling should
have no net long-term effect on share prices.
If short sellers caused a share price to fall
below its fair value, other investors would
take the opportunity to buy. Academic re-
search has shown that placing restrictions on
short selling reduces market efficiency, and
in particular that share prices may overshoot.
Second, far from all lent securities are used
to cover directional short sales. Securities are
also borrowed for many other reasons; for ex-
ample, to avoid settlement failures; by market
makers in order to provide liquidity to buyers
12 | GSL
The list of new securities lending markets
continues to lengthen. Latin America, for
example, continues as a promising and yet
largely under-penetrated region. In January,
RMA and the Stock Loan Division of the
Securities Industry and Financial Markets
Association (SIFMA) co-sponsored the first
annual conference on Latin American Securi-
ties Lending. There have since been many
follow-up discussions among those who
attended, with a focus on improving the envi-
ronment for securities lending in Brazil. East-
ern Europe, Greece, Israel and certain other
markets in Asia have also been encouraged by
the potential to earn significant spreads in the
early stages, though often they have less well-
developed legal, tax and regulatory regimes,
and a shortened market development cycle.
The industry has seen continued growth
in the hedge fund space and active exten-
sion products (also known as 130/30 funds)
continue to contribute incremental short
and to enable arbitrage-related activity: for
example, to go short individual shares versus
an index-based basket. Third, institutional
investors lend securities in order to earn
additional returns at low risk. If they decide
not to lend they not only miss out on that
return, to the detriment of their investors, but
one certain consequence of reduced securities
lending would be to lower market liquidity.
Particularly in current markets, that is the last
thing that any investor should want. Part of
ISLA’s mission is to ensure that policymak-
ers understand the importance of securities
financing markets to the health of wider
financial markets. The ability to borrow se-
curities underpins the services that securities
dealers offer their customers and the trading
strategies of dealers, hedge funds and asset
managers.
demand. Cash reinvestment pools indemni-
fied against principal loss has also generated
attention.
A major challenge in the industry is the
ongoing discussion surrounding corporate
governance and proxy voting. RMA, in
cooperation with SIFMA, has recently offered
funding to work on a project with the Center
for the Study of Financial Market Evolu-
tion (CSFME) that we hope will support the
industry’s argument that securities lending
does not facilitate inappropriate proxy voting
activity on the part of borrowers.
I am near the end of my term as chairman,
although I will still be involved as ex-officio
committee chairman. It has been a wonderful
two years and I look forward to a continued
involvement in securities lending.
Since the start of the credit crunch in Au-
gust 2007, securities lending volumes have
remained high, providing vital liquidity to
the money, bond and equity markets. To
take one example, problems in the unsecured
bank financing markets led banks and securi-
ties dealers to increase their collateralised
financing, primarily through the government
bond repo markets. Especially in Europe, the
ability to borrow government bonds against
the collateral of other securities such as
corporate bonds and increasingly equities has
been critical to the success of such financing
strategies..
AD
CIBC
PROFILE
Harold Bimpong has an interesting breadth
of experience across the investment market,
having worked at many of the major custo-
dian banks. Now head of operations at Mor-
ley, one of the biggest UK asset managers, he
is into his seventh year in securities finance.
He has also fulfilled roles at the International
Securities Lending Association (ISLA), by
co-chairing the best practice group since its
inception in 2005 and then co-chair of ISLA
Ops since last year.ww
This secondary role, he believes, is comple-
mentary to his Morley work in keeping
in touch with the wider securities lending
industry. “It has been very challenging, but we
try to actively promote improved operational
efficiency and joined up thinking,” he says.
“This is being achieved via open dialogue
within the securities lending industry and in
collaboration with broader market forums, IT
vendors, CSDs and service providers.”
This variety is neatly mirrored in Morley’s
securities lending offering. The firm offers
three types of lending: non-cash collateral,
cash collateral invested in securities structures
and cash lending with direct reinvestment.
Bimpong explains that “our underlying
clients are relatively conservative” and so the
first two offerings have been used more than
the third. This last offering, he says, is also
the newest, but was a necessary graduation.
“When I joined we didn’t do cash collateral,
which is something we had to address. We
have definitely developed from a traditional
UK lender into a much more risk analysed
structured trading model.”
In the first quarter of 2008 Morley selected
4sight’s Securities Finance software solu-
tion to replace the existing vendor. Bimpong
explains that in making the change the firm
14 | GSL
harold Bimpong of Morley
undertook thorough research, surveying a
number of offerings. “We went through an
initial review of available solutions and nar-
rowed it down to five which met the Morley
requirement. Then, having collated detailed
business requirements, we went through a
detailed RFP process with a scoring matrix in
terms of necessity and ‘nice to have’.”
He explains that lenders like Morley rarely
change their systems, so it became imperative
that this switch was a “flexible and future-
proof solution”. He says 4sight was chosen
as the system could perform the dual roles
of incorporating Morley’s current system
and being flexible enough to change as the
business develops. The introduction of 4sight
will replace the in-house systems that were
developed as satellites around its core system,
but Bimpong adds that they will continue to
use various banking systems from custodians,
along with Bloomberg, Pirum, Sec Finex
and Data Explorer. Sec Finex, he explains, is
occasionally used by Morley to run auctions
as part of BAU, along with ESec Lending.
“Both bring good functionality to the table
but didn’t allow us to reach a bigger audience
– which we thought they might.”
Bimpong explains that maximising return
on what is lent is balancing act; it is often
case specific and difficult to measure. “We
always try and get best price and achieve this
through using a broad range of counterpar-
ties,” he says. “However, it is no good getting
‘top dollar’ if operationally you cost the client
money. We therefore put a lot of emphasis on
the counterparties’ ability to settle on time,
particularly recalls.” He adds that a suc-
cessful technique has been refraining from
de-coupling the trade relationship from the
We have definitely
developed from a
traditional UK lender
into a much more risk
analysed structured
trading model
operational one.
Bimpong says he would welcome a lot
more automation of the “mundane” tasks.
Aside from a lot of talk and a few attempts
to improve automation, he believes this is
yet to materialise. On the ubiquitous subject
of transparency, he considers that this term
can mean different things to different people.
“If you mean transparency of the industry
then, yes, I support it. There is too little
understanding of the industry on the outside,
and this needs to be addressed. More open
reporting of positions and interests would
make a big difference in expelling some of
the myths, but this needs to encompass the
whole market – not just lending. Otherwise it
will just drive activity into derivatives-based
solutions.” However, he adds that he is not so
convinced about the transparency of pricing,
but admits that this may become “probably
inevitable”.
Bimpong anticipates a greater shift towards
structured lending products as a result of
tax harmonisation across the EU. The credit
crunch will leave a “lasting imprint” and will
provide different opportunities for those
willing to innovate, leading to different op-
erational risk and challenges. “As with most
things, I expect solutions to develop down-
stream from market innovation, so penty of
work to keep ISLA operations busy for years
to come!”
 Time to change?
Choose a flexible Securities Finance solution
that integrates seamlessly
4sight Securities Finance provides a full front
to back office system for lending, borrowing,
repo, swaps, and collateral management of
both Equities and Fixed Income Securities.
4sight Securities Finance is a proven solution
used globally by a wide range of financial
institutions, and can be used on an agency
or principal basis.
Financial Markets Solutions
• Software with the flexibility to be tailored to your
unique business requirements
• Maximise efficiency through quick and seamless
integration with your existing systems
• Quick and easy real time access to your data,
with the ability to import and export in any
required format.
email: info@4sight.com www.4sight.com
EDINBURGH • LONDON • TORONTO • SYDNEY
EmErgIng mArkEtS

In Bloom
Securities lending in Asia

“The US is a done market for us,” says Francisco Gonzalez, head of business and product
Ben Roberts looks development at Eurex, “we think Asia is not ready, but it is promising.” This shift in focus to the
Far East as a burgeoning hub for securities lending is becoming increasingly prevalent. Though
at a region coming China is a major exception to this area of finance, and each country has its own issues, the
continent overall has made significant inroads into global securities lending – “promising” is
into fruition and the exactly the word.
As traders and securities services companies look east, the Asian countries are looking back
balance of regulation at them as a modus operandi for their securities markets. Devenesan Evanson, chief operating
officer for Bursa Malaysia, says: “Securities lending and borrowing is one of the pre-requisites
and transparency of a developed market, and you want to stay in the direction of a developed market.” But
few of the fastest growing Asian markets – Singapore, Malaysia, Korea, India – are looking to
create a carbon copy of a western market that may be still in the mire of the credit crunch.
Strict regulation, central exchange oversight and margin limits are shot through many of the
economies. Though the Securities and Exchange Board I ndia (SEBI) reintroduced short
selling in May this year, India is still restricted to lending futures and options that are settled
over seven days. It is a cautious environment, but it has steady ambition. In this year’s Budget,
finance minister Palaniappan Chidambaram acknowledged the limits of its market but
proposed a tighter working relationship between government and the Empowered Committee
of State Finance Ministers to create “a truly pan-Indian market for securities that will expand

16 | GSL
 the market base”.
He also declared the government would “take forward the idea of self-regulating organisations
(SRO) for different market participants under regulation”.
Korea, long-established as a leading corporate bond market and with a securities lending
market in its 12th year, is relaxing aspects of its regulation. It has raised the maximum that
foreign investors can borrow from local lenders from KRW10 billion to KRW50 billion. In
a presentation to the PASLA/RMA Securities Lending Conference, Jong-Hyung Lee of the
Korea Depository revealed the huge growth in foreign investment in just a few years. From
56% foreign investment in its stockmarkets in 2005, last year that figure stood at 91%. Trust is
gradually building with external money, and in June it announced its first tri-party financing
equity trade, with Goldman Sachs as the lender, Rabobank as borrower and BNY Mellon as the
collateral manager. “As the local Asian capital markets continue to evolve, we will collaborate
with our clients and industry leaders,” says Art Certosimo, executive vice-president and head of
broker dealer and alternative investment strategy at BNY Mellon. “Broker-dealers and investors
around the world recognise the economic and risk management benefits of the tri-party
structure.”
It is vital for the marketing and appeal of securities lending markets in Asia that the
regulatory structure is not perceived as draconian. Francesco Squillacioti, senior managing
director and Asia-Pacific regional business director for securities finance at State Street, says
that although markets may have variations, there are fundamentals common to all to generate
global interest. “It is difficult to say one is better than another. However, it would be possible
to say that those systems which are transparent, which provide the most streamlined trading
methodology, and fewest restrictions, will tend to be the most efficient and the most ‘user-
friendly’.These systems will serve as a source of market liquidity.”
Evansan reveals that the biggest hindrance to the Malaysian market was supply, making
external interest critical. “I think the borrowing appetite is there but we do not have supply
[of tradeable stocks] within the current onshore model.” He explains that international agent
lenders are hindered when they try to enter Malaysia and must act as a principal lender –
meaning they must buy, and not just market, lenders’ securities. “Our onshore model requires
our lenders to sign on as principal, so the likes of State Street, BGI, cannot lend.”
Bursa Malaysia has attempted to remedy the situation with a new structure of lending. At
the moment foreign traders are not approved by clearing houses, they have to work with local
““The US is a done agent borrowers and lenders (themselves in short supply). Their correspondence flows through
the Bursa Malaysia Securities Clearing (BMSC). But a new system is set to be in place by the
market for us” end of 2008 which allows foreign investors to be approved by clearing houses – another sign of
the developing trust across continents – which will in turn establish a more direct relationship
Francisco Gonzalez, with lenders and borrowers. With more lenders and borrowers entering the market this
alteration will hopefully see trading volumes soar.
Eurex Evansen says that Korea was suggested by the Pan Asian Securities Lending Association
(PASLA) as a successful model for Malaysia. “It has got a very good framework,” he said of
Korea, “it achieves regulatory objective of the requirements of the SLB participants in the
market and I think the feedback [from PASLA] is that it’s a system which can work.”
Squilaciotti believes Malaysia and Inida have come along way in adapting to change: Both
markets, for example, have been working on models for some time. It has been more of a
process of refinement of the models and looking to be able to introduce a model optimal for
each particular circumstances.”
The securities lending market in the Philippines has struck a balance between financial
incentives and firm regulation. Any securities lending deal that complies with the Bureau
Internal Revenue regulations is tax free. Lenders and borrowers must sign up to a Masters
Securities Lending Agreement – called MSLA – to effect a loan but local regulators are

17 | GSL
EmErgIng mArkEtS

Express briefing with
Francesco Squillacioti
Do you think an established securities
lending market is a vital, integral part of a
competitive economy today?
Absolutely, State Street believes securities lending
is important to markets in at least two ways. First,
we believe it is a mechanism that provides essential
liquidity to the countries in which it is active.
Liquidity is a necessary ingredient for market
efficiency and, thus, is beneficial to the participants
in those markets. Second, apart from it being
important for an indigenous market, we feel it is
a way to provide significant risk-adjusted returns
both to institutional investors within those markets
and to foreign institutions who invest in them. To
the extent investors from the host countries can
participate in securities lending, they will be able
to utilise their portfolios of securities and earn
incremental returns.
Western markets are still dominated by an over-the-
counter culture. Do you think there is any hindrance
to foreign investors entering Asian markets that are
almost entirely run through central exchanges?
Foreign investors should not necessarily view this
structure as a hindrance. State Street supports the
markets that are opening to securities lending and
sees the changes taking place positively. The use of a
central agency does not pose barriers and it is a way
some markets look to embark on securities lending
while gaining comfort with it.
continuously updating its rules to retain transparency, particularly with short selling, and
the system is closely monitored by the Securities Exchange Commission. In October 2007,
amended rules stated: “The trading participant, upon receiving an order to short sell or
when short selling for its own account, must indicate the word ‘short’ on the selling order
and throughout all the records pertinent to the sale,” and later “A trading participant who is
engaged in short selling activities is required to maintain ledges, whether manual or electronic
format, to record the full and complete details of short selling transactions.” This is followed
in the wider rules for the Philippines Stock Exchange with “the SBL ledgers shall be subject to
reasonable periodic, special or other examinations”.
Japan, in its tenth year lending securities, has seen a tumultuous anniversary. In the RMA/
PASLA Securities Lending conference, Christopher Antonelli of Lehman Brothers revealed
that the on loan balances for securities lending fell USD50 billion between 2007 and 2008,
though it remains the biggest securities market in Asia at around USD950 billion (according
to the latest figures from PASLA and Spitalfields Advisors). According to statistics from the
Japan Securities Finance Co., the average level of outstanding margin loans fell from YEN1.339
billion to YEN695.933 million from June 2007 to June 2008, with the trading value falling from
YEN5.51 trillion to YEN4.43 trillion. Trading volumes by face value for the bond market also
fell dramatically. Antonelli, however emphasised the transparency in the market and the rise in
corporate activity, the continuation of foreign investment along with a wide variety of traded
products – from exchange traded funds to real estate investment trusts.
This balance between regulation and creating a liberal enough market will be the key to
establishing the continent as a whole, many believe. “For markets where securities lending is a
new activity - or re-introduced activities - it is important for the long-term viability of those
lending models that the regulators are comfortable with how they work,” says Squillacioti.
“Regulators also have, with a view to the longevity of the systems they implement, a need to
ensure that their models attract as much interest and use as possible. To do that, they are likely
to realise that a balance between the two needs is necessary.”
Francisco Gonzalez agrees, and uses China – which is yet to develop securities lending – as
an example of a need for openness. “China as shown opening up a market and now closed it
down a bit; like they’re afraid the business flow could go away. I think opening and closing is
the difficulty the communities are having and it needs a broader understanding. Asia is not
Asia, each country is individual ¥but the potential is huge. But they have to open but I think it
will happen.”

Has State Street had to adapt to the different

nuances (eg, regulation, infrastructure, local
investment ‘culture’) of these different markets, and
how has this been achieved?

State Street has in place a strong due-diligence team

and process. Before we enter any
market we make sure we understand the various
nuances of those countries, from regulatory, tax,
legal, operational and trading perspectives. This is
the case with any market in which we participate—
not just the Asian markets or
other new lending markets. The rules that
are established provide a framework in which
to operate and can also be where the opportunities
lie.

18 | GSL
Two Horse Race
Securites Lending in Latin America
Joseph Corcos examines how
Brazil and Mexico remain the
dominant players
When the first Latin American Securities Lending Conference was
held this year, attendance by regional players was slim on the ground.
In fact, only Brazil and Mexico were represented. This could be
because the Risk Management Association (RMA) and the Securities
Industry and Financial Markets Association (SIFMA) chose to hold
the conference in January, the month when practically all South
America is on vacation, but it was probably more to do with the fact
that in Latin America, Brazil and Mexico are still the only securities
lending markets of any note for offshore entities.
While it has become a seldom disputed fact that sec lending is a
healthy and indeed necessary practice, the Latin American market
continues to lag considerably behind its counterparts in the US and
Europe. The market can be likened to a newborn fawn, new, slightly
unsure, yet gaining in strength and direction with each passing
minute. That the market is underdeveloped is indisputable, but the
undeniable growth it is undergoing and potential for opportunity that
it represents for foreign investors are also obvious.
Of Latin America, the RMA’s director of sec lending Curtis Knight
says: “It’s a market that I think the entire industry is expecting to be
one of the next growth areas, but like any growth area and any new
market, particularly in this business, you have to do your homework.
One of the things that you have to do is to make sure that the
infrastructure can support the development of a securities lending
market.”
Both Brazil and Mexico are leading the way in securities lending,
and each have relatively robust infrastructure in place. If their sec
lending markets are a success and can be seen to be contributing
liquidity and activity, then other markets such as Argentina, Chile and
Columbia may also take steps to join the party.
At the moment it is only Brazil and Mexico who have shown
themselves willing, though the sec lending markets in each country
bear little resemblance to each other.
After tinkering with its regulations and processes, Mexico now
resembles any of the other 35 or so sec lending markets scattered
across the globe. However due to its slow start and the fact that it has a
relatively volatile market, the build-up has been slow and there is still a
lot of room for expansion.
Brazil
On the other hand there is Brazil, boasting highly desirable equities,
but a sec lending structure which has lenders wringing their hands
and tearing out their hair.
Deutsche Bank’s head of Americas security lending, Paul Busby,
calls the Brazilian market ‘problematic’.
This is because Brazil insists on working on a central counterparty
system, which is not used in other sec lending markets and is severely
debilitating for foreign entities trying to carry out sec lending in
the country. One of the vagaries of this system is that the central
counterparty, the CBLC, is the party which holds and manages the
collateral for the time of the transaction.
Usually in a sec lending transaction the ideal goal would be a
delivery versus payment situation, or if this is impossible due to time
or currency issues, a lag time of a day or so at most. Indeed, over the
last few decades there has been much tinkering with the sec lending
market in order to mitigate as much risk and exposure as possible.
However, with Brazil’s central counterparty system the lender simply
doesn’t get the collateral at all, in essence circumventing this risk
mitigation. This is effectively acting as huge boulder in the potentially
torrential flow of the Brazilian sec lending stream.
19 | GSL
EmErgIng mArkEtS
For example if a lender wishes to lend their client Brazilian equities,
this is possible, and they can negotiate with the broker as normal.
When delivery is made to the CBLC, they will then deliver the security
to the broker, but will consider themselves the counterparty, not the
broker. This is because on delivery of the security, the broker gives
them the collateral to hold on behalf of the lending bank’s client and
put it in an account. Thus resulting in the lending bank’s clients entire
exposure being to the exchange itself. Hardly ideal.
As Patrick Avitabile, global head of equity, trading and securities
finance at Citigroup makes clear, “Collateral is key. Collateral is the
most critical piece of the securities lending transaction. Not only do
you have to have it, and have it in your name, but you also have to
control its movement and maintain it and make sure that the collateral
moves with the value of the security that you’ve lent out.”
Both Taiwan and South Korea used to have a similar structure to
Brazil’s, however both countries recognized the benefit of changing
to a more internationally acceptable method and decided to allow
collateral to be taken offshore. At the Latin American sec lending
conference, representatives of both markets were present and gave
lectures demonstrating how
they achieved heightened expansion though the changes.
Most importantly, though neither market is plain vanilla,
and both have their various idiosyncrasies, in both markets
the broker that the lender makes the loan to is their clients direct
counterparty.
While most find the Brazilian sec lending market hard to operate in
because of their central counterparty structure, Frederico Ortega, the
director of securities lending at Grupo Bursatil Mexicano, says: “Some
people like the Brazilian model because they don’t have to do due
diligence or risk analysis for their counterpart because they only deal
with the CBLC.” But the fact is the overwhelming majority of foreign
lenders find it a difficult market to work in.
Brazil boasts highly desirable
equities, but a sec lending
structure which has lenders
wringing their hands and tearing
out their hair
20 | GSL
The fact that the structure underlying the securities lending
market in Brazil is so flawed is a pity, as appetite around the globe for
Brazilian equities is undeniably large. As part of the rapidly emerging
BRIC group of economies that is increasingly driving the world
markets, Brazil’s desirability has been growing at a rate of knots. The
country has recently been deemed investment grade by both Fitch and
Standard & Poor’s. This opens up the Brazil’s bonds to investors only
allowed to purchase securities from countries with investment grade
ratings from at least two agencies.
Nick Rudenstine, JP Morgan’s securities lending global product
head, says: “Brazil is on everybody’s radar these days. Most if not all
of the major lenders are working on the mechanics of how to start
lending in Brazil and all the big broker-dealers do transactions in the
Brazilian market.
“Its very hard to predict how or when growth will come, but
everyone is looking at Brazil as a very attractive market, from
an agent-lender perspective it’s just a matter of ironing out the
mechanics.”
Avitabile echoes this, saying: “We have a number of clients that are
very interested in lending their Brazilian equities, they realize there’s a
huge demand to borrow these equities.
“We’ve shown their portfolios to brokers and the brokers are
lighting up when they see them, but the bottom line is convincing the
investor to lend through the current model. It’s a difficult sell when
the rest of the world doesn’t work that way.
“The demand is phenomenal for Brazilian equities. Phenomenal.”
There is a ray of hope that it seems that regulators in Brazil are at
least aware of the problematic nature of the country’s sec lending
structure. The presence of a representative from the CBLC at the sec
lending conference earlier this year is surely a sign that the country is
open to hearing about and learning from foreign investors.
Avitabile claims that representatives from his outfit have spoken
directly to Brazilian regulators and that when it comes to the need for
change “they definitely are aware”.
Ed Oliver, a senior business consultant at Spitalfields Advisors
says: “It seems that they’re [Brazilian regulators] ready and willing to
present to international players and therefore get in dialogue, and that
can only be a good thing.
“And I’m sure in time they’ll get more comfortable with what
they’re doing and become more aware of what international best
practice is. Hopefully that will lead them down the route that most
people would hope they go down.”
In Mexico it is a route they have already gone down. It is here
where one finds the sec-lending model most similar to that of the
international markets.
EmErgIng mArkEtS
Mexico
After a slow start and several stumbles, Mexico now has a model which
will support a sec lending market that is rapidly expanding and most
would agree has untapped potential.
While the sec lending market in Mexico is well over a decade old,
many lenders are only now establishing, or re-establishing a presence
in the country. Oliver calls the Mexican market the most “normal” of
the Latin America sec-lending markets.
In 2005 Banco De Mexico decided to open up the local market to
foreign entities and insurance companies to start lending, a move
which has given a needed boost to the market.
Of the move Knight says: “This type of thing shows the willingness
of the regulators to let foreign investors in with some controls. This
brings you to a more mature state for that product and obviously
mirrors a little more the market conventions that are in the US and
that most people participate in. When you’re looking at those types
of funds that participate in securities lending - pension funds, large
mutual funds, those type of guys, the more controllable and the more
understanding and the more options those guys have the more those
guys are willing to lend their securities through their agents.”
Opening up the local market to foreigners was a good move on
the part of Mexico’s central bank. Ortega says: “Its great that foreign
entities that are now allowed to participate locally, because I think they
have a deeper understanding of the market and their participation can
help it grow.”
The Mexican sec lending market is also slowly readjusting after a
tax snag. Several years ago many lenders pulled out of Mexico due
to a greyness surrounding the tax regulations, with a capital market
gain on securities transactions. There was also vagueness surrounding
how sec lending was regarded, with many of the lenders fearful that a
lending transaction was under the same regulations as a straight buy
or sell.
Mexican regulators duly cleared up the uncertainty, but this did
not precede a rush back into the market by the lenders. Indeed,
progression has been slow, but is growing.
Eduardo Navarro, managing director for markets and securities
lending at the brokerage house Acciones and Valores (Accival)
recounts: “The market is talking about the participants again, talking
about lending size, mandatory pension funds, mutual funds and now
insurance companies.
“They are evaluating what it means to have large positions, to give
them an added return if they lend it to the market, so I think that
the regulation in Mexico is in place, it is basically at international
standards and the point is that the market is developing and we’re
betting on it growing.”
Avitabile says that in the last three or four years has also seen a
reduction in spreads, from “as high as 400 basis points”, as contrasted
to today when “you’re looking at anywhere from 50 to 150 basis
points, because there’s more supply”.
In order for the sec lending market in Mexico to continue to grow
however, it must give investors more diversified trading strategies to
take advantage of. There must also be continuing efforts to educate
the investors as to how best to use sec lending and the opportunities it
gives to investors to diversify their market strategies.
According to Ortega local demand for Mexican securities is
growing, a trend which has been largely overlooked thus
far by foreign players. He also recounts that the participation of
hedge funds in the Mexican stock exchange has also upped demand
for Mexican securities. Such exposure can only aid the growth of the
market.
Mexican investors themselves are also becoming more sophisticated
and sec lending can aid the country’s slowly developing derivatives
market. According to Navarro the sec lending market in equities in
Mexico is far more mature than the fixed income segment.
The fuTure
What the future has in store for the sec lending in Latin America is of
course impossible to tell. Most seem to believe that sec lending will
continue to grow steadily, and that in the case of Brazil, regulators will
install a structure more amenable to the needs of foreign players.
Whether other countries such as Columbia, Argentina
or Chile will attempt to evolve and open their markets remains
to be seen. At this juncture it is hard to even guess at the size of
these markets. Columbia has recently started to make changes to
its regulations which signal an interest in developing their market,
though Chile still has in place very tough regulations.
Curtis Knight says: “I think it depends on the type of stock market
that country wishes to have. If a country wishes to have an open stock
market with foreign investors adding liquidity and adding capital I
think securities lending goes a long way to doing it because you can
bring in those offshore investors who can get involved in the local
market, but that also means giving them opportunities that they are
used to in more developed markets.”
Slow and steady progression seems to be the order of the day for
Latin American sec lending, all the while keeping a weather eye on risk
and the integrity of the regulatory structures on which a healthy sec
lending market must be built. If these factors are accounted for, there
is no reason why Latin America cannot become home of the one of
the more vibrant and profitable sec lending markets.
21 | GSL
South Africa
A lenders view
Securities lending in South Africa has become an integral part of
most trading strategies with the majority of the borrowing in South
Africa taking place to cover short positions.
South Africa has stringent tax laws when it comes to the exemption
granted for securities lending transactions and borrowing for any
other reason must be done with caution.
In addition to the tax laws, South African players have to comply
with stringent foreign exchange regulations and only authorised
dealers are allowed to trade with offshore counterparties. This
condition makes the contribution of the authorised dealer in our
market a vital cog in the securities lending machine. A local lender is
only allowed to lend stock to an authorised dealer to make it available
to offshore borrowers and likewise a local borrower is only able to
access offshore stock via an authorised dealer.
If you operate locally, there is a great choice of lenders. The larger
choice makes it easier to stay within risk and credit constraints as the
value of the short positions grow.
Lenders include life insurance companies such as Sanlam,
authorised dealers, asset managers, satrix funds and pension funds
managing their own lending. Borrowing from non-pension funds
seldom occurs because of the tax payable on manufactured dividends.
Knowledge of the market is gained through experience and it is
quite difficult for an outsider to break into the market. Relationships
are key and most of the existing relationships have been nurtured for
a number of years.
There is no electronic trading platform available in South Africa
for securities lending. Any borrowing and lending is executed
via telephone or email. There is currently little interest in trading
electronically because the majority of the players prefer the personal
touch.
South African equities settle electronically through STRATE the
Central Securities Depository (CSD) for the electronic settlement of
August Sander,
head of securities lending,
Sanlam, looks at the
securities lending landscape
in South Africa
22 | GSL
all financial instruments in South Africa.. In order to load a loan onto
STRATE, a market participant can either be a business partner and
load the deal themselves or instruct your CSD participant to load the
instruction on your behalf. In addition to the cost benefits of being a
business partner, the ability of seeing the loans live on STRATE allows
you to identify and correct any settlement problems that may occur.
To allow more opportunity to short, it is advisable to have a few
lenders with reliable lines of stock on the books. The stocks offered
by the lenders depend on the holding of the underlying fund and the
percentage of the fund they are allowed to lend out.
Securities lending in South Africa has been subject to criticism with
the main bugbear being that short selling/securities lending pushes
down the price of the instrument/equity involved. While one can
understand this argument, it is undeniable that securities lending
here and abroad adds liquidity to the market – and this can never be
viewed in a negative light.
The securities lending market in South Africa has progressively
become more transparent and far more competitive over the last
few years. Margins are continuously under pressure and most of the
lenders are efficient and professional. The counterparty with the best
terms will generally secure the deal, as long as you remain within your
credit and risk limits.
Securities lending systems are not readily available and the choice
is limited - a few market participants use overseas systems that have
to be customized to local conditions. Unfortunately the cost of a
customized system can escalate dramatically with a volatile Rand
which seems to be following the depreciation trend. Some market
participants have written their own customized systems giving them
the flexibility to change the system to cater to their specific needs. The
rest of the market participants use a local system written for the South
African market conditions.
The collateral requirements of the different lenders are fairly similar.
Cash, money market instruments, government bonds or tradable
equities are all acceptable as collateral. The equities accepted by the
different lenders vary depending on the liquidity of the shares and the
view of the risk division on the counterparty. Corporate bonds are
currently not accepted as collateral.
South Africa has a thriving securities lending industry that will
continue to grow well into the future. There will be more competition
leading to more efficiency and ultimately more liquidity in our
market.
High Roller John Tabacco, founder of LendEX speaks with
Justin Lawson of GSL about Wall Street,
electronic trading and
I think the infancy stage is going to Theodore Roosevelt
be a short one. While there have
been few willing to take on this
opaque and ominous space due to
it being monopolized by the worlds
largest financial institutions for years,
I think the regulatory focus is rapidly
shifting in the direction of increasing
the demands on the industry to
embrace electronic solutions to
keep pace with the dynamic and
millisecond execution capabilities
of modern day trading systems. I
think the SEC and other regulatory It’s like anything else in life. You don’t
bodies need to continue the good get the order unless you ask for it, you
work they have been focussed on don’t become great unless you believe
recently and keep pushing the major it, and you don’t get succeed by
players to embrace technology to thinking about it. Everybody has great
insure that beneficial owners are ideas only a few execute them. One
getting the best executions on their of the best compliments I ever got is
sec lending, and that investors and from one of my mentors in business
hedge funds are getting a fair and and life, and coincidentally one of
equitable opportunity to access all of the smartest stock loan guys in the
the available liquidity to support their world, Tony Venditti. He said ‘young,
trading needs. up-and-coming guys always ask me
questions on how to be great, and do
Has the recent financial nothing with my advice, you ask the
crisis had any effect on questions then take my feedback, and
companies’ willingness to invest in then go and execute them’. Execution
How did you get involved with technology? and a willingness to work at it even if
the world of securities lending, you fail is my tip. And never let the
describe your early career before I can tell you first hand that since big guys get you down, I often recite
LendEX? I founded my companies in 2005, I the words of Mahatma Gandhi, “First
have been pounding the pavement they laugh at you, then they ignore
I started in learning about the telling all of the biggest institutions you, then you win”.
operations side of securities lending in the world why they need to Be humble, believe you can be
in my college days. my uncle got me embrace technology. But without great, execute your plan, and never
my first Wall Street job in the cashiers the regulatory nudge there was no give up. You may fall down, you may
cage at Shearson Lehman American incentive for institutions to change a get knocked down, and I don’t know
Express. I went to school at night model that was working for decades about publishing, but in the financial
and learned all the intricacies of this and often producing some of the markets you may even get beat down,
unique business from the ground up. largest revenues in the firm. But I but I have this slogan on my desk:
I have worked in every aspect of the must say that yes, the recent crisis’ ‘It is not the critic who counts;
is an auction platform, but they are have certainly produced a heightened
financial markets, and when I formed not the man who points out how the
vastly different than us. We like to degree of due diligence on behalf
tori Equities in 1998 to engage in strong man stumbles, or where the
look at our solution as complimentary of many of the top tier firms. After
the business of assisting small and doer of deeds could have done them
to the e-Sec model as they provide really working hard and being looked
midsize self clearing firms to navigate better. The credit belongs to the man
portfolio auctions, and we provide at as a rebel product for a couple of
the process of starting in house who is actually in the arena, whose
single stock capabilities. While it years, there are many respected and
securities lending desks, I saw the face is marred by dust and sweat and
would be flattering to be compared wise market participants who are very
need for electronic solutions rapidly blood, who strives valiantly; who errs
to e-Sec, considering its success as closely examining all the technology
approaching on the horizon. and comes short again and again;
a market leader and innovator, I don’t offerings out there. We have certainly because there is not effort without
think its fair to try to pigeon hole our become a very interesting commodity
LendEx has recently been error and shortcomings; but who
product in the space that e-Sec is to many of the largest firms out there.
described as ‘the latest addition does actually strive to do the deed;
in. Besides e-Sec, who continues Hopefully we can be a part of the
to the auction platform stable’ so who knows the great enthusiasm, the
to refine the model that started the solution to some of the problems that
as the new colt how would you great devotion, who spends himself
electronic lending era, I don’t see any face the capital markets today.
describe your offering and what are in a worthy cause, who at the best
other players in the US space that in
the USP’s which will make you the knows in the end the triumph of high
any way provide the transparent, open Launching a new securities lending
firm industry favourite? achievement and who at the worst,
source, and dynamic capabilities that publication or a technology solution if he fails, at least fails while daring
LendEx does. could be seen as fairly similar. The
Well, the term stable would suggest greatly, so that his place shall never
a number of different horses, and Many think it is a great idea but few be with those cold and timid souls
Electronic trading is in its infancy will dip their feet in the water. What
as I look at the current US domestic who know neither victory nor defeat.’
within securities lending. Why has are your tips for success?
landscape I don’t see any other
there been little penetration and
providers that in any way have the Theodore Roosevelt (1858 - 1919)
what needs to change for there to 23 | GSL
capabilities of LendEx. e-Seclending
be a greater uptake?
InFRASTRUCTURE
State of the art?
Brian Bollen
talks about how the
securities lending
industry is improving
its technology
Anyone who has ever spent any reasonable
amount of time on a treadmill knows
what it is like to be literally running to
stand still. Over the past three decades, the
financial services industry worldwide has
experienced a not-dissimilar phenomenon,
as the relentless progression of technology
and execution/trading improvements has
compelled organisations to install the latest
state-of-the-art equipment just to keep up
with market progress and client expectations.
Indeed, the financial services community
is expected to spend USD351.2 billion on
global IT products and services in 2008, or
a growth rate of 5.1% per annum (source:
Celent).
Securities lending, however, has lagged
behind other related equity execution
products and services in transitioning to
24 | GSL
fully-automated, electronic processes. “Other
back office technology has moved forward,
and stock lending is now, finally, moving in
the same direction,” says Bruce Turner, chief
operating officer at Quadriserv, a venture-
backed software provider founded in 2001 to
deliver a range of securities lending solutions
to hedge fund investors and beneficial
owners.
This mission is succinctly communicated
on the Quadriserv website: “Now more than
ever, small changes are having major effects
and new technologies are opening the door
to opportunities that will fundamentally
change the way borrowers and lenders
interact.” In a break from the unstructured,
opaque securities lending processes of the
past, Quadriserv’s new securities lending
innovations deliver an aggregated view
of competitive securities lending rates,
centralised liquidity, technology and
credit. In this way, Quadriserv is optimally
positioned to serve the interests of the vast
majority of institutional borrowers and
lenders, as well as to seamlessly manage
the inherent complexity of the securities
lending industry – from the nature of the
actual transaction to the multi-dimensional
relationships between borrowers and lenders.
“Our premise has always been to bring
more speed, efficiency and enhanced
capabilities to the securities lending
market,” added Bruce Turner. “The advance
of technology combined with a deep
understanding of equity execution practice
s in general, has enabled us to do that.”
As hedge fund activity and competitive
dynamics accelerate, stock-loan strategies
and corresponding operational efficiencies
are receiving a renewed look from hedge
fund managers eager to gain an advantage
wherever possible. Growth on the demand
side of the equation is matched by growth
in demand on the lending side. “Beneficial
owners see stock lending as a huge source of
return,” he observes. “They want to know the
risks, the returns, and how to enhance returns
without assuming undue additional risk.
We show them where the market is.” Prime
brokers and other market participants have
demonstrated a commitment to adverting
their daily rates as a means towards attracting
new customers.
There is, he says, a profound need for
greater understanding of stock lending
– a need exacerbated by the credit crisis
that began to erupt in the summer of
2007, and is only now beginning to abate.
Quadriserv believes it has a role to play in
providing that education and enhancing that
understanding. To that end, Bruce Turner
adds, “When consumers shop for a loan, they

“We would like to
see 25% to 30% of
total market share
being transacted
over all the current
electronic platforms
over the next few
years,”
Francisco Gonzalez,
head of Eurex
SecLend
have access to a wide array of competitive
rate information that is empowering and
facilitates sound decision-making. Similarly,
our aQuas portal aggregates securities
lending data from a number of providers and
delivers it directly to our customers through
an encrypted feed. So while complexity of
the underlying transaction and sophistication
of the customer is certainly distinct from a
traditional loan, the principle is the same:
customers receive fast, accurate, confidential,
transparent and diverse rates for securities
loans they can use as they see fit to optimize
their portfolios.”
Bruce Turner is optimistic about future
growth in what he argues is an asset class
poised for expanded participant involvement.
“It is no longer just a niche; the more
information you provide, the more people are
interested in exploring the possibilities. The
whole pie is growing.” Sales and customer
activity suggests Quadriserv is growing with
it: the company has 20 subscribers lined-up
for its aQuas portal, which was officially
launched only in December, with between
two and four times more that figure in
the sales pipeline. “Our target is 250-300
hedge funds with assets from USD500m to
USD10bn, and the interest we are receiving
from customers suggests we are reaching
a tipping point in terms of sales.” It just
might be enough to add securities lending
technology to the ever-expanding list of
technology “must-haves” for CIOs and
trading professionals just to keep up.
When asked to summarise the main
driving forces behind the development of
technology for use in securities lending, Roy
Zimmerhansl, head of electronic securities
lending at ICAP i-Sec, one of the newest
electronic securities lending platforms, is as
calm and methodical as anyone in setting
the scene. “Phase 1 was a drive towards
internal efficiency. Get your own shop in
order. The technology focus is on internal
books and records and STP processes. Phase
2 is to improve reconciliation processes.
Match your counterparties and focus on
exceptions. The technology focus is on
reconciliation tools. Phase 3 is to generate
additional revenue with marginal additional
cost. Making the best of what you’ve got. The
technology focus is on revenue enhancers:
trading platforms. Realistically, most firms
– both borrowers and lenders - have more
counterparties than they call efficiently or
effectively deal with on a daily basis.”
“ICAP is in the business of electronic
trading platforms, with over 30 products
traded electronically, up from 20 products a
year ago and representing an estimated 46%
market share within the electronic broking
business. Operating profits generated from
electronic trading products represented 32%
of ICAP’s total in the year ended March 31
2008. The global network represents more
than 6,000 workstations on 2,000 dealing
floors across 50 countries. i-Sec has been
able to leverage the existing product range
and infrastructure to offer a state-of-the-art
product that is delivered to users, typically
using existing technology links. Starting from
a base of four pilot clients in April 2007, it
now offers 10 markets to the existing user
base of 13 firms, with three more firms in
various stages of technology roll out. That
has occurred in less than 15 months of
operation.”
“As i-Sec is a new product, baseline
comparisons aren’t really useful as we have
only just gone through one business year and
you can’t compare one month’s volume to
another month’s volume due to the cyclical
nature of stock loan. We have been adding
firms, traders within firms and markets to
the product so of course volumes continue to
grow.”
Looking beyond the walls of IPAC’s offices
in the former Lehman Brothers building
in London’s Broadgate development, to
view the market more broadly, he adds
that it remains important to continue
introducing higher levels of technology
because lenders and investment banks
continue to accumulate assets into their
programmes at a faster pace than they can
distribute the assets. This could have a
dilutive impact for lending agents, although
that is currently masked by substantial
cash re-investment returns. He cautions,
though, against accepting unquestioningly
the recent suggestion that no more than 5%
of securities lending transactions take place
on electronic platforms, if only because it is
impossible to estimate. “I think it unlikely
that it would be higher than that, and I don’t
think it’s possible to set a target for electronic
platforms to aim for in percentage terms.
“For some firms it could be over 75%, for
others 5% could represent a huge volume.
The important thing is that electronic trading
should represent a portion of every firm’s
business.”
“We would like to see 25% to 30% of total
market share being transacted over all the
current electronic platforms over the next few
years,” says Francisco Gonzalez, head of Eurex
SecLend.
He chooses to highlight the need to achieve
greater speed and accuracy combined with
increased volumes to be processed in serving
its clients. In contrast to, for example, a
venture capital operation, securities lending
is largely an “instrumental” business, rather
than an end in itself, he elaborates. “It serves
lenders who want to profit from lending
out stocks, and it serves prime brokers or
in-house trading desks that want to borrow,
or borrow to relend for their conduit or street
25 | GSL
InFRASTRUCTURE
“We would like to
see 25% to 30% of
total market share
being transacted
over all the current
electronic platforms
over the next few
years,”
Francisco Gonzalez,
head of Eurex
SecLend
business,” he elaborates. “For all of them,
time is of the essence, but so are risk control,
speed of settlement and monitoring. So
the faster securities lending traders can do
things, while maintaining risk control and
transparency, the better we can serve our end
users. And technological development is the
best way to accomplish this. As a key example:
higher technology is important in regard
of a Central Counterparty (CCP). This will
make the whole electronic securities lending
process much easier and much faster, and it
will bring more players into the electronic
marketplace. CCP facilities are probably
going to be the next new technological wave
in electronic securities lending. For potential
players in emerging markets, a CCP will open
a lot of new doors, while for the providers a
list of open issues need to be addressed first.
A true trading platform is beneficial to
lenders in a number of ways, argues Roy
Zimmerhansl, related to transparency of
pricing, the control of counterparty exposure
and negotiation. Transparency of pricing
will mean that lenders will be able to see
the fee levels at which their competitors are
willing to lend, they will see the best price
that borrowers are willing to pay, the system
will allow them to select the appropriate
collateral type, and will be flexible enough to
take account of clients that are from multiple
26 | GSL
tax jurisdictions and therefore have different
dividend requirements.
In terms of control of counterparty
exposure, they should be able to restrict who
will be able to execute trades with them,
without sacrificing the transparency of seeing
prices from the entire market including
those firms outside their approved list, and
they should be able to restrict the range
of their trading relationships with their
counterparties to allow trading in certain
markets while excluding others. And if either
side is interested in a potential trade, but
wishes to negotiate, it should be able to do so
quickly and easily.
While it is impossible not to admire the
‘build it and they will come’ spirit evidenced
by the creation of i-Sec, it is equally
impossible to ignore the suggestion that it
might be 5-10 years ahead of its time. “It is
important to consider that market demand
transformation drives the business model
transformation and not vice versa, observes
Felix Oegerli, a member of the executive
committee at COMIT, a consultancy and
vendor firm in the area of securities finance
and collateral management. “Have they
therefore perhaps overestimated market
growth in this area?” he asks. “Are the build
and run costs justified by the short- to
medium-term volumes?”
This doesn’t mean, he stresses, that i-Sec
does not have a role to play, only that it could
be several years rather than months before
it can be properly assessed. “I don’t think
that even in five years time you will see the
biggest securities lending tickets being traded
electronically,” he adds. “It will happen, but
over a longer timeline than they maybe think.
Traders do not change their habits over a
short time.
For the large players, it is too costly to
integrate several platforms to get the full
benefits from them, and they will think twice
before linking to different platforms.” At the
end of the day, it would seem, it will be a
Darwinian survival test, and the market will
decide. The deciding factor on who survives
could be the answer to the question: who
has had the most support from the outset?
In the meantime, the growing complexity of
the trading environment makes it difficult
for technology to cope. “The ideal vendor
should anticipate market trends and build
systems accordingly, not just react to client
needs,” Felix Oegerli resumes. “The problem
is that most vendors are technology experts
just implementing what their clients are
telling them to do. They have no fundamental
understanding of the business itself.”
Sharon Walker, managing director of
EquiLend in Europe, is quick to point out
that the 5% estimate, specifically excludes
activity taking place on the Equilend
platform. “If you include Equilend in the
mix, I believe that EquiLend contributes
significantly more than the 5% of the
cumulative trading volumes attributed to
platforms mentioned during the technology
panel in Prague, and I would think it
difficult for anyone to accurately scale the
business.”At EquiLend, Walker summarises
the main driving forces behind the ongoing
development of new technology in the
industry as being scalability, the need for
efficiency, regulatory change, cost control and
changes in market direction. She says: “You
need to operate in a cost-effective manner,
and be nimble enough to respond to new
market directions. Automation will inevitably
continue; we see huge volumes of trading
business across our platform but the industry
has some significant way to go as there is
vast potential to grow. In the past two weeks
alone we have added two new trading clients,
bringing the number to around 50, and our
pick-up is growing steeper. I think we’re only
scratching the surface of potential usage.”
She reports recent peaks of around 20,000
trades a day, with a value between USD20
billion to USD25 billion per day across up to
25 markets. Our most recent statistics show
that for the first quarter of 2008, we reported
an increase of more than 21% in both value
and volume of trades executed compared to
the same period in 2007. Since the start 2008,
our contract comparison service is up 60%
we record in excess of 1.4 million records per
day and our mark- to- market comparison
service is up 55% based on the same time
period last year. We are in the process of
registering in Canada, state by state, starting
in Ontario, Sharon Walker reports. The
process should be completed by the end
of this summer. “We are also focussing on
Asia where we believe we make significant
inroads,” she adds.
The increase of business on the Equilend
RUnnInG HEAdER

27 | GSL
InFRASTRUCTURE
main driving forces behind the ongoing
development of new technology in the
industry as being scalability, the need for
efficiency, regulatory change, cost control and
changes in market direction. She says: “You
need to operate in a cost-effective manner,
and be nimble enough to respond to new
market directions. Automation will inevitably
continue; we see huge volumes of trading
business across our platform but the industry
has some significant way to go as there is
vast potential to grow. In the past two weeks
alone we have added two new trading clients,
bringing the number to around 50, and our
pick-up is growing steeper. I think we’re only
scratching the surface of potential usage.”
She reports recent peaks of around 20,000
trades a day, with a value between USD20
billion to USD25 billion per day across up to
25 markets. Our most recent statistics show
that for the first quarter of 2008, we reported
an increase of more than 21% in both value
and volume of trades executed compared to
the same period in 2007. Since the start 2008,
our contract comparison service is up 60%
we record in excess of 1.4 million records per
day and our mark- to- market comparison
service is up 55% based on the same time
period last year. We are in the process of
registering in Canada, state by state, starting
in Ontario, Sharon Walker reports. The
process should be completed by the end
of this summer. “We are also focussing on
Asia where we believe we make significant
inroads,” she adds.
The increase of business on the Equilend
platform in the meantime comes not
just from the growth in client numbers,
but is also due to a natural tendency for
different parts of an organisation to begin
using its services once it has made the
initial penetration. “Trading services leads
to contract comparison leads to other
services,” she summarises. To be brutally
honest, though, part of the message coming
from the industry, whether consciously or
unconsciously transmitted, is that people
instinctively recoil from change, preferring to
cling to the familiar, to the tried and tested.
This natural conservatism is a hurdle that
must be overcome if the industry’s broad
optimism is to be justified.
To those who have had no hands-on
28 | GSL
In conversation with Jason Hayes, sales
director, North America, 4sight Financial
Software
How would you summarise the main
driving forces behind the development of
technology for use in securities lending?
CLIEnTS: Our clients in the last 18 months
have been the driving force behind new
technology development. While, as a
software house we have our own internal
drivers for technological upgrades our
clients have been leading the the technology
charge. The adoption of service providers
like Equilend, Pirum and data Explorers
has forced our clients to evaluate how
they import and export information. data
extraction and interfacing have become
essential to running a securities lending
programme. Flat file extracts to third-
party systems are no longer acceptable
as the sole standard. People want direct
interfaces to other in-house or third-
party systems while expecting complete
intergration with their core securities lending
software solution. With this integration has
also come the automation of processes.
demands on middle and back offices have
increased and the need for automation has
led to increased efficiency and a shift in
workloads.
experience at the coal face, securities lending
can be a scary place, even with a sympathetic
mentor on hand. For anyone new to the
industry, whether as a practitioner or as an
independent observer, it can be a veritable
minefield. One wrong step can destroy all
confidence and credibility in an instant. One
thing that is important is not to make the
fundamental mistake of mixing technology
into a single category, thereby confusing
apples with oranges. There are books and
records systems such as 4Sight, Global
One, Martini, Anvil and COMIT. There are
reconciliation platforms, such as Pirum and
EquiLend. There are order matching systems
such as Loannet, auction platforms SecFinex
and EquiLend and trading platforms iSec,
SecFinex and Eurex SecLend, and EquiLend.
“We all differ according to the space we fill,”
says Sharon Walker. “Our own philosophy is
to provide whatever the market needs, and we
have already released one new trading service
this year [Trade2O] and another is planned.
AUTOMATIOn: Straight through processing
(STP) has also been a main driver for our
clients. Whereas securities lending used to
sit somewhat on the sidelines in terms of
technology within the financial landscape,
but institutions are now demanding the
same type of efficiencies and technology
already in use in other areas of the bank.
Batch uploads and downloads are being
replaced with real-time messaging and
information being streamed to other
downstream systems through an institution.
SCALABILITY: Increased volumes require
systems to be scalable. Adding more
disc space to a server to allow a database
to grow is no longer acceptable. Clients
require that systems can be distributed
and balanced across a number of servers
to improve performance and handle larger
volumes, as well as offering better options
with regards to archiving of data and
disaster recovery.
GLOBALISATIOn: More institutions are
setting up global lending desks, and as
such systems need to be able to be run
from multiple locations across different
timezones.
“EquiLend’s Trade2O, is a service in the
warm/hot stock space allowing traders
to bid/offer on lists sent by lenders or
demand lists from brokers. We are already
seeing hundreds of orders and executed
trades passing through this service on a
daily basis. One of the unique elements of
this, is its ability to interface directly with
the proprietary systems providing a fully
integrated solution.” This replaces the need to
send out numerous Bloomberg messages with
attached lists, making it more efficient than
Bloomberg’s, but arguably not much, some
observers might suggest.
“One electronic market may do simply
fixed-income while another concentrates on
General Collateral (GC) issues, while a third
features international equities, and a fourth
is purely a US-based/concentrated facility,”
adds Eurex’s Francisco Gonzalez. “Some
platforms are closed to all but large volume
users; some are closed to all but their original
members, except for new members who are
RUnnInG HEAdER

Ad

29 | GSL
InFRASTRUCTURE
able to pay a rather weighty initial fee. These
special features set one apart from the other.
So it all depends on what you want to pay for
and what you are looking for the platform
to do. This also explains why some users
are signing up to several electronic markets
and not just one, which is an interesting
development, suggesting an instinct for
eventual consolidation of the marketplace.
Maybe it’s the “let’s not miss the market’s new
idea” sense of play by the current players. If
something’s going to happen on one market,
no one wants to be left on the sidelines. On
the Eurex SecLend market place the traders
are able to trade the entire spectrum of GC
and specials in fixed income and equities on a
global basis.
“Eurex SecLend’s electronic market and
has been up and running for two years now)
allows the borrower to look at both equities
(including Exchange Traded Funds) and
fixed-income positions, either singly or as
part of a basket of securities. We enable
clients to talk to each other as part of the
negotiation process via facility. Several
borrowers can be dealt with at the same time
by a single lender, so the Eurex SecLend chat
button provides some of the useful features
of an auction system without the protracted
performance that auctions seem to involve.
Our breadth of clientele lets borrowers access
global securities from lenders who are located
in a wide variety of countries. We also cater
to that tier of lenders who may have the much
sought after small cap issues which the larger
lenders may not have in their portfolios.
Eurex SecLend provides an entrée into Eurex
Repo, of course, since one system is based on
the other and allows cross-usage. We offer our
clients the ability to trade both equities and
fixed-income positions on a securities lending
and borrowing open basis. We also offer
straight-through processing.”
For Chris Jaynes, President, eSecLending, in
recent years technology has made the largest
difference with post-trade processing and
reconciliation rather than trade execution.
Improvements in electronic messaging,
settlement platforms and reconciliation tools
have allowed for increased straight through
processing. The increase in automation
has resulted in an ability to better manage
increased lending volumes and trading
30 | GSL
activity, and has allowed for the growth assets out of the pool and using an auction.”
of third party lending. Despite recent
developments with both front end electronic Is the need for greater transparency having an
trading and more efficient post trade effect on securities lending technology and
processing there remains significant room how strong is demand for this? “The demand
in the market for further automation and for greater transparency in recent years has
technological advancements, he says. been fuelled by increased regulatory scrutiny
as well as changing views and expectations
“Improvements in technology have also of beneficial owners,” continues Chris
helped facilitate the use of multiple routes to Jaynes. “As beneficial owners increasingly
market as agents can manage programmes view securities lending as an investment
efficiently and safely regardless of whether function they expect to have better data
they are the custodian or not,” he continues. available to review returns, risk factors, and
“Historically, technological linkages between relative performance information to better
custodians and third party firms were less understand and monitor their programmes.
efficient causing the potential for increased We expect the demand for transparency to
risks and costs within an operating model. increase in the coming years as Lenders look
These factors have all changed significantly to ensure an objective, regulatory friendly
and today, third-party lending competes and auditable programme that can be easily
evenly with custodial programmes from an presented to their management team, board,
operational, risk and cost perspective.” and regulators. The increased demand for
transparency has been one of the factors
“We see a strong future for auctions. The contributing to the growth of auctions in
model continues to gain wider acceptance recent years as the auction process provides
amongst the beneficial owner community lenders with transparency and price discovery
because it facilitates better price discovery, that is not available in traditional pooled
provides clients with greater control over programmes and allows for objective decision
their programme, and offers guaranteed making on how to best allocate portfolios for
results that are objective and transparent to lending,” he concludes.
report to boards. We have seen continued
growth over the past few years with regards to
the use of auctions in the securities lending
industry and we expect that this trend will
continue. Traditional agents who were
historically opposed to auctions have been
increasingly supporting this route to market
based on client demand. It is important
to note that there remain significant
differences between auctions managed by an
independent provider who does not utilise
a pool versus those supported by traditional
agents whose core trading strategy is based
on combining specials with general collateral
and influenced by relationships with certain
preferred borrowers. Traditional agent
providers have to manage many conflicts with
their pooled programmes when managing
auctions on behalf of lenders. They have to
balance the impact to preferred borrower
relationships which are traditionally driven
by general collateral balances in exchange for
allocation of specials and also have to balance
the issue created by deriving premium
returns for one lender when pulling their
InFRASTRUCTURE
Technology Review
GSL looks at the solutions offered by securities lending vendors
4sight Financial Software is a
leading supplier of innovative
software solutions to the
Securities Finance, Settlement &
Connectivity markets with offices
and clients worldwide. 4sight
Securities Finance 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. 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’,
EquiLend is the leading provider
of brokerage solutions for the
securities finance industry. Owned
by eleven preeminent financial
firms, EquiLend revolutionizes
straight-through processing by
using a common standards-
based protocol and infrastructure,
which automates formerly manual
business processes. Used by
borrowers and lenders throughout
the world, the EquiLend platform
creates efficiency and provides
access to additional liquidity.
EquiLend’s end-to-end solutions,
which reduce the risk of potential
errors and eliminates the need
to maintain costly point-to-point
connections, include: Availability,
AutoBorrow, Trade2O, EquiLend
AuctionPortSM, Contract
Comparison, Mark-to-Market
Comparison, Returns, Recalls,
real-time value dated position
keeping and a powerful web
reporting module, allowing full front
to back office processing.
4sight Securities Finance also
integrates seamlessly with external
systems and employs a data
model that enables quick and easy
real time access to your data, with
the ability to import and export
information in any required format.
niche As a company 4sight is
small enough to be responsive
to our clients’ needs but large
enough to offer global support
capabilities through our network of
offices, with a wealth of experience
implementing multi site global
projects for some of the world’s
largest financial institutions
Main product: 4sight Securities
Finance (4SF)
Inception: 1996
Website: www.4sight.com
Billing Comparison and delivery,
dividend Claims Comparison, and
Agent Lender disclosure (ALd). The
EquiLend platform also supports
the execution of payment and
delivery instructions through the
dTCC.
niche: Our platform offers end-
to-end solutions for borrowing
and lending needs within the
Securities Finance Marketplace. It
is product agnostic and global in
scope, offering compatibility with
all financial products in all countries
around the world.
Main product: Securities Finance
Technology Platform
Inception: 2002
Website: www.equilend.com
Major clients: Goldman Sachs,
deutsche Bank, BnP Paribas
Services
FInACE® is the unique fully
integrated solution that supports
the future business model within
all Securities Finance and OTC
derivatives Collateral Management
products. The architecture of
FInACE® is based on a stable,
leading edge technology platform
empowering customers to manage
complex, scalable business critical
functionality. With flexibility at its
core, customer-driven extensions
and modifications can be quickly
and easily applied to the standard
component set.
All modules are based on the
position focused horizontal
FInACE® platform. The business
Anetics is both a service
organization providing technology
resources to extend internal staff
personnel, and an application
service provider with a modular
off-the-shelf tool kit that can
fill in the gaps – providing
functionality that may otherwise
be weak or missing in a firms daily
processing.
The Anetics tool kit includes
components that can manage
inventory through subscriptions
to both internal and external
sources of supply, and for the
publishing items available to
lend; Analyse trading positions
for available-to-lend, need-
to-borrow and recommended
returns and refinancing; Auto-
borrow both through popular
hubs and bilaterally with direct
counterparts; An automated
blotter for conduit matchbook
dealing that links sources of
supply with a counterpart’s orders
or needs; Analytics for balancing
specific modules can be
licensed independently. The
modular approach ensures
that our customers only deploy
functionality as needed.
Furthermore, additional or
modified functionality can be built
individually for our customers
quickly and at competitive
costs. With FInACE® business
architecture, customers can easily
adapt the platform to the enterprise
level, which enables the view
and analysis of all positions and
exposures across organisational
boundaries.
Main product: FInACE
Inception: 2004
Website: www.comit.sg
Major clients: Bank Julius Bär,
Credit Suisse, dekaBank
income and expense across
open borrows, loans, and swaps;
recall management designed to
leverage ARMS, automated fax,
et al; US domestic Regulation
SHO components for short-sale
locates complete with a direct
client-customer web interface and
compliance exception reporting;
Fee/rebate allocation, stock
borrow/loan/swap against trading
position (transfer pricing).
These modules can be linked
to existing infrastructure and
are designed to run either in the
customer’s data centre or as an
application service hosted by
Anetics.
niche Anetics caters to the small
to mid-size trading desk that
may not have adequate internal
resources to develop and support
the tools necessary in today’s
dealing environment. While most
technology firms offer a monolithic
front-to-back package for global
securities lending, the Anetics
solution is modular. The customer
can select just the components
necessary to, say, fill in the gaps.
31 | GSL
InFRASTRUCTURE
IOn specializes in flow
trading technologies offering:
Connectivity to over 100 trading
venues covering rates, credit,
commodities and FX; Full repo
and securities finance solutions
(Anvil) leveraged by both buy
and sell side institutions; Real-
time cross-asset pricing and
risk management; High-speed
framework for implementing
customised algo trading
strategies; Fully-distributed
component-based, open and
scalable technology platform
Anvil forms a core part of the
IOn e-trading systems portfolio.
Unlike any other repo and
securities finance system, Anvil
has been designed by traders for
traders, allowing faster execution,
more efficiency and greater
trading volumes. Anvil enables
high levels of trading automation,
so traders can concentrate on
doing what they do best: trading.
niche: High level of automation
features, tight integration with
electronic trading venues,
freedom to have a high degree
of customisation where required,
provision of dedicated technical
consultants and support
personnel when required, ability
to trade repo and securities
lending in one system, more
advanced technology than the
competition, componentised
approach.
Main product: Anvil
Inception: late 1990s
Website: www.iontrading.com
32 | GSL
Europe’s leading investment
banks participate as borrowers in
the Eurex SecLend marketplace,
acting as principal broker and
intermediaries. Agent lenders and
direct lenders provide substantial
availability in global fixed income
and equity names. They benefit
from Eurex’ leading state-of-
the-art trading and processing
services. Eurex SecLend is
playing a pioneering role in the
SLB market’s development. By
delivering efficiency across the
deal chain and providing innovative
solutions to the needs of all
SLB market participants, Eurex
SecLend helps volumes to grow
for the benefit of all its clients.
Eurex SecLend provides a fully
integrated electronic marketplace
for fixed income and equity lending
and borrowing. It offers a real-
time trading, settlement and loan
management environment, which
is supported by a wide range of
automated post-trade services. It
provides high-volume transactions
processing at low cost, making
SecFinex provides an efficient,
impartial and transparent web
based platform that enables
market professionals to arrange
securities lending and borrowing
transactions. SecFinex delivers
value to participants by improving
access to securities and finance
via a central marketplace, by
using state of the art technology
that provides participants access
to a screen-based, price driven
market place with bids and offers
posted on a firm to trade basis.
it easier for financial institutions
to maximize the return on their
assets, or balance their short
positions.
niche: Eurex SecLend is an
electronic market with enhanced
and unique trading functionality.
It also includes auction, price
discovery and other key features
for securities lending and
borrowing transactions. Eurex
SecLend supports trading desks to
handle the mass GC flow business
as well as “hard-to-borrow”
specials market. Fixed Income
and Equity representatives prefer
Eurex SecLend’s global securities
universe.
Main product: -Eurex SecLend &
Eurex repo
Inception: 2005 & 1999
Website: www.eurexchange.com
Major clients: Julius Baer,
HypoVereinsbank, Fortis Bank n.V.,
Over 40 financial institutions use
SecFinex, including a wide cross-
section of lenders, borrowers and
intermediaries.
niche: SecFinex is an exchange,
operating in the SBL marketplace.
It allows participants to trade in
three different ways:
1. Order Market: Pre-trade
anonymity
2. Private Market – name give up
prior to trading
3. Auctions
Main product: SecFinex
Inception: 2001
LendEX is designed to provide
price discovery, enhanced
revenues, transparency and
benchmarking capabilities to
all securities lending market
participants. With LendEX, our
members will have real time
trading opportunities and data to
evaluate their lending revenues
and utilization rates.
LendEX requires no change
in our members’ current
procedures other than adding
one additional approved
counterparty. to execute
transactions on LendEX,
members need to establish a
securities lending relationship
with The Alaska USA Trust
Company, a wholly owned
subsidiary of the Alaska USA
Federal Credit Union. AUTC acts
as principal in all transactions
and stands between borrowers
and lenders acting as a credit
intermediary thus maintaining
the anonymity of the exchange.
niche: There are several
electronic solutions emerging
but LendEX is the only full
service securities lending
marketplace that provides
real time, single stock trading
and market data. We provide
complete back office operational
support. From execution until
the loan is closed, we do all
maintenance on the transaction
including but not limited to mark
to market adjustments, rate
changes, recalls and returns.
Main product: LendEX
Inception: 4/30/2008
Website: www.anetics.com
InFRASTRUCTURE
Quadriserv brings new
perspectives to the securities
lending market by directly
connecting securities lenders
and borrowers in innovative
ways. Our products and services
deliver market data, transaction,
technology and credit solutions
that allow end users to be better
informed and better equipped to
succeed in the securities lending
markets. Our cornerstone
product, the Aquas portal is a
secure, interactive, web-based
application where borrowers
and lenders of securities get a
single view into the securities
lending markets. The Aquas
portal provides its users with
fast, accurate, confidential,
transparent and diverse rates
i-Sec enables traders active
in securities finance to borrow
or lend equities via a screen-
based electronic platform
that combines the leading
order matching system with
a high-speed, high capacity
communications network.
i-Sec currently facilitates
securities lending activity across
nine global equity markets with
additional special niches in
European ETFs and depositary
Receipts. new markets are
added quickly and easily based
on user demand.
Through i-Sec both borrowers
and lenders can easily broadcast
their search for securities or
enhance their distribution of
available portfolio to a wide
range of interested parties. The
for securities loans, daily and
historical market data, analytics
and synthetic trading products.
niche: The Aquas portal provides
lenders and borrowers (brokers,
hedge funds, 130/30 funds) of
equities a unique window into the
securities lending markets. The
Aquas portal aggregates historical
and indicative securities lending
data from a number of providers
and delivers it directly to our
customers through an encrypted
feed. Our data provides actionable
equity securities lending rates
which allow our clients to uncover
the intrinsic value of their long
positions and the true cost to
borrow
Main product: Aquas portal
Inception: december 2007
Website: www.quadriserv.com
transparency of screen based
trading on i-Sec, the visibility of
market depth and the power of
negotiating tools on the system
help firms gain optimal terms for
their transactions.
i-Sec builds on the client base and
infrastructure already in place for
a wide range of ICAP Electronic
Broking (IEB) products. This
results in proven quick and easy
rollout and implementation of the
IEB product range including i-Sec.
niche: The leading edge securities
lending trading platform – it is the
newest platform on the market
with the most flexibility and can
be customised to each individual
trader’s specific preferences
Main product: i-Sec
Inception: April 2007
Website: www.icap.com
i-SunGard’s Martini is a proven,
scalable software solution
that provides integrated
global trading and positions
management for all aspects
of securities finance. Martini
provides a comprehensive
front and middle office solution
that meets the demands for
rapid response times and
broad product coverage. The
global trading desks of major
investment banks, broker-
dealers and hedge funds rely
on Martini as their worldwide
securities finance trading
platform for global repo and
international stock loan.
Martini is fully real-time, multi-
currency and multi-legal entity.
Traders enjoy a fast, easy-to-
use screen providing entry,
inquiry and worldwide position
availability segmented by
transaction type, currency and
other attributes.
niche: The strength of Martini
lies in its real-time global
positions management and
trade capture functionality.
Fundamental to its design is
the ability to show an individual
trader a tailored view of the
positional data that they are
responsible for, while at the
same time reflecting their trades
within the firm wide book and
entity structure. This truly
allows the global book to be
managed in real-time from any
location around the world. The
scalability and volumes handling
capabilities of Martini set it aside
from its competitors. Martini also
provides an access point to the
broader Sungard community
of securities finance customers
and integration with an
extensive network of solutions
and services (including Global
One and Loanet) specifically
designed to address this niche
market area.
Main product: SunGard Martini
Inception: 1997
Website: www.sungard.com/
martini/
33 | GSL
nEXT ISSUE
Francisco Gonzalez the head of business and product development at Eurex SecLend
MARkETS UndER THE MICROSCOPE
Eastern Europe – Ben Roberts
discusses the pros and cons of Europe’s
new and developing SBL markets;
Czech Republic, Hungary and Poland.
Is it all plain sailing or are they a million
miles apart from what the established
markets are used to?
USA – With this year being the 25th
Anniversary of the original securities
lending conference organised by the
RMA GSL’s Joe Corcos takes a look at
the worlds most developed SBL market
and what the current trends are.
Canada – Over the last few years
Canada has seen a flurry of regulation
changes. Catherine kemp takes a look
at the Canadian market, speaking with
Td Securities, CIBC Mellon, RBC dexia
and Scotia Capital to get a full local
flavour and some of the new entrants
to the market like Macquarie Bank,
34 | GSL
who earlier this year hired Paul Larkin,
of Scotia Capital to head up its newly
created securities lending desk in
toronto.
IndUSTRY InSIGHT
Asian Repo Update – GSL investigates
the current trends in the Asian Repo
market. How does it compare with the
European landscape?
Collateral Flexibility – Anthony
Harrington speaks about the changing
demands within the world of collateral,
the increased cost of borrowing cash
and the higher demand for non-cash
collateral.
PEOPLE
CEO Profile – Giles Turner speaks with
Brian Lamb, head of EquiLend about
their products, new technologies and
the market at large.
Francisco Gonzalez the head of
business and product development
at Eurex SecLend discusses his role
and the evolving industry of servicing
securities
Lender Profile – One of the leading
American West Coast pension funds
speaks to GSL about their involvement
in the industry, their first auction, and
how the credit crunch has affected the
market.
3rd Quarter Moves – GSL looks at the
tactical substitutions taken by many.
Where are they now? Read more to find
out.
COnFEREnCES And
BOnUS dISTRIBUTIOn
14 – 17 Oct, RMA Securities Lending
Conference, 25th Anniversary, San
Antonio, Texas, USA
 ��������

����� � �������
��������������������������������������������������������� �
������������������������

���������������������������������������������������������
���������������������������������������������������������������

��������������������������������������������������������
���������������������������������������������������������
���������������������������������������������������������
�����������������

��������������������������������

���������������������������������������

����������������������������������������������������������������������������������������������������������������
�����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������
�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������
�������������������������������������������������������������������������������������������������������������������������������������������������������������������

GSL 16-35.indd 35 6/8/08 16:56:57

inFrastructure
Flexible, transparent, and value adding
ETF lending
Securities lending plays an increasingly
important role in the world’s capital markets
as investors and investment strategies
become more sophisticated. Today, the
securities lending industry is a very large,
over the counter and well regulated market
with over EUR14 trillion of lendable assets
available, with an average of EUR3 trillion
assets on loan daily.
The practice of lending assets, already a
common activity in unit trusts and mutual
funds, has also reached exchange traded
funds (ETFs).
According to Marc Knowles, head of
product management for iShares, the ETF
arm of Barclays Global Investors, an ETF
investor can unlock further potential in
these funds by combining the benefits of the
revenues generated from securities lending
within the fund with revenues from lending
the ETF unit itself.
Lending ETFs is
a growing
component
of the securities
lending market,
explains
Marc Knowles,
head of product
management at
iShares
36 | GSL
Overall, securities lending provides
numerous benefits to market participants,
including improved liquidity in the securities
and derivatives markets, the ability for
investors to express negative views as well as
positive ones, and affording market makers
an efficient two-way pricing mechanism.
Within unit trust or mutual funds,
this activity accrues benefits to all fund
shareholders, as revenues from securities
lending are usually reflected in the net asset
value. Lending revenue generated by BGI
on behalf of iShares funds is split 50/50
between the fund and BGI.
The largest demand for borrowing now
comes from deliberate trading strategies.
The securities lending business supports
many of these strategies by providing shares
to cover transactions where the seller is not
in possession of the shares. Normally, the
broker-dealers or prime brokers identify
demand and act as intermediary to facilitate
loans for internal or external end users.
Prime brokers also regularly borrow
securities to hedge exposure caused by
the creation of derivatives instruments.
This borrowing demand is usually satisfied
through lending agents, who aggregate
lendable supply from asset owners and
negotiate prices on behalf of lending clients.
Custodian banks, investment managers, and
third party lending specialists all serve as
lending agents.
The difference between unit trusts or
mutual funds and ETFs is that in ETFs,
securities lending can occur in two ways.
Firstly, investors can earn revenue by the
lending of the constituents inside the fund
similar to unit trusts or mutual funds.
Secondly, uniquely to ETFs, investors can
lend the units of ETFs themselves to earn
an additional revenue stream. Equity, bond,
commodity or property ETF units can all
be lent, although there are different demand
drivers and different revenue opportunities
for individual ETFs. An example of how it
works at iShares, BGI’s ETF arm, is each
ETF holder can decide whether or not to
lend their units, and any lending revenue
gained will accrue directly to that investor
(after any revenue sharing with a lending
agent). The amount of revenue earned from
lending the ETF unit alone can particularly,
or in some cases completely, offset the cost
of holding the ETF position. This unique
ability further increases the attractiveness
of ETFs as investment products, by adding
value beyond the flexibility, cost efficiency
and high degree of transparency that ETFs
already offer. Unlike mutual funds, all ETFs
have their portfolio composition updated
and disclosed daily.
The lending of ETF units is a growing
component of the securities lending market.
Market data compiled by Performance
Explorer, an independent aggregator and
vendor of securities lending pricing and
volume information, indicates there was
an average of EUR22 billion of ETF units
on loan daily in the first half of 2007, with
approximately 15% growth in on loan
balances during this period. Shorting ETFs
may allow fund managers to efficiently
execute complex trading strategies at an
index level; similarly, borrowing ETFs can
also be a competitive hedging solution
compared to using futures or OTC
derivatives. From an operational perspective,
lending ETF units is an easy and simple
process, as they trade and settle like equities,
and should fit into a standard securities
lending programme.
As one of the largest institutional money
managers in the world, and as investment
manager for the iShares ETFs, BGI is well
placed to act as lending agent. BGI has
delivered significant additional returns for
investors from the combination of lending
inFrastructure

Marc Knowles -
ishares head of
product management

within the fund and lending of units. All Lending returns inside iShares ETFs
iShares holders benefit from lending within
fund, but only holders who actively lent their ishares etFs Fiscal Year 2004 2005 2006 2007
iShares benefited from this component of ishares Msci turkey 31-Oct 114.6
lending return. ishares DJ euro stOXX 50 31-Oct 19.4 25.3 26.8. 28.6
ETFs are powerful investment solutions. iShares FTSEurofirst 80 28-Feb 25.1 33.8 25.4
In addition to their ease of use and precise ishares Ftse/Xinhua china 25 28-Feb 3.2 25.1
market exposure, these instruments also ishares DJ euro stOXX Midcap 28-Feb 2.8 15
enable complex investment strategies beyond ishares DJ euro stOXX select Dividend 28-Feb 14.6
traditional allocations. ishares DJ euro stOXX smallcap 28-Feb 5.1 12.8
Within the ETF, securities lending returns IShares FTSEurofirst 100 28-Feb 24.7 14.1 12
depend on constituents and tax domicile of ishares DJ stOXX 50 31-Oct 13.8 22.3 17.9 9.7
the fund. Needless to say, both lending inside ishares Msci eastern europe 28-Feb 8.7
ETFs and lending of ETFs units are only ishares s&P 500 28-Feb 5.8 6.2 8.4
possible where there is sufficient depth in the ishares Ftse ePra/Macquarie Global infrastructure 31-Oct 6.7
ETF market. ishares Ftse/ePra european Property index Fund 28-Feb 3
Lending the constituents of an ishares Msci Japan 28-Feb 2.1
iShare benefits all holders as returns are ishares DJ euro stOXX Growth 28-Feb 1.5
incorporated in the fund NAV. Unique to ishares £ corporate Bond 28-Feb 0.5 0.5 1.4
ETFs, an additional income stream can be ishares ˆ corporate Bond 28-Feb 14 2.8 1.2
unlocked through the lending of ETF units ishares Msci emerging Markets 28-Feb 0.9
themselves. As both revenue streams inside ishares Msci World 28-Feb 0.3
and outside of ETFs are subject to supply ishares Ftse 100 28-Feb 0.1 0.2 0
and demand dynamics, securities lending ishares Ftse 250 28-Feb 0
revenues are not guaranteed. As the world’s
largest manager of ETFs, BGI is uniquely Table 2: Lending returns inside iShares ETFs and from lending the ETF units
positioned to identify attractive lending
opportunities in the market that may be ETFs TER Total revenue Excess Return
available to a custodian or a third party IShares Russell 2000 Index Fund (US) 20 8 108 116 96
lending agent. iShares FTSE 250 40 - 93 93 53
iShares DJ Euro STOXX 50 35 29 25 54 19
IShares MSCI Emerging Markets (US) 74 7 103 110 36

37 | GSL
inFrastructure

Tri-party collateral
management gets subtle
Collateral management

In these cash strapped times, with no one really sure when the credit crunch will end,
liquidity continues to be a problem across a wide range of sectors. At first glance, this looks
like a situation made in heaven for the major tri-party collateral agents as more and more
organisations, from banks to broker dealers look to their securities holdings as a way of
raising much needed liquidity. However, there are storm clouds louring even here, at least
in the traditional rep business, which still accounts for some 75% of the global tri-party
collateral marketplace.
Repo, or repurchase agreements, to give them their Sunday title, are in essence cash
Anthony advances given by a lender against a basket of securities offered as collateral by the borrower.
The origins of tri-party collateral management lay, as Pascal Morosini, head of Tri-party
Harrington sheds Collateral at Clearstream explains, in the way the basket of securities being offered to lenders
became more and more diverse at the start of the 1990s.
some light on how This diversity and complexity in turn created an opportunity for third party agents to step
in and offer an independent collateral management service. That service has since developed
an increasingly on well beyond repo, but this is where the story begins. 1992, for example, was the year that
Clearstream launched its introductory repo collateral management offering.
popular format is “There was a growing demand in Europe at that time by the industry for a way of
exchanging multiple assets in little pieces and in differing currencies, all as part of
coping with changing a single repo transaction in a single currency,” Morosini says.
This complexity was far too tedious for bi-party transactions. A lender of cash would have
times to invest in very substantial middle office systems if it wanted to offer this kind of cash-for-
securities deal to a wide range of counter parties with vastly different securities portfolios.
At the same time, borrowers wanted to maximise the collateral value of their securities
portfolios and they were really keen – and still are – to push the mix of acceptable securities
to the limit. Again, from their standpoint, having to sit down time after time with individual
lenders and thrash out bi-party agreements on what was and what was not acceptable
collateral for each specific loan (with many loans being of very short duration, overnight or
for a week, for example) was massively inefficient.
So the stage was set for tri-party agents to bring deep systems skills to this market,
automating the whole process of proffering and accepting baskets of securities, and
managing all the administration and settlement aspects of this.
The ability to maintain an eligibility list for a client and check automatically all securities
in the proffered basket against that list, is a major added value service that the tri-party agent
brings to the process. The agent will also mark to market the securities in the bundle and a
third, very important service these days is the ability to offer the borrower the limited right
of substitution of the pledged securities.
What this last point means is that provided the client has other securities in their
portfolio, they can still deal in the pledged securities if, for example, the market moves in
their favour. The system will then automatically allocate an equivalent value of other eligible
securities to the basket.
“It is clear from all this that the cash provider delegates a great deal of responsibility to
the tri-party agent. At the same time, the agent provides the borrower with tremendous
flexibility through the power of limited substitution,” he says. For an organisation that wants
to raise finance against a portfolio, the tri-party set up has tremendous advantages. For the

38 | GSL
Global SECURITIES LENDING 22/07/08 12:34 Page 1

Do you have

an eye
for value?

You can now use and re-use collateral with

full and immediate substitution capabilities.

Our reduced tariffs also mean the lowest

prices ever. Use your eye for value and get
so much more for so much less.

Triparty services for securities collateral.

High on value, low on cost.

© 2008 Euroclear Bank SA/NV, 1 Boulevard du Roi Albert II , 1210 Brussels, Belgium,
RPM Brussels number 0429 875 591 triparty@euroclear.com
inFrastructure
Olivier de schaetzen - euroclear,
director, collateral services
40 | GSL
lender, in a repo arrangement the securities are marked in the name of the lender, so their
hold for the period the securities are in their hands, is absolute. At the same time they know
they are going to get their cash back plus interest as soon as the time period for the loan
expires.
“For private bankers, central bankers and all those lender organisations who have not
invested very substantial sums in their own sophisticated repo technology, using a tri-party
house brings huge advantages,” he says. From the cash lender’s perspective, this is so much
better than a time period deposit without a guarantee. They have the securities in their name
and the whole back office function required to run this kind of deal is easily outsourced to the
tri-party agent.
In 2005 Clearstream launched an initiative with a central counter party (CCP) Eurex
Clearing called Eurex Repo. According to Morosini, this moves the whole tri-party function
on to a new level. “Now, if you want to deal you do not call the other party and arrange to set
up the transaction through a tri-party agent. Now you go to an electronic trading system.
This is a new game for tri-party agents. In the ordinary course of events, broker-dealers, for
example, hate standardised baskets because they want to have the most open profile possible,
to derive full value from as much of their portfolio as possible. As the agent, the tri-party
provider has no power to constrain the “basket” in any way. Now, however, by standardising
on ECB eligible paper, and moreover, by allowing borrowers anonymity through the medium
of the trading platform (the lender does not need to know the borrower since they can rest
with confidence on the ECB basket they are getting as collateral), the tri-party agent has
created a very desirable mechanism for both lender and borrower. Your counterparty, in effect,
is the CCP, Eurex Clearing, and you can trade with confidence.
Morosini says,“Tri-party arrangements where, there are only two players plus the agent can
be much more aggressive because the lender can tweak the eligibility criteria based on their
assessment of the borrower. However, the advantage of the Eurex Repo arrangement is that
banks who are highly risk adverse will lend because of the special nature of the platform”.
He also makes the important point that German banks who are lending through Eurex
Repo and receiving the ECB basket of securities, can now pledge those bonds direct to the
Bundesbank. “The more liquidity managers and risk managers in lending organisations
understand the benefits of this product, the more we will see tremendous growth in
demand,” Morosini says. Clearstream launched this service for international customers in
October 2007, right in the middle of the credit crunch. It has added seven new international
counterparties to the “club” and there are now EUR42 billion of collateralised loans, up from
EUR17 billion twelve months ago.
So where then, is the “dark cloud” and the doom and gloom for tri-party collateral? It
lurks in the obvious fact that the more risk averse people get, the less tolerant they get about
the quality of the collateral they will accept. at Euroclear, which manages around EUR350
billion of triparty dealing for its clients, reckons that Euroclear saw what he calls “a gentle
tightening” of the eligibility profile for securities from lenders through 2007 and then a more
sharply defined tightening through 2008.
“We are now seeing a more thorough review of the basket by the collateral taker. The
quality of the assets has increased greatly, from a well diversified portfolio of AAA corporate
securities and government bonds, to the point where the proportion of government bonds
demanded is well in excess of the proportion of other credit products,” de Schaetzen says.
Risk managers, he says, have been really exercised on the theme of the collateral being
taken. It has to be sufficiently liquid to be sold instantly should the counterparty default.
“Before Bear Sterns, there was much less concern about the possibility of a major player
defaulting, after Bear Sterns the status of the counterparty is uppermost in everyone’s mind,”
he says.
Although the spread of tri-party deals covers the full spectrum of the money market
dealmaking, about 75% of all the business done is still short end business, ranging from one
day to one week, and one week to one month. However a growing proportion of the repo
 =ZgZ

;aZm^WaZhdaji^dch!iV^adgZYidndjgcZZYh#GZaVi^dch]^ebVcV\ZbZci!
Wj^aidcYZZeZgjcYZghiVcY^c\#HZgk^XZZmXZaaZcXZ"i]VindjXVciV`Z
[dg\gVciZY#8aZVghigZVb#G^\]i]ZgZ!l]ZgZndjcZZYjh#

HZiiaZbZciVcY8jhidYn"<adWVaHZXjg^i^Zh;^cVcX^c\">ckZhibZci;jcYHZgk^XZh \ZibdgZ 41 | GSL

inFrastructure

Another game for the business done by Euroclear is now being done on an open ended basis, which means that the
cash taker can stop the transaction on call. De Schaetzen points out that this is a measure of
tri-party collateral the fact that people are feeling less comfortable about going into transactions.
While tri-party repo still takes the lions share of the deal, the main tri-party collateral
managers is the fact management organisations, such as Clearstream, Euroclear and Bank of New York Mellon,
are working with their clients to see how they can use the collateral to service many different
that the European types of transaction.
“While repo remains the main focus, we see other collateralised transactions, particularly
firms can pledge in the securities lending business, where one asset is exchanged against a basket of other
assets,” he says. This kind of deal is typically used to implement a collateral upgrade, with
collateral to get the borrower borrowing GC securities as against corporate bonds. This is a particularly
interesting game for pension fund managers, for example, who will be long on government
dollar liquidity in the securities as part of their liability matching exercise. The fund manager can lend out his/her
government bonds without losing them, in return for an interest payment and will have solid
US from the Federal collateral in corporate bonds in return. The borrower in turn gets more government bonds
to put into his “basket” of collateral which satisfies his lender’s increased eligibility criteria.
Reserve There is no doubt that the proportion of securities on loan by pension funds has increased
dramatically.
Another game for the tri-party collateral manager is the fact that European firms can
pledge collateral to get dollar liquidity in the US from the Federal Reserve. Still another
option is tri-party services for secured loans covered by securities collateral.
De Schaetzen points out that Euroclear also helps its customers fulfil their collateral
obligations to CCPs. A trading counterparty could be asked to fulfil margin requirements
during the course of their margin based trading activity, and if Euroclear and the CCP
have mutual clients who are looking for management help on the moving of collateral to
support margin calls, that is all grist to the mill for Euroclear. It can manage the collateral
movement and report on the outcome to both parties. “The clearing house will indicate to us
the acceptable basket of securities for margin requirements and will set the exposure amount,
and we will cover the margin on that throughout the life of the exposure, since we have a full
view of our client’s securities portfolio holdings,” de Schaetzen says.
A more recent addition is collateral management for derivatives exposure. Euroclear
has a relatively new product called DerivManager, which will calculate the exposures of
two counterparties to a range of derivatives trades, and can post the collateral against the
exposure for those derivatives trades.
“The key point to understand is that we are now well beyond just tri-party repo. This is
now the era of tri party collateral management, with clients wanting to optimise the use of
their securities in more and more types of transactions,” he says.
That is driving the expansion of the tri-party service to other types of deals. As de
Schaetzen points out, from a borrower’s perspective, you want to have all your assets pooled
with one agent, since that helps you to leverage a wider pool of assets across a greater range
of transaction types.
From the standpoint of cash lenders offering term money, they have seen their lines of
credit shrinking significantly through the credit crunch. So banks who are long on cash
are looking for alternative ways of securing their term money investments, which boosts
tri-party collateral management. In parallel to this, de Schaetzen says, the rise of electronic
basket trading, such as the Clearnet system or the LCH.Clearnet Sterling GC product.
This latter, launched in March last year, allows Sterling money market participants to trade
Sterling against a basket of UK government bond collateral. It was aimed at banks active
in the Sterling markets and had strong take up from a wide range of banks using it to fund
their Sterling positions.
De Schaetzen is confident that the tri-party format has a long and bright future ahead of
it, despite the squeeze on eligibility profiles.

42 | GSL
inFrastructure
reinventing repo
European repo
Catherine Kemp
explores to what
extent the credit
crunch has affected
the European repo
market
The European repurchase agreements
(repo) market has changed dramatically
since the beginning of the credit crunch.
Between 2001 and June 2007 - ICMA
figures on total value of repos and reverse
repos outstanding on the books of
participating institutions grew every six
months, year on year from EUR 1,863
billion to EUR6, 775 billion.
The strength of the European bond
markets, the stability of the Euro and the
ICMA’s standardisation document for
repo transactions – the Global Master
Repurchase Agreement, all contributed
to its steady development. However in
December 2007 the figures dropped,
falling from EUR6, 775 billion to
EUR6,382 billion. Not only did it fall
lower than it had been the previous six
months, but lower than the previous year.
However as market commentators will
testify, this by no means indicates that the
market has stopped growing.
Repos involve one party selling
securities to another – using a transfer of
cash as collateral. The seller then agrees
to repurchase the same or equivalent
securities at an agreed date in the future.
Its economic effect is that of a secured
loan. The majority of repos are conducted
within the real repo market. They include
specials and general collateral (GC) repos
and primarily focus on financing a dealer’s
securities inventories. The majority of bond
and government securities lending and
borrowing is conducted via repo.
The ICMA figures refer to the real repo
market. The drop in volumes, reported in
the first quarter of this year, demonstrate
how much the real repo market has been
affected by the credit crunch. Primarily the
drop in value of triple-A rated Mortgage
Backed Securities (MBS) and Asset
Backed Securities (ABS) have taken an
enormous amount of liquidity out of the
market. Secondly, the lack of trust between
banks who are not sure which counterparty
is exposed to the crisis, has meant that the
unsecured lending market has dried up
and banks now have to find other ways of
raising cash and managing liquidity. Repos
have become a vehicle for raising cash as
Bart Vandeldren senior repo trader at KBC
Bank confirms: “All banks suddenly want
to use collateral to make cash, to produce
cash. If you look at the unsecured funding
market at the moment it is much more
expensive than the repo market, which is
why repo is becoming more popular.
“All banks are opening up their drawers
to find paper for repos. The repo is also
attractive because it is very low risk. There
is a Global Master Repurchase Agreement
in place that makes the margins on a
daily bases. So if the collateral value
fluctuates on a daily bases they have to
give additional collateral to make the
loan secured again. As a result a lender’s
exposure is close to between 99-100%
of the collateral value. If the bank goes
bankrupt they have the majority of the
value secured.”
However as the ICMA figures testify, it
is not the real repo market that is being
utilised, but a new transfigured version
of the repo as Marcel Naas managing
director of Eurex Repo explains: “Since
the credit crunch we have seen a shift in
the behaviour of our clients. Before it was
a real repo market, a security driven repo
market, which means you do the financing
of specific securities.
“What happened with the crisis is
that people within the bank were really
driven by managing the liquidity of the
bank, essentially to secure the bank. There
was a lack of trust in the market, banks
questioned whether it was safe to lend
money to other banks and so the banks
started to move into the secured money
market, which is a cash driven market. This
is a dramatic change of view and means the
banks had internal discussions about the
repo desks having to give their collaterals
in order to secure the cash driven market.
It is now the same structure, but instead of
trading securities banks are trading cash.
It’s just turning the whole thing round and
looking at it in different way.”
Also the credit crunch has meant that
market participants look at ratings and
the quality of securities in a different
way. In the past collateral classes were
43 | GSL
inFrastructure
Stephan Lepp -
clearstream executive board member
ratings towards new standards, and one
of those is the European Central Bank
(ECB) quality. EBC eligible collateral has
ensured that securities have been given a
new quality approval, as Bart Vandeldren
explains: “There is a big focus on ECB
eligible collateral because the inter bank
market has basically gone dead.
“Banks don’t trust each other any more.
The ECB has criteria regarding the types
of securities it will take, it doesn’t have
to just be bonds, as long as you fit that
criteria you are secure. So people prefer to
give paper to the ECB and get cash from
the ECB, because your risk is a central
bank and therefore close to zero, while
with a commercial bank or investment
bank you always have the risk that it will
disappear one day or another.”
Other technological, regulatory and
infrastructural developments have also
driven this dramatic shift of focus. For
example the rise of tri-party repo in
Europe and the availability of services
like Euro GC Pooling, BNY, JP Morgan,
which offer the advantages of central
counter party (CCP), and which provide
anonymous and secure trading are essential
in a market of counterparts who don’t
trust each other. CCPs manage collateral,
ensuring for example that enough
collateral is always provided to make the
44 | GSL
loan secure as the market fluctuates, and
they mean that a bank is never trading
against a bank they are always trading
against a central counterparty. The use of
CCP and ECB eligible securities means
that customers are much more likely to
take other forms of securities as collateral.
Another factor is that banks started to
change the way that they managed their
liquidity a few years before the credit
crunch began as Stefan Lepp confirms:
“Originally you had a treasury department
that managed their own liquidity pool,
a repo desk that managed theirs’, and an
equity desk that managed theirs’. A few
years ago the banks began to realise that
this was not very efficient because it meant
that they didn’t have optimal use of the
collateral. More and more banks started
to pool together the liquidity of these
different departments. They also started
to centralise external liquidity pools. So
for example, a bank is using investment
bank x for one set of activities, and bank z
for another – which is very inefficient. If I
have exposure with bank x, and bank z is
managing my collateral then in order to
make the trade it is necessary to transfer
the securities from one bank to another,
this means I miss the trade and I’m short
and need to go to the market to buy
money. Very inefficient. Banks started
to think about having one centralised
liquidity provider, that’s where our product
came in.”
These centralised pools of liquidity
ensure that when the credit crunch hit
many banks were already structured in
a way which would allow them to re-
orientate their repo desks towards the
secured lending market. Products like
Clearstream’s liquidity management that
automate the management of exposure,
provide the ability to quickly re-use
collateral in real time and so on, were
available to enable banks when the need
arose to garner all their assets in the search
for cash liquidity.
At the beginning of the credit crunch
Eurex Repo saw a drop in business of
approximately EUR 40 billion in August
and September 2007, which they attribute
to the loss of liquidity in the market as a
result of the drop in value of MBSs and
ABSs. But in contrast to their competitors
they revived within eight weeks. This
incredible turn around is related to their
unique service, which in partnership with
Euro GC Pooling provides centralised,
automated and flexible liquidity
management and simultaneous CCP
anonymity and security. Suddenly banks
needed not only a central counterparty to
feel secure in their trades, but also needed a
service which would enable them to make
the most use of their resources. Since then
this combined service has seen increasing
volumes, and since January 2008 they have
had both competitors and new clients
asking for consultation.
While this may seem an advert for
Eurex Repo’s success, it also demonstrates
that the credit crunch was a catalyst for a
change that was already on the way. The
banks’ needs changed not only in response
to the fact that the unsecured lending
market had dried up and they needed to
utilise all their resources in the search for
cash, but in the long term they needed
adequate automated and low risk systems
for trading and collateral management.
And with the Basel II accord on the
horizon, which will ask banks to ensure
that the capital requirements for unsecured
lending are much higher, the need will be
reinforced.
inFrastructure

institutional grade
operations attract investment
Investment opportunity

ConvergenCe of traditional and absolute-return portfolio management

A common theme in the institutional asset management industry over the last ten years
has been the blurring of distinctions between traditional and alternative portfolio strategies.
Until recently the two approaches appeared to be very different animals with unique
clientele and differing operational needs. We have observed these divisions dissolve and
now asset managers freely leverage components of both traditional and alternative methods
when developing their products – witness for example the growth of 130/30 funds as a
middle ground between long and short equity exposures.
These 130/30 funds are often dismissed in hedge fund circles as ‘lite’ versions of absolute
return strategies, but the industry should rightly note the intrinsic value offered to the
institutional investor in these funds: the stability of a traditional manager – all of the
operational solidity implied by a long track record and an established backoffice – combined
with the promise of additional alpha derived from the portfolio construction.
In addition to delivering consistent performance, we now commonly see alternative
managers forced to critically review their operations and consider whether their fund
platform meets the expectation of an institutional investor – specifically in the areas of
operational resilience, valuation transparency and oversight functions. Without a steadfast
backoffice operation, institutional mandates can be delayed or entirely jeopardized – a
reflection of the importance investors now place on a fund’s operations in mitigating risk.

Custodians as partners in mitigating Counterparty risk

RBC Dexia’s Where traditional managers have leveraged custodians to securely hold and service assets in
segregated accounts and thereby have offered additional protection to the fund’s unitholders,
Brad Taylor alternative managers have built relationships with deposit-taking institutions that co-mingle
their own assets with those of their clients.
explores The events of this past March have brought into sharp relief the counterparty credit
risks that alternative managers take on when operating their strategies in this way and as a
convergence, response, alternative fund managers are again considering the function of an independent
custodian and how they might leverage a custodial provider to isolate counterparty risk. In
counterparty risk, response, custodial providers have developed solutions for asset managers such as middle
office collateral management and tri-party repo capabilities.
and how to enhance In the case of middle office collateral management, the custodial provider manages the
valuation and lodging of collateral between the fund and the prime broker(s) – ensuring
portfolio returns. that only an appropriate amount of assets are delivered to the prime broker to secure the
transaction.
Tri-party repo offers a greater degree of safeguard for the fund – in this instance the
custodial bank provides an escrow function for collateral between the fund and the prime
broker, holding the collateral independently of either party and ensuring that both parties
interests are protected in the event of a default.

45 | GSL
 A custodian may also provide trustee services to the fund, wherein the trustee maintains
Engaging a controls with respect to the safety of the assets. This additional responsibility places the
custodian in a fiduciary role and gives institutional investors an added measure of security
custodian to provide when making an investment.

the array of services an industrial grade operation negates operational risk

Institutions require operational transparency including clear details on documented front-
to the fund gives to-back operational practices and oversight. The requirement for portfolio transparency
places importance on a fund manager to present opaque and unbiased reporting of portfolio
the asset manager holdings. Recent best practices documents have suggested this function is best provider
by an independent provider with clearly documented and auditable valuation controls.
the time to focus on To provide the widest possible instrument coverage, the valuation agent should be able
to demonstrate systems and processes regarding the valuation of illiquid and structured
portfolio construction portfolio positions as a constituent part of the daily and monthly NAV.

and optimizati on Consolidation benefits

The holistic custodial model means one set of processes, one set of controls, and one service.
This enhances risk management as all of the client’s activity – exposures, concentrations,
and diversification – can all be tracked and validated through a single point. The result is
a beginning to end service proposition that starts with a partnership at the front office
with the client and runs into a middle office oversight function through into a back
office support function – and the custodian is the logical choice to provide it. Custodial
banks have also expanded to include portfolio valuation services as a natural extension of
providing asset custody to institutions. In recent years, a number of other products have
become commonplace in the custodial service offering which include securities lending
and borrowing, wherein the custodian lends the portfolio’s assets as a source of revenue and
lends securities to the portfolio to support short selling or the use of leverage.
Other ancillary services that contribute to maximum operational efficiency are
shareholder services and distribution support. Shareholder services include registrar and
transfer agency, cash management, fee processing, dedicated quality assurance, e-business
facilities, investor communication (distributor and shareholder) and reporting. Distribution
support for asset managers encompass order processing and confirmation, corporate action
management, trailer fee calculation, asset allocation, custody and account management
support, settlement and compliance monitoring.
Engaging a custodian to provide the array of services to the fund gives the asset manager
the time to focus on portfolio construction and optimization, while continuing to receive
the highest level of quality and support from the service provider.

enhanCe portfolio returns

The increase in leverage and shorting by the asset management community will impact
the market for the foreseeable future,
Leveraging their position as holder of assets for a wide array of asset managers, custodians
typically operate sizable securities lending programs. Portfolio managers may elect to engage
custodians directly as an alternative source of securities borrowing to support short selling.
Managers who engage securities lenders directly will find large, stable sources of supply that
can be accessed in a cost efficient manner.
Alternative funds will find in custodial banks a willing and capable provider of servicing
that offers the scalability and stability to support increasing institutional investment while
reducing the operational footprint required. The injection of institutional capital into
alternative strategies is transforming the industry and making managers operate in different
ways – custodial banks such as RBC Dexia stand at the ready to support managers who are
making this transition.

46 | GSL
infraSTruCTure
Can’t see the
fees from the trees
Transparency in Securities Lending
Most people have, from time to time, broken
down their phone bill in order to find out
how on earth they managed to spend so
much in one month. According to new
research, few pension fund managers are
even able to break down what custodians
are charging them for in regards to their
cash management and securities lending
bill. A Vodia Group Survey, Institutional
Investors on Custody, Cash Management
Are custodial fees
as transparent as
previously thought?
Giles Turner to both
the believers and the
heretics
and Securities Lending, published at the
beginning of 2008, stated that 56% of
institutions surveyed reported frustration
with understanding what custodians are
charging for in regards to the bundled service
offered by custodians.
Understandably, custodians were not
impressed. An unnamed spokes-person
from a well-known US custodian called it: “a
confusing statement.” If you only dealt with
asset managers rather than pension plans,
this claim on transparency, or the lack of it,
may well seem puzzling. This depends on
those surveyed, rather than the problem of
price transparency.
Vodia Group interviewed over 40 leading
public, private and non-profit funds
managing over USD1.3 trillion in assets. The
original survey was followed up with another
in May 2008. Here, the survey focused on the
asset management community, and of those
surveyed, 79% of the managers said that they
paid separately for each service provided
by their custodian. Only 21% reported
bundled pricing and of those ‘just a few’
drew attention to any level of opacity in the
billing process. Asset managers seem either
be too committed and bespoke to ask for
bundled services, and any worry concerning
transparency is either deemed unimportant,
or at least trivial compared to other problems
asset managers are facing at present.
Josh Galper, Managing Principal of Vodia
Group and joint-author of the surveys,
explains: “We’ve found pension plans and the
institutional investors we have spoken with
to be very much less sophisticated in their
understanding of the cost of their securities
and lending relationship than we found asset
managers to be.”
Although institutional investors may have
less understanding, this hasn’t stopped them
realising that they may be on the wrong end
of the deal concerning their fees for custody
and bundled services. According to the
January Vodia survey: “The central culprit in
47 | GSL
infraSTruCTure
“There might be institutional dissatisfaction with custodian is
the bundling of services combined with the
clarity initially opacity of pricing. Appreciated by some for
its simplicity, this approach has increasingly
negotiated into the pushed away asset holders, particularly the
largest funds.” The results of the survey
contract, but then showed that 77% of respondents that used
their custodian for securities lending and
when a bill comes cash management stated that their custodial
services was bundled with no explicit price
it is not necessarily transparency.
Obviously, custodians do not agree, and
all broken out so looking at transparency in regards to fees in
general, custodians have faith in their mode
a lay person can of operations. Suzanne Lee, senior managing
director and head of account management in
understand.” State Street’s securities finance business, states
that: “From a State Street perspective that
we do provide that transparency as part of
our renegotiations for all services. Securities
John Galper lending is highly transparent from a fee
revenue generation standpoint in terms of we
Managing Principal provide information, fee splits or obviously
identify the revenue is reported on a monthly
of Vodia Group basis.”
Wayne Burlingham, Global Head of
Securities Lending & Clearing Services,
HSBC Securities Services, puts forward a
similar statement: “Certainly from
an HSBC point of view, it’s absolutely
transparent. The clients know
exactly what they are paying for in terms of
custodyies and all the
lending-fee arrangements are fully
documented. in that agreement. There is
certainly no sneaky “back door”. One of the
most common conversation
questions is that if the client participates
in a lending programme then what there
is generally a discounts may available on
custody or other fees?
48 | GSL
Regarding the bundling of services,
Burlingham sees it as a case of
choice, rather than anything more nefarious.
“Reasons behind bundling is
usually client preference. And in some cases it
can be to do with the way
the fund manager arranges custody on behalf
of an underlying client. It can
make a difference for fee arrangements they
have in place, i.e. they can
pass some changes through to some funds
but not others. This might be along the
lines of reducing custody fees in return for a
dpreferential fee split.
To us commercially, it is all the same number
at the end of the day, the
difference is just how it is carved up.”
This argument around fee transparency is
hardly novel, nor confined to the standard
institutional investor landscape. Turning
to the relationship between hedge funds
and prime brokers, it has been notoriously
difficult for hedge funds to establish exactly
what they are paying for. More importantly,
when the hedge fund’s assets are used by
the prime broker to generate returns, this
usually takes place outside the knowledge of
the underlying hedge fund. The worrying
factor here is that the difference in client
sophistication between a hedge fund
manager and a pension fund manager is
usually significant. If hedge funds are being
kept in the dark regarding their fee packages,
what hope does the unsophisticated investor
have?
However it is important not to box
the discussion into a simple case of good
versus evil. Galper explains: “I don’t think
the custodians are trying to mislead the
client. I think that unless you have a
certain sophistication and understanding,
infraSTruCTure
the pricing is not always fully clear. There
might be clarity initially negotiated into the
contract, but then when a bill comes it is not
necessarily all broken out so a lay person can
understand.”
One might be tempted to wonder what
a lay person is doing in charge of a pension
fund, but that doesn’t hide the obligation
of the custodian to do it’s best to clear the
murky waters of fee transparency. There is
also the case of fee opacity causing a domino
effect because if custodial fees are not fully
understood on the pension plan side, they
may not be reported correctly. As a result,
not only do you start a discussion concerning
who is losing out, but also regarding who
is truly benefiting? Do the funds within
the pension plan get a better custody deal
than they really ought to? Likewise in
asset management, are fund corporations
benefiting at the expense of investors?
It is unsurprising therefore to hear
rumours of some significant lawsuits being
formulated in the US, brought by pension
funds and their class action lawyers against
retirement plan administrators who have
inaccurately managed their custodial and
securities lending relationships leading to a
loss of revenue for investors.
Now is the time for increased scrutiny
into fees and transparency as everyone from
administrators to investors look for ways
to decrease overheads and avoid the legal
consequences brought by angry investors.
Suzanne Lee explains: “What we have seen
over the last ten months is a true shift
from clients who were very focused on
revenue generation to those looking at risk
management. We have seen our customers
become very resolute on truly understanding
an appreciating the programme, where we are
lending, who we are lending to, the types of are being made today are not always fully
collateral we accept, where we are investing understood, at least when the bill comes.
cash collateral. They want to fully understand Even the asset managers surveyed by
their risk profile.” Vodia Group admitted that the bill was hard
This is not to say that the risk factor is the to understand and it took them time to break
most important element in the securities it down.
lending industry. Like any financial industry, It is without doubt that greater
returns take a higher precedence than any transparency is in everyone’s interest.
‘philosophy’ or ‘risk appreciation’, and as Hopefully it wont take a lawsuit to enforce
transparency increases margins begin to greater transparency, rather market forces
fall. This also results in an increase in those should induce change. Custodians are
searching for the next opportunity. Peter battling against agent lenders and they need
Economou Executive Vice President Head of to prove that their services are worthwhile.
Securities Finance, State Street, explains: “I With investor confidence at fragile levels,
think as transparency comes into this market custodians certainly don’t want to be seen
what we are clearly seeing is from our client biting one of the more profitable hands that
base is they are becoming more comfortable feed them.
expanding their programme faster than
they normally would. This is because
they are getting educated, they are getting
knowledgeable, and they are getting data
showing how much return can be expected
and how much incremental risk is associated
with expending into a new region or product.
In the future revenues will increase for
beneficial owners because they will become
more comfortable with their portfolios.”
Becoming increasingly comfortable
with your own securities lending portfolio
can only come about through increased
transparency, something that is difficult
to enforce externally. It is obvious that
custodians are going to say that they are
doing everything by the book, and it is hard
to argue that they are deliberately trying to
confuse anyone for their own advantage.
To argue such a point would not be to the
benefit of anyone. However it remains
the case that no matter how comfortable
beneficial owners may become in the future,
the securities lending agreements that
49 | GSL
 entering the fray
Traditional asset Managers in the Securities Lending
Market by alexander Tallett, research analyst, Vodia Group
For the first time, traditional asset managers
are becoming both large-scale borrowers and
lenders of securities. Their long/short assets
are growing rapidly as leveraged strategies be-
come institutionalized and 130/30 continues
to win away mandates from traditional long
only strategies. As lenders, asset managers
continue to be a primary source for securities
loans alongside pension plans and similar
institutions. New dynamics are changing how
asset managers see securities loans however,
forcing them to rethink their lending strate-
gies. The end result will be higher borrowing
costs for other borrowers, notably indepen-
dent hedge funds.
Leveraged assets are on the rise industry-
wide and with them market demand for bor-
rowing securities. Vodia Group recently spoke
to 32 asset managers with USUSD16.6 trillion
in assets, or 27% of the assets of the top 300
firms. These managers currently have roughly
3% of AUM in hedge fund strategies. While
still a small percent, this figure is up from
nearly nothing just a few years ago. Based on
feedback from these managers and a similar
study of pension plans we conducted, we
project that leveraged assets will grow from
USD2.65 trillion today to USD4.58 trillion
over the next four years, a growth of 73%.
Concurrently, we see asset managers
looking to feed their growing demand for
borrows by sourcing from their internal
assets. By lending to themselves, asset
managers can improve returns for both the
lending and borrowing fund and effectively
eliminate counterparty risk. A neutral
third party will still set the rate so as not to
50 | GSL
preference one client portfolio over another. investment boards. Asset managers also think
While beneficial for asset managers with large that securities lending transparency is good
long inventories, a widespread adoption will for business; we found 69% also believe that
make inventory much scarcer for hedge funds transparency will lead them to
and the prime brokers who serve them. greater revenues .
Traditional asset managers are thinking We expect asset managers to grow
to take inventory off the table for other increasingly sophisticated in the securities
reasons as well. Concerns over corporate lending market. Currently many firms
governance and the risks inherent in are divided into long only and alternative
collateral management returns have caused management divisions, sometimes with
some managers to pull back. Specifically, different operations teams. In time these
many asset managers we spoke with were groups will appreciate that by leveraging a
pulling back on general collateral lending, as common asset – securities for lending or
they no longer believed the risks to be worth borrowing – they will lower their costs and
the reward. A number of asset managers increase their funds’ performance. While the
reported simply cutting out general collateral end game is still a long way off, an overall
lending and focusing on specials to generate shortage of supply will act as a catalyst to
revenue. Drawing a weighted average from development in the securities lending market.
our interview sample, we found that asset Other market factors, such as electronic
managers will increase their publicly available trading markets, prime brokers and hedge
securities lending inventory by only 0.4% funds, will see equivalent benefits and
over the next four years. struggles as asset managers make their mark.
With less of an emphasis on returns from
collateral management, the rebate rates of
specials take on a new importance. This
suggests that supply for specials will remain
healthy if not necessarily growing, while
supply for general collateral securities may
be negatively impacted. We expect increased
demand on this relatively flat supply to make
borrowing more expensive across the board.
These same forces fostering tighter supply
will also push the securities lending market
towards greater transparency. Traditional
asset managers naturally seek transparency
in all of their trading operations; this is part
of a culture of cost analysis and reporting to
running header

51 | GSL
infraSTruCTure
Jane Milner, global Product Marketing Manager, SunGard
Securities Finance, talks about enhancing profitability
through an integrated securities lending solution
The securities lending market is expected
to continue to grow by 5% in the US and
10% in Europe according to a recent report
by Towergroup. In this expanding market
the need to improve efficiency and drive
down costs is never far from the mind
of the business manager. International
securities lending is an area in which there
is still considerable scope for efficiency
improvement as it is one of the last areas to
have fully embraced automated processing.
The lack of automation, evident in front,
middle and back office activities, is largely
due to the variable nature of the trades
and the lack of market standards in the
operational lifecycle. This is particularly
true in international lending (as opposed to
US Domestic lending), as the cross market
complexities make automation even more
challenging.
While securities lending volumes and
values continue to grow, there is the danger
that revenue increases can be outstripped by
increases in cost, resulting in a compression
in overall profitability. Empirical evidence
suggests that there are still countless
efficiencies that could be realised to hold
down costs. This involves two distinct areas
for improvement; enhanced processing
and integration of IT solutions within an
organization, and also increased efficiency
of communication between counterparties
during the many lifecycle events that occur.
With a securities lending trade duration,
ranging anywhere from one day to weeks,
months or years before a trade is complete,
maximizing efficiency is clearly of paramount
importance.
Technology has already assisted by putting
into place a collection of small, distinct
innovations, such as order routing and
contract compare. But what will lead to real
transformation and greater profitability in
the industry is the closer integration to allow
the entire process to be managed end-to-end.
Not only will this deliver reduced costs and
increased efficiencies, it will also build in
the scalability required to support ongoing
52 | GSL
increases in volume and business expansion.
The danger with automation of isolated
parts of the process is that a bottleneck is
simply moved further down in the processing
cycle, or even worse, a new bottleneck is
introduced within the trade management
lifecycle. Ideally, a solution needs to cater
for straight-through processing (STP)
from order entry, through each stage of the
trade lifecycle, to maintenance of a firm’s
core books and records. Integration in its
simplest form eliminates the repetition of
tasks on multiple systems. It also gives greater
sophistication and synchronization to a total
solution.
Tthe International markets STP has been
focused around areas such as electronic
settlement, but there is still great scope for
further integration to improve efficiency in
many more of the front, middle and back
office processes.
The benefits of automation are not only
appreciated by those managing the labour-
intensive back office tasks, but also by the
traders in the front office. Securities financing
is no longer a ‘service’ to other trading
functions, and securities finance traders need
to become more proactive and opportunistic
in their approach. To be more efficient, this
requires more sophisticated decision support
tools for price discovery, visibility of market
volumes and trends, and a clear awareness
of consolidated borrow requirements and
securities availability.
With the front office equipped with more
sophisticated tools to gain efficiencies and
increase business, the back office must keep
pace and maintain high levels of service. Not
only is back office automation required to
manage this activity, but it must be carried
out ever more efficiently and cost effectively.
High volumes present significant challenges
in manually intensive processes. Increased
automatwion of efficient business processing
and increased STP is a fundamental
requirement rather than a ‘nice to have’.
There are many potential efficiencies
that can be driven from the functionality
incorporated within a securities lending
solution. Having these challenges addressed
by dwisparate, non-integrated systems can
bring its own set of issues, and possibly
result in moving bottlenecks to other stages
within the business process. Close integration
between disparate systems is needed to fully
reap the benefits of improved efficiency of
process and support scalability, while helping
to control risk and cost.
An integrated solution can become an
enormous asset for managing an institution’s
own record-keeping commitments as
well as trading activity with other market
participants, while eliminating the repetition
of tasks on multiple systems. However,
anyone who has been involved with
integration of systems, whether manual or IT
related, knows that the devil is in the detail.
What sometimes appears on the surface
to be a relatively simple task can build in
complexity as the scope and subtleties of each
system become apparent.
Up until now, securities lending has often
existed in isolation in relation to many other
departments within financial institutions.
However, institutions are increasingly
realising the benefits of enterprise-wide
efficiency and improved workflow gained
by a consistent approach to technology and
systems. One clear premise that arises from
this realisation is that the more integration
there is between systems, the greater the
benefits these systems can offer. The most
effective integration therefore can be achieved
with a total solution sourced from a single
supplier.
ProfiLeS

Lender Vox Pop

deutsche Bank’s Jane Karczewski, director, head of
supply sales Europe and global prime finance asks
asset managers and pension funds how the sub-prime
crisis has affected them
“The Fund Industry has become increasingly competitive over the last decade, and even more so in the current
market environment. As a result Pension Funds and their Asset Managers have been overlaying additional Portfolio
Enhancement Products on top of their standard investment allocation (Outperformance Certificates, Swaps, Securities
Lending, Repo, Cash re-invest products). Are you active in this arena? Have you changed your risk criteria over the
last year in light of the sub-prime crisis (e.g. accepting Non Cash collatereal for Securities Lending, re-evaluating your
trading counterparts etc)? How has the last year affected the funds performance overall?”

JerrY mAY cAsH, securities Lending officer At frAnk vAn der kAnt, Pggm investments August sAnder, HeAd of securities Lending,
oHio PubLic emPLoYees retirement sYstem sAnLAm investment mAnAgement

“Ohio PERS is active in securities lending
and cash reinvestment products. We have
not changed any formal policies or guidelines
at this point in the credit cycle. In practice,
we have been at a heightened state of alert, if
you will, regarding our exposures, and cash
reinvestment risk. We monitor all of these
issues very closely, and have been cautiously
watching the markets, as I’m sure most
market participants have. Performance over
the last year has continued to be relatively
strong in our securities lending programs.
This is due, in part, to the structure of our
program, as well as the increased demand to
borrow some asset types.”
“PGGM is an asset manager based in the
Netherlands. Our largest client is the Pension
Fund Zorg en Welzijn (PFZW) with roughly €
87 bln. of assets. At the heart of PGGM’s beta
management lies the Sophisticated Matching
Approach (SMA), an in-house developed
beta management style for the management
of PGGM’s total liquid beta exposure. The
objective is to deliver the targeted return on the
aggregated liquid beta portfolio at low costs
and remain flexible enough to accommodate
portfolio rebalances. This all within very
tight risk limits. Portfolio Enhancement
Products are frequently used; eg securities
lending Government bonds and equity only
are accepted as non-cash collateral. These
collateral guidelines have remained the same
for the last three years. As a result of the
collateral guidelines the effects of the sub-
prime crises did not have a negative impact on
the revenues from securities lending.”
“Sanlam Investment Management conducts
securities lending on behalf of clients whose
mandates specifically provides for the
utilization of their assets for lending, in order
to enhance performance (or reduce costs)
of the specific fund. In the past 12 months
we have reviewed our collateral criteria in
response to market conditions, specifically
with reference to different types of collateral
and the spread of assets accepted. The South
African banking sector (who are the main
counterparties and issuers of collateral in
South Africa) has however not been seriously
affected from a ratings perspective as they have
had very limited (if any) exposure to the sub-
prime or similar type of investments. Despite
the negative sentiment on world markets,
the activity in the South African securities
lending markets have to a large degree been
maintained, resulting in returns from this area
not being affected to the same extent as was
expected.”

53 | GSL
Stats LENDABLE ON LOAN ON LOAN vs TOTAL ON TOTAL ON
Below is the risk Manage-
ASSET vs CASH NON-CASH LOAN ($m) LOAN (%) ment association Securities
($m)* COLLAT- COLLATERAL Lending Composite - aver-
ERAL ($m) ($m)
ages for the first Quarter of
2008.
north american Treasuries/Bonds $1,918,074 $546,708 $85,522 $632,230 33%
Lendable assets refer to the
uS Treasuries/uST Strips $512,581 $316,996 $67,755 $384,751 75%
value of loanable securi-
uS agencies $180,837 $75,140 $9,250 $84,390 47% ties. on loan versus cash
uS Mortgage Backed Securities $186,822 $45,284 $1,019 $46,303 25% collateral refers to the value
uS Corporate Bonds $1,014,888 $108,249 $5,006 $113,256 11% of secuirties on loan in return
for cash.
Canadian Bonds (gov’t & Corporates) $22,945 $1,038 $2,492 $3,530 15%
on loan versus non-cash
colelrateral refers to the
north american equities $2,695,899 $274,235 $13,556 $287,791 11% value of securities on loan.
uS equities (includes adr’s) $2,637,800 $269,034 $11,565 $280,599 11% The 1st Qtr. 2008 table was
Canadian equities $58,100 $5,201 $1,991 $7,192 12% produced by data explorers.

european equities $1,175,178 $47,834 $65,675 $113,509 10%

french equities $153,032 $17,146 $6,667 $23,813 16%
german equities $148,351 $8,405 $8,553 $16,959 11%
italian equities $55,114 $3,412 $3,400 $6,812 12%
uK equities $398,886 $2,328 $18,126 $20,454 5%
Scandinavian equities $90,990 $5,361 $4,928 $10,289 11%
all other european equities $328,804 $11,181 $24,001 $35,182 11%

Pacific Rim Equities (Includes Australia) $496,669 $28,146 $40,360 $68,506 14%
Japanese equities $264,015 $12,060 $15,034 $27,094 11%
hong Kong equities $75,350 $4,302 $7,477 $11,779 16% * Lendable assets are reported
australia $112,329 $10,241 $12,008 $22,249 20% as aggregate assets without
all other Pac-rim equities $62,975 $1,542 $5,841 $7,384 12% consideration for client or bank
imposed guidelines (e.g. credit
all other equities (not Previously Listed) $98,366 $13,477 $4,768 $18,245 19% limits and percentage and/or
Total equities (aggregate Total) $4,466,112 $363,692 $124,359 $488,052 11% dollar loan volume caps).

euro denominated Sovereign Bonds $263,452 $66,455 $39,243 $105,698 40% The Survey reflects data provided
french Sovereign Bonds $60,664 $16,938 $9,078 $26,016 43% by the following institutions:
german Sovereign Bonds $81,988 $25,996 $9,922 $35,918 44%
italian Sovereign Bonds $42,188 $5,278 $5,065 $10,343 25% aig global investment Corp
Spanish Sovereign Bonds $12,991 $3,295 $2,695 $5,990 46% Brown Brothers harriman & Co.
all other euro denominated Sovereign Bonds $65,622 $14,947 $12,483 $27,430 42% Citibank n.a.
(not previously listed) Comerica Bank
Credit Suisse
uK gilts frost national Bank
emerging Market eurobonds(latin america & eastern $118,207 $16,872 $43,328 $60,200 51% goldman Sachs agency Lending
europe) $32,080 $4,793 $398 $5,191 16% M&i global Securities Lending
eurobonds $385,995 $18,575 $37,348 $55,922 14% Mellon financial Corp.
all other Sovereign Bonds † $55,61 $8,025 $9,768 $17,793 32% The northern Trust Company
Total Bonds (aggregate Total, incl uS) $2,773,424 $661,428 $215,606 $877,034 32% union Bank of California, n.a.
The Vanguard group, inc.
ToTaLS $7,239,536 $1,023,120 $339,966 $1,365,086 19% Wachovia global Securities Lending
average number of Lending Markets Wells fargo institutional investments
17

54 | GSL
 From the first quarter of 2007 to the
Total equities on loan versus cash and non-cash collateral first Quarter of 2008 total Equities
on loan verses cash collateral went
down, and total equities on loan
600 553,675
versus non-cash collateral went up.

500 466,720
Curtis Knight of the rMa: “The
450,325
432,456
reason for the shift is more u.S.
400 363,692
lenders and clients are taking more
Total equities on loan versus different types of non-cash collateral
300 cash collateral USD MM have gone down due to low investment rates and
in some cases an unwillingness to
200
143,803
124,359
assume the reinvestment risk of
71,769 90,299 cash. as clients get concerned for
100
76,908 Total equities on loan versus non-cash where to invest cash to achieve
collateral USD MM have gone up. return rates that would require
0
1Q.2007 2Q.2007 3Q.2007 4Q.2007 1Q.2008 additional risk, it is easier to take
non-cash and negotiate a straight
fee.”
Percentage break down of equities on loan Percentage break down of equities on loan
versus non-cash collateral in 1st Quarter 2007 versus non-cash collateral in 1st Quarter 2008 from 1st Quarter 2007 until 1st
Quarter 2008 equities on loan
versus non-cash collateral went up
from uSdMM 71, 769 to uSdMM
124, 359. however, n. american
Bonds on loan went down 6%
and n. american equities on loan
went down 3%, where as equities
from the rest of the world went up.
european equities on loan went up
2%, Pacific-Rim including Australia
on loan went up 19% and all other
equities (not previously listed) which
refers to: global depository receipts,
North American Bonds: 48% North American Bonds: 42% international depository receipts,
other depository receipts, Bermuda
north american equities: 9% north american equities: 6% equity, Brazil equity, Mexico equity,
israel equity, South african equity,
european equities: 29% european equities: 31% other equity and exchange traded
funds, have gone up from 0% to
Pacific Rim (includes Australia): 14% Pacific Rim (includes Australia): 19%
2% which actually amounts to a
all other equities(not-previously listed): 0% all other equities(not-previously listed): 2% difference of uSd 273 million to uSd
4,768 million. This means that while
non-cash collateral is the preferred
Percentage break down of equities on Percentage break down of equities on choice, and uS bonds and equities
loan versus cash collateral in 1st Quarter 2007 loan versus cash collateral in 1st Quarter 2008 are still the major equity type to be
lent since the credit crunch other
types of collateral are becoming
more desirable.

from the 1st Quarter 2007 until

1st Quarter 2008 equities on loan
versus cash collateral went down
from uSdMM 450, 325 to uSdMM
363, 692. n.american Bonds on
loan went up 5%, n. equities went
up 1%, and all other equities (not
previously listed) also went up 1%.
Where as the rest of the world went
North American Bonds: 56% North American Bonds: 61% down, european equities 4% and
Pacific-Rim (Including Australia)
North American Equities: 31 % north american equities: 30% 1%. The north american Bonds and
equities rise may be correlated with
European Equities: 9% european equities: 5% the decline in their use for non-
cash collateral. Whereas the rise in
Pacific Rim (includes Australia): 4% Pacific Rim (includes Australia): 3%
all other equities (not previously
listed) in both graphs may refer to
All Other Equities(not-previously listed): 0% all other equities(not-previously listed): 1%
the general expansion of securities
lending into new regions.

55 | GSL
InfrasTrucTure
The downturn & lending
Fintuition director Michael Eisenbeis outlines why information
and knowledge are crucial in the current climate
Time warp to the 1970s
With the economy expected to further slow
dramatically and inflation numbers worse
than they’ve been in more than two decades,
we could very well experience a time warp
back to the days of polyester shirts, when spi-
raling inflation joined forces with economic
stagnation - slow to no growth, combined
with rising unemployment - to create the
portmanteau word economists still use
today: Stagflation.
Status quo
Oil and other basic commodities (ie. gold,
wheat) prices are surging to new heights
with double digit growth rates. At the same
time the growth picture is just as bleak. Some
economists are predicting anemic growth
for 2008, and a growing number of experts
are even predicting a recession, now that
consumers have been weakened from the
housing bubble and the credit crunch that re-
sulted from the subprime-loan crisis. Sectors
like automotives, airlines or retail which are
sensitive to oil prices, consumer confidence
and – due to high leverage – to interest rates
are facing fresh downgrades by analysts.
56 | GSL
What will the future look like?
Slowing economic growth and the insatiable
need for liquidity has been triggering the
Fed’s policy of lowering interest rates but it
seems as if this time is over. Bernanke could
not be in a worse position. The Fed now has
to fight inflation and at the same time sta-
bilise the deeply disturbed financial markets
which means that the liquidity drain will stay
and asset values should face more write-
downs at least until next year.
Custodian banks the winners
Global custody banks have experienced un-
precedented growth in their securities lend-
ing business in the past year thanks partly to
the global credit crunch. The explosion in
revenues can be put down to the impact of
the credit crisis, which has pushed up collat-
eral reinvestment returns. This anomaly has
not only affected returns but also the inher-
ent risk profiles have changed significantly.
On top, we have learnt from clients that some
banks have earnt the best margins lending
cash internally.
FinTuition offers a variety of courses cov-
ering today’s challenges:
Collateral management
As relatively safe investments can turn sour,
custodians face new challenges in client
relationships. Is my counterparty engaged
in Alt-A or leveraged loans? Do my assump-
tions concerning the probability of default
differ from the rating or models?
Securities Lending
Understanding the mechanics of a securities
loan is both basic knowledge and challenging
at the same time as you have to understand
the relationship between the returns & the
risks of these transactions. And as we all
know the devil is in the details – We have de-
scribed in the following two simple examples
how a small mistake can corner you in these
volatile markets:
Using the wrong day-count convention
trading with a foreign counterparty it will
probably delay the settlement.
Marking to market every month or week can
prove also lethal as collaterals fluctuate and
the longer the time between each time you
mark to market you are more exposed to risk.
Hedge funds = Your clients
Wouldn’t you like to know with whom you
are doing business with?? Of course you
should! Understanding what are the motiva-
tions, strategies and needs of the different
market players (hedge funds, trading desks,
asset managers) is key to improve your prod-
ucts and processes and to maximise your fee
income.
New experts = Fresh courses
Many of our courses face significant up-
grades reflecting the current market condi-
tions and the need for practical relevant edu-
cation. We have also expanded our trainer
pool with Jens Ebinger, Head of Short Term
Products Structuring and Sales at Dekabank,
Grant Saunders, Head of Short Term Prod-
ucts Trading at Dekabank, and Alex Krunic
of Citigroup.
InfrasTrucTure

fintuition Training
Global collateral Management
15-16 October 2008 – London
Trainer: Alex Krunic /Kathleen Tyson-Quah
This course explains the rationale and current best-practice functioning of
collateral management programmes for financial institutions. It is designed to build up
a sufficient level of expertise to give attendees a good grasp of the legal, technical,
process and economic issues and drivers affecting the profession. It is therefore
suited to individuals who are either starting up a collateral management function or
seeking to improve their unit’s capability to add value to the front and middle offices
through adoption of more efficient collateral management processing.

International securities Lending

9-10 September 2008 – London
7-8 October 2008 – New York
18-19 September – Hong Kong
Trainer: Walter Kraushaar / Jens Ebinger
This course explains the mechanics of securities lending as well as the
motivations of the various market players. The focus is on how the economic benefits
of securities ownership are retained even as legal title is transferred. Lending and
collateral options are outlined and assessed. We then examine the borrowers
perspective and the trading strategies that drive securities lending. Why borrowers
reward lenders for collateral flexibility will become clear. Following a review of the
risks incurred in a securities lending programme, and the protection offered by good
documentation, the course explains the different routes to the lending market and
provides a comparative review of the main electronic securities lending exchanges
and their impact on the industry.

Bond financing (rePO)

12-13 November 2008 – London
Trainer: Paul Carroll
This course provides a comprehensive overview of the fixed income repo
product. You will be introduced to the economic motivations of market players and
learn the main trading structures, delivery methods, risk elements and
documentation. As part of a small group, you will employ alternative trading
structures in an extensive case study using SunGard’s Personal Martini trading
software. You will gain an understanding of the role of the repo desk as the ‘hub’ of
the fixed income trading floor. You will learn what factors drive demand to borrow
specific securities and create ‘specials’ in the market through a review of the main
bond trading strategies.
PrOfILe
Back to basics
Wachovia Global Securities Lendings newly appointed chief investment officer,
Kevin O’Connor, explains why remaining true to traditional lending principles
can be the most ‘cutting edge’ approach a provider can take in an ever-changing
environment
This July, Wachovia Global Securities Lending
(WGSL) welcomes a new chief investment
officer, Kevin O’Connor, to its executive suite.
O’Connor brings credentials and experience
that position him well for success in his new
role. Prior to his appointment, O’Connor
served as chief lending officer for WGSL,
focusing on portfolio management and trad-
ing for the firm’s securities lending division.
While some new arrivals to such a critical
and visible leadership position might be
inclined to cite a litany of intended changes
among their goals, O’Connor sets a markedly
different tone, emphasizing instead what he
wouldn’t change.
“At the outset, it is vital that we maintain
and enhance the program we have,” he says.
“What has helped make our lending program
so successful? Extracting the intrinsic value of
the securities loan per se. Emphasizing risk-
avoidance rather than risk-taking.”
WGSL continues to enjoy a level of client
loyalty virtually unmatched in the finan-
cial services industry today, while the firm
consistently earns high marks in industry-
wide surveys, particularly in regard to its
risk-management capabilities. In a time when
words like “innovation” and “thought leader-
ship” are sometimes tossed around aimlessly,
O’Connor’s vision for the firm implies an
underlying conviction that a conservative
approach to lending may be the most revolu-
tionary one of all.
“Tried-and-true principles, such as a sepa-
rate-account management philosophy and a
high-credit/low interest-rate risk approach on
58 | GSL
the reinvestment side, have enabled our cli-
ents to achieve higher-than-market returns”,
he says.
WGSL chief executive officer Gary Rupert,
familiar with O’Connor’s style having
worked with him for over 18 years, believes
O’Connor’s appointment is in the best inter-
est of the firm and its clients. “Our philoso-
phy of separate account management, strong
fundamental credit analysis and conservative
investing have been the backbone of WGSL,
and with Kevin as CIO, that will not change,”
he says.
Giving Credit Where it is Due:
Terry CrowO’Connor is quick to credit his
predecessor, Terry Crow, for forging the firm’s
prudent lending and reinvestment philoso-
phy.
“Terry was relentless in conveying the im-
portance of keeping it short,” says O’Connor,
referring to the firm’s continuing preference
for maintaining a low-duration/short-matu-
rity emphasis on the reinvestment side of the
lending equation.
Recent market events support the wisdom of
this approach. “The idea that you could gain
extra yield by going further out on the curve
was not something Terry believed to be in the
best interest of our clients, regardless of what
the competition was doing,” says O’Connor.
“The importance of this belief is under-
scored by recent events,” he says, referring to
the fallout of the 2007 sub-prime mortgage
crisis. “Terry always believed that lending is
about incremental returns for our clients, and
delivering that outperformance is best only
when it involves incremental risk to a client’s
profile.” CEO Gary Rupert agrees. “In his time
at WGSL, Terry was truly a client fiduciary,”
he says.
Crow, who served as WGSL CIO from 1995
to 2008, recalls how since the 1990s, ex-
tended periods of low interest rates, declining
spreads and a backdrop of overall benign
credit risk lulled investors into taking on
more risk in the pursuit of stellar returns.
“This was also true in the securities lending
industry,” he says, as “cutting edge” became
a euphemism for taking on unnecessary
risk. “The current credit and liquidity crisis
will re-emphasize the need for strong risk
management.”
WGSL’s policy of proceeding with caution
in new lending markets is a prime example.
While accessing new markets is important,
“in order to fully exploit opportunities
you need a full understanding of the risks
involved, whether they’re around settlement
expropriation, collateral or regulations,” says
O’Connor. The first mover into uncharted
lending territory, he says, may not be afforded
the advantage that a lender who proceeds
with caution gains. “We’re comfortable not
being the first to move into untested mar-
kets,” he says.
Today’s CIO: A New Paradigm
Most market participants would agree with
CEO Gary Rupert, who believes the global
markets have changed dramatically since June
2007.
PrOfILe
“A global financial de-leveraging has begun
to take place,” comments Rupert. “Against the
backdrop of this historic shift, our long-term
philosophy of fundamental credit analysis,
matched with prudent, conservative invest-
ments, has clearly benefited WGSL clients.”
In light of market developments, Crow
believes today’s lending CIO faces increased
responsibility. “The CIO has always had to
guard against landmines,” he states. “But
recent times demand stronger, more sophis-
ticated credit-assessment skills in light of
rapidly changing conditions.”
Counterparty Risk: A New Frontier
Among the myriad changes that the liquidity
crunch has brought about is a change in how
a lending participants should view counter-
party risk, says O’Connor. While lenders must
be willing to accept a certain degree of coun-
terparty exposure, the nature of due diligence
has changed.
“You have to amplify due diligence in regard
to counterparties, getting the right levels of
collateralization and stepping up protections,”
he says. And, diversification is critical. “You
have to make sure your risks are not tied to
just one or two counterparties.
At the same time, O’Connor reminds clients
that counterparty risk is unavoidable. “It’s a
necessary facet of this business,” he says, “that
shouldn’t be shied away from, but rather, ef-
fectively corralled through collateral manage-
ment and diversification.”
Growth Through product specialization are trends born of the
Flexibility, Adaptability third-party lending arena, where he believes
O’Connor’s vision offers ample room for client-focused innovation thrives.
growth around the firm’s high-credit, low- O’Connor also credits third-party providers
duration and short-maturity philosophy. with helping guide securities lending at-large
First, customization remains one of WGSL’s to become more of an asset-management
most effective competitive tools, an ability than “custody-offshoot” business.
that in turn supports another of O’Connor’s Much like liquidity, adaptability is para-
goals as CIO: to expand the firm’s supply by mount, a capability that O’Connor says drives
bringing new clients on board. WGSL’s enviable client loyalty. “Clients value
“Our ability to customize solutions appeals our ability to deliver a customized solution
to prospective clients, and the subsequent in a market where economies of scale are
infusion of new clients into our program becoming more the focus. This translates into
strengthens our portfolio of lendable assets,” our speed and agility in responding to clients’
he explains. requests, and our penchant for ensuring that
Next, while each lending transaction is forti- all of our team professionals are at our clients’
fied by the strong capital base and deep well disposal. “In an environment where acces-
of expertise WGSL leverages through its par- sibility and personal attention are becoming
ent, Wachovia Bank, N.A., O’Connor believes scarce, perhaps this is the most cutting-edge
greater internal teamwork will strengthen this approach of all.”
advantage.
“Whether a style preference or my interpreta-
tion of the strong ethical culture I inherit, I
intend to heavily promote and reward a true
team approach,” he says. “I want the profes-
sionals on our team to know they have direct
access to me and can directly impact our
results.”
Similarly, while WGSL has traditionally
espoused a separate-account approach as a
path to superior performance and transpar-
ency, the firm recognizes the value in offering
a commingled vehicle. “We can offer either a
separate-account structure or a commingled
vehicle, which can be managed internally or
externally through strategic partnership ar-
rangements,” says O’Connor.
O’Connor believes that customization and
59 | GSL
PeOPLe
roster moves
July
SunGard ASTEC Analytics has
hired Tim Smith as director for
North America, who formerly
worked for Data Explorers.
Smith worked for Ax Investment
Managers before joining Data
Explorers.
Brown Brothers Harriman has
bolstered its sec-lending team
with a round of hirings. Jeffrey
O’Neill has been hired as a
senior vice president and head of
global trading for sec-lending.
Thomas Poppey has also
been brought in as a senior
vice president and head of
relationship managment for the
Americas.
Andrew Pettit has left
Deutchse Bank, where he was
head of securities lending
business developement. He will
be senior vice president and head
of global business developement
for sec-lending.
In addition Daniel McGuiggin
has left State Street, where he was
head of the international lending
desk in Boston, and has joined
BBH as vice president and head
of US trading for sec-lending.
Erin Callan has been hired by
Credit Suisse as its managing
director and head of global
hedge fund business. Callan
moves from Lehman Brothers
where she was chief financial
officer. In her new role Callan
will join the Investment Bank
Management Committee and
the Global Client Steering
Committee.
60 | GSL
Simon Fallon has been hired
by CIBC Mellon. Fallon will
bolster the outfit’s sec-lending
team and will work under Rob
Chiuch, executive trader and
head of trading. Previously
Fallon worked for the National
Bank of Canada where he was in
equity finance.
Jonathan Morris has been hired
as chief operating officer by Data
Explorer. Morris was previously
with Thomson Reuters, whichi
he joined from Pearson, where
he was head of product and
technology management for
FT.com. Data Explorers has also
hired Christopher Holmes as
sales director.
John Hitchon of Deutsche Bank
is relocating from New York back
to London, where he previously
lived for three years while he
built DB’s prime brokerage
operation.
Geoff Pullen is to join BNP
Paribas’ Business Developement,
Alternative Funds outfit.
Prior to the move, Pullen was
the Europen head of prime equity execution where he will
brokerage consultancy at Bear be under the auspices of John
Stearns, before which he was at Stracquadanio.
Lehman Brothers.
AIG appoints chairman Robert
June B. Willumstad to the additional
position of CEO. Willumstad
ABN Amro’s head of sales and succeeds Martin J. Sullivan, who
marketing, global securities is leaving AIG and its Board of
finance, Chris Clark, has left the Directors. The Board has also
company. named Stephen F. Bollenbach as
its lead independent director.
Dan Lacey has been hired by
JP Morgan where he will work eSecLending appoints Peter
on the outfit’s SBL and Delta Bassler as managing director
One tax-driven strategies. Lacey of Business Development.
will replace Nathan Winstone
and will be working under the
supervision of Lee Olley.
Jasper Dikker Hupkes has been
hired by Fortis to work in the
company’s Global Securities
Financing Group.
Sadat Mannan has been hired by
Barclays Capital as the outfit’s
new head of equity finance
in prime services for Europe.
He replaces James Day, who
has been made director in
Geoff Pullen
PeOPLe
John Hitchon
Bassler will be responsible for
developing new business with
eSecLending’s institutional
investor target market
throughout North America.
Bassler joins eSecLending from
Dresdner Kleinwort’s Agency
Securities Lending business
where he was the director
of Marketing and Client
Management.
May
Northern Trust hires Douglas
Gee as UK and Irish Pension
Fund Sales Manager in the
asset servicing group’s business
development team, based in
London. Mr Gee joins from
Morse Group plc where he was a
Business Development Manager
for five years having previously
worked at Computacenter Plc
and BMC Software Inc.
Charlotte Wall and Philippe
Lopategui depart Morgan
Stanley
ING boosts desks globally. In
New York, Patrick McDonald,
joins as VP and Head of Credit
Repo. formerly of ABN Amro.
Mark Keefe as Global Head
of Global Securities Finance
Technology. Moving over from
Deutsche Bank.
Jim McDonald joined as a VP
on the New York Credit Repo
desk. Jennifer Saraiva was hired
as a VP and US Equity Lending
& Repo Sales trader. Erin
Jennings was hired as a VP and
Equity Derivative saleswoman.
Additionally Justin Dowey as
a VP and CFD trader, moving
over from Lehman Brothers.
Yumi Baldeon was hired as
an associate and client service
representative on the CFD desk,
reporting to Alison Scott.
And in internally in Brussels
Frederic Rober joined the tri-
party repo team, reporting to
Marc Seidemann.
RBC Dexia Investor Services has
moved Susan Pike into a newly-
created role as Global Head,
Market Products & Services.
Her previous role was serving as
Global Head, Securities Lending.
Michael Madaio, managing
director, responsible for
securities lending in the US
leaves UBS.
April
Paul Wilson joins 4sight
Financial Software following
positions at ION Trading and
Anvil Software and will be
responsible for pre-sales.
Mike Lambert moves to 4sight
Financial Software from
SunGard Consulting Services to
be responsible for consultancy to
existing and new 4sight clients.
Bear Stearns hires David Rabaut
to its European Securities
Lending and Synthetics team
arriving from Natixis in Paris.
US based broker-dealer, Merlin
Securities hires Ian Isaacs as
a senior partner, Director of
Research, and member of the
Executive Committee. Isaacs has
previously spent eight years with
UBS as senior vice president.
BNY Mellon Asset Servicing has
appointed two new securities
lending staff in London.
Sean Greaves previously with
Citigroup joins as a product
specialist focused on securities
lending sales initiatives, while
Clare Bromiley-Carmen,
formerly of Royal Bank of
Scotland, joins the client service
team.
sunil Daswani
Sunil Daswani moves internally
within Northern Trust and
has been appointed head of
client sales and relationship
management for securities
lending in Europe Middle East
and Africa (EMEA) and Asia
Pacific (APAC). Previously
Daswani was regional manager
for securities lending in Asia.
George Trapp named as
regional manager for securities
lending in Asia at Northern
Trust succeeding Daswani.
Citi’s Lawrence Komo has been
named chairman of PASLA.
Matthew Harrison, founder of
the Martini trading platform
moves to the securities finance
practice at Rule Financial.
BNP Paribas hires Graeme Perry
as global head of agency lending.
Perry joined from Banco
Santander. In his new role he
will report to Sarah Fotsch,
global head of liquidity services.
Anthony Duggan, head of
hedge fund and flow trading,
HSBC resigns. Duggan arrived
at HSBC from Dresdner where
his last position was head of US
domestic equity finance trading
61 | GSL
PrOfILe
Meet the future...Will Duff Gordon
How did you get into the
world of securities lending?
By chance. I filled the shoes
of a lady on maternity leave for
a company then working in a
Georgian house in Spitalfields.
The boss - Mark Faulkner - laid
out some exciting plans on a
white board in his kitchen and it
has been exciting since.
If you could change one
thing in the world of
securities lending what
would it be?
I would put all sec lending
conferences on roof terraces
rather than in underground,
airless hotel ‘ballrooms’.
What aspect of your
current position do you find
the most interesting?
The chance to move the business
forward in such a variety of
ways - from specifying new
enhancements to the products,
to pitching for new business, to
raising our profile through the
media, to closing new business.
The travelling is a privilege also.
Who are your role models?
Jose Mourinho is up there in
the sporting arena. His belief
that success is his by right is
infectious. To go from being
a translator in the back room
at Barcelona to winning the
European Cup and Premiership
whilst having the worlds media
hanging on his every word -
what a feat! Michael Heseltine
is a model success story. From
humble beginnings he became
Deputy Prime Minister and
when he left politics was able
to step back into the publishing
business he founded before his
career in politics.
If you were nominated
employee of the year how
would you celebrate?
Take a holiday and go
windsurfing in Tarifa.
I hear you are relocating
to New York, what attracts
you most about this move?
The chance to succeed where so
many British bands have failed!
We have a great chance to be the
definitive source of short interest
intelligence in the biggest stock
market in the world. There are
not many places better to work
than London, but New York is a
very exciting place. Some skiing
in the winter will be on the
agenda, most definitely.
If you could teach Hugh
Grant one thing what would
it be?
How to do the pole vault. It may
be the only thing I can do that
he can’t!
Where will Will be in five
years time?
Running a race horse owning
operation more successful than
the one I do at the moment.
Give us a prediction about
the shape of the industry in
the years to come.
It will become more streamlined,
with fewer players and greater
transparency. It may perhaps
even have an exchange.
My favourite location for a
conference would be the
Cayman Islands, what’s
yours and why?
Somewhere near my office.
There would be less travelling
involved and therefore a smaller
carbon footprint.
63 | GSL
PrOfILes
czech please
This year’s rMa/IsLa securities Lending conference explored in detail an industry
at a crossroads. GSL’s Ben Roberts attended.
GsL’s Justin Lawson chats with eurex’s
Bethany Harlock
The 17th Annual RMA/ISLA Securities
Lending conference took place in the
beautiful gothic backdrop of Prague. The
setting was particularly appropriate given
the detailed discussion of the region along
with further eastern European markets on
the second day, moderated by Robert Barnes
of UBS. This talk included an assessment of
Greece in terms of regulation, technology
and infrastructure by Anastassis T.
Gabrialides of the Hellenic Capital Markets
Commission.
Each talk produced a stimulating diversity
of subject, opinion and outlook at a critical
stage for the securities lending industry and
financial markets generally. A discussion
on Basel II touched upon the varying
calculation methods to determine the
principals’ exposures in trading, along with a
64 | GSL
head of global asset allocation and alternative
investments at JP Morgan. The ambitious
question in the presentation title – ‘Where
Will Capital Go?’ – was tackled with a varied,
colourful and detailed set of slides. “There is
a 50/50 chance with recession,” he observed,
“at the moment we’re sitting in the middle
and we don’t know which way it will go.”
He demonstrated the familiar trends where
two-thirds into a recession by tracking the
movement of the S&P 500 (including the
point in which “you can smell the recovery”),
and the effect on the European market
structure caused by these “blow ups”. He also
provided an overview of the massive leverage
of securitisation, the rise of repo among
hedge funds and where, in essence, “the whole
world became a big banking system outside
regulation”.
detailed analysis of principal ‘types’. This talk
in particular was a welcome assessment of
the ubiquitous themes of the credit crunch:
transparency, risk reduction, and the altered
relationships along the lending chain.
Securities lending’s most prominent
borrowers, hedge funds, were included in
a discussion of the Hedge Fund Working
Group (HFWG), arbiters of the informal
‘Comply or Explain’ best practice doctrine.
On Thursday, strategies for fund managers
were discussed, including the key
considerations they must undertake for
borrowing securities. The panel – moderated
by Nick Rudenstine of JP Morgan – also
touched upon the effect of new regulation for
those servicing asset portfolios.
One of the most remarkable presentations conference attendees relax at the Deutsche
came from Jan Loeys, managing director and Bank party
 Japanese Textile Stencil, 1900 — Mulberry paper with dye

The Art of Relationships

At JPMorgan, we invest in what’s really important—whether protecting priceless works JPMORGAN SECURITIES LENDING

of art for future generations or building client relationships that stand the test of time. A full spectrum of global capabilities,
We take our relationship with you very seriously, to help you achieve your business including discretionary, principal
and directed lending, as well as
goals, enhance efficiency and mitigate risk. auctions and exclusives

When you’re passionate about your business, the right relationship is essential. Financial strength

JPMorgan clients benefit from the expertise of our entire global franchise. Through Disciplined risk management
this holistic approach, we harness innovative technologies and firmwide resources Innovation in product development
to offer clients more choices, greater customization and unmatched flexibility.
Access to resources and expertise of
a leading financial services franchise
Innovation with superior results.

To find out more, log on to jpmorgan.com/securitieslending, or contact:

V
V

Western Hemisphere William Smith at 212-623-5664

Europe, Middle East and Africa Michael Fox at 44-207-742-0256
Australia/Japan Stewart Cowan at 61-2-9250-4647
Asia Andrew Cheng at 85-2-2800-1809

The products and services featured above are offered by JPMorgan Chase Bank, N.A., a subsidiary of JPMorgan Chase & Co. JPMorgan Chase Bank, N.A.,
is registered by the FSA for investment business in the United Kingdom. JPMorgan is a marketing name for Worldwide Securities Services businesses of
JPMorgan Chase & Co. and its subsidiaries worldwide. ©2008 JPMorgan Chase & Co. All rights reserved.
Better process, better price.
Looking to maximize securities lending returns
for your portfolio? There is a better way.

eSecLending takes an active approach to

securities lending by managing customized
programs for institutional investors. Unlike
the traditional agency approach, where many
lenders’ portfolios are grouped together and
their securities wait in a queue to be borrowed,
eSecLending markets each client’s portfolio
individually and awards lending rights to the
optimal bidders.

Our clients receive more lending revenue

over their traditional programs, because

Traditional Way. eSecLending introduces objective competition

via a blind auction process. Rather than the
traditional “best efforts” approach, our clients
can count on their lending revenue because
borrowers pay guaranteed fees in exchange for
exclusive borrowing rights. eSecLending clients
achieve all this while maintaining conservative
risk parameters and close control over their
lending programs.

eSecLending provides services only to institutional investors and

other persons who have professional investment experience.
Neither the services offered by eSecLending nor this advertisement
are directed at persons not possessing such experience. Securities
Finance Trust Company, an eSecLending company, and/or
eSecLending (Europe), authorised and regulated by the Financial
Our Way. Services Authority, performs all regulated business activities. Past
performance is no guarantee of future results. Our services may
not be suitable for all lenders.

United States +1.617.204.4500

Europe +44 (0) 207.469.6000
info@eseclending.com
www.eseclending.com