GSL|

Markets
Asia, US, Canada, CEE
Global
Securities Infrastructure
Lending Tri-party Collateral Management,
Repo, Risk Management

ProfIles
EquiLend, CalPERS, Eurex, Anetics

Gsl Issue 02

Sold Short
Has the lending industry
been unfairly treated?

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

Cover GT to DC.indd 1 26/9/08 18:40:33

 eDItorIaL

Lend an ear
“Securities lending is the missing building block for market completeness”

Markets The securities lending industry is an increasingly essential part of

US, Canada, CEE the financial machine. However, as an industry which has been
strengthened by growth in the alternative funds sector, the FSA ruling
Infrastructure on short selling and SEC ruling on ‘naked’ short selling has caused
Tri-party collateral management,
Repo, Risk Management
controversy and debate. In a month, which has brought disaster of
fictional proportions to the financial services industry, we attempt to
ProfILes
answer some of the questions raised by the FSA ruling on short selling
Brian Lamb, Dan Kiefer, Paul Wilson and its effect on securities lending (p14).
In readiness for the RMA’s 25th Anniversary securities lending
editor: conferences in Texas, GSL looks at the securities lending markets
catherine kemp (catherine@2ipartners.com) in North America. Joe Corcos provides an update on the securities
reporters: lending industry in the US (p21) and Catherine Kemp investigates the
Joseph corcos (Joseph@2ipartners.com) regulatory changes that have lead to growth in Canada (p27).
Ben roberts (Ben@2ipartners.com)
Group editor:
Transparency and the ability to ensure an accurate view of your
Giles turner (Giles@2ipartners.com) risk remains a Sisyphean dilemma. GSL talks to Dan Kiefer of the
California Public Employees’ Retirement System (CalPERS) about the
value of auctions in ensuring transparency and why beneficial owners
contributors:
Brian Bollen,
should be able to retain their right to vote proxies while securities are
anthony Harrington out on loan (p19), and Paul Wilson at JPMorgan about how securities
lending has evolved into a front office function that chases alpha (p56).
Design: Jerry May from OPERS writes on risk from a lenders perspective (p55).
David copsey Elsewhere Francisco Gonzalez at Eurex SecLend discusses the future of
electronic lending (p50), Anthony Harrington discusses the challenges
operations Manager: of ensuring an accurate global view of collateral risk exposure across all
sue Whittle (sue@2ipartners.com) asset classes (p39), and David Little from Rule Financial discusses the
industrialisation of collateral management (p44).
Publishing Manager: GSL continues to explore emerging markets. Ben Roberts looks at
Monique Labuschagne
the numerous obstacles to developing securities lending in the Czech
(Monique@2ipartners.com)
Republic, Poland and Hungary (p31), while Brian Bollen encounters
the world of Asian repo and the potential for growth (p35).
commercial Manager:
Jon Hewson
The bankruptcy of Lehman Brothers, the buy out of Merrill Lynch,
the declassification of the Morgan Stanley and Goldman Sachs as
Publisher: investment banks, the buy out of HBOS, and the restrictions on
Justin Lawson short selling globally, are events which have dramatically changed the
(Justin@2ipartners.com) landscape of the financial services industry. How long these seismic
shakeups will change the securities fincance industry is difficult to tell.
ceo: Mark Latham What is for certain is that the waters will remain choppy for some time.
(Mark@2ipartners.com)
Catherine Kemp
16-17 Little Portland street,
London W1W 8BP
t: +44 (0) 20 7299 7700
f: +44 (0) 20 7636 6044
© 2008 Investor Intelligence.
all rights reserved.
no part of this publication may be reproduced,
in whole or in part, without prior written permission
from the publishers. Issn 1759-0728
Printed in the uk
GSL | 1

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

 contents
News

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

Country Profiles

21 country overview - usa

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

Industry Insight

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

Technology

50 eurex - francisco Gonzalez

51 sunGard on risk management
54 statistics on the short selling volatility

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

Companies eSecLending - 18, 22, 40 OhioPERS - 55

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

2 | GSL

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GSL p01-15 Final.indd 3 26/9/08 17:57:03
 News
Global securities lending news
Top industry stories at deadline. For more recent updates go to www.isj.tv
Paris - SecFinex and LCH.Clearnet have
launched central counterparty services for
stock borrowing and lending across the
SecFinex Order Market multilateral trading
facility for Euronext markets. This will
include stock loan transactions in France,
Belgium, The Netherlands and Portugal.
This is the first time that stock borrowing
and lending markets will be able to take
advantage of the services offered by a central
counterparty.
Vienna - JPMorgan has launched its Asia
offshore payments clearing system, designed
to process payments from initiation to
settlement. Intended to service the global
trading needs of the bank’s financial
institution partners and their customers,
it will allow them to keep liquidity in
the region, clear in multiple regional
infrastructures, concentrate their accounts
and benefit from same-day finality.
Paris - Société Générale Securities Services
(SGSS) has become a General Clearing
4 | GSL
GSL p01-15 Final.indd 4
Participant (GCP) of EuroCCP (European
Central Counterparty Limited). This will
provide clients with simple and rapid access
to Turquoise, the new pan-European share
trading platform launched on 15 August
2008. This service complements those that
are already available on new trading venues
like the Chi-X pan-European alternative
trading platform, as well as on the traditional
regulated markets. SGSS’ clients can also
access a wide range of post-trade services on
the main regulated and multilateral trading
facility (MTF) markets.
New York - Erste Group Bank has selected
Citi Global Transaction Services to provide
a single integrated electronic execution
and custody solution. The service provides
a single counterparty to execute, settle and
provide custody in all major execution
markets worldwide. Through the linking
of Citi’s capital markets and securities
capabilities operational inefficiencies and
risks that come from dealing with multiple
providers are removed.
London - SIFMA, ISLA, RMA, PASLA &
ASLA released the following statement
on the 26 September 2008 in regards to
developments within the lending industry:
“Against the background of the current
market turmoil, the International
Securities Lending Association (ISLA),
Risk Management Association (RMA),
Securities Industry and Financial Markets
Association (SIFMA), Pan-Asian Securities
Lending Association (PASLA) and Australian
Securities Lending Association (ASLA)
recognise why regulators around the world
have put in place temporary restrictions on
short selling of financial shares and support
their objective to protect the integrity
of markets and guard against financial
instability.
It is vital, however, that these temporary
measures are designed as far as possible to
avoid unintended damage to the liquidity of
cash equity and related derivatives markets.
In particular, dealers must be allowed to take
short positions in the course of providing
liquidity for their customers. They need
therefore to continue borrowing financial
shares from lenders, such as pension and
investment funds and insurance companies,
for this purpose. Continued lending is also
important in order to prevent chains of
failed settlements. For these reasons, we ask
that regulators do not introduce measures
that might prevent or discourage lending
of financial shares. For example, selling
shares that are currently on loan should not
be treated as entering into a short position
where the seller can recall the lent shares
within the normal settlement cycle. Lenders
should also be able to lend in good faith
without requirements to make enquiries
about or obtain documentary proof of the
intentions of borrowers.
More generally, we encourage lenders to
continue to make financial shares available
for lending in order to support market
making and efficient settlement. Any
wholesale withdrawal of financial shares
would have highly unwelcome consequences
for liquidity in the cash equity and derivatives
markets that would be against the interests
of investing institutions and contrary to the
stated intentions of regulators in introducing
these measures. We are encouraged by the
response of securities lenders and again urge
them to continue to lend and to maintain
their on-loan positions as appropriate in light
of their respective goals.”
Abu Dhabi - Standard Chartered Bank has
expanded its custody services in UAE with
the recent addition of Abu Dhabi Securities
Exchange (ADX and now provides a full
custody services in three markets, including
Dubai International Financial Exchange
(DIFX) and Dubai Financial Market (DFM)
in the Middle East.
26/9/08 16:14:54
 Natixis

GSL | 5

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 News
Madrid - Family Investments has appointed
Santander Asset Management UK to
manage its GBP1.5 billion investment
portfolio. This is the first institutional asset
management mandate win for Santander
Asset Management in the UK, and reflects
its growing reputation in this market. The
Family Investment Portfolio comprises of
23 funds, including the Family Child Trust
Fund, and the Family staff pensions scheme.
Santander Asset Management UK will take
over management of the portfolio
during Q4 08.
Belgium - To ensure the transparency of the
shareholder structure of listed companies,
new transparency legislation in Belgium
requires investors to notify the regulator
and the company at which shares are held
whenever they exceed specific shareholding
thresholds. The Belgian regulator Banking,
Finance and Insurance Commission (CBFA)
also now requires companies to disclose the
information their investors need in order
to submit these notifications, and are also
required to disclose the information received
in these notifications themselves.
Vienna - The Polish National Depository
for Securities (KDPW) is implementing
Microsoft BizTalk Accelerator for SWIFT, for
the transport, management and exchange of
more than 4 million SWIFT transactions per
year. As the central institution responsible for
the management and supervision of clearing
and settlement in Poland, KDPW will use
Microsoft’s leading solution for financial
messaging integration, leveraging BizTalk
Accelerator for SWIFT to help about 10
domestic and global customers efficiently and
effectively connect to SWIFT.
Munich - Algorithmics announced that it is
working with Allianz Group on a strategic
insurance risk management project that will
enable Allianz to calculate its risk capital
across the entire group and meet its Solvency
II requirements. Tom Wilson, CRO of Allianz,
said: “Our goal is to be able to quantify all
our risk types across our entire organization
and shorten our reporting time for economic
capital significantly. Ultimately we want to be
6 | GSL
GSL p01-15 Final.indd 6
able to use our risk measures in our business
decision making in 12 months’ time.”
Brussels - Fortis Bank, Old Mutual and
Tianjin TEDA Investment Holding entered
into an agreement for Old Mutual to acquire
the 49% stake that Fortis holds in ABN
AMRO TEDA Fund Management a major
Chinese asset management joint venture,
for a cash consideration of approximately
EUR 165 million. The sale is the result of
regulatory compliance following Fortis’s
acquisition in April 2008 of the asset
management business of ABN AMRO Group,
and is subject to approval by the China
Securities Regulatory Commission (CSRC)
and relevant government authorities.
New York - Dresdner Kleinwort has
been awarded a third party US equity
securities lending mandate by Colorado
Public Employees’ Retirement Association
(Colorado PERA). PERA is the 23rd largest
public pension plan in the United States, and
at the end of 2007, the fund had over USD41
billion in assets available for
benefit payments.
Tim Smollen, global head of agency
securities lending at Dresdner Kleinwort,
said: “We interface seamlessly with Colorado’s
custodian, Northern Trust, using straight-
through processing technology.” PERA
provides retirement and other benefits to
the employees of more than 400 government
agencies and public entities in the state
of Colorado.
New York - DWS Investments, the mutual
fund arm of Deutsche Asset Management and
the second-largest European mutual fund
company, has selected EquiLend’s trading and
trade reconciliation services to enhance their
securities finance business.
“Choosing EquiLend reflects DWS
Investments’ commitment to strengthening
automation across its business lines as it
aims to mitigate operational risk and achieve
greater processing efficiency. EquiLend will
help us to maximize the “alpha” generation
for our investors in an efficient manner“, says
Dirk Bruckmann, managing director, DWS
Investment GmbH.
“We are very pleased to welcome DWS
Investments which further strengthens
our German client base. This underscores
our ongoing commitment to providing
innovative securities finance solutions to the
Global Securities Finance marketplace,” says
Sharon Walker, managing director, EquiLend
Europe Ltd.
Tokyo - Asian clients are now able to use
Euroclear Bank’s triparty services to close
overnight repo transactions with European
counterparties at the end of their business
day, thereby leveraging their end-of-day
securities positions as collateral, and have
full use of these securities the next morning.
European-based firms, in turn, are now able
to finance their yen and other Asian currency
exposures with local Asian securities
and counterparties.
Clients can use Euroclear Bank’s triparty
collateral management service to move
securities and/or cash automatically between
the relevant accounts, and to automatically
substitute securities that are used in financing
deals when needed to fulfill other transaction
settlement needs.
New York - A group of global commercial
and investment banks, including Bank
of America, Barclays, Citibank, Credit
Suisse, Deutsche Bank, Goldman Sachs, JP
Morgan, Merrill Lynch, Morgan Stanley,
and UBS, today initiated a series of actions
to help enhance liquidity and mitigate the
unprecedented volatility and other challenges
affecting global equity and debt markets.
Specifically, the banks are working together to
do the following:
First, to assist in maximizing market
liquidity through their mutual commitment
to their ongoing trading relationships,
dealer credit terms and capital committed to
markets.
Second, to establish a collateralized
borrowing facility, which ten banks (Bank of
America, Barclays, Citibank, Credit Suisse,
Deutsche Bank, Goldman Sachs, JPMorgan,
Merrill Lynch, Morgan Stanley, and UBS)
have committed to fund for USD7 billion
each (USD70 billion in total). The facility will
be available to these participating institutions
26/9/08 16:15:36
 News
for liquidity up to a maximum of one third of
the facility for any one bank. It is anticipated
that the size of the facility may increase as
other banks are permitted to join the facility.
Third, to help facilitate an orderly resolution
of OTC derivatives exposures between
Lehman Brothers and its counterparties. This
effort included opening the OTC derivatives
market for trading this Sunday afternoon.
New York - JPMorgan Securities Lending
has become the first major agent lender to
lend Greek and Polish equities, and is now
actively lending in over 30 international
markets. “JPMorgan’s approach to opening
new markets means our clients are at the
forefront of opportunities to enhance returns
through securities lending,” explained
Nick Rudenstine, Global Securities Lending
Product Head, JPMorgan Treasury &
Securities Services. Entering both the Greek
and Polish markets ahead of the competition
allows the bank’s clients to take advantage
of higher fees driven by increased demand
and limited supply. JPMorgan began
lending Greek equities within seven business
days after the Hellenic Capital Market
Commission approved using the over-the-
counter facility for securities borrowing and
lending. The first trade in Polish equities
followed shortly behind.
London - JPMorgan has announced that
its GlobeClear business will now offer third
party clearing for Warsaw Stock Exchange
(WSE) members who wish to trade Polish
securities. JPMorgan will be providing
clearing and settlement capabilities to clients
who want to transact in equities and fixed
income products on the WSE. This latest
offering marks the 23rd exchange supported
directly by JPMorgan GlobeClear. Its first
client went live on the WSE with JPMorgan
GlobeClear on 5 August 2008. Alex Dockx,
GlobeClear product executive, JPMorgan,
said: “By providing direct access to the WSE,
international investors can now directly trade
in one of the most promising and vibrant
markets in Europe. Central Eastern European
markets are rapidly growing, and the WSE is
a leading trading centre. Through JPMorgan
GlobeClear’s single access portal, which
GSL p01-15 Final.indd 7
provides clearing and settlement of trades
in more than 65 markets and 23 exchanges,
clients benefit from a wide coverage at low
cost.”
New York - Fundtech, a provider of global
transaction banking solutions, announced the
introduction of Global CASHplus (GCP), a
new generation transaction banking platform
that combines comprehensive global cash
management with the full range of automated
financial supply chain features. For banks,
GCP provides a competitive edge with its
integrated features, operational efficiency, and
Web 2.0-inspired user interface. Corporations
will benefit from an unprecedented level
of global financial control, enabling them
to optimize their working capital while
managing risk.
GCP is an extension of Fundtech’s end-to-
end-to-end (also referred to as E-to-E2)
strategy, which expands the traditional
boundaries of global end-to-end transaction
banking to include corporate clients and their
trading partners. With far more visibility into
their clients working capital needs, banks
are able to provide new services that deliver
greater financial leverage through just-in-
time cash.
London –The Financial Services Authority
has banned short selling of financial stocks, in
a move designed to address market concerns.
The FSA will require from 23 September daily
disclosure of all net short positions in excess
of 0.25% of the ordinary share capital of the
relevant companies held at market close on
the previous working day. Disclosure of such
positions held at close on September 19th will
also be required on Tuesday September 23rd.
The FSA stands ready to extend this
approach to other sectors if it judges it to be
necessary. These provisions will remain in
force until 16 January 2009, although they
will be reviewed after 30 days. A review of the
rules on short selling will be published
in January.
GSL | 7
26/9/08 16:15:36
 News
News Analysis
Lehman collapse sparks
loosening of collateral
The sheer angst emanating from the financial
sector these days is palpable. Mortgage
firms and investment banks once the pride
of Wall Street have been humbled, brought
low by their own blind greed and stupidity,
and the knock-on effects are reverberating
throughout the world economy. The sight
of Lehman Brothers employees standing
despondent outside their Canary Wharf
offices, clutching their boxes of personal
items was only the latest of the losses of the
crunch. Playing the role of desperate fireman
trying to douse the worst of the conflagration
is the US Fed.
With the collapse of Lehman Brothers,
which, after a fruitless search for a buyer, filed
for bankruptcy with debts of USD613 billion,
the Fed has decided more action is necessary
to infuse liquidity into the ailing market.
And no, this doesn’t mean a multi-billion
dollar bailout for Lehman. Instead, after an
emergency meeting between Ben Bernanke,
central bankers and industry figures, the Fed
has decided to expand the types of collateral
it accepts for its sec lending programme.
Whereas before it was only accepting Treasury
8 | GSL
GSL p01-15 Final.indd 8
securities, agency securities, and AAA-rated
mortgage-backed and asset-backed securities,
it will now accept all investment-grade debt
securities, making it easier for everyone to
offload what they can’t sell onto the Treasury.
Furthermore, the Fed has decided to add
USD25 billion to the pot of securities on
offer. This means there is now a total of
USD200 billion available.
This was in reaction to the price of
lending climbing rapidly on news of the
Lehman collapse. Fed funds were trading as
high as 6% after the bank announced it was
bankrupt. This is a full 4% above the target
rate set by the central. It is hoped that with
a massive infusion of liquidity from the Fed
that the rate will go down to
normal levels.
So continues the financial bailout of
proportions that have rarely been seen
before. This means that there will be little
accountability for those whose profligacy
is now being exposed, but in effect the Fed
has little choice but to continue with its
emergency measures, lest the entire system
sink further into the morass.
The Fed created the Term Securities
Lending Facility (TSLF) back in March in
the wake of Bear Stearns spectacular collapse
and bailout, the first major soap opera of
the crunch. The TSLF was created alongside
the Primary Dealer Credit Facility to aid the
markets. But with the most recent round
of collapses and near-collapses many are
predicting that interest rates are soon to be
slashed as well.
It will take months for Lehman to unravel
all its deals. Lehman, along with many other
outfits, was an enthusiastic user of the repo
market in order to gain funding.
The Fed is claiming these measures are
temporary. However how temporary is
questionable. What the long-term effects
of the conflagration will be are uncertain.
Some are predicting the demise of the
independent broker/dealer. Bear Stearns is
no longer, Lehman Brothers has bit the dust
and Merrill Lynch has been bought by the
Bank of America. Only the future will see if
JP Morgan, Goldman Sachs, et al will survive.
Even if they do, a radical change may be
needed for their business models.
Meanwhile, ten large banks, including JP
Morgan and Goldman Sachs have set up a
fund of USD70 billion in order to help the
market stay liquid.
The industry and regulators are
scrambling to head off the crisis, which
together they have created, but only time will
tell if they will be successful. To many it seems
as if things are falling apart, as if the centre
cannot hold. Many will wonder if some
revelation is at hand.
News Analysis
JPMorgan opens the door
to securities lending in
Greece and Poland
JPMorgan has become the first major lending
agent to lend Greek and Polish equities.
The bank’s securities lending business
began lending Greek equities seven business
days after the Hellenic Capital Market
Commission approved the use of the over-
the-counter facility for securities borrowing
and lending. The first trade in Polish equities
followed shortly after. The bank announced
the news on 10 September 2008 and is now
actively lending in over 30 international
markets.
“JPMorgan’s approach to opening new
markets means our clients are at the forefront
of opportunities to enhance returns through
securities lending,” explains Nick Rudenstine,
global securities lending product head,
JPMorgan Treasury & Securities Services
The expansion of the securities lending
market into emerging markets such as Asia
non-Japan has been a major trend in the
industry for a number of years. However,
emerging markets in Europe are now the new
point of interest for exposure hungry lenders.
Lending in emerging markets can be
lucrative, often creating higher returns
relative to holdings of equities in more
developed markets. This is because there is
less supply of securities and so people are
willing to pay higher fees.
Currently, Poland is the dominant equity
26/9/08 16:15:36
 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.

Securities_203x267_e_neu 1 21.7.2008 14:40:48 Uhr

GSL p01-15 Final.indd 9 25/9/08 19:14:20
 News
market in Eastern Europe. Companies across
the region list on the Warsaw Stock Exchange
to draw in cash from pension funds and
benefit from surging share prices.
The Warsaw market, whose companies
have a combined market value of USD155.2
billion, is already larger than bourses in
Prague and Budapest, at USD50.5 billion and
USD39.3 billion respectively. Poland has had
28 initial public offerings of shares this year,
while Hungary has had three. Two share sales
in Prague this month will be the first IPOs in
two years.
The Greek government forecasts the economy
to grow 3.6% this year, below a previous 4%
estimate due to higher oil, energy and food
prices, and global economic turmoil. The
European Commission expects growth
of 3.4%.
In 2007, data shows that Greek mutual
fund investors pulled cash out of domestic
equity and bond funds in 2007 switching into
funds investing abroad for diversification.
In August 2008 foreign investors took a net
EUR262 million (USD372 million) out of
10 | GSL
GSL p01-15 Final.indd 10
Greece’s equities market in August but still
owned half of the market’s free-float, data
from the Athens stock exchange shows.
Month-on-month, the Greek equity market’s
total capitalisation fell 2.5 % in August 2008
to EUR124.5 billion, which represents about
54 % of the country’s gross domestic product
(GDP). Year-on-year the market’s value fell
32.4 %. However, the government plans
to combat the global financial crisis with
new taxes and changes to labour markets.
JPMorgan’s move to open up the lending
markets in Greece and Poland is welcomed
by industry representatives. They think that
securities lending won’t necessarily have
an effect on the level of these markets, but
moving into these markets will provide more
liquidity, by for example making it easier to
have an index derivative. And it will aid the
development of these markets and making
them more attractive for foreign investors.
It will be interesting to watch as these
two very different markets expand with the
opening up of securities lending.
News Analysis
Down turn down
under for ANZ
The sacking of two senior executives at
Australian bank ANZ after a rigorous
internal review of its securities lending
operation revealed this year’s themes of risk
management and operational oversight will
still keep financial institutions on their toes.
The review, overseen by chief executive Mike
Smith, concluded that there were deficiencies
in staff knowledge – most notoriously the
inability to distinguish between securities
lending and equity finance. Further, the
bank’s involvement with the troubled broker
Opes Prime was deemed to have cost the
bank damages to its reputation.
Opes Prime went into receivership in March
this year following the revelation by Deloitte,
the receivers, of “a number of cash and stock
movement irregularities” on its accounts.
It had been a significant player within the
securities lending market, with ANZ a
key business partner, with the bank also
providing the broker with equity financing.
This financing allowed Opes Prime to provide
margin loans, with ANZ retaining the official
ownership of the shares.
With the demise of Opes Prime many of
the shares supplied by ANZ have also gone
astray, and various companies whose shares
were involved in the exchanges between the
bank and broker are seeking compensation.
Over the last few months Beconsfield, a small
cap investment firm, have made the news in
their battle for shares. Legal proceedings will
begin on the 8 October, with specialists ING
representing Beconwood. The firm is said
to be seeking the shares or compensation of
around ASD6 million.
Mike Smith has said that the review –
despite posing serious questions to the entire
lending division - exonerates the bank from
the ensuing legal wrangles.
Turn to page 34 for an Australian update
26/9/08 16:16:00
 
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GSL p01-15 Final.indd 11 25/9/08 19:14:22

 news
Across the Atlantic
Michael P. McAuley, chairman of the RMA Committee
on Securities Lending, discusses the current challenges facing
the industry.
The securities lending industry in the United
States has been coping with concerns in the
credit markets, as well as the recent fallout
and subsequent regulatory responses to
those events. Bank of America’s acquisition
of struggling Merrill Lynch & Co., the fire
sale of Bear Stearns to JPMorgan and the
loss of Lehman Brothers Holdings, Inc. to
bankruptcy have led to an unprecedented
consolidation of market players. The
intervention of US federal agencies, namely
the US Treasury’s conservatorship of Fannie
Mae and Freddie Mac and its bailout of
American Insurance Group, the Securities
12 | GSL
GSL p01-15 Final.indd 12
and Exchange Commission’s Emergency
Order with respect to short selling and
new regulations have clearly changed the
landscape and will have an impact on the
future of the industry — both in the US
and abroad.
Much of what our industry will face going
forward will be determined by how we deal
with these extraordinary events. The hope
is that beneficial owners will take comfort in
the borrower default indemnities provided by
their agent lenders, the manner in which their
agents work through the Lehman default
and other evolving circumstances, and the
stabilising controls that regulators have put
into place. Importantly, another hope is that
beneficial owners will have the confidence to
continue lending to viable counterparties, as
appropriate.
Amid all the market turbulence of the past
year, beneficial owners have earned significant
revenues from securities lending due in large
part to the unusually wide credit spreads.
Those who had confidence in their agent
lenders’ ability and commitment to provide
disciplined risk management were rewarded
with appropriate risk-adjusted returns.
Strong risk management practices will
remain the foundation of successful lending
programs, especially given the fact that we
now have fewer trading counterparts, leaving
potentially higher balances concentrated in
the hands of fewer borrowers. Also, the trend
toward non-cash collateral will increase as
those counterparties closely manage their
balance sheet and capital requirements.
Lenders that have flexibility in the forms
of collateral they are willing to accept can
benefit by meeting this market need.
Finally, I would like to touch on my role as
incoming chairman of the Risk Management
Association’s (RMA) committee on securities
lending. I have set several goals for the
coming year, not the least of which is joining
with the rest of the committee members
to continue our work with the Securities
Industry and Financial Markets Association,
the International Securities Lending
Association, the Pan Asia Securities Lending
Association, the Australian Securities Lending
Association, regulators and other industry
participants to attend to those challenges that
confront our industry and help set a prudent
course for continued growth.
Also, in this new environment, I would like
to spotlight more attention on the important
work our subcommittees are doing, most
notably the operations and legal/regulatory/
tax subcommittees.
Through this column, I will strive to keep
Global Securities Lending readers informed
about what’s happening in the securities
lending marketplace from this side of
the Atlantic.
9/10/08 17:51:33
 news
David Rule, chief executive, ISLA
ISLA’s chief executive defends securities lending markets and provides
an update on how ISLA has been attempting to fine tune the securities
lending industry.
Charged with facilitating short selling and,
so it is argued, driving equity prices lower,
securities lending markets remain under the
spotlight of regulators and commentators.
ISLA has continued to put the case for the
industry, pointing out the academic evidence
that short selling has no long-term effect on
share prices and emphasising the importance
of securities lending to the wider liquidity of
wholesale markets.
Meanwhile, ISLA’s broader work to
improve industry standards has continued.
In July, we published a recommended model
for agency lending disclosure (ALD) in
Europe, which builds on the successful US
model, using the same file formats and the
DTCC as a file-transfer hub. But it adds
reporting of agency repo trades and optional
reporting of agency reverse repo trades,
and addresses reporting of triparty and
Crest DBV collateral to meet the needs of
borrowers under Basel 2. The UK FSA has
said it will welcome the proposal, which will
help borrowers to meet the FSA requirement
to obtain daily data about their exposures to
underlying principal lenders by
1 January 2010.
In May, ISLA published a draft new version
of the Global Master Securities Lending
GSL p01-15 Final.indd 13
Agreement (GMSLA) for comments. The
new version updates the 2000 version; seeks
to clarify the tax obligations of borrowers and
lenders; addresses areas of that agreement
that are commonly amended by borrowers
and lenders in side letters, such as whether
failure to deliver equivalent securities and
collateral is an event of default; and brings
the agreement into line with other industry
standard agreements in some areas, such as
set-off procedures following default. Over
twenty comments on the draft have been
received, with lively debate over some of the
proposals. ISLA is now recalling its working
group of lawyers from member firms to
discuss the next steps.
ISLA has continued to work with regulators
and infrastructure providers to improve the
environment for securities lending in Europe.
For example, the Spanish authorities are
expected to publish a regulation permitting
Spanish UCITs funds to lend securities
shortly. That follows ISLA’s earlier work on
the Irish, Luxembourg and UK regulations.
In order to help educate regulators,
commentators and market participants about
the market, ISLA will be running its first
securities lending workshop on 12 November
in conjunction with the established ICMA/
SIFMA repo and collateral management
course. Details are available on the
ISLA website.
13 | GSL
26/9/08 18:18:30
 news

Sold Short
The FSA ban on short selling has caused controversy and debate but
what effect will it have on global securities lending, asks Catherine Kemp

The FSA has banned short selling outright

for hedge funds until 16th January 2009.
The ruling helped to lift stock markets
immediately, but whether that is because of
the ban on short selling or because of recent
action by the Fed to create a new scheme to
buy up toxic assets is questionable.
Some argue that short selling, the
borrowing of stock and selling it on in
anticipation that it will lower in price so
it can then be bought back for less, allows
market participants to gain better price
discovery. However, the FSA is concerned that
while short selling is a valid trading process,
it may have caused the driving down of share
prices. It is also concerned that the practice
of short selling makes companies more
vulnerable when markets are volatile.
David Rule at ISLA says: “If hedge funds
are deliberately manipulating the market then
that isn’t the fault of short selling. You don’t
ban cars because people drink and drive.”
Rule believes the decision to ban short selling
is just a way to appease public opinion.
“There is academic evidence that short selling
has no long-term effect on share prices,” he
says. “These are dictated by the underlying
changes in the expected future earnings of
companies. The FSA being seen to take a
strong line on the financial crisis is good for
public confidence and may put share prices
up in the short term, but ultimately hedge
funds are not market makers and share prices
will go down again, because fundamentally
the banks are unstable. I would say that the
market is bolstered at the moment [Friday 19
September], less because of the ban on short
selling, but because US Treasury Secretary
Hank Paulson and Ben Bernanke, chairman
of the Federal Reserve, are creating a new
scheme to buy up toxic stocks.
“Thankfully, market makers are exempt from
these restrictions. Short selling is absolutely
vital to the way dealers operate in the market.
You cannot operate in the market buying and

14 | GSL

GSL p01-15 Final.indd 14 26/9/08 18:18:31

 news
selling to customers without the ability to
hedge yourself by going short. And so dealers
continuing to be able to perform their vital
role in providing liquidity for customers in
the cash equity and derivatives markets.”
ISLA has sent out a press release urging
lenders of financial shares to continue to
lend in order to facilitate market making and
efficient settlement (see insert). However,
both CalPERS and Dutch pension fund APG
stopped lending certain bank stocks on Friday
19th September to help bolster the markets.
CalPERS temporarily restricted the lending
of securities of Goldman Sachs, Morgan
Stanley, State Street, and Wachovia. APG was
less specific, but a spokesman said: “We have
stopped stock lending in several American
but also European banks whose shares face
the most downward pressure, among others
from short sellers. By doing this we are trying
to discourage short-selling activities, and
provide stability to the market. We do not
disclose the names of these banks.”
The danger is that lending will become
synonymous with short selling, in the sense
that it facilitates short selling. Some anticipate
that this will decrease liquidity and be
dangerous for the health of the market.
The defence from the hedge funds is that
they use fundamental financial analysis to
find out whether a company is too expensive
or not – companies are bought when they are
cheap, and sold when expensive. By doing this
they are putting the prices at the level they
should be, not pushing them down. From a
securities lending perspective, hedge funds
often promote the growth of markets because
they drive demand, increase utilisation and
profits from both sides. This in turn
increases liquidity.
Sir Peter Burt, former chief executive of
Bank of Scotland which merged with Halifax
to form HBOS seven years ago, has said that
HBOS was a “victim” of speculators after a
sustained and dramatic fall in share price.
GSL p01-15 Final.indd 15
However, Data Explorers released data that
indicates only 3% of HBOS stocks were on
loan during the tumultuous week beginning
15th September, which indicates that it was
not the shorting of its shares that made it
too expensive for them to borrow money to
appease their debt – but the instability of the
financial system itself.
There is a case for saying that the value at
risk is a system that works well for broker
dealers because they constantly change
positions as the market changes, but for the
owners of stock it can make everything so
short term that there isn’t time to recover.
However, some still believe short selling
is a fair practice, even beneficial to the
market. The FSA ordinarily embrace it as a
fundamental driver of growth. Hedge funds,
which often have aggressive shorting tactics,
have been blamed, but Charlie McCreevy, the
EU Commissioner for International Markets
instead believes: “As much as some people
want to demonise hedge funds, they are not
the cause of the difficulties in the market.
Let us not forget where the present crisis has
its roots.”
PROHIBITION ON SHORT POSITIONS IN
FINANCIAL STOCKS
Against the background of the current market
turmoil, the International securities Lending
Association (IsLA) understands why the
Financial services Authority (FsA) and other
regulators around the world have prohibited
temporarily the creation of new net short
positions in financial shares and supports
their objective to protect the integrity of
markets and guard against further financial
instability. nonetheless, IsLA believes that
the role of short selling in the markets for
many financial shares recently has been
overstated. The underlying drivers of share
price movements are not the actions of
particular groups of buyers and sellers but
rather underlying changes in the expected
future earnings of companies.
IsLA welcomes the reiteration
by the FsA that short selling is a legitimate
investment technique in normal market
conditions and looks forward to the removal
of these temporary restrictions when the
current extraordinary market conditions pass.
IsLA welcomes the exemption
from these restrictions for market makers,
which should allow dealers to continue to
perform their vital role in providing liquidity for
customers in the cash equity and derivatives
markets. It also notes that the FsA has not
imposed restrictions on securities lending and
urges lenders of financial shares to continue
to lend in order to facilitate market making
and efficient settlement. IsLA Chief executive
David Rule commented today, ‘Any wholesale
withdrawal of stock available for loan could
have highly unwelcome consequences for
liquidity in the cash equity and derivatives
markets that would be contrary to the stated
intentions of regulators in introducing these
regulations’.
15 | GSL
26/9/08 18:18:31
 EmErging markEts

16 | GSL

GSL 16-35 BR to DC.indd 16 26/9/08 16:42:07

 CEO PrOfilE
Brian Lamb
Giles Turner speaks to Brian Lamb, CEO of EquiLend, about the future
of the company, and the development of products within the securities
finance industry
It has been nearly been three years to the day
since Brian Lamb took the job at EquiLend.
Lamb, formerly of Barclays Global Investors,
joined EquiLend in 2005, succeeding former
President and CEO Dirk Pruis. While some
may wonder whether Lamb may have wished
for a luckier third year in the securities
finance market, Lamb on the other hand, is
anything but negative.
The recent issues regarding the market
shake-up of investment banks may have
caused much hand wringing at EquiLend
as the company is made up of a number of
‘global financial institutions joined together,
looking for ways to optimise efficiency in the
securities finance industry by developing a
standardised and centralised global platform
for trading and operations services.’ These
institutions included Barclays Global
Investors; Bear, Stearns & Co. Inc.; Credit
Suisse; The Goldman Sachs Group, Inc.; J.P.
Morgan Chase & Co.; Lehman Brothers;
Merrill Lynch; Morgan Stanley; Northern
Trust Corporation; State Street Corporation;
and UBS.
Recent market events have changed the
ownership structure of EquiLend. Lamb takes
such changes in his stride: “Bear, Merrill and
Lehman’s are owners in EquiLend. Typically
these matters take some time to be worked
out regarding the intricacies of what is
actually done with the holdings and anything
that is owned by these companies. In the case
of Bear Stearns, JPMorgan Securities bought
that company, so we fully expect our current
relationship to be incorporated within their
existing business. In the case of Merrill, it
GSL 16-35 BR to DC.indd 17
turns out that Bank of America was not a
client of EquiLend, so fortuitously that may
result in a net positive for us. Lehman’s is
perhaps the most complicated of all for us
because. Time will tell but the net of it all is
that we will see more consolidation among
our ownership group and we still have more
than 40 non-owner clients so our client base
continues to grow at a healthy rate.
Before such black swans crashed into Wall
Street, Lamb has made the most of these past
three years: “Time flies when you are having
fun, but no-one could have foreseen what
has happened in the credit markets in the
past 18 months. But in regards to securities
finance some things have been predictable.
The adoption of technology solutions to
support the growth for the global industry.
The adoption of electronic trading in
securities finance as a paradigm that people
are willing to utilise. Clearly our place in that
space continues to evolve. We have been up
and running now for over six years and we
are well past the tipping point and at a stage
where we are evolving into new things and
doing the old things better than before.”
Time also flies when you remain busy,
and EquiLend have continued to develop
at pace. The roll out of Trade2O, a trading
services that allows traders to negotiate and
agree trade terms for global equities and
fixed income securities and process them
straight through to a proprietary system
without having to use the telephone or other
manual methods.
The platform, released in January 2008,
has already had good feedback, with many of
EquiLend’s client institutions using Trade2O
for their daily borrowing and lending needs.
Lamb was personally behind the
development of this product: “I very much
see it as EquiLend fixing what it tried to do
six years ago. We had a product (One-to-One
Negotiation) in this space but it was ahead
of its time and as a result not adopted by
the market. Part of what goes on regarding
product take-up is real behavioural and
cultural dynamics. People like to do things
the way they have done them before. I
understand that as I traded for years. For
example people don’t like to give up of real
estate off their screens. They like to use
the phone. They like to deal with the same
people. They get into a comfort zone. It is
difficult for any electronic trading platform
to penetrate that dynamic. But we are really
pleased with the result as we have tried to
go about it differently. We have specifically
utilised input and feedback only from people
who have experience trading.”
Trade2O has predominantly been used
for the US equity market. Though there has
been some interest in Japan, and increasing
development in Europe and the UK. Lamb
also believes that there are also some
interesting possibilities for basket trading.
Lambs ‘can-do’ attitude continues by
seeing the securities business through a global
perspective. Rather than defining it ‘securities
lending’, as is the term of choice in Europe,
Lamb sees the industry as ‘securities finance’,
offering possibilities beyond just lending.
Regarding EquiLend’s expansion, Lamb sees
a dichotomy between the equities side and
GSL | 17
26/9/08 16:42:09
 CEO PrOfilE
the fixed income side of the house. “The fixed
income side of the house on the dealers side
has repo and not securities finance, although
essentially the dynamics are pretty much
the same. I think there is some potential for
EquiLend to add functionality to the fixed
income securities finance side.”
The growth of the securities finance
business has allowed EquiLend to
differentiate itself within the industry,
something that many find it hard to do.
In Europe, the confusion over the services
offered by EquiLend and eSecLending,
an electronic and securities borrowing
and lending agent, was often down to
the similarities in phonetics, rather than
products. However at the turn of the century
there were several dot-com offerings that
sprung from the securities finance industry,
EquiLend and eSecLending included. Some
survived, others did not, however all got
lumped together into the same basket.
“People rarely paid attention to what it
exactly each company were offering, instead
making the assumption that we were all was
offering the same thing. eSecLending is a
lender, period. Their lending style makes
use of an auction platform. It is as simple as
that,” states Lamb. “EquiLend is a consortium
that caters to lenders and borrowers. Because
eSecLending is a lender they are a very
natural client of EquiLend and I hope that
they will a very big client some day.”
Europe holds a continued
misrepresentation of EquiLend, often
describing it as an auction platform.
EquiLend does indeed offer auction
functionality in the shape of AuctionPort,
a browser-based portfolio auction service
that allows the lender to host an auction of
a securities portfolio. However this auction
functionality represents less than 1% in terms
18 | GSL
GSL 16-35 BR to DC.indd 18
of EquiLend’s offering to the marketplace.
EquiLend’s real prowess lies in its trading
platform. Lamb explains: “In terms of new
trades done everyday on our platform we see
15-20,000 each and every day, globally in 27
markets around the world. That’s roughly
USD15-20 billion of new deals done every
day. That is the lion’s share in what EquiLend
is all about, trading.”
Lamb remains positive about the future,
but only if people remain at the top of their
game, and the quickest way to providing
high-end products is if clients continually
demand more. “In regards to competitiveness
and the global landscape, I hope that clients,
institutions, dealers, custodians, and hedge
funds continue to be even more discerning
and more demanding of their service
providers in order that the providers offer
solutions like ours that are global, 24/7, and
enable the client to achieve a lot of efficiency
as a result. There are too many disparate
solutions out there in my view.”
Does this mean that people are failing to
demand enough from their service providers?
“Historically there has been a tendency for
people to be accepting of less.”
On a global perspective, Lamb sees
great promise in the now almost emerged
markets. “I am very excited by the dynamics
in the Asian securities finance marketplace.
EquiLend has always had clients in Japan.
We have always had securities lent and
borrowed on our platforms from the Asian
markets.” EquiLend has also made inroads
into the Australian market, and as of last year
EquiLend offered post-trade services and are
hoping to offer trading services, if not by the
end of this year then by early 2009.
Similarly there are lots of opportunities in
Taiwan, India, Korea, Hong Kong. EquiLend’s
trade and electronic confirmation services
meet the requirements of the Hong Kong
exchange, giving a real boon for clients
wishing to avoid filling out of forms for each
and every transaction common for inter-
regional transactions. Although EquiLend are
not planning to have an office out in Asia any
time soon, training is supplied on a
regular basis.
How has being a trader
helped you?
Obviously being a trader i
understood what i needed to do to
trade. in terms of any sort of system
design i can at least consult on
some of those things and ask the
developers questions before we put
export to the trading community.
also as a trader i think that you
need to be able to make decisions
very quickly and take in as much
information as you possibly can
in order to make a very quick and
educated decision and then move on
to the next thing. i think those sorts
of things have helped me in this role
and hopefully they will continue to
help me.
26/9/08 16:42:09
 lEndEr PrOfilE
Dan Kiefer
GSL speaks to Dan Kiefer of the California Public Employees’
Retirement System (CalPERS) about the value of auctions and why
beneficial owners should be able to retain their right to vote proxies
while securities are out on loan.
Can you tell me how you got involved
in the world of securities lending?
In August of 1993 I came to CalPERS as
a research analyst in the fixed income
group. In 1999, after spending several years
managing a convertible bond portfolio, I
took over the securities lending program.
Immediately, I questioned the custodial and
traditional agency structure. There was too
much inefficiency and too little transparency;
I knew there was a better way. With the help
of many resources, an on-line blind auction
GSL 16-35 BR to DC.indd 19
model was developed. Our first auction,
which was actually conducted telephonically,
was a tremendous success.
As of April 30, 2008 CalPERS
investment portfolio had a market
value of USD 248.4 billion. What
proportion of this is lendable at any
given time?
In general, slightly over half of the portfolio is
lendable at any given time. As new portfolios
are funded and new securities lending
opportunities arise, they are analysed on a
case-by-case basis. We work with our agents
and utilize the auction to gather information
and determine which, if any, route to market
is most appropriate.
CalPERS was the founding client for
eSecLending, taking part in their inaugural
auction in October 2000.
What attracted you to the auction
model and how successful has it been
for you?
After spending time evaluating the securities
lending business, the inefficiencies in the
market became clear to us at CalPERS.
Following a review of our route to market
options available at the time, we determined
that the best way to optimize our lendable
assets would be to offer them directly to the
borrower community for exclusive access via
a blind competitive auction. In 2000, we co-
developed an auction program based upon
our specific needs and objectives. The result
was a product that offers CalPERS a lending
solution other than the traditional custodial
or other third-party structure. Through our
auction based platform, we have obtained
greater transparency and control over our
lending activities while achieving significantly
higher returns; the auction model has
facilitated this growth without comprising
our risk parameters.
The model has been extremely successful
for CalPERS and our approach and
philosophy has not changed. Today, we are
still achieving premium returns and we have
complete transparency into the program for
everything from performance and risk to all
operational components. Over the last eight
years, CalPERS has auctioned nearly USD 800
billion in assets through 30 separate auction
events.
GSL | 19
26/9/08 16:42:09
 lEndEr PrOfilE
How do you choose what to auction
and what not in regards your
lendable assets?
CalPERS auctions everything. The auction
itself is a great mechanism for price discovery
and route to market allocation. It effectively
exploits the inefficiencies of the lending
marketplace and we use it as a tool to
determine how best to optimize each lending
portfolio or market. Through the auction
we invite bids from both exclusive principal
borrowers and agents. We use the results to
make decisions as to which assets are best
optimised via an exclusive, and which may
be better suited to trading on a discretionary
basis.
With discussion still raging about
transparency, what is your view as
one of the biggest lenders?
The demand for greater transparency and
best execution in the securities lending
market is continually growing. I expect this
trend to continue in the coming years as
asset managers look to optimise an objective,
regulatory-friendly and auditable securities
lending program.
What are your views on the SEC’s
initiative in regards to “naked”
short selling?
In general I believe that short selling helps
create pricing efficiency and liquidity in the
market. Although the order has expired, if
it were to be implemented again it would
benefit the overall securities lending market
because it would increase the demand to
borrower securities to comply with the
new rule. In particular, it makes exclusive
arrangements more attractive because of the
ease in demonstrating access to the particular
positions.
Describe how the industry has been
affected by the credit crunch over the
past twelve-months and what has the
industry done to respond?
While on loan balances have decreased,
beneficial owners accepting cash as collateral
should be enjoying the benefit of record
earnings due to increased spreads on both
intrinsic and reinvestment sides of
their program.
20 | GSL
GSL 16-35 BR to DC.indd 20
The credit crunch has raised awareness
among industry participants and in
particular the cash collateral reinvestment
portion of a lending program has become
more of a focal point. The need for
diligent and sophisticated counterparty risk
management has also increased given the
current market environment and we believe
many agents are enhancing their analytics
to better understand and monitor perceived
credit risks. All of this has caused beneficial
owners, to place an increased emphasis on
risk management across both the lending and
cash collateral reinvestment portions of their
programs.
We want to know where returns are being
generated and what risks are taken to achieve
them. I think these types of questions have
helped educate the entire industry which in
the end is a good thing.
How do you measure against your
peers’ securities lending programs?
While we actively monitor our securities
lending performance and are mindful of
benchmark returns, we understand each plan
is unique. Given CalPERS characteristics,
the auction platform was most beneficial
in determining the most efficient route
to market. It works for us and have been
pleased with our earnings since moving to
this platform.
How do you manage your risk/return
profile?
Comprehensive reporting is key for us.
CalPERS keeps a balance between managing
risk and returns in mind when making
investment decisions. To that extent, we
have worked with our agents to build
several forms of daily and weekly reports.
These reports enable us to make continued
adjustments to our program and keep our
risk/reward profile in balance. The reports
are designed to address the risks inherent in
any securities lending program including:
counterparty, operational, reinvestment, and
legal/contractual.
Our fiduciary responsibilities are balanced
between enhancing total return through
securities lending fee revenue and by
protecting CalPERS’ interest as a shareholder
through corporate governance. CalPERS
promotes a highly collaborative effort
between our Corporate Governance and
securities
Lending units. The guidelines set by the
Corporate Governance group are supported
by strong operational procedures and we
believe that we lead the industry regarding
best practices for securities lending and
corporate governance.
With all the new technology platforms
and trading venues over the last five
years from ICAP iSec to LendEX
and Quadriserv, where do you see
the market heading with regards to
electronic lending platforms?
The securities lending industry has come
a long way from negotiating rates over
the phone. There has been a tremendous
increase in the emergence of electronic
trading platforms in the last couple of years.
These platforms have certainly created
significant efficiencies and increased the level
of automation for many participants in the
securities lending marketplace.
There is still significant room in the market
for further automation and technological
advancements for operational processing and
trading. Given the increased focus on best
execution and transparency, I expect that
we’ll see a more rapid progression towards
screen based trading and more efficient post
trade processing in the years to come.
If you could change one thing in
the world of securities lending what
would it be?
Proxy tracking. Beneficial owners should be
able to retain their right to vote proxies while
securities are out on loan. For instance, if
DTC could extend the mechanism for income
tracking to cover proxies it would facilitate an
easier balance between corporate governance
and securities lending.
26/9/08 16:42:09
 COuntry PrOfilEs

Coming of age
Amid hard times, the securities lending industry in the US has
cemented its place within the structure of the financial system and is
preparing for strong growth, Joe Corcos reports.

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

GSL | 21

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 COuntry PrOfilEs
promised to lend up to USD200 billion of
Treasury securities to various primary dealers.
Initially the term for these was overnight, but
this was recently extended to a term of 28 days
with the option for further extension. When
announcing the expansion of the programme,
the Fed stated: “The TSLF is intended to
promote liquidity in the financing markets for
Treasury and other collateral and thus to foster
the functioning of financial markets more
generally.” The fact that the Federal Reserve
has extended this facility, alongside its Primary
Dealer Credit Facility rather than just cutting
rates is of course evidence of how seriously the
Federal Reserve regards the current volatility
and lack of liquidity in the market.
Of course the practice of securities lending
overall is also seeing some gradual change,
some of which is the result of the crunch,
some of which is not. As in most sectors, there
is a renewed emphasis on both transparency
and risk management. Beneficial owners now
wish to be more informed of what is occurring
in the lending and cash collateral reinvestment
side of their programmes. While this trend
has been snowballing for the last few years, the
events of the credit crunch have exacerbated
it. Seidel adds wryly: “The credit crunch has
been an enlightening time for many clients in
lending.
“The returns have been exceptional, but
clients have also been drawn to potential
risks within their programs, particularly on
the reinvestment of cash. The concept of risk
adjusted returns is becoming more
prevalent again.”
The result of this is that agent lenders are
under more pressure than ever before to put in
good performances. This is a sea change from
the early days of the industry. Ten years ago
securities lending was more of a back office
function where, on the whole, if lending agents
were making enough to pay custody fees then
clients were satisfied. Obviously today the
function of securities lending has evolved,
moving closer to the front office and becoming
an alpha-generating tool.
Chris Jaynes, of eSecLending, says:
“Beneficial owners are paying more attention
to their programme, trying to understand
the returns they’re generating and the risk
they’re taking to generate those returns. They
are taking a greater interest in revealing the
performance of their agents and determining
22 | GSL
GSL 16-35 BR to DC.indd 22
if they have allocated their portfolio in the best
way among different agents and routes
to market.
“The more knowledgeable the beneficial
owner base is and the more the beneficial
owner is paying attention and challenging
agents and asking them questions about
performance and risk, the better. Ultimately
the more this happens, the better the lenders
and lending agents will get and the more the
beneficial owners will receive.”
The lending agents who are slow to latch
onto this trend will certainly suffer for it.
Northern Trust’s deputy head of global
securities lending, Jeff Benner, says: “There’s
definitely been a trend for transparency. We’re
active in communicating with our clients and
independent data providers to see how well
our clients have performed versus benchmarks,
whether it be the RMA or others.”
Seidel says that clients are now choosing
lending agents using the same criteria as they
would an investment manager. Agents must
now be able to tailor programmes to specific
clients’ needs. Increased transparency is “the
future for lending.”
Hand in hand with transparency is a
trend towards greater examination of risk
management across the entire spectrum of
securities lending. Awareness of counterparty
risk is ever more important and risk relative
to return is now a major concern of clients.
As the complexity of lending has increased,
lenders have an increased responsibility to
provide risk management.
Another symptom of the evolution
of securities lending is the desire for the
unbundling of services, which is something
that has been happening in the US for some
time and is also being replicated worldwide.
Increasingly beneficial owners are utilising
different routes to market and tending to
unbundle from custody. Some do not regard
this as necessarily beneficial and believe that
the credit crunch may have slowed the trend.
JP Morgan’s head of business development
for securities lending, Bill Smith, says: “I think
the jury is still out on the long-term value
seen in diversifying your lenders. But I think
that has been slowed significantly as we’ve
gone through this turmoil, because this has
been a period when knowing that your agent
has USD125 billion worth of shareholders
equity capital to back up its indemnities
and underscore the strength of its ability to
deliver products and invest in its business has
suddenly come back in vogue and is seen to be
a valuable attribute.
“Prior to the credit crunch that may have
been undervalued a bit as we saw more
boutique providers enter the market who may
have been single strategy or single security
type players.
“I think the pendulum has swung back now to
look for a big fortress-like provider and gain
the comfort from that, that change will be here
for a while now.”
Whether this is true is debatable. While
many clients may indeed appreciate the
security of a big player, increasingly some will
prefer specialists to optimise their
lending portfolio.
A further trend, that has risen partly out of
the need for more risk management, but which
has other catalysts as well, is a preference
towards non-cash collateral among borrowers.
Historically the US securities lending industry
has always preferred to take US dollars as
collateral. This is in contrast to Europe where
non-cash collateral has historically been
preferred. However currently both regions are
shifting more towards each other’s ethos, with
the US leaning towards non-cash collateral
and Europe becoming more familiar with cash
collateral. Many lenders and agent lenders in
the US have found that accepting non-cash
collateral can cut the risk of clients’ overall
collateral exposure.
Northern Trust’s Benner says: “When we
look at the assets and liabilities, the assets
being the collateral and the liabilities being
the loans, the correlation of the two is very
positive. If one goes up the other one goes up
with it, or if one goes down the other one goes
down with it.
“Taking that as part of the mix of our
collateral we are trying to optimise the
collateral we are taking so that we actually
reduce our clients’ VaR.”
In the last year, up until 29 August the
amount of US equities being lent against
non-cash collateral has risen by almost 29%,
according to numbers from Data Explorers.
The amount of US equities being lent against
cash collateral on the other hand has risen by
barely two per cent.
The recent preponderance towards using
non-cash, including equities and debt, has
26/9/08 16:42:10
 Country Profiles
been caused by clients having qualms about
reinvesting their cash collateral in the present
climate. Additionally, non-cash collateral is
attractive to clients who are inclined to us their
long inventory as collateral, which means that
they don’t have to convert into cash.
Overall, the sec lending industry in the US
and elsewhere is set to expand. The desire to
borrow securities is growing, though for now
supply still far outstrips demand. Lenders and
agents are looking at the much-trumpeted
130/30 strategy to be a major driver of growth
in the future. However, in 2008, despite all the
hype, 130/30 funds did not grow significantly.
But many are predicting that from next
year we will see many former long only
institutional asset managers use the strategy.
This is good news for lending agents, as it will
make sense for asset managers to use those
agents they work with to lend securities to help
Elizabeth Seidel - senior vice president and head of them borrow in order to establish long short
global relationship management, Brown Brothers portfolios. Consequently many agents are now
Harriman busily shaping their products to comply with
such strategies.
“We’re going to Seidel predicts of 130/30: “We’re going to see
some activity there [130/30]. It’s been more of
see some activity a challenging market for these funds to take
off lately. But as these funds do expand, we will
there [130/30]. It’s likely see some increased opportunities in the
lending market with the introduction of the
been more of a short side of that equation.”
Obviously any strategy that involves hedging
challenging market strategy can only be a boost to securities
lending. Thus the expanding uptake in
for these funds to quantitative strategies and synthetic vehicles
will also have an effect.
take off lately. But Northern Trust’s Benner says: “Long run,
we’re very bullish on the long-short strategies
as these funds do to continue. I think 130/30 took off in 2008,
but I think they’re going to come back as the
expand, we will likely quantitative approach gets better performance.
“We’re expecting 130/30 to grow, we’re
see some increased building our 130/30 capabilities in being able
to service those clients from the custodial
opportunities in the and fund administration standpoint. We are
definitely looking at 130/30 as an opportunity
lending market with going into 2009 and beyond.”
There is no doubt that the securities lending
the introduction of industry as a whole is preparing itself for
growth. Once the liquidity issues in the market
the short side of that sort themselves out – as they must eventually
– firms’ balance sheets increase, cost of funds
equation.” decrease and the current de-leveraging ends,
24 | GSL
GSL 16-35 BR to DC.indd 24
the industry will certainly see this substantial
growth. But one issue that still needs to be
ironed out is the standardisation of messaging
between the supply and demand sides of the
business. Currently there are several platforms
available for clients, and as volumes rise, lack
of standardisation could become an obstacle.
Currently the EquiLend platform is the most
widely used in the market. Created in 2000
the platform has 11 large firms behind it,
including Barclays, Credit Suisse, Goldman
Sachs, State Street, Northern Trust and
Morgan Stanley. It touts itself as being a full
solution, encompassing front, middle and back
office functions.
Seidel says: “I do think that there is a real
need for more standardisation, particularly
as supply and complexities increase in the
market. With more volume, there is a real need
for increasing efficiencies with counterparties.
We’ve seen some great progress with the likes
of an EquiLend, and that’s a real need going
forward to ensure that we create efficiencies
and standardisation between the supply and
demand side.”
The issue of a standardised platform may be
solved in the near or more likely, the distant,
future. But what is more important is that the
securities lending industry has come through
the credit crunch not only intact, but positively
vindicated as a vital component of the wider
financial machine. Now the industry is gearing
up to process the higher volumes that are
almost certainly over the horizon. And the
middle-men are poised to reap the fees that
will come with that volume. Let the lending
begin and the good times roll.
26/9/08 16:43:53
 MarkWeeksGSL203x267.pdf 8/29/08 2:00:03 PM

CM

MY

CY

CMY

K
 Country Profiles

US equities lent: non cash vs cash

80, 000.00 560,000.00

70, 000.00 540, 000.00

USD Millions

USD Millions
60, 000.00 520, 000.00

50, 000.00 500, 000.00

40, 000.00 480, 000.00

30, 000.00 460, 000.00

20, 000.00 440, 000.00

10, 000.00 420, 000.00

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

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

26 | GSL

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 Country Profiles
Bring it on
Changes in regulation and tax laws have allowed Canada’s securities
lending market to grow significantly, writes Catherine Kemp
The Canadian securities lending and
borrowing market has grown considerably
over the last seven years, with approximately
USD1.1 trillion dollars available to lend,
according to Performance Explorer.
Four regulatory and tax changes opened
up the market to new lending opportunities.
In 2001 mutual funds were given the right
to lend securities; in 2005 the 30% cap on
investing on foreign markets was lifted;
and in 2007 the prescribed market rule was
decoupled from securities lending and the
cross boarding withholding tax was removed.
This has introduced cash collateral into
the market, increased volumes of available
lendable securities - both Canadian and
foreign origin - and increased lending
opportunities in other markets.
However, the opening up of the market
has been a slow and discursive process, and
market participants have been cautious about
expansion. In 2001, a movement by Canadian
lending institutions working with mutual
funds in lobbying regulators prompted a
regulation change to allow mutual funds
to lend securities.
GSL 16-35 BR to DC.indd 27
“The regulators had a clear view of the
industry and the phenomenal track record
it had had over the previous decades,” says
Mark Fieldhouse, head of technical sales in
the Americas at RBC Dexia. “They realised
that there was no reason not to allow mutual
funds to participate and that the funds were
essentially hampered by not being allowed
to participate.”
The decision to allow mutual funds to lend
securities boosted the market place as many
took advantage of the additional revenue to
be generated from lending assets. At the end
of August 2008, 35% of securities available
for loan belonged to Canadian mutual
fund companies, according to Performance
Explorer. This represents a pool of USD381
billion, with USD55 billion on loan, which
represents a 14% utilisation rate. (The
Performance Explorer universe is believed to
represent around 90% of the lending activity
in the market place, with all large lending
agents submitting their data.) However, it
took a few years for funds to have an impact.
“The lending of mutual funds put well
over hundreds of billions of assets into the
Canadian market place, that was a key event
in 2001,” says Fieldhouse. “But it wasn’t a
shotgun start. There were a few clients that
came on board initially and then gradually
more and more funds moved over in the last
three to four years. These recent entries have
really pushed growth.”
This caution is characteristic of Canada’s
securities lending and borrowing market.
While the decision to allow mutual funds
to lend is now widely considered a positive
step, there were debates about the effect of
allowing mutual funds to lend. James Slater,
senior vice president of capital markets at
CIBC Mellon says: “The vast majority of our
mutual fund clients now lend their securities.
Initially market participants thought that
the additional supply would exert downward
pressure on fees. This has not been the
case. Several factors have helped to mitigate
dilution of returns, including the growth
demand for securities by hedge funds, and
the increasing allocation to foreign markets
among Canadian institutional investors.”
The removal of the 30% cap on tax-assisted
savings and pension plans investment in
GSL | 27
26/9/08 16:46:42
 Country Profiles

Canadian Securities timeline

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

Bill C-28 was passed in

December 2007 and eliminated
the withholding tax on fees or
interest on cross-border loans
against cash-collateral.

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

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

28 | GSL

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 Country Profiles
foreign markets in 2005 has allowed pension
funds to make much larger investments in
foreign assets, including access to the Asian
markets. “It’s becoming more important for
securities lending participants in Canada to
combine their local knowledge with global
access as pension funds look for more supply
of international stocks as well as finding
value from lending out their international
positions,” says Richard Mills, division
director, at Macquarie Securities in
North America
The rule change has caused the market to
become far less Canada-centred as a result,
explains Fieldhouse. “It has increased the
breadth of lendable securities considerably.
Before this rule change, growth in the
Canadian market was centred on buying and
selling Canadian equities. There was really a
critical mass with regards to assets available to
lend, so by allowing diversification there has
been an increase not only in holdings in large
cap stocks in some of the more established
markets.”
However, market participants are cautious
about expansion into these markets. “There
wasn’t an immediate change,” says Slater,
“people didn’t just jump into foreign markets.
Pension plans and other institutional
investors very carefully structure their
portfolios, typically based on some form of
asset liability profile that drives an investment
strategy. So it took a while for plan sponsors
to do their analysis. Over the last couple of
years we have seen a gradual shift of assets,
where clients are starting to reduce some of
their Canadian equity allocations, increasing
foreign bond and equity as they go into
emerging markets.”
Fieldhouse adds that it has taken a long
time for the large institutional investors
to evolve their asset allocations to take
advantage of the opportunities presented by
the change in regulation, but RBC Dexia has
seen a gradual movement to a steady increase
in the allocation to non-North American
markets, with a proportion heading to
emerging markets.
The changing of the qualified security issue
in December 2007 ensured that Canadian
pension plans were not only able to invest
in foreign markets but lend in them as well.
GSL 16-35 BR to DC.indd 29
In the Tax Act the rules around securities
lending before 2007 stated that for a security
to receive favourable tax treatment in a
securities lending transaction, it must be a
qualified security - most importantly, it had
to be listed on a prescribed stock exchange.
This list did not include most emerging
markets, which inhibited growth. Canadian
agent lenders lobbied the finance department
in Canada to amend the legislation and in
2007 the finance minister announced that
Lending into foreign
markets is driving
securities lending profits
generally, because there
is less supply in these
markets and so it creates
a high price threshold
for what what people are
willing to pay
the prescribed market requirement was to be
decoupled from the securities lending rules.
This has meant that the ‘qualified securities’
that market participants are allowed to lend
has been extended to include those traded on
any exchange anywhere in the world.
“There was a restriction in certain markets
so that if you did a lending transaction it
would be classified as a sale and repurchase,”
says Fieldhouse, “which obviously created
some restrictions on what our clients could
do. The rule change has also opened up
lending opportunities in emerging markets,
which our Canadian clients hadn’t been
exposed to before. Emerging markets are
where a lot of the growth is coming from and
is where a lot of the big revenue opportunities
come from.”
According to Fieldhouse, RBC Dexia’s
clients’ returns from lending in emerging
markets are much higher in comparison
to their Canadian holdings. Lending into
foreign markets is driving securities lending
profits generally, because there is less supply
in these markets and so it creates a high price
threshold for what people are willing to pay.
Slater explains that while many larger
pension plans and retail investors had
enjoyed a greater exposure to global markets
through the use of derivatives, the regulatory
change has meant that these more expensive
positions have been unwound and have
been replaced by direct investment which
has expanded the range of securities lending
opportunities. “Increased global allocations
has made more assets available to borrowers
since these positions had previously been
held in derivatives,” he says. “These additional
assets have brought greater diversity in our
lending pool and new opportunities to
enhance returns for our clients. With more
diversity comes greater capacity to satisfy our
borrowers globally, and greater access to a
broader pool of securities.”
Terry Bourne, CEO of Penson Financial
Services Canada, says they are also seeing
growth in this market. “At this time we are
certainly seeing an increase in volume and
interest in these markets. With our firm this
has impacted our trade desk more so then
our lending desk. We have seen a growing
interest in global lending and are working
with a clearing customer today to help put
this in place for their firm.”
The commodities boom has also bolstered
the lending market, says Slater. “Demand for
resources has been on the rise and Canada
is one of the richest countries in the world
in terms of natural resources. This has really
fuelled our capital markets by pushing up
asset values and resulted in an influx of new
players coming into the market. This has also
meant that the Canadian dollar has done
remarkably well against the US dollar, and
means that pension funds and institutional
investors see current market conditions as
favourable for diversification out of Canada.
That’s very positive for us from a securities
lending perspective because of the lending
opportunities this creates.”
Rising commodity demand has also lead
to increased attention to the Canadian
equities market from internationally based
funds. Mills explains that it’s becoming more
common to be dealing with a European
or Asian based fund that is looking for
exposure to Canada. The Canadian securities
GSL | 29
26/9/08 16:46:42
 Country Profiles
lending market has become more focused
on servicing these clients, offering these
international funds local expertise and access.
Bill C-28 was passed in December 2007
and eliminated the withholding tax on fees
or interest on cross-border loans against
cash-collateral. The rule change has meant
that the Canadian market has gone from zero
use of cash as collateral to an estimated 20%
use of cash as collateral in a year and a half.
And means that it is becoming increasingly
like other securities lending markets globally,
like the US where cash accounts for around
60% of collateral and in Europe, where cash
collateral is increasingly being used.
“The rule change has opened up additional
avenues for collateralising transactions,” says
Slater. “We expect this increase in business
to carry on through this year, into next year,
and to continue to build. It has also driven
an increase in activity from global borrowers
and given lenders maximum flexibility in
meeting the stringent demands of borrowers.
Along with an increase in tri-party collateral,
the Canadian market is becoming more
consistent with global trends in composition.”
Canada has abroad range of government
backed fixed-income securities that are widely
used as collateral in transactions. There is also
a trend for using equities as collateral. This
combined with cash collateral capabilities
makes Canada very attractive for borrowers.
“Allowing for greater use of cash as
collateral builds on the flexibility of clients
to cover borrower requirements,” says
Fieldhouse, “which makes the market that
much more attractive for borrowers and
ensures that securities are that much more
likely to be borrowed.”
Market participants consider that cross-
border lending against cash collateral will
continue to grow. Beneficial owners are
becoming more likely to accept cash on
a domestic or cross boarder basis as they
begin to recognise the benefits of enhanced
returns, with minimum risk, earned from
reinvestment of collateral in a well
managed program.
However, Slater explains that growth has
been hampered by the credit crunch as the
broker-dealer community is less likely to
collateralise loans against cash than other
less expensive forms of collateral. But CIBC
30 | GSL
GSL 16-35 BR to DC.indd 30
Mellon anticipates cash balances to increase in the coming years.”
as greater liquidity returns. This has allowed the demand side of
The growth of the hedge fund market the business in Canada to keep pace with
has also dramatically increased demand. the growth from mutual funds joining the
Canadian hedge fund managers now control lending programmes. It has also led to new
over CD37 billion in assets, according global entrants to the Canadian securities
to Investor Economics in Toronto. This lending landscape as well as an offering of
represents only 5% of the overall retail more sophisticated products. “Funds are
mutual fund market - but as Slater explains, looking for their securities finance teams to
“pure hedge funds are only a part of provide a wide array of solutions, whether
the story”. physical or synthetic” says Mills. “Firms that
“Increasingly long-only managers and can offer flexibility in collateral continue to
institutional investors are driving additional have success. Canadian equity finance desks
demand for borrowing as they wade into are becoming one-stop shops leveraging their
alternative strategies. Canadian retail mutual local knowledge with global access.”
funds are now permitted to hold up to 20% The changes in regulation and tax
of the value of a fund in short-positions, with law have given the market considerable
regulatory approval. In two years this hybrid room for expansion, and greater lending
segment of the market has grown from opportunities will drive volumes in the
market. As institutional interest in the hedge
It’s becoming more fund market grows and lenders increase their
parameters, Canadian securities lending
important for securities can only grow in size and become more
lending participants in competitive internationally.
Canada to combine their
local knowledge with
global access as pension
funds look for more
supply of international
stocks as well as finding
value from lending
out their international
positions
around CAD7 billion in assets to CAD15
billion, according to Investor
Economics research.
“Furthermore, Canadian pension
funds now hold around CAD20 billion in
alternative asset classes, representing around
two per cent of their overall holdings,
according to CPF Investment Directory. This
is a small allocation but the figure is growing
as most funds above the CAD 1 billion asset
threshold are beginning to allocate to these
investments. In fact, some of our custody
clients have stated a goal of achieving up to
20% of their assets in alternative investments
26/9/08 16:46:42
 Country Profiles
At the starting line
The Czech Republic, Poland and Hungary are yet to get off the blocks
when it comes to securities lending despite interest, writes Ben Roberts
For out-and-out trading, the Czech Republic,
Hungary and Poland are three markets
growing, diversifying and deepening, with
subtle differences between them and other
countries. For lending and borrowing,
however, all three remain “at the starting
line”, according to Tomas Karban, an analyst
at Wood & Company, a trading and research
firm. This view is common among many
active in the region, from banks such as
Raiffeisen and Erste Bank that have developed
networks of custodial and security services
in the region, to local players such as the
Czech bank CSOB, to the stock exchanges.
Regulation, legal issues, supply, market
awareness and infrastructural issues combine
in different ways to hinder the development
of a liquid economy for lending and
borrowing that is at all recognisable to the
rest of Europe and the US.
Alexander Schleifer, head of custody at
Erste Bank, says the stability of the three
markets has actually prevented many market
players from thoroughly examining the
benefits of securities lending. He compares
Central and Eastern Europe (CEE) to the
BRIC (Brazil, Russia, India, China) markets,
which have seen such an unprecedented
boom this decade that they were encouraged
“to look at this topic”. The CEE, by contrast,
small but steady, is only just opening to
extensive foreign trade and so “there was
not much liquidity coming in to the market.
If there was the same boom then they will
have to deal with that – at the moment there
is progress but all market players look at
lending but no one is running that much
money. The Czech market growing 20-40%,
but now we’re seeing a downturn in the
market they may be looking for alternative.”
Babett Pavlics, director of Raiffeisen’s
financial institutions division, thinks along
similar lines. “Pension funds might avoid
security lending because they think ‘oh, the
markets are going this way, why should we
do this?’ But Raiffeisen explains to them
GSL 16-35 BR to DC.indd 31
that securities lending can bring even more
transactions to the market,” she says.
The Czech Republic, on first analysis,
looks to have many of the right credentials.
It has a central securities depository called
UNIVYC, the chief settlement body in the
country that maintains a pool of securities,
including those for lending, with an
increasing divergence of assets. But Karban
explains that the pool is small and a capacity
to lending securities “is not interesting for
the lenders”. He adds that the conditions are
not really favourable for mutual and pension
funds; they have not discovered “the beauty
of lending and borrowing, as these markets
were growing fairly rapidly so the margins
in borrowing and lending are so small they
don’t care”. These “conditions” include a
current rule that pension funds cannot lend
their stock. “There are limits, for instance if
they are buying the shares they cannot sell
them below the purchase price. They have to
keep them and sell them higher – they are not
allowed to make a loss on the trade”. Further,
securities can only be loaned for 30 days,
according to Ivo Mestanek, spokesperson for
CSOB bank in Prague. “The reason of this
limitation originated from the history of the
lending and borrowing system. From the very
beginning of the system, the main lenders
used to be funds and lending of funds’ assets
had been limited by the legislation - 30
days. According to latest information from
UNIVYC, there is possibility of changing
this rule because UNIVYC is open to discuss
changing it or cancelling it at all.”
There have been stalled plans for the
development of a new central depository
to improve supply and encourage lending
and borrowing. In the latest annual report,
Helena Cacka, general director of UNIVYC,
writes that the plans stopped last year “due
to the non existence of evaluation of the
Prague Securities Centre databases”. However,
“at the end of the year we will be preparing
modifications in the clearing of securities,
which were formerly intended not to be
implemented until the central depository was
created. This way trade clearing will become
more effective for the participants”.
Karban believes the creation of a new
depository will be vital as the fulcrum for
generating interest in lending and borrowing,
a business that Wood & Company is keen to
develop. “There is no one institution which
would put these parties together: someone
who would organise, take these stocks from
the fund, convince funds this is interesting,
convince politicians that they should make
changes in their local legislation and bring
in customers to borrow the shares,” he says.
“There are clients looking to borrow the
shares, but they don’t know how much it will
cost, where they will borrow them, whom to
ask, there is no pool for them.” He adds that
it is the international custodians that hold
pools of stock, and the lending agreements
are essentially over the counter.
Further, securities lending is subsidised by
prime brokers in London, and hedge fund
managers are using prime brokers in these
financial centres primarily due to a lack of
contacts in the local market. “You don’t need
to inform the stock exchange in Prague about
transactions being done in London; I don’t
think that goes to the local market at all.
These transactions are purely done outside
the country.”
The reliance on foreign brokerage outfits
and with no requirement for the exchange
to be informed means the Czech Republic
stands outside the centre for its own potential
market for securities lending. By contrast,
repo transactions are a lot more common for
entirely local transactions, Karban says.
Ivo Mestanek at CSOB believes that a
central security depository will help to
improve the current weaknesses of the
borrowing and lending system, including
the official change of beneficial ownership
according to the Czech legislation. The
success of a new system, he says, depends on
GSL | 31
26/9/08 16:46:42
 Country Profiles
the shareholders’ readiness to put their shares
into it. On a brighter note, he adds that the
appetite to be a lender is “steadily increasing.
Investors are looking for new means of
increasing the profit of their assets and this
relatively safe possibility can be accepted in
the near future because of the cash collateral
provided by the borrower and full
UNIVYC guarantees.”
Poland, home of the highly ambitious
Warsaw Stock Exchange, is beset with
legislative problems different to the Czech
Republic but an equal hindrance to securities
lending. There is current confusion as to
whether lending securities will entail a 1%
stamp duty charge for each transaction.
President Lech Kaczynski is soon to sign an
amendment to the Financial Act that Karban
believes will clarify the matter, and says the
security centres are “not of any help - they
don’t care about developing new business
opportunities they just follow the strict
wording of the legislation”. Unlike the Czech
market, a fully functional CSD ensures that
all transactions, including potential short
selling from foreign traders, must take place
on the local market. But again, the issue
is local appetite for the activity, although
Karban adds that the WSE rarely rests on
its laurels. “WSE is very proactive, the most
aggressive in the region. It has built up a very
efficient market, it is lending and bringing
in international securities to the market,
offering remote membership,” he says, adding
that the lending will inevitably begin with
blue chip companies.
Hungary has opened up significantly to
foreign investors. Orsolya Bozso of the
Budapest Stock Exchange estimates that 80%
of the listed securities on the exchange are
foreign owned, the highest proportion in
Europe. She adds that some of the biggest
securities lenders in Hungary have foreign
background and they lend securities also
from their foreign funds. Hungarian lenders
have been working recently to acquire
international partners and customers she
says, but adds that this process “requires more
time to make its effect felt”.
However, much of Hungary’s securities
lending business exists on the basis of
32 | GSL
GSL 16-35 BR to DC.indd 32
private, bilateral agreements outside the
central security depository, called Keler,
according to Bozso. “Since 2006 pension
funds are permitted to lend securities after
the modification of the Pension Fund Act
but against expectations it did not spurred
the lending market,” she says. “Only the few
biggest pension funds take advantage of
securities lending as an additional revenue
source, most of them are still cautious. The
volume of lent securities in Hungary is closely
dependent on the actual market situation
and valuation levels. Lending activity slowed
somewhat recently as a strong negative trend
persists since July 2007, and at such low
valuation levels investors are reluctant to take
short positions. We expect to see acceleration
of the lending market after a rise in
equities valuations.”
There are clients looking
to borrow the shares,
but they don’t know how
much it will cost, where
they will borrow them,
whom to ask
Pavlics of Raiffeisen, who has headed a
new financial institutions department since
January, is wholly critical of the potential
structure for securities lending in Hungary.
Firstly, like Poland, there is legislative
uncertainty. Pension funds are not sure if
engaging in securities lending entails the
portfolio manager signing each contract
or the pension fund – or both. Even the
authorities, she says, have no clear idea. At the
moment “the pension fund must be involved
in each transaction because a securities
lending transaction is usually something that
has to be done very fast. So we have to go to
the pension fund and the portfolio manager
to sign the contract and this is not easy”.
Secondly, the act says the securities lending
agreement must be concluded for a specific
term. This means that each loan needs a
starting date and the end date. However, she
continues, “if the brokers want to borrow for
short selling they usually don’t know how
long they need the security - sometimes one
month, two month. Again, this is something
the pension fund doesn’t like because in its
portfolio evaluation they have to somehow
indicate an end date for the transaction”.
She describes the Keler system as inflexible.
The possible lender must contact Keler to
create a securities pool, she says, “but this is
what the pension funds don’t like to do - they
usually go on a transaction-by-transaction
basis. So Keler’s system is not working.”
Raiffeisen has developed a unique
answer to the problem. The bank has plans,
according to Pavlics, to reinvent itself
effectively as a CSD for the region using its
central ‘mother’ bank in Vienna as a kind
of securities hub. The bank’s international
market contacts will provide a platform
for Hungarian pension and investment
funds to have access to lend and borrow
securities around the world. At the same
time, the local contacts in the market will
generate and sustain a local appetite for
securities lending. Pavlics reveals that her
team has already converting a number of
pension funds to this line of business. “Local
broker-dealers were lacking securities to
borrow [if they are] lacking transition for the
compulsory settlement or for short selling.
So they would call an international bank –
such as JPMorgan – because they could not
find a partner in Hungary. Or they found a
partner in Hungary but these only one or
two transactions. There is a need for such an
institution, such as Raiffeisen Hungary, who
could actually start this teaching/education
process and we’ve started to get the possible
borrowers on board and tried to establish a
system whereby these lender could lend.”
The strength of the plan, she explains, is
to maintain a ready supply of borrowers and
lenders. Hungary, she supposes, could be seen
as the bank’s “pilot”. It could be argued that
Raiffeisen itself is a pilot for banks operating
as a CSD in a market still developing
sufficient resources for securities lending.
For Ronald Nemec, head of securities
lending at Erste Bank, the question for
each market remains: is securities lending
26/9/08 16:46:42
 Country Profiles

needed? “I would say there are hedge funds CZECH MATE: the Prague stock exchange has seen a tempestuous year
looking for securities lending, but maybe 1955
this is a question of which new products are 1905
available.” He says the launch of certificates 1855
1805
such as oil and gold by Erste Bank in
1755
February newly listed on the Budapest Stock 1705
Exchange is an example of the more exotic 1655

assets available. He adds that equity lending 1605

1555
especially gives markets additional liquidity. 1505
Tomas Karban believes the Czech Republic, 1455
Poland and Hungary have great potential 1405
1355
as competitive arenas for lending. Foreign
1305
business will bolster the market, he believes,
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future for it. But we are struggling to bring
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GSL 16-35 BR to DC.indd 33 26/9/08 16:46:42

Country Profiles
A Prime target for scrutiny
Simon Lee, senior vice president, business development,
EMEA at eSecLending, analyses the effect of the Opes Prime fall out on
transparency in securities lending in Australia.
Following the collapse of the Australian
stockbroker Opes Prime earlier this year, May
saw the conclusion of the Beconwood versus
ANZ Banking Group Australian court case.
Judge Finkelstein confirmed the effectiveness
of transfer of title to securities lent under
industry standard securities lending
agreements. What began as a story of a
victim of a turbulent market quickly became
an extensively reported examination of the
securities lending industry in Australia, with a
specific focus on the form of legal agreement
that all securities lending transactions
worldwide are conducted.
The Opes Prime business unravelled at the
beginning of the year leaving many private
investors facing substantial losses as ANZ sold
off borrowed stock positions to cover cash
shortfalls realised through the failure of Opes
Prime’s margin lending business. At the heart
of matter was the form of securities lending
The views expressed are the views of the author only through the period ended 31 August 2008 and are subject to change based on market and other conditions.
The information we provide does not constitute securities lending advice and it should not be relied on as such
34 | GSL
agreement that Opes Prime was using to it has become clearer now that securities
lend client assets to ANZ. This was a version lending should be treated as an investment
of the industry standard Australian Master management function. As such, lenders
Securities Lending Agreements (‘AMSLA’), should be viewing their choice of provider
itself an adaptation of the Master Securities in the same manner, and making decisions
Lending Agreement (‘MSLA’) based on the same quantifiable factors, often
used globally. summed up as ‘best execution’.
While the activities undertaken by Opes Currently, Australian regulators are focused
Prime bore only the briefest resemblance to on a disclosure regime that satisfies interest
the workings of the global securities lending in securities lending and short selling. It
industry, some press reaction ensured that remains to be seen what form this takes and
the securities lending market in Australia whether or not the increased disclosure solely
was put under the spotlight like never before. focuses on short selling, or is expanded to
The situation in Australia quickly drew the take in securities lending activities. Whatever
attention of securities lending practitioners the outcome, it is inevitable that the level
worldwide. The International Securities of transparency in the Australian market
Lending Association noted “the concept of will increase, which the majority of market
title transfer is fundamental to securities participants would agree is a good thing for
lending and repo markets, as it is critical to the securities lending industry as a whole.
the ability of the receiver of the securities to
give good title to a third
party to whom it may transfer those
securities. This ruling will give further
certainty to market participants that
securities loans governed by agreements
such as the Global Master Securities Lending
Agreement are legally robust.”
Ultimately, securities lending in Australia
has continued in much the same way as it had
before the Opes Prime story broke without
suffering the widespread interruptions
that had been predicted. That said, lenders
in Australia were compelled to place their
lending programs under great scrutiny,
satisfying themselves as to the prudent
management of their programs, the amount
of transparency being received, the adequacy
of their risk management, and whether or
not the financial rewards were commensurate
with all these factors. Through this process,
 inDustry insight

Revved up and ready to repo

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

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 Industry InsIght
a broadly valuable tool to control against
certain uses of it.”
When it comes to discussion of the big
issues affecting the market, the answers sound
reassuringly familiar. The big players, like
Citi, would like to see a harmonisation of, or
even better the removal of, any withholding
taxes on repo transactions. The provision
of financing, and the increased liquidity
afforded by repo markets should warrant
a simplification, or ideally an exemption,
of incremental withholding taxes on
repo transactions, runs the argument. A
complicated WHT regime will likely limit
or eliminate the use of repo, resulting
in significant inefficiency and economic
loss, while the incremental tax revenue on
repo transactions is likely to be small in
comparison.
They would also like to see a strong legal
framework, which includes:
the agreement by all participants to use
standardised documentation;
acceptance within the local legal framework
of the need to allow a true title transfer of
repo collateral, and the ability to use that
collateral as needed and as specified within
the repo documentation; cross –border
participation in repo markets. Also on
the wish list is a level-playing field for
participation by foreign institutions in the
local repo markets.
Major trends identified by undertaking
a straw pool of market participants include
an increasing awareness of repo as a useful
funding tool for liquidity management,
and the use of repo by regional financial
institutions using repo as part of their
funding toolkit.
Liquidity is singled out as a major driving
force, both for funding and trading liquidity.
“Regulators are emphasising more strongly
the funding diversity of financial institutions,”
says Ed Gildar. “At the same time, everyone
is increasingly aware of the value of trading
liquidity to the overall stability of financial
markets. Repo in Asia is a work in progress,
moving in the right direction, at a reasonable
pace, but with a substantial amount of work
still left to do.”
Comparing the landscape and market
with Europe can be an interesting exercise,
especially as the latest International Capital
36 | GSL
GSL 16-35 BR to DC.indd 36
Markets Association survey on repo in
Europe hit the streets during the preparation
of this article.
Asia, some people argue, has a better
understanding of the risks and benefits of
repo markets compared to Europe when it
was at a similar stage in its development.
Others recognise the need for growth in Asia
because of the experience they have had in
Europe. However, Europe was at a similar
stage to Asia nearly 20 years ago, and there
remains a significant amount of work to
do, to get the market to an as equally well-
developed position as Europe is today.
“It is a multicurrency, multi-jurisdictional,
multi-cultural region with different rules for
onshore and offshore participants,” adds Alex
Blanchard, head of Asian Money Markets
at Goldman Sachs in Tokyo. And in looking
forward to the expansion of business in non-
Japan Asia as well as further growth in Japan
itself, he adds:
“That won’t change in the foreseeable
future, but we think there is a business case
in non-Japan Asia and we will be looking to
build repo in the region, even though it won’t
be easy due to the difficulty in generating
economies of scale.”
So, what happens next? Again, the answer
is very familiar, and has been said of many
other products and services over the decades:
education, dialogue and support. Continued
education of the market participants,
continued dialogue with the market
regulators, and continued support for the
evolution of the repo markets.
What needs to be done to take the market
forward? “Promoting a deeper understanding
that the more liquidity sources an institution
has, the better they are positioned to
withstand market turmoil and disruption,”
says Ed Gildar. “Luckily, Asia was not the
centre of the current market disruption,
so it has avoided any major impact. The
authorities will certainly learn from the
troubles of other financial institutions, and
should continue to support the development
of repo markets to allow a stronger, more
diversified funding structure for Asian
institutions.”
Alex Blanchard adds: “We need to
see domestic institutions recognise the
opportunities that repo presents, or at
least recognise the concept. And increased
international participation is needed to grow
it. We are here for the longer term and will
be glad to work with local institutions and
regulators so that we can all take advantage
of the huge opportunities that I believe
exist here. No market will become a major
financial centre unless it has liquid equity
and bond markets, and you need a liquid
repo market for the latter; people won’t buy
government bonds unless they can fund
them, and you need to be able to fund in
order to invest. We believe that in three to
four years Korea, China and India could
have liquid, actively traded bond markets,
with regular corporate as well as government
issuance. Once you have a liquid market,
people can trade in and out of positions, and
price discovery becomes easier. Everyone
benefits. We build our franchise, governments
can sell their bonds to a wider range of
buyers, and local taxpayers benefit as the
government debt burden reduces because the
interest rates it must pay drop in response
to the greater demand. There will be some
cynicism given the difficulties that the more
developed economies have found themselves
in lately, but there couldn’t be a better time to
promote liquidty. Without a liquid funding
market in the US, things could have been
very much worse. If anything, the repo story
is even more compelling today than it was a
year ago.”
In the meantime, at the risk of over-
generalising, the appetite for risk, the
eagerness to take a bit of a gamble, is
notoriously greater in Asia than in some
other parts of the world. It is safe to say
that compared to elsewhere, more market
participants are comfortable taking moderate
economic risks within a near-term time
horizon. “However, there is little appetite for
taking any tax or regulatory risks, and also
a lower level of appetite for economic risks
beyond a certain time horizon, or beyond a
certain value,” adds Ed Gildar.
That can affect the market by slowing
down the development of new markets or
other innovation, because most innovation
requires development in the absence of
precise regulation, with the regulation
coming later. A resistance to taking regulatory
risks when considering new products or uses
26/9/08 17:27:55
 Industry InsIght

of products, will inevitably lead to fewer, or at macroeconomic framework of a country

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

“I think during and immediately following the Asian Crisis

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

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 Analyse Asia with Dominick Falco

Dominick Falco, BNY Mellon’s managing director, broker-dealer

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

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 Industry InsIght
Three way street
A flexible collateral profile has become a key selling point for those in
the middle of tri-party deals, writes Anthony Harrington
The credit crunch has sharpened the way
organisations of all kinds approach risk
management and their use of collateral.
When liquidity is tight, there is considerable
pressure on assets, and both borrowers and
lenders look to maximise the potential worth
of their portfolios’ contents. This has put
collateral management very much centre
stage. This is good news for the tri-party
agents and just about anyone else in the
collateral management game.
Mark Higgins, head of sales and
marketing and with responsibility for
business development EMEA at BNY Mellon,
has over 10 years’ experience in collateral.
“Our traditional product at Bank of New
York was tri-party repo, but an expanding
part of our business is now the provision of
outsourcing services for bi-lateral parties,”
he says.
GSL 36-46.indd 39
In 2006, BNY Mellon started looking at
providing services to derivatives deals. “Here
we become the outsourcing receiving centre
making margin calls on behalf of our clients,
who are typically buy-side players,”
he says.
When the bank’s systems and capabilities
handle the collateral management, the
buy-side is able to move from being reactive
to pro-active. “We can help them with
independent valuations of the swaps and
collateral. This means that if you are a small
player, you can operate on an equal footing
with a player who has 4,000 agreements.”
When a pension fund or an investment
fund enters into a securities loan or an
interest rate swap with a bank or other
institution, the trade creates exposures that
need to be margined. This is the kind of
service that BNY Mellon is ideally placed
to provide, particularly with respect to
equities, since it can measure and generate
actions on that exposure. “Some 80% of the
world’s collateral in the derivatives space is
cash, and if there is a margin call of a certain
percentage per million, that will generally be
a cash call; or if it is coverable by securities,
they will be sovereign securities. We can make
calls on behalf of our client against the dealer.
We agree the numbers, provide the custody
if necessary and any clearing that is required
around the collateral,” he explains.
In the current climate, an agent is
particularly suited to these transactions for
those receiving securities as collateral wanting
to take advantage of rehypothecation (the
assignment of the securities to the lender).
They are going to want to onward lend the
securities and generate payment in return.
However, the bi-lateral world is generally a
39 | GSL
26/9/08 16:49:29
 Industry InsIght
simpler affair for an agent to manage, with
one line of cash being matched to one line
of securities.
“We see a pool of assets which the agent
lender wants to lend out at a fee,” says
Higgins. “So institution A will lend a dealer
a range of securities that the dealer wants
and will take collateral in return that will be
either equities or more bonds. The dealer
will provide a slight excess of collateral
over the loan. Margins and margin calls
have become a very critical area, and there
are lots of very busy people making and
receiving margin calls in the derivatives
space right now because of market volatility.
Dealer downgrades, too, will result in
additional margin calls, all of which needs
to be managed. That creates real service
opportunities for us.”
Twenty years ago, trading was a very
gentlemanly activity and margins were not
necessarily adhered to, he explains. But
today regulation and risk mitigation are the
watchwords and “the mechanics of collateral
might not be that different, but the controls
around collateral have tightened very
significantly”.
Christopher Poikonen, managing
director and global head of trading at
eSecLending, the independent third party
securities lending manager, says there is a
very strong market for beneficial owners that
have a flexible collateral profile. “Collateral
flexibility has become increasingly important
and the most successful beneficial owners
will be those who can accept a broader range
of collateral options, regardless of their
jurisdiction,” he says.
“The recent market events have heightened
the demand for lenders to increase their
collateral flexibility because borrowers who
are looking to manage their balance sheets
more proactively will offer premiums to
those clients who can accommodate different
collateral types including US dollar cash,
Euro cash and non-cash collateral.”
However, cash collateral in particular
requires careful management to ensure
both sufficient liquidity and also prudent
investments and it is an area where a
specialist service provider like eSecLending,
can add significant value. “Cash collateral is
a much larger percentage of all trades in the
US than it is in Europe, where around 70% of
40 | GSL
GSL 36-46.indd 40
lenders currently accept non-cash collateral
only. But where lenders are prepared to
accept various forms of cash and non cash
collateral with proper margining, they are
best positioned to capitalise on the increased
returns that the market is offering.”
“The credit spreads have been enormous
as a result of the crunch, so lenders taking
cash collateral and investing are making
above average returns,” says Poikonen. It
should be done in a prudent fashion, with a
sound, conservative investment programme
behind it. eSecLending has a team of people
who are dedicated solely to risk management
as a value added service to the client.
“One of the paradoxes of this market
is that although beneficial owners, broker
dealers, and agents are strained more than
ever before, they have the opportunity to
realise record earnings from their securities
lending activities and collateral management
– provided that these activities are prudently
managed,” he comments.
Olivier Grimonpont, director and head
of collateral services at Euroclear, says due
to the number of different transactions
that require exposure management there is
scope for Euroclear to expand its tri-party
support activities beyond tri-party repo.
For example, when two counterparties to a
securities lending transaction have agreed
that they want an agent involved to manage
the collateral passing between them “we then
take the rules and agreements that constitute
the fundamentals of the bi-lateral transaction
and ensure that all the collateral movements
fulfil the rules set by the counterparties.
Our role in this is completely impartial and
neutral to both counterparties,” he says.
Often Euroclear will also be acting as
a custodian for one or both parties, so it
will have a view of their existing portfolios.
This enables Euroclear to automate a huge
amount of the back office functions involved
in managing the collateral in a bi-lateral
arrangement. “What is key here is that there
are ways of capitalising on the use of a single
pool of collateral to manage exposures
against a range of different transaction
types beyond repo,” he comments. This
is what makes using an agent so effective.
They bring their tremendous overview of
the collateral pool to the table, along with
automated procedures that make light work
of swapping out part of the collateral that
a counterparty might want to trade. The
system will automatically move a counter-
balancing package of securities into the
collateral taker’s account that fulfils the terms
of the collateral agreement specified in the
bi-lateral contract as a substitute for the
securities removed for trading and settlement
purposes.
“The important fact is that neither
counterparty needs to contact us to make this
arrangement. Provided there is a sufficient
volume of securities in the collateral giver’s
portfolio to do the substitution, the system
will automatically detect and release the
securities the counterparty wants to sell,
and move just the right type and amount of
securities from this counterparty’s portfolio
into the collateral taker’s account,” he says. In
the unlikely event that the collateral giver did
not have sufficient securities in its portfolio
to cover the substitution, the system would
automatically flag this as a problem, inform
the client and would not release the security
used as collateral.
“At this point, we would be phoning the
collateral giver to tell them that they need
to bring new eligible securities into their
account if they want to press ahead and
trade securities already used as collateral,” he
comments. It is key here that when securities
need to be substituted, the collateral taker’s
exposure is never unsecured.
Similarly, Euroclear can automatically
enable the counterparty receiving
securities as collateral to use them in
turn to collateralise an exposure they
might have with another counterparty.
“These securities could be used to cover
a securities lending, derivatives, secured
loan transaction or any other transaction
requiring collateral as agreed between the
two parties,” he comments. This is known as
rehypothecation, or the re-use feature of tri-
party collateral management.
“It is very important in the derivatives
world where counterparties are accustomed
to using cash to secure exposures. For these
counterparties to use securities instead of
cash, the rehypothecation feature was a
prerequisite. Typically, you might have an
open derivatives position with one dealer
and a reverse position with another dealer.
Here you might have collateral movements
26/9/08 16:49:29
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41 | GSL
RPM Brussels number 0429 875 591 triparty@euroclear.com

GSL 36-46.indd 41 25/9/08 17:10:49

 Industry InsIght
simultaneously. These kinds of complexities,
once again, are best handled by a specialist
collateral management agent, unless the
organisation concerned has built up a very
substantial collateral management capability
in-house.”
The demand for rehypothecation has
picked up among agent lenders. “They sit
between the two counter-parties and act
on behalf of the beneficial owner of the
collateral, and interface with the borrower.
They can use a triparty agent to administer
the collateral movements when lending their
client’s securities to a borrower, receive the
collateral and ultimately move the collateral
back to the beneficial owner,” he notes.
Grimonpont believes holding all a client’s
assets and treating them as a single pool of
collateral to be used across all exposure types
is a significant benefit for clients using a tri-
party collateral management agent.
Grimonpont also notes that as a
result of Basel II regulations, intra-family
collateralisation is now a growing business.
If, say, the asset management arm of an
institution is doing a transaction with its
banking arm, Basel II says that they need
to collateralise the transaction even though
it is all under the same roof. Collateral
requirements for longer term secured loan
transactions are also growing in importance
where, in many instances, the transaction
will be open ended and the composition of
the loan might change on a daily basis. The
tri-party agent will manage the collateral,
pulling in securities from the collateral giver’s
total portfolio in accordance with the rules
set out between the collateral giver and the
collateral taker.
The alternative to going to an agent is
to build a full-on collateral management
capability in-house, fully supported by the
appropriate IT systems. This is a very big deal
indeed, says David Little, head of securities
finance at the specialist IT consultancy Rule
Financial. Rule is seeing a lot of interest in
42 | GSL
GSL 36-46.indd 42
collateral management systems from Tier Collateral management agents are in a good
One investment banks and hedge funds. position to help their clients achieve this
Little points out that many of the traditional global view, and Little reckons that Rule
IT systems in the dealing space already Financial’s operation is well-placed to build
have some kind of collateral management the necessary systems interfaces to let the
capability or support function. banks take maximum advantage of the
“Trading system software providers services offered by tri-party and bi-lateral
such as Global One, Martini, Anvil and agent collateral managers.
4-Sight all offer some kind of collateral
“One of the paradoxes of this market is that although
beneficial owners, broker dealers, and agents
are strained more than ever before, they have the
opportunity to realise record earnings from their
securities lending activities and collateral management –
provided that these activities are prudently managed,”
Christopher Poikonen, eSecLending
management support, and there are also the
specialist collateral management systems
providers. Some of the back office systems
such as Midas and Wallstreet also have
some capability, but until now there’s been
no system a Tier One bank could buy that
does everything today’s collateral manager
requires,” he says.
Little says in-house collateral
management has historically been very silo
based, with separate collateral management
desks for fixed income, equity securities and
derivatives, often with separate systems and
teams providing the management.
“The challenge organisations face is to
get an accurate global view of their entire
collateral risk exposure across all legal entities
and all asset classes, with the ability to cover
all the business process requirements,” Little
adds. These requirements would include
trading capabilities, settlement capabilities,
swaps and rehypothecation.
26/9/08 16:54:31
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• T he transparency and control this affords can also help institutions achieve
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to the investment banking community. We employ over 200 people and
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Tel: 020 7826 4444

www.rulefinancial.com
 Industry InsIght
Post-crunch trends in collateral management
An industry focus on collateral has produced new outlooks regarding
vendor packages, risk management and transparency, says David Little,
head of Securities Finance, Rule Financial.
The credit crunch has cut across a number of
emerging trends in collateral management.
Some of these will continue once the global
financial services sector finally emerges from
the shadows, but others will probably not - or
not in their current form. Speculation is rife
on the new developments emerging in the
post-crunch world.
When the crunch started to bite in August
2007, collateral management became a more
integral and high-profile element of both
risk management and corporate governance.
Looking back over the past decade, it is clear
that the supporting IT infrastructure for
securities finance has moved from favouring
in-house bespoke systems to vendor
packages. This move has been driven largely
by cost pressures as organisations begin to
appreciate the high total cost of ownership
associated with bespoke systems. Confronted
by a more agile and dynamic environment,
“hard-coded” legacy bespoke systems prove
themselves to be anything but responsive
and costly to maintain, let alone alter. Vendor
packages provide the opportunity to offload
continuing development work to the supplier
and to spread the cost across a much larger
client base.
The importance for collateral
management is that the scale of the
management, administration and reporting
tasks involved requires substantial systems
support. The typical investment bank in
2008 has collateral agreements with literally
thousands of counterparties, so IT support
is essential. Typically, until very recently, this
support would be provided on a silo basis
with different departments each having
their own collateral management desk.
This created a fixed-income trading silo,
a derivatives trading silo and an equities
trading silo.
Prior to the credit crunch, the prominent
trend was to create efficiencies by bringing
44 | GSL
GSL 36-46.indd 44
these separate silos together as a common
collateral management desk. To compete,
organisations had to go for scale.
With margins decreasing and volumes
increasing, substantial investment in systems is
needed to cope, while scale is essential to cover
the investment costs.
This is essentially the “industrialisation” of
the collateral management environment
through the use of strong, scalable IT systems
and processes. Straight through processing
(STP) and automation are the twin goals
here, and both are increasing in the drive
for improvement. Among leading banks, for
example, STP percentage ratios are probably
in the high 90s, which is about as good as it‘s
likely to get. The only elements receiving a
human touch nowadays are exceptional items
requiring skilled decision-making.
It is important to note that organisations
which have reached this point of maturity in
their handling of collateral, and which now
support systems with this kind of capability,
are looking to leverage that systems base, and
their own skill sets, to develop and design
new products to bring to market.
This in turn has created a trend that has seen
collateral management moving from being a
purely back office function to being a profit
centre in its own right. Indeed, the aim now
is to make money out of your collateral,
borrowing it in at “x” and lending it out again
at “x + y”. The returns organisations can expect
on their collateral book might be a couple of
basis points in the repo market, while in the
equities market 10 basis points is acceptable,
with some trades generating
substantially more.
However, here too, margins are getting
squeezed as the on-lending of collateral
becomes more industrialised. So once again,
if the lending organisation is not in the scale
business, then it will find itself unable to win
a significant share of this market.
26/9/08 16:55:35
 Industry InsIght
If these were the patterns prior to the credit
crunch, what might we expect to see a year or
two down the track? “Business as usual” does
not look like an option. Instead, some of the
trends are likely to accelerate while some new
trends might also emerge.
One prominent new development is the
rise of liquidity risk. It already seems clear
that liquidity risk - hardly a consideration
prior to the crash of the Bear Stearns funds
- is going to stand shoulder to shoulder
with credit and market risk. Managers
will be asking themselves: “What’s the risk
that I won’t be able to shift this chunk of
collateral I am taking, tomorrow if I have
to?” Consultation papers have already been
issued by the Basel Committee on Banking
Supervision relating to liquidity risk: might
they be the pre-cursor to Basel III?
There is an increasing awareness that
risk systems need to be unified to provide
a holistic view of the organisation’s total
risk portfolio. The old days of apportioning
different risks to different risk managers and
different risk management teams look like
fading into history. Some of Rule Financial’s
major clients are already pulling their stand-
alone credit and market risk teams and
systems together into one, unified team.
Then we come to the most important issue:
collateral itself. Natural as it now seems, the
ball only got rolling in New York in the 1970s
and 1980s. Collateralised trades were a high
maintenance proposition from
the outset.
They are so much more complicated
than a straight buy or sell trade which is only
on the books for two or three days through
the settlement period. A collateralised trade
might be a rolling trade, remaining on the
books for years. On top of this, inside the
collateral there can be a raft of corporate
events requiring maintenance
and management.
Given this complexity, the rise of the
tri-party collateral management agents such
as Clearstream and Euroclear was inevitable.
The agents have removed all the intricacy
associated with the back office administration
of collateral and, instead, offered its
management as a well-paid service, one to
which they continue to add value. Take the
experience of bond traders of the 1980s, for
GSL 36-46.indd 45
example: the only time they needed to borrow
bonds was when someone failed to deliver,
and they had to borrow to complete delivery
to a client. The bonds in all probability would
be lent as a favour and the idea of collateral
would never come up.
Where might this lead? One could
suggest that we might start to see the rise
of central counterparties for repo*. The
central counterparty in this scenario would
be an institution whose ownership would
be probably split between the banks and
governments. They would occur on a market-
by-market basis and their great attraction
would be that they would dismantle credit
risk. The exposure of the two parties to the
transaction would each be to the central
counterparty, with government guarantees.
This is a kind of mirror image of the way CLS
has come into being in the foreign
exchange markets.
The key here is that the central
counterparty, as a government backed
institution, would be “cast iron” and
highly unlikely to fail. Funding for such a
development would come from the players in
the sector, who would pledge margin for it,
and their gain would be the guarantees they’d
enjoy from the central counterparty if their
counterparty failed to fulfil their obligations.
Again, there is no guarantee this will actually
happen, but it shows the kind of completely
new developments we could see in a post-
crunch world. As markets mature, they tend
to develop similar characteristics, with a
central exchange, a central clearing house and
settlement venue. At the moment, bi-lateral
collateral has no such institution available to it.
However, since collateral management services
can be highly profitable, some organisations
would prefer to retain these themselves, so one
can expect some resistance to such a scheme.
Further, we will see more demand for new
transparency in certain vital areas, such as tri-
party allocation. At present, the agent carries
out all the allocations automatically through
their systems, catering for asset swaps and
substitutions. They may report to the lending
bank on a daily basis via a batch report, but
it is a challenge to get that information back
into the bank’s risk systems. Without this, the
risk manager lacks a complete view of their
exposure. They may think that their exposure
to a certain stock or asset class or region is
‘x’, when it is really ‘y’. We expect to see real
time feeds integrated into risk systems and at
Rule Financial we are already implementing
projects on this theme for some clients. The
risk manager can then see at a glance what
their exposure is - for example, to oil related
stocks in BRIC countries.
One of the drivers here is the bank’s ability
to get the advanced ratings on regulatory
capital. It need to be able to show the
regulator that they have a complete handle on
all its risk. It is not convincing to say, “I can’t
see my intra-day exposure on this or that line
of business”. It must tell the regulator that it
know exactly how a particular transaction is
collateralised and that you have a real time
feed on that.
In the current illiquid climate there has
been a dip in the volumes of transactions as
everyone is hanging onto their cash instead of
lending it. However, this will pick up. During
this period, organisations have time to revisit
their supporting IT systems and can allocate
time and resources to re-architect those
systems. Rule Financial is seeing a number
of clients taking advantage of the fall off in
trading volumes to do exactly this.
* See “Containing Systemic Risk: The Road
to Reform” issued by the Counterparty
Risk Management Policy Group, chaired by
E. Gerald Corrigan (Goldman Sachs) and
Douglas Flint (HSBC) August 6th 2008. www.
crmpolicygroup.org/docs/CRMPG-III.pdf
45 | GSL
26/9/08 16:55:35
 Industry InsIght
A perfect match
An initiative between SWIFT and six major prime brokers to create a
new trade-date matching solution for hedge fund trades is set to reduce
costs and risks for prime and executing brokers worldwide, writes Thea
George at SWIFT
Failed securities trades are a considerable
source of cost and operational risk in the
industry. The longer it takes for errors in the
details of a trade to be discovered, the more
likely it is that the trade will fail to settle on
time, requiring expensive manual interven-
tion to fix. As trade volumes grow, so does the
cost of manual repair. In an environment in
which margins are falling, rising operational
costs are a highly undesirable trend.
The level of operational risk created by high
trade fail rates is also unacceptable given the
increased focus on risk management and
improved transparency in the marketplace
today. Prime broker/executing broker trade
matching: the challenge
In recent months, the cost and risk of
failed equity and fixed income trades has
been a particular problem for prime and
executing brokers processing trades originat-
ing from hedge funds globally. Discrepancies
between trade details submitted to prime
brokers by the hedge funds on one hand, and
their executing brokers on the other, have the
46 | GSL
GSL 36-46.indd 46
potential to prevent trades from settling on
time. Today, these errors are often not dis-
covered until late in the process, at the local
settlement agent level.
Timely automated matching of trade details
between counterparties offers an opportunity
to identify problems early enough to prevent
settlement fails, thus reducing cost and risk
and improving straight-through
processing (STP).
A new initiative under which SWIFT has
been selected by six major prime brokers
to develop and operate a pre-settlement
matching solution is aimed at reducing the
operational risk of processing hedge fund
trades – and cutting the escalating cost of
fixing failed trades manually. Says Fabian
Vandenreydt, Head of Broker/Dealer and Pre-
Settlement Services within the Markets divi-
sion of SWIFT: “By enabling trade matching
on trade date or T+1, the new solution will
allow errors that could cause settlement fails
to be identified up to two days earlier than
they are today. This will reduce risk and cost
for the brokers, and help them to improve
their service to their hedge fund clients.”
Which firms are involved?
The brokers working with SWIFT to help cre-
ate the new pre-settlement matching solution
include Citi, Credit Suisse, Goldman Sachs,
Lehman Brothers and Merrill Lynch. A pilot
is targeted to start in Q4 2008, with a view to
the solution going live in Q1 2009.
SWIFT and the prime brokers are also
working together to raise awareness and
encourage the wider community of brokers
processing trades for hedge funds worldwide
to take advantage of the new solution.
Why SWIFT?
SWIFT was chosen to provide the new
pre-settlement matching solution follow-
ing a competitive selection process, with
the brokers having done due diligence on a
number of providers before picking SWIFT.
An important factor in the brokers’ selection
of SWIFT was that they had decided on a
central matching – rather than a local match-
ing – model.
Central matching is a more efficient solu-
tion than each party using local matching
in an environment in which prime brokers
are managing feeds from multiple executing
brokers. Executing brokers are routing trade
confirmations to multiple primes, and hedge
funds are typically engaged with multiple
prime and executing brokers.
SWIFT has been providing central matching
for foreign exchange (FX), FX options and
OTC derivatives trades through its Accord
service – used by banks, brokers and invest-
ment managers worldwide - for a number
of years.
To support pre-settlement matching for
equity and fixed income trades, SWIFT is
extending its existing Accord solution, adding
functionality to match securities messages to
the system’s existing capability to match FX
messages. Because SWIFT is not creating
26/9/08 16:55:36
 industry insight
this system from scratch, it is able to meet the
brokers’ requirement for a rapidly delivered
solution to the problem of hedge fund trade
matching.
Since the brokers that have signed up
to use the new solution are already users of
Accord, adoption of the functionality for
equity and fixed income trade matching
is simplified, and will require minimal IT
disruption. Additionally, the new solution
will be based on ISO standard messaging,
meaning the brokers can tap into their
existing messaging expertise to take
advantage of trade-date matching for hedge
fund trades.
Jitu Parmar, Head of Broker Dealers,
Treasury and Derivatives, UK and Ireland
at SWIFT, says: “We are building on our
experience of providing central matching
for FX. That experience is very important
to the prime and executing brokers, because
they know we understand the business of
matching, irrespective of asset class.”
Once the ability to match securities trades has
been added to Accord, it will be positioned
as a truly cross-asset matching solution,
enabling financial institutions to exploit the
benefits of central matching across a wider
range of their trading activities. Expanding
asset class coverage is a continual focus for
SWIFT, says Vandenreydt, because “brokers
and asset managers are looking for solutions
that cover as many asset classes as possible
through a single interface”.
How will the solution work?
Hedge funds typically notify their prime
brokers about executions at the end of the
trading day. The prime brokers then match
the trade details with those they receive from
the funds’ executing brokers, in a process
that currently involves disparate systems and
often manual work. As a result, discrepancies
between trade details are frequently not
GSL 47-55.indd 47
By enabling trade matching on trade date or T+1, the
new solution will allow errors that could cause settle-
ment fails to be identified up to two days earlier than
they are today. This will reduce risk and cost for the
brokers, and help them to improve their service to their
hedge fund clients.”
uncovered until the day before settlement or
even settlement date itself, increasing the risk
of settlement failure.
Once the new pre-settlement matching
solution is in place, trade details will be
submitted to Accord in ISO standard format
by both the executing broker and the hedge
fund’s prime broker. Accord will then match
the trades, and flag any mismatches and the
reasons for them to the brokers as close to
T+0 as possible – meaning any problems
that could cause trade fails are identified
much earlier, leaving plenty of time to fix the
breaks.
What are the next steps?
SWIFT has been working with the brokers
for several months to establish their
requirements for the new pre-settlement
matching solution, and is now engaged in
adding the necessary new functionality to
Accord. Once the pilot scheduled to begin
later this year is complete, the solution will go
live in Q1 2009.
As part of their commitment to use the
new solution, the brokers are working with
SWIFT to raise awareness of the benefits
of pre-settlement matching among other
brokers executing trades for hedge funds
globally. As with any central matching
solution, the more market participants use it,
the more widely the efficiency benefits will be
felt across the industry.
In addition, the brokers will also oversee
the evolution of the solution going forward,
as SWIFT continues its efforts to help
the broker/dealer community implement
automated solutions to eliminate cost and
risk in other areas of their business.
“The broker community is the driver for us,
to inform and educate us in terms of what we
should be doing,” says Parmar. “We are a co-
operative, and they are our members.”
The brokers working with SWIFT to
help create the new pre-settlement matching
solution include Citi, Credit Suisse, Goldman
Sachs, Lehman Brothers and Merrill Lynch.
A pilot is targeted to start in Q4 2008, with a
view to the solution going live in Q1 2009.
SWIFT and the prime brokers are also
working together to raise awareness and
encourage the wider community of brokers
processing trades for hedge funds worldwide
to take advantage of the new solution.
Why SWIFT?
SWIFT was chosen to provide the new
pre-settlement matching solution following
a competitive selection process, with the
brokers having done due diligence on a
number of providers before picking SWIFT.
An important factor in the brokers’ selection
of SWIFT was that they had decided on
a central matching – rather than a local
matching – model.
Central matching is a more efficient
solution than each party using local matching
in an environment in which prime brokers
are managing feeds from multiple executing
brokers. Executing brokers are routing trade
confirmations to multiple primes, and hedge
funds are typically engaged with multiple
prime and executing brokers.
SWIFT has been providing central matching
for foreign exchange (FX), FX options
and OTC derivatives trades through its
Accord service – used by banks, brokers
and investment managers worldwide - for a
number of years.
To support pre-settlement matching for
equity and fixed income trades, SWIFT is
extending its existing Accord solution, adding
functionality to match securities messages
to the system’s existing capability to match
FX messages. Because SWIFT is not creating
this system from scratch, it is able to meet the
brokers’ requirement for a rapidly delivered
solution to the problem of hedge fund trade.
GSL | 47
26/9/08 17:10:47
 technology
the trading hub
Rob Sammons from Anetics on global securities lending
and its role at the centre of modern day asset management.
G
lobal securities lending is no
longer a practice limited to the
facilitation of short selling or
dividend arbitrage. It touches
on almost every aspect of a firm’s asset
management.
Assets that can be used as fee-generating
instruments or corresponding collateral and
swapped with a trading partner on terms
that facilitate customer dealing, reduce costs,
generate income, manage risk, and adjust
the balance sheet. For a firm to be successful
at this new style of securities lending, there
are two key requirements - one internal, the
other external. The securities lending desk
sits in the middle.
The internal requirement may sound
simple, but not always: You must know your
position. To wit, what instruments do I have
available to lend or sell, and on what terms;
what instruments should or must I borrow or
buy, and on what terms. These instruments
include securities, cash currency, and certain
derivative products. Depending upon the size
and complexity of the firm, this information
may be readily available from one master
system. More likely, the securities lending
desk must compile it from a series of internal
sub-systems.
The external requirement has, at its
foundation, a dealing agreement with at
least one or more trading partners - the
marketplace. In the case of just one trading
partner there is little to do. The day’s work
is submitted to the trading partner, terms
agreed, resulting deals then turned over to
the middle and back office for execution,
settlement and maintenance.
But most firms don’t deal with just one
trading partner. They have dozens if not a
hundred or more trading partners - each
offering a distinctive product or benefit
in a hierarchy from most-favoured to
counterparty of last resort. And it is here,
in leveraging these relationships, that the
48 | GSL
GSL 47-55.indd 48
securities lending professional earns his or
her keep. Each business day the race is on
to satisfy the firm’s internal requirements
by making favourable external deals in the
marketplace.
An absolute prerequisite to accomplish
this work is Information: Who’s long and
willing to sell or loan, who’s short and needs
to buy or borrow, at what rates, with what
offsetting collateral. Sounds like this too
should be simple, however…
The dissemination of information
between trading partners, a prerequisite
to dealing, is where the industry is stuck
in the twentieth century. Sure, now there
are trading hubs that aggregate some
information. The major agent and custodial
lenders publish daily, if not real-time, lists
of aggregate holdings available for loan, but
this is only part of the picture. Aggregate lists
are just that – big lists that don’t necessarily
reflect sub-lists of opportunity. The industry
may have graduated from the use of fax as a
means to distribute lists, but it remains mired
in a patchwork of electronic messages and
phone calls as a key dealing medium.
The Pareto principle (the 80-20 rule), or Dr.
Joseph Juran’s observation of the “vital few
and trivial many,” applies to this industry
just as others. The securities lending desk
likely can satisfy 80% of the firms dealing
requirements with 20% of the day’s work.
The remaining 20% of firm dealings
requires 80% of the effort. One might
conclude: Adjust the work to diminish those
trivial tasks that take 80% of the time. But
that theory is flawed as some of these trivial
many tasks belong to the vital few of your
best customers. You end up weakening your
franchise.
The better approach, and this is where the
future of technology has its best opportunity,
is to aim to adjust the joint ratio from 80:20
to, say, 70:30 or 60:40. Admit that you’ll
never get to 50:50. In practice, if the Pareto
principal is to hold true, your firm will always
drift back to 80:20 even as you strive for, say,
even 75:25. But it will be a stronger, more
efficient 80:20.
Trading hubs are useful, especially the
largest with order routing and straight-
through bookkeeping and settlement. But
it is unreasonable to believe that there
will ever be one hub with access to every
opportunity. Instead, the securities lending
desk must be prepared to aggregate and
leverage the various hub opportunities with
its own bilateral relationships. This is where
telephone, e-mail, Bloomberg messages, chat,
spreadsheet attachments, all flying around,
aim to fill the gap.
Let’s digress for a moment. Price, or rate
transparency in securities lending, is a
popular topic. Admittedly, it is helpful to
know, for a specific security, the level at which
others are dealing, to benchmark or gauge
where, say, my firm should be dealing. It is
a bit like a homeowner asking a neighbour
with a similar house, ‘What was the total
cost to heat your home last winter?’ as a way
of benchmarking total heating costs. But
without knowing the myriad factors that go
into actually heating a home, temperature
preferences, fuel and source, heating system
age and type, et al,
such benchmarking can be misleading.
Furthermore, in evaluating performance,
it isn’t about specific instruments, but the
total value of what one can deliver to a
customer, firm, counterpart, trading desk, or
any other aggregation unit. And even that
value isn’t just income or expense. It has risk,
durability, and balance sheet considerations.
It is unlikely there will ever be a big board
defining the bid/offer dealing levels in the
borrowing or lending of a security. The
reason being that the purchase or sale of a
security on an exchange like the NYSE has
absolutely nothing to do with who is buying
or who is selling – only that buyer and seller
26/9/08 17:10:47
 technology
met in that market at a single point in time
and agreed on price and quantity. Conversely,
borrowing or lending a security has less to do
with the subject security (other than certain
key attributes, like fungibility) and everything
to do with who is borrowing, who is lending,
and why. As such, price or rate discovery in a
security borrow/loan transaction is primarily
a bilateral process with the market for each
counterparty pair specific to the level at
which they agree and deal. Any firm that fails
to acknowledge this reality and deals at, say,
blanket or benchmark rates for the bulk of
its requirements is potentially dealing at the
wrong level, or missing deals entirely.
Right now, today, we may be seeing as much
transparency in securities lending as we will
ever see - or need to see. With the advance
of technology that enables more automated
bilateral discovery, transparency is of lesser
importance. The market value to borrow or
lend any security will be the weighted average
aggregate of the firm’s dealings. The level
other firms are dealing at doesn’t matter.
That’s their deal.
Let’s assume for this discussion that your
desk has the requisite system tools to present
a complete and accurate picture of current
settled and pending positions, and your tasks
for today’s work are any of the fairly typical,
borrow to enable short-sale settlement,
loan to reduce financing costs, refinance to
optimize earlier short coverings, raise cash,
return and re-borrow items that have been
recalled, et al. You know what you have to do.
Question is,
How to do it quickly and easily?
First step likely is to leverage any automated
resource available to your desk. Trading
hubs, coordinated order routing, bilateral
auto-borrow/ auto-loan, and the like. This
cleans up 80% of the work in 20% of the
time. Next, on to the future of technology…
GSL 47-55.indd 49
You have a utility that runs on your desk that
you and your team use to engage in serial,
bilateral communication with your hierarchy
of trading partners, in the order you favor,
as you seek to do deals. We won’t take this
too far into the future so we’ll assume the
favored communication medium is e-mail
(it can be secure, there is an already existing
audit trail). Your e-mails will be generated
at your direction by this desk utility, it will
maintain a database of what you distribute
and to whom, and the e-mails will be in a
format that is also machine readable by the
counterparts you aim to do business with.
Since the entire Street will have moved to this
future of technology, your counterpart’s desk
utility, upon receipt of your e-mail, will have
already compiled your transmittal into its
database and alerted your trading partner of
your request. Your trading partner will then
review your request against his or her own
position and any other requests that may
be pending, and respond to your inquiry in
minutes if not seconds.
This response goes directly into your
desk utility upon receipt, you are alerted,
any deals you agree to do are accepted and
forwarded directly to your trading system
with no further key entry. A confirming
e-mail is automatically returned to your
trading partner’s desk utility so it can book
its side of the deal. Done; two minutes and
fifty-two seconds of elapsed time; on to the
next trading partner.
In practice, this is bilateral dealing as it
has been since the dawn of commerce: Offer,
counteroffer, acceptance, execution. This
is just what is happening across securities
lending desks today but with frequent
document copying and pasting, double or
triple key-entry of data, and a team of people
that must remember the state of play on
each negotiation.
While the purpose of this discussion
is to focus on the 20% of the work that
takes 80% of the time, this future desk
utility is not just for bilateral deal hunting,
but would communicate, desk to trading
hub, desk to coordinated order routing,
desk to auction house; a complete dealing
solution. And while for simplicity we’ve
discussed serial bilateral negotiations, with
computer, database aided tracking, multiple
negotiations may occur simultaneously.
Middle and back office operations like
mark-to-market and corporate actions are
not addressed in this discussion but can
benefit from the same sort of common,
straight-through exchange of information –
day’s work appears on a screen, counterparts
agree, one click and the action flows straight
through to settlement on both sides (through
automated messaging). This is not a single
platform, but any number of platforms that
know how to communicate.
On to the future!
GSL | 49
26/9/08 17:10:47
 technology
F
rancisco Gonzalez has been
instrumental in designing the
products offered by Eurex SecLend
and has done much to shape the automation
of securities lending and borrowing
trading. As head of business and product
development Eurex secured funding product
line – covering both securities lending and
repo – he demonstrated early and impressive
intuition in the industry in 2002, when it
was a lot smaller than today’s multi-trillion
market. Now the key is to bring this market
forward to the next level of trade automation,
execution and integration.
“The electronification of the securities
lending market is pervasive and
revolutionary. The difference between mailing
and electronic trading seems very small
compared to integration efforts. One major
step is the integration of trading activities
with the bank’s infrastructure, including
collateral management; integration with the
settlement and custody network, including
tri-party facilities, is another important step
in realising full STP.”
Gonzalez says trading activities have
shifted towards high-quality collateral.
As a result, last year volumes declined in
certain segments due to the financial crisis.
“Sovereign securities, serving various
financing needs, have been in high demand,”
he says. “This is the main focus for many
investment professionals who use Eurex’s
50 | GSL
GSL 47-55.indd 50
technology interview:
Francisco gonzalez
The head of Eurex SecLend discusses
his role and the future for an electronic
lending market.
secured financing marketplaces. I don’t
see that an electronic trading system on its
own can dramatically lift trading volumes.”
He cites the fragmentation of the market,
meaning there are a number of sub-markets,
each of which represents part of the invisible
overall market. Eurex’s goal is to streamline
processes and minimize fragmentation at
the trading layer by channelling various
settlement and custody networks.
He mentions SIS SegaInterSettle AG’s
Triparty SecLend service as an example of a
sophisticated and valuable service featuring
fully integrated and automated settlement
and risk management functions.
He adds that in view of increasing market
standardisation, a partially open marketplace
such as Eurex SecLend seems well positioned.
Gonzalez emphasises the increase in
opportunities available to traders thanks to
expanded horizons. One key success factor
for a trader is his or her personal network in
the industry. This factor is being protected
and placed above other business drivers, even
best execution.
However, he acknowledges that the
personal relationships between market
participants – the fulcrum of over-
the-counter (OTC) trading – will not
diminish very much. “I think a trader
needs relationships with corresponding
counterparts at an appropriate level,” he says.
“But in order for a profit-oriented trading
desk to process all the flows of opportunities
with the best possible price discovery (best
execution), it is necessary to automate by
introducing an electronic trading system like
Eurex SecLend.”
“At present, services like collateral
management, corporate action services and
mark-to-market services are at the top of the
banks’ wish lists. I think this will also push
centralised facilities forward.”
Will the hard-to-borrow market be traded
electronically in the near future? “Yes, I think
it will,” he says. “The market does not seem
ready yet, but in my opinion, it is on its way.
One major advantage of a system like Eurex
SecLend is the fact that a bank can reach far
more counterparties at the same time and
that the counterparties all apply the same
standards for trading and collateralisation
(eg, collateral schedule). This makes fees
more easily comparable and volumes deeper.”
Eurex SecLend, spurred by Gonzalez, has
adapted to change. “I think a service provider
like Eurex has to develop different models
which offer added value for
market participants.”
26/9/08 17:10:50
 technology

leveraging the us
Jane Milner, market specialist at SunGard Securities Finance, analyses
the progression towards a harmonised adoption of risk management
requirements in Europe.

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

GSL | 51

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

 technology
regulators and IT solution providers. Parties
worked together for two years, incorporating
the credit pre-qualification process, in order
to ensure that the requirements could be
met in the most effective manner. SunGard,
EquiLend and DTCC joined forces to provide
a service that allow lenders and borrows
to supply files to a single service provider,
regardless of the service used by the end
user of the data. Today, over 100 market
participants provide their files directly
into the SunGard hub, with more than two
million records being transmitted through
the hub on a daily basis.
European ALD/Basel II Co-Operative
Solution to US ALD
The disclosure of principal requirement
was initially to be implemented throughout
Europe from the start of 2008. However,
there still appears to be much confusion in
the market as to whom this impacts and what
must be done. This may be partly because
there are multiple authorities involved,
introducing the potential for each to translate
the EU Basel II requirements differently. In
the case of the FSA, there is the option for
interim monthly reporting, with the move
to the mandatory daily reporting deadline
being held-off until January 2010. Although
this does not give the borrowers full relief
from the capital implications of dealing with
lenders who do not provide the necessary
trade and collateral reporting files daily, it
52 | GSL
GSL 47-55.indd 52
provides a lead-time to allow FSA-regulated
participants to get automated processes in
place.
To assist the market in implementing a
solution, ISLA formed the ALD Working
Group, in which SunGard is a founding
member, and has worked in conjunction with
consultants Capco to identify a workable
model for the final solution. The solution is
largely based on the existing US model, with
additions to specifically handle:
DTC access for non-DTC members
Repos/reverse repos
Tri-party collateral
DBV collateral
Industry Classification Codes
An implementation timetable has been drawn
up by ISLA, working towards full compliance
by January 2010 latest.
Interim Solution
In the meantime, the priority for the brokers
has been to receive data from their largest
lenders and they are now exchanging files
through the existing mechanisms. With this
in place SunGard understands that brokers
will now be encouraging their remaining
lenders to provide the required data files on
as frequent a basis as possible. Even lenders
who provide details of the underlying
principals at the time of trade are required
to provide loan and collateral information
in the agreed file formats in order to allow
the brokers to carry out the necessary capital
adequacy calculations.
Automation of this process can greatly
reduce the effort and opportunity for
error that this additional reporting burden
represents.
Like ALDoP, the disclosure of principal
required for Basel II is a very large, complex
project. The introduction of ALDoP in the
U.S. ran smoothly because the industry
worked together with regulators and IT
solution providers from beginning to end.
SunGard’s ALDoP service was successfully
implemented and continues to run well. It
is anticipated that a similar model can be
replicated in Europe.
26/9/08 17:10:56
 next issue
industry view:

GSL looks back on the events of

week September 15th and analyse
the effect on the securities lending
market.

gsl looks at securities

lending in the nordics:

Sweden, Norway, Denmark and

Finland, Iceland.

UK pension funds’ involvement

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

Asian tri-Party collateral

Management –

In June, BNY Mellon became the

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

south Africa:

RMA Conference Review.... Securities in South African

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

GSL | 53

GSL 47-55.indd 53 26/9/08 17:10:58

 STATISTICS

Neither borrower nor lender...

Data Explorers have released graphs documenting market cap out
on loan versus value of stock in the period running up to HBOS
acquisition by Lloyds TSB, Lehman Brothers filed for bankruptcy, and
Merrill Lynch’s acquisition by Bank of America.

HBOS % Market Cap on Loan Price

700.00
HBOS’ Market Cap out on loan (%MCOL) to short 20.00
Market Cap on Loan (%)

investors showing that short positions were covered

between September 16 and September 17 this week, 600.00

Price (GBP)
18.00
with the MCOL falling from 2.96% to 2.75%.

16.00
500.00
Data Explorers: “This percentage is nowhere near the
HBOS high of 18% MCOL in July, and to put it into
context - Fannie Mae and Freddie Mac at some stages 14.00
400.00
peaked to 40%.The data appears to conflict with the
views of the popular press who are suggesting a surge 300.00
in short-selling. The risks inherent in being a short 12.00
seller could not be more clear than in the HBOS -
Lloyds TSB saw to that.” 10.00
200.00
8

8
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8
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17

14

12

09

07

04

01
Lehman % Market Cap on Loan Price
18.00
The percentage of LEH MCOL increased from 10% to 20.00
Market Cap on Loan (%)

18% between September 5 and 11. Utilisation jumped

16.00
from 35% to 63% in the same time frame. 18.00
14.00
Data Explorers: “Lehman (LEH), who filed for

Price (USD)
bankruptcy last September 15, saw an enormous 16.00
12.00
spike in short interest the previous week, presumably
as short investors got wind of the possible catastrophe 14.00 10.00
at the weekend.”

12.00 8.00

6.00
10.00
8

8
0

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-0
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p-

p-

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ep

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-

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28

01

03

05

09

11

Merrill Lynch % Market Cap on Loan Price

16.00 40.00
% Market Cap on Loan (%)

There has been a general decrease in the short

positions in Merrill Lynch (MER), from a %MCOL of 5% 14.00
in early August to 2.6% today, although short interest
has picked up from 2% on September 8th. Utilisation 12.00 35.00
Price (USD)

is at just 11% so there is plenty more left to borrow. 10.00

8.00 30.00

6.00

4.00 25.00
2.00

0.00 20.00
08

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08

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54 | GSL

GSL 47-55.indd 54 1/10/08 16:53:54

 PeoPLe
Ignorance is the enemy
Jerry May, cash securities lending officer at OhioPERS, writes on
managing risk in an unstable market.
In January 2007 securities lending programs
in the US were anticipating a strong year
for earnings. The Federal Funds rate was at
5.25% having just experienced 17 regimented
increases of 0.25% by the Federal Reserve.
There was some speculation as to whether the
Fed had overshot its intended target, and just
how soon and at what trajectory rates would
come back down. Cash collateral managers
were in their sweet spot by being able to take
advantage of extending durations in cash
portfolios, and picking up some amount of
incremental yield.
Rather quickly in the year, though, there
were signs of difficulties with sub prime
mortgages at the forefront of many analysts’
concerns. Bear Stearns’ hedge funds had
publicised problems, and by August of that
year, there had been significant tightening
of liquidity within the marketplace. For the
last year now, the securities lending market,
as well as other short-term markets, have
been dealing with this liquidity crisis. Risk
has been significantly re-priced in the cash
markets, with financials taking the brunt of
the change in investor sentiment.
In addition, securities lending programs
have had to deal with the rapid deterioration
in a significant counterparty – Bear Stearns
– and the implications of that situation upon
the industry as a whole. Even though most
organisations were aware of the pressure
upon investment banks, it seems that the
suddenness of Bear’s decline is worth re-
GSL 47-55.indd 55
examining for an industry that is largely
dependent on the ability of counterparties
to return borrowed assets. Yes, there are
measures in place to counteract this situation,
when a counterparty is unable to return
assets, but no one wants to endure the
headaches of actually having to enact
these measures.
Boards and management of beneficial
owners have had to get involved in an activity
that is not risk-less. Fate or providence has
a way of reminding participants of this fact
every decade or so.
So, what do market participants do now?
Where do we go from here?
If one examines reactions after the
difficulties in the early to mid-1990’s, some
insight could be found into what may
happen in the next few months and years.
If memory serves correctly, to some firms
the word “derivative” became synonymous
with dumping barrels of money into a river,
never to be seen again. As most now know,
derivatives can, in fact, be acceptable if all
of the parties understand the risk and the
reward involved, and the actual structure of
the security being contemplated.
The same reaction might be in store for
the term “leverage” after the current crisis.
The problem with reacting, though, is that it
leaves you little time for anticipating.
What may be a more appropriate response
is to educate participants in the risks of the
lending process - from counterparty risk
to operational risk; from reinvestment risk
to legal risk. Boards, in particular, seem to
have a skewed view of lending, and the risks
involved. Whether this has been of their own
choice, or from communication they have
received, these individuals, who bear the most
risk in the process, need to be educated in
what those risks are, how those risks can be
quantified, and what can be done to mitigate
those risks.
Some steps that can be taken include: an
in-depth review of cash investment guidelines
with all parties so that risks that can be taken
are well known; a discussion with the cash
manager of the program so that the risks that
are being taken are communicated, and all
parties are comfortable; and a formal look
into the aggregate counterparty risks being
born, including securities lending.
Ignorance is an enemy of the securities
lending industry, as we have found out time
and time again. Education is one way to
fend off problems, and difficulties that may
occur after a crisis. While no individual or
firm is able to correctly identify all potential
problems, a legitimate effort to educate
those who are the risk takers will create
some degree of trust, as well as provide
a foundation of knowledge from which
management out of the crisis can take place.
GSL | 55
1/10/08 16:53:55
 PeoPle
Paul Wilson, global head of
client management and sales in
the securities lending division at
JPMorgan, talks to Joe Corcos
What major changes have you seen
develop since you first started
working in the sec lending arena?
A major change has been the transformation
of lending from being a back office ancillary
function to a front office alpha-generating
activity. With this has come an increase in
focus on risk management. Clients have also
become significantly more demanding, taking
56 | GSL
pg56-64jc.indd 56
a greater interest and active involvement in
lending activities. Also, most agent lenders
have developed their own specific style of
lending so that most of the major lenders
actually look very different to each other.
The industry has also become much more
competitive; when I first started in the
industry ten years ago, questions about the
lending agent’s performance weren’t asked
as much. In those days, if the agent, who was
typically a large custodian, was earning enough
to pay custody fees then everybody seemed
to be happy. Overall however, much of the
debate in the industry still centres around the
same subjects as it did when I first started; best
route to market, the risks of cash collateral
management, impact of lending on proxy
voting, risk management and transparency.
What do you find particularly
interesting and gratifying about
your role as Global head of client
management and sales in the
Securities Lending division at
JPMorgan? What part of the job is the
most demanding?
The feedback that we have had from our
client base over the last year on the way
in which we have managed the market
turmoil has been exceptionally pleasing
and rewarding. I think this is an area
where both JPMorgan and specifically
our securities lending business have really
been differentiated. I also find it interesting
to look at the different trends and issues
in the market and how they vary from
region to region. The issues, challenges and
opportunities do vary across the different
regions of Europe, Asia and the US. I would
add that it has also been very satisfying that
we have continued to invest and build out our
client management and sales teams across the
globe, to the point where we now have more
than 70 professionals globally in our client
management and sales team. As a result the
business has grown dramatically over the last
2-3 years, as well as significantly improving
the experience for our clients.
As corporations grow beyond their
own countries and markets become
1/10/08 19:15:26
 PeoPle
more liberal, there is now a greater
need for cross-border financing, how
has this impacted sec lending?
Any source of new demand, i.e. new
organisations needing to borrow securities
or having new reasons to borrow securities,
can only be positive for the securities lending
industry. As we have seen from many of the
industry statistics, over the last five years
there has been quite a lot of new supply
coming into the market, and you obviously
need to balance that with new sources
of demand.
Clearly, if supply dramatically outstrips
demand, that will have an impact on price.
That’s pure economics. It has to be a positive
that these new sources of demand are out
there, and long may there continue to be new
sources of demand. One of the things I’ve
also seen in my time in the business is that
as the lending industry has grown and new
sources of supply have come into the market,
the industry has done a very good job of
responding positively and absorbing that
without any significant detrimental impact.
How has the role of the lending
agent evolved?
As I have already mentioned, the business
has transformed from being a back office
ancillary function to a front office alpha-
generating activity. In the “good old days”
lending was virtually an automatic add-on
to custody. Now we’re assessed on how good
our risk management and indemnity are,
on our reporting and client management,
as well as on our ability to generate superior
earnings within a client’s management
framework. The role of the lending
agent has become more focused on risk
management and certainly has become more
consultative. And with that, many clients are
now demanding for more detailed revenue
performance and attribution reporting in
respect of what value has been added and
where out-performance has been achieved
relative to the peer group. I think the role
of the agent has changed in that regard. It’s
these and a wide variety of other things that
have moved us from a sleepy back office
function into a front office alpha-creating
activity.
How has the credit crunch affected
the role of sec lending in the broader
financial system?
pg56-64jc.indd 57
The debate has always been there regarding
the role and impact that securities lending
has on the market. I think that the credit
crunch specifically has highlighted many of
the positive aspects that lending brings to the
market. As an example, securities lending
is a way of putting additional liquidity into
the market, particularly at a time when the
market was looking to borrow very high
quality treasury securities for collateralisation
and financing purposes, as additionally
evidenced by the Fed implementing its own
form of lending programme for exactly the
same reason. Secondly, with the markets
being volatile there has been an increase
in trading activity, which gives rise for the
potential for more failed trades. Lending
provides a way in which many such failed
trades can be avoided. In this regard lending
also provides another form of liquidity in
certain stocks and securities where trading
volumes are thin and may be difficult to
trade in tight markets. Having the ability to
borrow those securities gives rise to more
efficient markets and creates greater pricing
transparency. Thirdly, and perhaps this is
less often realised, securities lending agents
have large sums of cash that must be invested
every day, and historically a lot of that has
been invested in secondary money market
instruments which have provided sources of
financing for issuers and companies.
Is the dealer community now
requesting more diverse types of
collateral? If so, why?
The amount of cash collateral as an overall
percentage of collateral in the market has
declined, which has been caused by two
things. Firstly, the broker dealers themselves
have been looking to reduce the amount of
cash collateral, given the cost of doing so
and also balance sheet constraints. Secondly,
from a client’s perspective the investment
of cash collateral is where they consider the
most risk to be. So what has happened is
that these two things have come together
and, naturally, that has led to more non-cash
collateral. Right now, collateral flexibility is
definitely the name of the game. The broker
dealers are looking for more flexible and
cheaper ways to finance some of the lending
trades, but similarly clients are also looking
to diversify and expand collateral. However,
from the client perspective, having diversified
collateral does not necessarily mean taking
more risk.
Of late there has been increased
growth in both hedge fund activity
and the use of 130/30 strategies,
which has in turn boosted desire for
the lending of securities in order to
support short positions - has this
noticeably benefited lenders
and agents?
130/30 and long short trading strategies have
become much more talked about, but to what
extent that has translated into vast amounts
of additional lending volume resulting from
these types of trading strategies is unclear.
Certainly there is more to come. From a
JPMorgan perspective, we have focused a
large amount of our investment over the last
couple of years actually integrating the ability
to support 130/30 and long short strategies
with our securities lending product. We see a
number of asset managers and pension funds
who are owners of securities and want to lend
them, but are also launching 130/30 funds
where they need to borrow securities, which
from our perspective is all part and parcel
of the same process. So we have developed
the capability to effectively lend on the long
side and then help our clients finance/borrow
the short side, which has been quite a critical
development for us. Some may argue that
this is the start of convergence between prime
brokers and agent lenders/custodians, but I
would actually disagree. Nevertheless we are
certainly involved in things, which we weren’t
two years ago, because of the advent of the
130/30 long short product.
Have you seen the desire from clients
for more unbundling of services?
Absolutely. The biggest growth in our
business right now is in our non-custody
lending book. I hate to call it “non-custody,”
because I look at and consider JPMorgan as
a global lending agent. The location of the
underlying assets is just geography. What we
are now selling is our style of lending, our
performance and revenue generation, and our
risk management supported by the JPMorgan
balance sheet, along with the depth, strength
and expertise across the entire JPMorgan
organisation. The US market has been
unbundled to an extent for a considerable
time, but we’re starting to see more and more
of that in Europe as well.
GSL | 57
26/9/08 12:22:10
 RMA CoNFeReNCe
As investment banks topple,
short-selling halts, and the entire
financial system is reappraised,
one glimmer of joy remains
amid the encroaching tides
of despair. That’s right, the
RMA 25th Annual Conference
on Securities lending is right
around the corner. And perhaps
the timing of the conference is
just right. Players in the industry
may welcome the chance to
reappraise, take a break and
take the opportunity to chat with
colleagues and engage in a bit
of analysis and reflection.
Itinerary
Monday, October 13th
Cocktails, Food,
Monday Night Football,
Baseball Playoffs, and Bull Riding.
“Welcome to Texas”
Reception
7:30 p.m.– 9:30 p.m.
Compliments of
Frost Bank
Penson Financial Services Inc
Tuesday, October 14th
live Band/Music
Dance Floor, and much, much
more!
opening Reception
6:30 p.m.– 8:30 p.m.
Compliments of
BNY Mellon
Deutsche Bank
Dresdner Kleinwort
Kellner Dileo & Co
Merrill lynch
The Northern Trust Co
58 | GSL
pg56-64jc.indd 58
european-based folks will also
grab the chance to flee the onset
of shivery autumn winds and
bask in the heat and hospitality
of San Antonio, Texas.
The conference is to be held in
the Westin la Cantera Resort
and will feature a veritable deluge
of cocktail receptions, tennis
tournaments, golf tournaments,
live bands, buffet dinners, and
more cocktail receptions. But
amid the merriment some serious
business will be taking place.
A ‘Fall Securities lending
Round Table’ will
Dinner Buffet
7:30 p.m. – 10:00 p.m.
Compliments of
Barclays Global Investors
Citi
Jefferies & Co
Macquarie
Morgan Stanley
Ramius Securities llC
Southwest Securities
live Band/Music
from the Oh So Good Band!
Dance Floor, Cocktails
8:00 p.m. – Midnight
San Antonio’s Oh So Good Band!
Number one for variety dance
music and entertainment.
Wednesday, October 15th
Breakfast with exhibitors
7:30 a.m. – 8:45 a.m.
Compliments of
Coffee Break
10:15 a.m. – 10:30 a.m.
Compliments of
take place on the 14th, which
everyone is invited to. This
has been described as ‘a
discussion on key issues
affecting the industry’. The
State of the Industry Update
from Spitalfields’ Mark Faulkner
takes place on the 15th, and is
followed later in the day by the
Industry leaders Panel, Treasury
Market Practice Group Update,
Hedge Fund outlook and the
keynote speech by Steven D
levitt, co-author of the iconic
Freakonomics, and author of the
lesser known children’s book,
Tennis Tournament
1:00 p.m. – 4:00 p.m.
Compliments of
WachoviaSecCommand
Cocktail Reception
5:30 p.m. – 7:30 p.m.
Compliments of
www.rbccm.com
Thursday, October 16th
Breakfast with exhibitors
7:30 a.m. – 8:45 a.m.
Compliments of
Penson Financial Services Inc
Coffee Break
10:45 a.m. – 11:00 a.m.
Compliments of
FINACe
MF Global
Golf Tournament
1:00 p.m. – 5:00 p.m.
Compliments of
locateStock
Cocktail Reception
5:30 p.m. – 7:30 p.m.
The Boy With Two Belly Buttons.
on the 16th there will be a
Market outlook Panel, Cash
Collateral and Balance Sheet
Management Panel and a primer
panel on swaps and securities
lending. That night will see the
annual Goldman Sachs blow-out
to end the conference.
But after a few days of
sun, cocktails and general
hobnobbing, perhaps things
may not look so bad and the
Goldman folks, along with the
rest of the attendees, will let their
hair down.
Compliments of
SunGard
Additional
Conference Sponsors
Bottled Water
Compliments of
State Street
www.statestreet.com
Internet Kiosks
Compliments of
J.P.Morgan
Keycards
Compliments of
Cantor Fitzgerald
USB Pen/Flash Drives
Compliments of
ING Financial Markets
26/9/08 12:22:12
 RMA

Congratulations to The Risk

Management Association on your
25th Anniversary Conference from:

On behalf of RBC Dexia Investor Services,

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

RBC Dexia continues to advocate the

importance of such conferences in helping
to shape the future of the industry. We are
delighted to have had the opportunity to
participate and contribute to this annual
conference throughout the years.
4sight offers our congratulations to the RMA for 25 years of success.
Once again, congratulations on your silver
anniversary and we wish you continuing 4Sight Financial Software
success in the years ahead. Conference House
152 Morrison Street
Reeve Serman Edinburgh
Global Head,
Securities Lending Trading
& Market Execution
T: 416 955 6901
E: reeve.serman@rbcdexia-is.com
All the best from:
Yvonne Wyllie

GSL|
Global Head,
Product Management, Global
Securities
Securities Lending Lending

T: 416 955 7517

E: yvonne.wyllie@rbcdexia-is.com

GSL | 59

pg56-64jc.indd 59 26/9/08 12:40:01

 PeoPle

Access the
Experts from
Everywhere,
Anywhere

Regulation in Rio, technology in

Tuvalu and securities services from the Square mile.

ISJ.tv brings you the latest news

around the globe from the people who participate.
60 | GSL

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

 PeoPle

From your mobile to your

mainframe, expert analysis is now available.

Wherever you are.

GSL | 61

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

 PeoPle Moves
Appointments
Jörg Debé, relationship management director in Germany
for Société Générale Securities Services (SGSS)
September
RBC Dexia has appointed of Padraig Kenny
as managing director, Ireland. He was
previously investment director at Private
Wealth Managers Ltd.
in Ireland
Tamie Gardner, formerly of Ferox Capital
Management, has joined Brown Brothers
Harriman’s (BBH) securities lending trading
desk in London as a vice president. She was
previously employed in the equity finance
group at Citigroup Global Markets.
Philippe Lopategui previously of Morgan
Stanley, has joined the Royal Bank of
Scotland (RBS) Equity Finance & Collateral
Trading (EFCT) team as the global head of
Equity Finance Distribution.
Temenos has appointed Mike Head as global
partners director. Prior to Temenos, he was
responsible for the start up of Pecaso.
Bernd Knobloch has resigned from the board
of managing directors of Commerzbank with
effect from September 30 2008. Knobloch is
leaving the bank at his own request and by
mutual agreement.
Aviva Investors has appointed of Aline
Sullivan as global corporate affairs director.
Sullivan will lead the global communication
activities of Aviva Investors. Sullivan
62 | GSL
pg56-64jc.indd 62
Jon Anderson, global head of over-the-counter (OTC)
derivatives for GlobeOp
was previously head of communications
at US Trust and before that head of
communications for The Private Bank at
Bank of America.
Standard Chartered has announced
the appointment of John Paynter as an
independent non-executive director with
effect from 1 October 2008. Paynter has
experience in the fields of corporate broking
and financial advisory, serving 29 years with
Cazenove, and latterly JP Morgan Cazenove,
where he was vice chairman.
Paul Abberley has joined Aviva Investors’
executive committee. Previously CIO
of Fixed Income at ABN Amro Asset
Management, Paul will be chief executive of
Aviva Investors’ actively managed portfolio
business, Aviva Investors London.
Société Générale Securities Services (SGSS)
has appointed Jörg Debé as relationship
management director in Germany. Previously
responsible for institutional and fund
administration for BNP Paribas Securities
Services in Frankfurt, he will be responsible
for handling relations with institutional
clients.
ICAP has hired Robert Rees and Steve
Bingley to lead the firm’s new London Metal
Exchange base metals broking business.
Rees and Bingley’s role will be to build the
firm’s LME business and offer expert sales
Mike Head global partners director at Temenos
and execution services on LME products.
Previously, Rees and Bingley were joint global
heads of Base Metals at Bear Stearns.
Data Explorers has appointed Maria Volpe
as director of business development. Maria
Volpe joins from Reuters, where she was
director of ratings and led Reuters’ Machine
Readable News from inception. Maria also
helped build and launch Reuters Investment
Banking and Corporates businesses in
EMEA.
Data Explorers has appointed Ken Read as
its head of sales for the Americas. Joining
Data Explorers from Williams Lea, where he
led the North American financial services
outsourcing practice.
BNP Paribas Securities Services (‘BNP
Paribas’) has appointed Alan Cameron
as the new head of clearing, settlement &
custody (CSC) client solutions. Alan joins
from Citibank where he spent nearly 20 years
and was most recently director of business
development for direct clearing and custody.
Jon Anderson has been appointed GlobeOp’s
global head of OTC Derivativesand will
be based in the company’s Manhattan
headquarters office. He will also join
GlobeOp’s Operating Committee.
Wachovia Securities have announced that
Craig Overlander, formerly of Bear Stearns,
26/9/08 17:37:47
 PeoPle Moves
Malcolm Hobday, Rule Financial
will join the firm as managing director and
global head of Fixed Income, beginning
September 15.
CLS Bank International have appointed
Roger Rutherford as the new head of product
management. Rutherford joins from ICAP,
where he was a global product manager.
He previously worked for EBS, the global
currency and metals e-trading platform
acquired by ICAP in 2006.
August
RBC Dexia has appointed Nick Emmins and
Conor Hoey as directors, sales & relationship
management in RBC Dexia’s London office.
Emmins most recently worked with BNP
Paribas as head of business development
- UK retail. Hoey was previously with
Capita Group in the position of business
development director.
Garrett Curran has joined Credit Suisse as a
managing director and co-head of European
securities sales. He joins Credit Suisse
from Dresdner Kleinwort where he was a
member of the Dresdner Kleinwort Executive
Committee.
Credit Suisse Group has appointed Hans-
Ulrich Meister as CEO Switzerland and a
member of the executive board. Hans-Ulrich
Meister was previously head of business
banking for UBS.
pg56-64jc.indd 63
Mathew Harrison, Rule Financial
Jon Jodka, founding partner of the hedge of equities for Asia. Peter Hilton joins as head
fund Copper Arch Capital LLC, has joined of Asian equities research and David Sarkis
UBS as managing director and head of US will relocate to Tokyo as head of equities
prime brokerage sales within its equities for Japan.
division. Jodka previously spent 13 years at
Morgan Stanley. Following Rule Financial’s recruitment
of Matthew Harrison, the founder of
State Street has hired David Puth to join the Martini, the firm has further strengthened
bank as head of State Street’s investment its securities finance practice with the
research, securities finance and trading recruitment of Malcolm Hobday. Malcolm
activities worldwide. Puth was previously at spent a total of 21 years at UBS, with the
JP Morgan until 2006, where he was head past 15 years in SBL on both the trading
of global currency and commodities, sales, and product control sides of the fence, most
trading and research, after which he founded recently as head of product development/
the Eriska Group at the end of 2006. business controls for SBL and Swaps.
Kaupthing Singer & Friedlander has hired
Johannes Brenner within its treasury division
where he will be in charge of securities
finance. He was previously managing
director within Citigroup’s Prime Finance
division in London, running Funding &
Collateral Trading.
Foppe Zwikstra has left Kas Bank. Roel
de Groot who will act as temporary head
of Securities Lending until a new head is
appointed.
Peter Irvine is now head of ABN AMRO’s
Asian Equities business, and will relocate
to Hong Kong. Irvine will also continue his
role as head of global equities finance and
collateral trading. Kin Cheung will take on
the role of head of trading and deputy head
GSL | 63
26/9/08 17:37:47
 PeoPle
Meet the Future
Nora Reemts speaks about work, life and aspirations
Since its inception in 1989, IMC Trading
has grown into one of the world’s leading
proprietary trading firms. With investment
strategies in nearly every major market in
Europe, the United States and Asia Pacific,
and now involved within Equity Finance,
the company strives to capitalise on the
continuously changing conditions in the
global capital markets. Justin Lawson speaks
with Nora Reemts in the continuation of the
Meet the Future series.
When did you start working for IMC
Trading and how would you describe
your role?
I started working for IMC as relationship
manager 10 months ago. In my role I look
64 | GSL
pg56-64jc.indd 64
after external relations such as trading
counterparts. I also travel a lot representing
IMC at conferences and industry events.
What aspect of your current position
do you find most enjoyable?
I really enjoy the dynamic and energising
atmosphere in the dealing room. No one
day is like another and we have a very
international team of traders. I also very
much enjoy travelling and meeting new
people. With offices around the globe IMC
is the ideal company to provide the grounds
for that.
How did you find yourself at the RMA
/ ISLA Conference in Prague and what
were your impressions of the event?
It was our first time at the conference.
IMC has grown significantly over the past
years and we are continuously exploring
related business areas. The conference was
very useful in giving us a good overview
on the securities lending industry and its
participants.
If you were nominated employee of
the year, how would you celebrate?
I would thank the people around me -
friends, colleagues and family - by throwing a
big party - there would be no success if they
were not around.
If you were to choose the location
and venue for the IMC Christmas
party where would it be?
As our headquarters are located in the
wonderful city of Amsterdam, I would
choose a nice big boat to cruise the canals.
Who are your role models in life
and why?
My main role model is my mother. I admire
strong women who live a self-determined life
and challenge the existing, often out-dated
status quo. My other role model is Elvis
Presley – because he had a beautiful voice,
and I wish I had one.
What life experiences have
changed your attitude towards your
profession?
Being a mother has put everything else into
perspective and has given me a different
sense of being. It’s a great source of joy and
energy that has a positive influence on my
view on work and private life.
If you could do one thing in life what
would it be?
I find the thought very difficult to restrict
myself to one thing or situation only. But if
I had to choose I would want to spend time
with the people dear to me.
Where do you see yourself in
five years’ time?
I will happily give an interview in an “Arrived
at the top” column.
26/9/08 17:37:48
 Maximize returns. Control risk.

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GSL pp01-15 GT2.indd 11 5/8/08 12:06:02

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