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2009

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EDITORIAL SECURITIES LENDING MARKET GUIDE
SECURITIES LENDING
MARKET GUIDE
2009
Welcome to the 2009 edition of Investor Services
Journal’s annual Securities Lending Market Guide. It
has been a challenging year for global finance, with
no shortage of press coverage on the credit crunch
and its effects on the market. However, securities
lending and borrowing has fared well, with contin-
ued growth in the number of market participants, the
amounts lent and borrowed and its expansion into
new markets. This guide aims to bring you up to
speed with the latest developments and act as a ref-
erence handbook to the vagaries of this ever-chang-
ing business. Our special feature profiles Mark
Faulkner of Data Explorers, who discusses the
changes to the buyer-seller relationships amid the
credit crunch, the resistance to electronic trading,
the complexities of the agreements between parties
and the potential impact of the recent Financial
Services Authority’s ruling on disclosure require-
ments for short positions in the shares of companies
undertaking rights issues. He also discusses the
expansion of securities lending and borrowing into
new markets and how successful it has really been
(page 8).
Securities lending is a relationship business of high
touch and complex negotiations, making the
automation of transactions sometimes difficult to
achieve. Liquidity requirements in recent times have
further highlighted the importance of the symbiotic
relationships between broker dealers and their coun-
terparts. However, there is great opportunity in using
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 1
electronic systems to drive down cost and improve
efficiency, for risk management, netting, and straight
through processing. Risk management is the legacy
of the credit crunch. Automation and electronic sys-
tems in securities lending and borrowing is seen by
many as a way to achieve this, as well as increase
transparency and competition in a MiFID-like way.
Francisco Gonzalez, head of Eurex SecLend, dis-
cusses the benefits of its electronic market place and
the movement towards the increased use of technolo-
gy (page 36), and Felix Oegerli, an executive com-
mittee member of COMIT assesses how far technol-
ogy can help manage risk (page 42).
The growth in the market over the past 12 months
has been widely acclaimed. There has been an
increase in the demand for securities globally as a
result of the growing size and number of hedge
funds and 130/30 funds as well as the increasing
sophistication of trading strategies used by banks,
proprietary trading desks, and investment managers.
The involvement of emerging markets has also
boosted growth, and Luke McCabe, managing direc-
tor at eSecLending discusses this on page 38.
Liquidity has also been a defining feature of the past
year. Although the injection of liquidity by central
banks in March tempered markets, indices remained
unstable. We analyse the impact of volatility on
securities lending on page 14.
The FSA’s ruling on short selling concerned many
in the industry, not least David Rule, chairman of
ISLA, who explains the self-correcting nature of the
markets in his foreword. Further, he explains, only a
small percentage of lent securities are used to cover
directional short sales, and that if institutional
investors decide not to lend they would not only
miss out on that return, to the detriment of their
investors and market liquidity at large. The RMA
and PASLA have also written forewords for the
guide, reviewing the growth of the market in Asia
and the effects of the market turmoil on securities
lending over the last 12 months.
Market experts from APG Investments,
Brown Brothers Harriman, CaLPERS, ICGN and
OPERS also offer their opinions on securities lend-
ing as an investment strategy, the credit crisis, using
equity repo for diversification in an illiquid market,
fund governance and the affect of cash collateral on
securities lending performance measurement,
respectively, starting on page 28.
Catherine Kemp
Editor
 FOREWORD RMA
New chapter
Tred McIntire, president of
Goldman Sachs Agency Lending
and chairman of the RMA
Committee on Securities Lending
As I sat down to write
this article, I couldn't
help but think about
the past twelve months
and the turmoil in the
financial markets. In
the securities lending
industry, however, it
was a year in which
many saw solid earn-
ings, in large part due
to significant reinvest-
ment returns resulting
from the Federal
Reserve rate cuts. But
Tred McIntire it was also a year of
uncertainty in the money markets, which were
plagued by credit and liquidity issues related to
subprime mortgages and structured investment
vehicles along with a succession of asset write-
downs & banks posting losses.
The difficulties in the credit markets are
prompting pension and mutual fund boards to take
a closer look at the investment guidelines for the
cash collateral pools related to their securities
lending programs and to ask questions about bor-
rower exposures. These boards are also asking
about counterparty credit, fees and relative per-
formance. Regulators have also been making
enquiries, and it all reflects the continuing theme
of increased transparency across the industry.
The financial market turmoil has had other far-
reaching effects. For lending agents, I believe the
issues underscore the value of credit diversifica-
tion achievable through an agency securities lend-
ing structure, where they have the ability to man-
age credit in a more flexible and timely way.
The list of new markets continues to grow. Latin
America, for example, continues as a promising
and yet largely under-penetrated region for bor-
rowing and lending. In January, RMA and the
Stock Loan Division of the Securities Industry and
Financial Markets Association (SIFMA) co-spon-
sored the first annual conference on Latin
American Securities Lending. The conference was
held in January in Florida and attracted around
2 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL
130 participants, representing borrowers, lenders,
regulators and exchange officials from the region.
Since the conference, there have been many
follow-up discussions among those of us who
attended, with a focus improving the environment
for securities lending in Brazil.
Other markets to watch include Eastern Europe,
Greece, Israel and a few in in Asia. General
themes in these markets include the potential to
earn significant spreads in the early stages,
often less well-developed legal, tax and regulatory
regimes, and a shortened market develop-
ment cycle.
The push to introduce new products is another
important dimension of change. There is, as
expected, continued growth in the hedge fund
space, albeit at a somewhat slower pace. Active
extension products (also known as 130/30), con-
tinue to contribute incremental short demand.
Indemnified cash reinvestment structures - cash
reinvestment pools that are indemnified against
principal loss - have also drawn attention amid the
recent uncertainty in the money markets.
The industry is not without its challenges, how-
ever. One major challenges is the ongoing discus-
sion surrounding corporate governance, proxy
voting and securities lending. RMA, in coopera-
tion with SIFMA, has recently offered funding to
work on a project with the Center for the Study of
Financial Market Evolution (CSFME) that we
hope will support the industry's argument that
securities lending does not facilitate inappropriate
proxy voting activity on the part of borrowers.
RMA, the International Securities Lending
Association (ISLA) and SIFMA have been vocal
in responding to uninformed, incomplete and, in
some case, misleading information in the press.
During my two-year term as chairman of the RMA
Committee on Securities Lending, I have been
involved inclarifying information about the corpo-
rate governance and proxy voting issues. But there
is still more to be done.
I am near the end of my term as chairman,
although I will still be involved as ex-officio com-
mittee chairman. It has been a wonderful two years
and I look forward to a continued involvement in
securities lending.
Tred McIntire oversees Goldman Sachs Agency Lending
in the US and Europe. He is a BA graduate in Economics
from Harvard University and an MBA graduate in
Finance and Accounting from Columbia University. He
is also president and a director of The Goldman Sachs
Trust Company, a director of Goldman Sachs Cayman
Trust and is a member of RMA's board of directors.
FOREWORD ISLA
Timely boost
David Rule, chief executive
officer of ISLA, looks at how
securities lending has
strengthened the market
In last year's fore-
word, ISLA chairman
Laurence Marshall
wrote that securities
lending is at the heart
of the financial sys-
tem, providing liquidi-
ty to markets and
touched on how vital
borrowing securities
was to the services
dealers offer their cus-
tomers. He also men-
tioned its core role in
the trading strategies
David Rule of dealers, hedge
funds, asset managers, pension funds, insurance
companies and banks.
The truth of those statements has been thor-
oughly demonstrated over the last year. Securities
lending volumes have remained high, providing
liquidity to markets in short supply. For example,
problems in the unsecured bank financing mar-
kets led banks and dealers to increase their collat-
eralised financing, primarily through the govern-
ment bond repo markets. The ability to borrow
government bonds against the collateral of other
securities such as corporate bonds and increas-
ingly equities has been critical to the success of
such financing strategies, particularly in Europe.
On the supply side, the market's longstanding
focus on risk management - with fully collater-
alised, legally robust transactions - helped to
maintain the confidence of lenders, such as pen-
sion and investment funds. Many lenders have re-
examined and, in some cases, tightened collateral
guidelines and cash collateral reinvestment man-
dates. And the credit crunch has also brought
opportunities for lenders. For example, potential
reinvestment returns on cash collateral have risen
for those able to manage the risks.
Falling equity markets raised the familiar criti-
cism that facilitating short selling drives equity
prices lower. In the United Kingdom, the
Financial Services Authority recently introduced
disclosure requirements for short positions in the
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 3
SECURITIES LENDING MARKET GUIDE
shares of companies undertaking rights issues,
without consultation, and threatened restrictions
on lending of those shares on the basis that 'the
rights issue process provides greater scope for
what might amount to market abuse'.
Three responses can be made to such argu-
ments. First, short selling should have no long-
term net effect on share prices. If short sellers
caused a share price to fall below its fair value,
other investors would quickly try to buy.
Academic research has shown that placing
restrictions on short selling reduces the efficiency
of price formation, and in particular that share
prices may overshoot. Second, only a small per-
centage of lent securities are used to cover direc-
tional short sales. Securities are also borrowed for
many other reasons - for example, to avoid settle-
ment failures. Third, institutional investors lend
securities in order to earn additional returns at
low risk. If they decide not to lend they not only
miss out on that return, to the detriment of their
investors, and reduced securities lending would
lower market liquidity. That is the last thing any
investor should want.
The International Securities Lending
Association (ISLA) represents the common inter-
ests of participants in the securities lending
industry. ISLA has more than a hundred members
comprising insurance companies, pension funds,
asset managers, banks and securities dealers rep-
resenting around 4,000 clients in more than 20
countries in Europe, the Middle East and North
America. ISLA's priorities for 2008 include
working with regulators to provide a safe and
efficient framework for securities lending, open-
ing new markets, providing information to mem-
bers, developing good industry practices and
good relationships with other associations,
enhancing the public profile of the securities
lending industry, completing its review of the
GMSLA and promoting use of the Agreement.
Finally, ISLA will implementing its model for
Agent Lender Disclosure in Europe to meet the
needs of securities borrowers under Basel II.
Raising the profile of securities lending is to
ensure that policymakers, regulators and com-
mentators understand its importance to the wider
liquidity of modern financial markets. We need to
do more to get the message across.
David Rule was appointed as ISLA's first chief execu-
tive in May 2007. Previously, he was head of Sterling
Markets Division at the Bank of England and has also
chaired the Securities Lending and Repo Committee
from 2002 until 2006.
 FOREWORD PASLA
New horizon
Lawrence Komo, PASLA
chairman, and securities finance
head at Citigroup AsiaPacific
GTS, looks at the vibrancy of
Asia's securities borrowing and
lending market.
In March 2008 the
Pan Asian Securities
Lending Association
(PASLA) elected a
new executive com-
mittee, which included
a change of guard in
the Chairman's seat.
After three years of
leading PASLA, Sunil
Daswani has relocated
back to London, and
PASLA thanks him for
Lawrence his invaluable contri-
butions. Sunil leaves
Komo behind both a strong
association, as well as a vibrant Asia securities
borrowing and lending (SBL) market that has seen
lendable assets grow to some USD957 billion as at
June 2008, up 16% from the previous year, accord-
ing to figures from Data Explorers.
This increase comes on the back of the high
growth in Asian market-focused hedge funds,
where Eurekahedge estimates the total size of the
Asian hedge fund universe at USD160 billion as at
end-2007, up 21% from the previous year, and
where Asia has also continued to see positive net
inflows in recent months (USD 400 million in May
and USD500 million in April).
We can expect this inflow of capital to Asia to
continue to help drive industry and regulatory sup-
port for SBL and enhanced hedging capabilities,
as regulators in the region increasingly recognise
how their capital markets can benefit from an effi-
cient and effective SBL market.
In this, we are seeing the result of years of active
campaigning by PASLA. The opening of new mar-
kets has been a continuing focus and is expected to
gather pace this year.
Malaysia looks set to introduce a bilateral OTC
model (similar to Korea and Taiwan), which will
improve access for overseas investors. The intro-
duction of guidelines last year by the Philippines
will similarly provide greater clarity for overseas
4 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL
investors in lending their Philippine equities.
Thailand is working to improve the depth of its
domestic SBL market and Indian regulators have
introduced a SBL platform; PASLA continues to
monitor the further development and evolution of
their model.
While these are all welcome developments,
PASLA is also acutely aware of the heightened
focus on SBL and short-selling amid the current
downturn in world equity markets.
Since the beginning of the year, the MSCI World
Index and the S&P 500 Composite are down 12%
and 11% respectively, while in Asia, the MSCI EM
Asia Index fell 19%. Stock markets in Australia,
Japan and Hong Kong similarly saw declines of
15%, 10% and 18% respectively, and even the
Asian stars of 2007 were not spared - China has
lost 47% while India has shed 30%.
The market downturn has created some
headwinds for SBL regionally and globally. The
UK's FSA has recently announced and introduced
disclosure rules for short-selling in companies
engaged in rights issuance, which is already
impacting the investment community.
Earlier this year, SBL in Australia has also
experienced intense scrutiny from investors, regu-
lators and the local media, arising from local retail
margin lending incidents. The Australian Master
Securities Lending Agreement (AMSLA) was
upheld in a court case testing its enforceability,
which is a strong positive message to the viability
of the SBL industry in Australia.
The heightened attention being paid to SBL
accentuates the role of PASLA, as the collective
group of major industry players in Asia, in cham-
pioning the growth of Asia SBL markets. PASLA
remains committed to monitoring these develop-
ments and in helping the industry navigate the
changing market landscape in the year ahead.
Lawrence Komo is managing director and Asia Pacific
head of securities finance at Citigroup, with responsibil-
ity for directing and managing Citigroup's agency secu-
rities lending program in the region.
He has extensive experience in regional and global
securities lending markets, particularly from the
broker-dealer industry, where he had previously headed
the equity finance desks of Citigroup Global Markets in
London, Tokyo and Hong Kong, as well as managed
equity finance desks at Goldman Sachs, Lehman
Brothers and Daiwa Securities in Hong Kong and Tokyo.
Komo earned his BA degree in Economics at
Yale University and an MBA from Emory University
in Atlanta.
In March 2008 Komo was elected chairman of PASLA.
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CONTENTS SECURITIES LENDING MARKET GUIDE 2009

contents
Special Features
10 Interview Mark C Faulkner of Spitalfields Advisors talks to ISJ

14 Statistics Lending by numbers

Section One
16 Sec Lending panel debate Six discuss the key issues in securities lending

28 Ask the Experts We put the best to the test

Market view: Features

36 Eurex SecLend If it’s not broken, still fix it

38 eSecLending Growing in sophistication

40 Societe Generale All in one and one in all?

Securities Services

42 COMIT Technology and risk management

44 One Chicago SSFs

46 Northern Trust Risk management in securities lending programmes

Section Two
48 Technology panel debate Five discuss technology in securities lending

54 Securities lending guide For those who want to know but were afraid to ask

64 Glossary The definitive details of definitions

66 Market Update FinTuition

6 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

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 INTERVIEW MARK C FAULKNER
Mark C Faulkner admits he entered into securi-
ties lending almost by accident. With a backgroud
in operations, he entered the industry in 1986 in
Royal Bank of Scotland in the corporate actions and
operations department based in Angel, London.
His introduction to money broking came about in
one crucial conversation with Adrian Tomlinson, an
internal customer at the bank. “He said, ‘would you
like to come and be a money broker? I'm leaving the
bank and am going to do that’. I said, ‘What's a
money broker?’ and he replied, ‘It's where you bor-
row and lend stock’. I said, ‘does that really exist - I
didn't know anything about it!”
But his business origins, he admits, are common
among practitioners of securities lending. “I think
quite a lot of people in the industry come from an
operational background, which is why to some
extent the business hasn't really grown and become
as high profile, successful and dynamic as perhaps
it could be. The gene pool is quite shallow and very
operationally focused. And it's only recently,
because of the enormous profitability of the busi-
ness, the global scale and its applicability to capital
markets, that people have actually recognised that
the more technical, ‘front office’ type people, with
derivatives expertise and so on, have begun to enter
the market.
“But the progress has been slightly slower than
expected. So I guess that I'm typical, of what some
might call ‘an operations person made good’ and
still learning.”
8 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL
Lending advice
Author, conference chair
and Spitalfields Advisors
managing director
Mark C Faulkner talks to
Catherine Kemp
Faulkner says the appeal of the industry was as
something fresh and new. He describes the year-on-
year growth of securities lending as a “constant evo-
lution”. One example of change he cites is the death
of the tax trader, and to paraphrase Mark Twain’s
complaint, “the rumours of the death of the tax trad-
er have been greatly exaggerated, time and again.
Every year people talk about it and every year peo-
ple find new ways of trading tax. This is because it's
an innovative, progressive, growing business that's
profitable.”
Faulkner explains that his enthusiam for the
industry was sustained when he set up his independ-
ent consultancy business - Spitalfields Advisors - in
1994. Like the industry, the firm has undergone
an evolution, progressing from being a consultant to
a recruitment organisation, conference organiser,
author, and now data provider. “It's been such a fas-
cinating journey and remains very fascinating.”
Despite the unprecedented scale of securities
“I think it's very difficult for people
even inside the industry to under-
stand how big it is. We think it
might be an USD80 billion gross
revenue business this year.”
lending, he muses that it is still an underrated area
in the wider financial context. “The scale of the
activity in the industry has always been outstanding.
I think it's very difficult for people even inside it, to
understand how big it is. We think it might be an
USD80 billion gross revenue business this year.
This is higher than it's ever been, and represents the
total cost of borrowing stock by proprietary traders
and hedge funds, including the splits that may be
taken by prime brokers and agents acting on behalf
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 INTERVIEW MARK C FAULKNER
of underlying beneficial owners.
“The opportunities to continue to develop the
mature markets are still there. So why am I interest-
ed? Because it's interesting.”
In establishing securities lending into the main-
stream, he says people need independent advice in
order to understand what this practice is and to have
somebody to bounce ideas and suggestions off. In
this, Spitalfields Advisors has its niche. “They
couldn't find that from even the more consultative
counterparties in the market, and certainly not
through the more generalist consultancies in the
market. All we do is focus on securities financing
activity in its broadest sense. We do not roam into
custody, or foreighn exchange, or money market
activity. We aren't generalists, we are specialists. I
think the market recognises that securities lending is
a specialist activity and needs specialist advisors
and a specialist data provider. This isn't business as
usual - this is an unusual business.”
Faulkner remembers the firm’s first assignment
was from a major pan European clearing organisa-
“Regulation written in haste is not
necessarily the best regulation.”
tion which came about three or four weeks after the
firm first opened. Since then the floodgates
opened - “we've been incredibly busy ever since”.
He says the firm has 65 employees - if things con-
tinue as planned he estimates that number will grow
to more than 100 people by June 2009.
In the wake of the credit crunch, Faulkner says
the relationship between buyers and sellers has both
strengthened and changed. He says it is in times of
duress that you really find out who you can count
on, and that a number of organisations have devel-
oped longer-lasting ties with business partners they
expected to have only short-term dealings. He says
the relationships have become much higher profile
than before, and are now even more important to
their respective organisations.
“The liquidity requirements of the broker dealers
are of paramount importance, the pressure that their
balance sheets are under is critical to them.
Managing this liquidity, managing those balance
sheets, and working with partners so that you can
swap out of cash and non cash as you see fit, to do
term, special transactions, and structured financing
during trades, is vital. Similarly, for the agents who
have been managing cash collateral on behalf of
their underlying clients, open dialogue remains crit-
ical, along with strong relationships with the broker
dealers to facilitate the ongoing financing of these
10 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL
books to maturity and avoid liquidations that might
result in capital losses.”
Will relationships always be paramount to securi-
ties lending? “I believe that securities lending is a
relationship business, but it's perhaps been too
much of a relationship business in the past. Some
uneconomic things have happened, cross subsidisa-
tion of funds occurs. There's a whole range of issues
about allocation algorithms, the balances for fees,
trade-off, a whole range of different things which
raise questions about the way in which the business
is run.”
He explains that the operational legacy of the
business has been the cause of these questions. A
more front office technical approach would have
less of a relationship component. Regulatory imper-
atives and client inquisition will drive for more
transparency, best execution will eventually be
adopted in securities lending. With USD80 billion
worth of fees at stake, it's too much to not have best
execution.
“To some extent, all business are relationship
businesses. But certainly in the securities lending
business the transactional/business element will
come more to the fore in the next few years.
Interestingly, current economic conditions have
reinforced the importance of the relationship side of
the business; it has tied firms closer together to
work through the challenges they face. But I view
this trend more as a way to deal with the current liq-
uidity and credit crunch issues, rather than as a per-
manent state of affairs.”
Why has there been a resisitance to electronic
trading? “I think conceptually, everybody believes
that it will happen in time - it's just a question of
when it happens and when the tipping point is
reached. At the senior management level, that tip-
ping point has been reached, but at the desk execu-
tion level there are a number of different reasons
why this hasn't taken off as much as it could have.
“It's a complicated business. For example, when
you say you'd like to borrow a stock, there aren't
normally standard lots for how much is traded, or
standard terms for how long. It could be open for
any length of time, whether, cash or non-cash collat-
eral. If cash stock, what currency? If you know the
currency, what kind of investment terms? If non-
cash - what kind of security? What kind of margin?
Where do you want it delivered? All of these types
of things make for a high touch business. None of
these are insurmountable problems but they require
addressing.”
He says the automated markets that have seen
success are for cold securities that demand little dis-

cussion of value. The US, UK and to an extent
France and fixed income “are starting to move quite
nicely in this direction” with significant potential
volumes.
By contrast, he says when a stock starts to
migrate into the warm/hot space it is often
taken off of the broadcast capabilities of the suppli-
ers because they are worried that they are going to
effectively be lifted at the wrong price and
won't be able to re-price at a later stage. This leads
to gaps for price discovery, including reference
pricing.
“The hot, on-the-run securities are almost certain-
ly at this stage dealt with on a manual, phone bro-
kered, electronic communication bases, rather than
in a fully automated way. But that too will migrate
to the winning platform or platform over time in
due course, all markets digitise over time.”
He says the market is well within the remit of
digitisation, but is hampered by what he calls “his-
toric inertia”. He adds that it may need a genera-
“Current economic conditions have
reinforced the importance of the
relationship side; it has tied firms
closer together to work through the
challenges they face.”
tional change of traders, “the X-BOX generation
will think it mad and old fashioned to pick up a
phone to do things when you could just transact
electronically,” as he puts it, colourfully. “But it's
very normal for this kind of stand off between the
market and electronic transactions. It's surprising to
me that there aren't more people looking at it.”
Electronic systems also face opposition based on
risk issues, he believes, but adds that a central coun-
terparty may play a key role in enhancing the stand-
ing of technology. “I see great opportunity in the
electronic markets not least to drive cost, and
improve efficiency, risk management, netting,
straight through processing.”
He cites the Financial Services Authority’s snap
decision to impose disclosure requirements for
short positions in companies undertaking rights
issues as an example of why the industry is intrigu-
ing. He says the ruling may adversely affect market
liquidity, and would not like to see some lenders
making similar snap decisions and withdrawing
from the market.
Like others, he emphasises the differentiation
between securities lending and short selling. “An
investor or traders' ability to borrow securities and
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 11
SECURITIES LENDING MARKET GUIDE
short sell them and express their view on a compa-
ny's performance is important - even during a rights
issue. There are more significant timetabling issues
to be addressed and some interesting work done
comparing UK rights issues with US placings. And
who knows - it might have some short-term posi-
tive impact on the share prices, which may be con-
strued as a positive impact of the regulations.”
He suggests that the shock of the FSA’s
requirements might have caused any price rises
rather than any change in behaviour or scale of
activity. “Regulation written in haste is not
necessarily the best kind of regulation.”
As Asian markets tentatively enter into securities
lending, Faulkner says he was struck by a recent
PASLA presentation from a “really fascinating,
amazingly well-educated and dextrous” presenter
from China. When asked after his 45 minute pres-
entation how many lending transactions had been
completed, the speaker first evaded the question.
When pressed, he admitted there had only been a
single transaction. He says developed markts have
so far shown concern with the market structure in
India - “but it’s early days”.
He explains that new countries structure their
markets in an esoteric fashion, diligently research-
ing established markets before “throwing that
research in the bin and do it the way they want to do
it”. This can mean the countries do not take into
account risk management, netting, margins toler-
ances, reporting, which are essential for
International investors, this in turn limits their mar-
ket's growth.
Nevertheless, Faulkner is a supporter of variety.
“I'm not saying that every market should be like a
mature ‘Western’ market. But this kind of
reluctance to embrace established global
standards often goes too far for them to be success-
ful and some of these markets are effectively ‘still
born’.” He cites Singapore as having made signifi-
cant progress, and is now popular among Asian
hedge funds. Australia, by contrast is going through
a “troubled adolescence”, with
greater scrutiny once again being a positive long-
term influence.
But over time, the emerging markets will relax
and open up, he believes. “When you look at Brazil,
India and China, those have the most
exciting future ahead of them in the capital markets
arena. One would hope that they would be able to
embrace and develop securities lending functional-
ity. Securities lending is the lubricant of the capital
market machine; if you don't have lubricants,
machines don't work.” SLMG
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 STATISTICS SECURITIES LENDING

Lending by numbers
Below is a table showing a year on year the value of loanable securities.
snapshot of the industry worldwide, courtesy On loan versus cash collateral refers to the
of the Risk Management Association value of securities on loan in return for cash.
Securities Lending Composite - Averages for On loan versus non-cash collateral refers to
the First Quarter of the value of securities on loan.
2008.Lendable assets refer to LENDABLE ASSET ON LOAN vs CASH ON LOAN vs NON-CASH TOTAL ON TOTAL ON
($m) COLLATERAL ($m) COLLATERAL ($m) LOAN ($m) LOAN (%)
North American Treasuries/Bonds $1,918,074 $546,708 $85,522 $632,230 33%
US Treasuries/UST Strips $512,581 $316,996 $67,755 $384,751 75%
US Agencies $180,837 $75,140 $9,250 $84,390 47%
US Mortgage Backed Securities $186,822 $45,284 $1,019 $46,303 25%
US Corporate Bonds $1,014,888 $108,249 $5,006 $113,256 11%
Canadian Bonds (Gov't & Corporates) $22,945 $1,038 $2,492 $3,530 15%

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

US Equities (includes ADR’s) $2,637,800 $269,034 $11,565 $280,599 11%
Canadian Equities $58,100 $5,201 $1,991 $7,192 12%

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

French Equities $153,032 $17,146 $6,667 $23,813 16%
German Equities $148,351 $8,405 $8,553 $16,959 11%
Italian Equities $55,114 $3,412 $3,400 $6,812 12%
UK Equities $398,886 $2,328 $18,126 $20,454 5%
Scandinavian Equities $90,990 $5,361 $4,928 $10,289 11%
All Other European Equities $328,804 $11,181 $24,001 $35,182 11%

Pacific Rim Equities (Includes Australia) $496,669 $28,146 $40,360 $68,506 14%
Japanese Equities $264,015 $12,060 $15,034 $27,094 11%
Hong Kong Equities $75,350 $4,302 $7,477 $11,779 16%
Australia $112,329 $10,241 $12,008 $22,249 20%
All Other Pac-Rim Equities $62,975 $1,542 $5,841 $7,384 12%

All Other Equities (Not Previously Listed) $98,366 $13,477 $4,768 $18,245 19%
Total Equities (Aggregate Total) $4,466,112 $363,692 $124,359 $488,052 11%

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

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

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

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

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

Average Number of Lending Markets 17 *(Reported in Aggregate) **(Latin America & E Europe) †(Not Listed Above)

This survey reflects data provided by:
AIG Global Investment Corp
Barclays Global Investors
Boston Global Advisors
Brown Brothers Harriman & Co.
Citibank, Frost National Bank
Investors Bank & Trust Company
JP Morgan Chase & Co.
M & I Global Securities Lending
Mellon Financial Corp.
MetLife Insurance Company
The Northern Trust Company
PFPC Trust Company
US Bank
Union Bank of California
The Vanguard Group, Inc.
Wells Fargo Institutional Investments
Wachovia Global Securities Lending

14 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

 SECURITIES LENDING MARKET GUIDE

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

Averages of lendable assets for Q1 2008 compared to Q1 2007

The graph shows the

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

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

The graph shows the overall
percentage increase of lendable
assets are on loan. The drop in
North American treasuries/
bonds overall for the first quar-
ter of 2008 may be accounted
for by the liquidity injection
mid-way through the period.
Elsewhere, the lending increase
for Pacific Rim (including
Australia) and other equities
hints at the growth of securities
North American North American European Pacific Rim All Other lending in the Far East adn in
Treasuries/Bonds Equities Equities
Equities Equities (inc
Australia)
other new markets.
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 15
 THE SEC-LENDING PANEL DEBATE
Guy d’Albrand has been global head of liquidity management at Société Générale
Securities Services since June 2004. He began his career in 1988 with Société
Générale as a futures broker in Tokyo, then spent five years in Paris as a junior
auditor before being appointed inspector in 1995. He joined Fimat in 1997 to run
the Tokyo office. In 1999 he was appointed executive vice president and special
advisor to the CEO, for Société Générale, Japan. He subsequently headed-up the
online brokerage operations in Japan as deputy CEO and then CEO. In 2002 Guy
d’Albrand moved back to Paris to become global head of audit for the corporate
investment banking division of Société Générale.

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

securities lending at Northern Trust Global Investments. He is responsible for all
Northern Trusts clients outside of North America that participate in securities lend-
ing and leads the sales efforts for any new clients. Previously director and regional
manager of securities lending in Asia for Northern Trust Global Investments he
was responsible for addressing and evaluating securities lending initiatives for
lenders and borrowers and focused on building the supply of Asian assets for
Northern Trust global securities lending program.

Jane Karczewski joined Deutsche Bank as managing director and head of supply
sales in Europe for the global prime finance desks in 2007. Prior to this
Karczewski spent 13 years at Morgan Stanley, spending three years on the equity
finance trading desk before becoming a senior sales person for all outperformance
and yield enhancement products across the European client base. Jane also
worked at Cavendish SAM in Monaco after completing her degree in European
Studies with Combined Languages at Kent University.

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

Securities Lending and is a member of the firm’s executive, investment, and cred-
it committees. He is responsible for distribution, client service and product devel-
opment in the western hemisphere as well as expansion of business in Europe
and Asia. Previously he spent 19 years at JP Morgan and in served various senior
roles within the securities lending product during which time JPMorgan and its
heritage firms grew from USD12.5 billion on loan to over USD300 billion in 2006.

Elizabeth Seidel is senior vice president and global head of relationship manage-
ment at Brown Brothers Harriman. She is also one of the founding members of
the BBH’s securities lending program and currently serves as global head of rela-
tionship management for BBH's offices in US, Europe and Asia. She has over 15
years of experience working in the securities lending industry.

James Slater, is senior vice president and head of capital markets, CIBC Mellon.
He is also a member of the company’s executive management committee. James
is responsibile for CIBC Mellon’s capital markets function, which includes global
securities lending, treasury and cash management. He provides strategic client
service engagement in relation to his trading and financial markets responsibilities
and chairs the company’s asset liability committee. Mr. Slater has 20 years of
experience in the financial services industry with CIBC World Markets and CIBC
Mellon. While at CIBC World Markets, he was part of the team charged with the
formation of CIBC Mellon.
16 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL

1. How is risk managed in your lending
programme?
Slater: Risk management is a core focus in all of our
business activities. In securities lending we carefully
manage reinvestment risk, borrower risk, and opera-
tional risk. The overriding objective of our cash rein-
vestment risk strategy is the preservation of capital.
We maintain a substantial amount of overnight liquidi-
ty in our reinvestment pools to reduce the potential for
forced sales. We analyze each issuer for credit quality
and maintain strict portfolio diversification standards.
Our cash reinvestment trading system monitors each
trade against predefined limits to prevent compliance
breaches against stated mandates. CIBC Mellon con-
ducts comprehensive and on-going credit reviews of
borrowers, and has established borrower limits that are
monitored in real-time. We mark-to-market collateral
for each loan on a daily basis to ensure adequate
coverage of the value of each loan. We have estab-
lished policies and procedures incorporating daily rec-
onciliation of back-office activities, strict segregation
of duties between operations and trading teams to
maintain adequate internal controls, and rigorous
employee training. CIBC Mellon is committed to fur-
ther automating our back-office ensuring less manual
intervention and so reducing the potential for human
error.
Daswani: Risk management is the cornerstone of our
program. Northern Trust employs stringent approval
processes, including ongoing monitoring by dedicated
risk management resources and senior managers who
are actively engaged in managing business risk
through committee structures. Both qualitative and
quantitative measures are used to control and monitor
borrower, investment and collateral risk.
d’Albrand: Risk management is a critical part of all
of our services for securities lending, repurchase
agreements (repo), FX and cash reinvestment. Our
risk and compliance department closely monitors
counterparty, market liquidity and operational risks
continuously, with clear reporting flows to risk man-
agement entities within SG. We aim to avoid market
liquidity risk by increasing collateral quality and rein-
vesting cash within diversified and high quality
instruments. Counterparty risk is managed initially by
the borrower’s choice, then is mitigated through our
agency lending programmes that offer diversification
and indemnification in case of counterparty default.
Risk and compliance also plays an important part in
the development of new products and activities.
Picone: Risk management at Wachovia is a
firm-wide endeavour. There are internal systems, pro-
cedures and individuals responsible for risk
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 17
SECURITIES LENDING MARKET GUIDE
management. We use investment and counterparty
risk management using the broader Wachovia fran-
chise. Evergreen, our investment management sub-
sidiary, is utilized for both credit research and overall
market risk management. The credit team facing off to
the investment bank is our major source of counter-
party risk management. Day to day exposure to risk
is managed through a combination of the WGSL
operations and trading teams to ensure that all margin
levels, recalls and entitlements are executed on a time-
ly basis. Our internal risk and compliance team under-
goes compliance checks against all lending guidelines,
not just collateral, on a daily basis.
Karczewski: Deutsche Bank has stringent risk con-
trols across all of our business platforms.
Counterparty, market and operational risks are
assessed daily. Deutsche Bank borrows on a principal
basis so the beneficial owner’s counterpart is
Deutsche Bank. Our long term ratings are Aa3
(Moody’s), AA- (S&P) and AA- (Fitch). Counterpart
exposures, be it verses our hedge fund clients or our
lenders, are analysed by a dedicated risk team within
global prime finance and credit. Our models take into
consideration issuer exposure (earnings warnings,
credit downgrades, mergers/acquisitions and down-
grades) and macroeconomic risks (sovereign default,
energy price shocks, political instability and disas-
ters). The level of risk control at Deutsche Bank has
meant that our lenders are usually happy to accept
flexible forms of collateral and margin. Operational
risk in securities lending will always exist, even if lim-
ited. Automated recall processing and monitoring,
coupled with a dedicated client service team who
proactively monitor and react to settlement and corpo-
rate action queries, serve to mitigate operational risk.
Any operation exposures are monitored by operational
controllers and credit officers within the firm.
Seidel: Our focus is on the main risks inherent
within securities lending: counterparty risk,
collateral risk, reinvestment risk, operational risk and
regulatory risk. The management of each of these
risks involves a detailed set of disciplines we adhere
to throughout the lifecycle of a loan transaction and
include our decision to lend to a limited number of
top tier borrowers, our focus on extracting maximum
intrinsic value in each loan transaction, and prudent
collateral reinvestment. This set of disciplines has
served our clients well during both the recent period
of market turbulence and similar challenging periods
in the past.
2. How has the credit crunch changed the
market?
Slater: The credit crunch has brought greater oppor-
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 SECURITIES LENDING PANEL DEBATE
tunities to enhance returns and has opened the door to
more informed dialogue with clients around the
unique risk/reward characteristics of lending against
cash collateral. Higher incremental returns as a result
of wider credit spreads have stimulated greater interest
in lending against cash. Collateral costs have
increased, so borrowers have increased their use of
non-cash collateral to mitigate pressure on their bal-
ance sheets. This highlights the importance of a flexi-
ble collateral management program, which incorpo-
rates both cash & non-cash collateral.
Daswani: The credit crunch has changed the securi-
ties lending market in numerous ways. Investment
spreads have expanded, borrowers are de-leveraging,
and a flight-to-quality has increased demand and
spreads for US Treasuries. With the changes in the
market environment over the past year, regular com-
munication with our clients has been a top priority.
Clients now take a keen interest in refreshing their
understanding of securities lending, their program, as
well as specifics such as our approach to fixed income
research, collateral characteristics, borrower reviews,
and the dynamic drivers of demand.
d’Albrand: The credit crunch has stressed the impor-
tance of efficient risk and collateral management.
Affected by uncertainty and credit downgrades, securi-
ties lending equity markets have, in fact, celebrated
greater returns because of the increased focus on the
generation of cash collateral and returns through the
reinvestment of cash. Our clients understandable cau-
tion about the quality of collateral, requires us to
focus on more diversified investment strategies in
order to obtain a certain level of stability.
Picone: We have seen three significant changes. The
flight towards increased quality, along with a normal-
ization of rates has produced returns that are more rep-
resentative of the risk the client is taking. Second, in
order to meet balance sheet requirements, dealers have
put pressure on agents and our clients to accept not
only less cash collateral, but also more types of collat-
eral. Third, the market has been re-awakened to risk
and should allow for better differentiation in product.
Karczewski: Since August last year, various major
events including sub-prime, inflation and trader losses
have changed the dynamics of the markets across all
trading activities. Investor’s confidence has been
affected and there has been a distinct flight to quality.
Deutsche has seen a marked increase in new client
business over the last 12 months. Fund managers are
divsersifying their risk and partnering with organisa-
tions with whom they feel safe. In securities lending
and equity financing volumes have increased as bor-
rowers have sought to move balances to lenders
20 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL
accepting forms of non-cash collateral. GC (general
collateral ) is being sourced at discounted levels, and
via synthetic structures. Specials (or hot stocks) are
becoming more volatile and costly due to increased
sensitivity around corporate governance. It is therefore
important to deal with the market leaders who have
the appropriate operational infrastructure and detailed
market knowledge to maximise the profitability of
your portfolio.
Seidel: In early 2007, the focus was on how to gener-
ate higher returns from enhanced collateral reinvest-
ment vehicles and new routes to market. Eighteen
months on, the posture of many beneficial owners has
understandably changed. They still value the benefits
of lending but they are much more focused on ensur-
ing their principal assets are protected properly.
Owners are zeroing in on the investments in their cash
“The flight towards increased
quality, along with a normalization
of rates has produced returns that
are more representative of the risk
the client is taking.”
Eugene Picone
collateral vehicles, the credit quality of borrowers in
their program and their contractual protections.
3. How has changing liquidity affected
borrowing/lending spreads?
Slater: In August 2007 liquidity tightened because
lenders were increasingly reluctant to extend credit to
institutions. This caused credit spreads to widen
across the board impacting all issuers including banks,
corporations and ABCP conduits. Confidence is now
returning to the credit markets in response to the
aggressive action of central banks and the willingness
of financial institutions to replenish their balance
sheets with new capital. These wider spreads have
resulted in greater revenues for our clients. Prudent
management of our reinvestment process, ensured
CIBC Mellon avoided adverse impact on returns from
more risky, higher-yielding non-bank sponsored
ABCP issues. Although credit spreads remain higher
than we have seen historically, they are moderating as
relative normalcy returns to the credit markets.
Daswani: As the credit markets deteriorated in late
2007, there was a flight to buy US Treasuries and US
Treasury lending spreads were extremely wide in the
fourth quarter of 2007 and first quarter of 2008.
After the Federal Reserve provided credit facilities to
promote liquidity in the markets, US Treasury lending

spreads tightened significantly. In addition, the
demand side created liquidity and reduced leverage,
which reduced overall loan volumes. A greater
demand for cash in general and we experienced an
increase in reinvestment spreads, which benefited our
clients who are willing to accept cash collateral.
d’Albrand: With the changing liquidity there has
been a widening of the spreads, which has required
agent lenders to re-examine their lending strategies. At
SGSS, we are getting away from specials and have
adopted a general collateral approach, focusing more
on cash flows to remain as liquid as possible. In order
to obtain the best rates however, we need to be able to
quickly switch between cash and non-cash trades.
Most recently, we have seen some trades which have
actually been backed by securities collateral as
opposed to cash in order to increase the non-cash net
balance.
Picone: In terms of liquidity of supply, we have seen
very little pull back for programs, thus the dealers
seem to have no trouble finding securities. What has
happened is that the early flight to quality put pressure
on the high-quality US Treasury market raising intrin-
sic spreads by 20-75 basis points at times. The lack of
collateral investment product lead to a greater demand
for overnight repo backed by almost any “high quali-
ty” collateral, pushing up spreads for general collater-
al. Product that does remain is “scarred,” so we see
spreads on 1-3 month CP over 20 basis points or more
to Fed Funds.
Karczewski: The spreads in the securities lending
market have certainly been affected by the dynamics
of the market over the last year. The cost of collateral
has in some cases driven GC trades into negative prof-
itability; hence GC levels have been subject to great
pressure. The european lenders who accept non cash
collateral, especially equities and converts have been
the main beneficiaries, with more of their GC being
lent due to the attractiveness of their collateral profile.
4. Do you anticipate any changes to your relation-
ship with the regulators - will it be closer?
Slater: Canadian regulators recognize the importance
of securities lending in facilitating the efficient opera-
tion of the market, and have expanded the range of
permitted markets for securities lending transactions,
and have worked with industry players to expand the
range of institutions allowed to lend. Regulators have
also supported the introduction of short strategies to
the retail mutual fund market. Bill C-28, passed
December 2007, is expected to drive growth in lend-
ing against cash collateral with non-Canadian counter-
parties. It eliminates cross-border withholding taxes
on securities lending rebates.
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 21
SECURITIES LENDING MARKET GUIDE
Daswani: Regulators have become much more
knowledgeable about securities lending over the past
few years. They are now operating in a more coordi-
nated way globally which is vital, as the industry
becomes more global. Northern Trust works directly
with regulators and industry associations to stay
informed and to work directly on solutions.
d’Albrand: We expect closer regulatory monitoring
as a result of the MiFID directive, effective in France
since 1 November 2007. MiFID has altered the whole
regulatory landscape for financial services. For
instance, we are now required to file comprehensive
reports regarding our activities and evidencing our
compliance with MiFID rules.
Picone: Wachovia has always subscribed to a policy
of full transparency when dealing with our counter-
parts, clients, regulators and auditors. It will be inter-
esting to see how the regulators of our clients will
react, if they tighten scrutiny of programs and if
greater focus is placed on examinations. With Basil II
just around the corner, I am sure the Fed and the OCC
will be watching closely to see what effect this has on
their constituents, both on the securities lending and
the asset management side.
Karczewski: Deutsche Bank has always worked
closely with market regulators, but has been especially
close to the FSA, BaFin and similar organisations over
“Regulators have become much
more knowledgeable about
securities lending over the past
few years, which is vital, as the
industry becomes more global.”
Sunil Daswani
the last year as part of the firm’s compliance with
Basel II regulations and ALD.
5. What have you found to be the best system for
helping beneficial owners manage collateral? Has
the last 12 months changed this process?
Slater: The steady growth in cash collateral balances
over the past few years demonstrates that the
Canadian market is moving toward a more balanced
and flexible approach to collateralization.
Traditionally Canada was a non-cash (fee-based lend-
ing) market but now cash collateral loans account for
around 20% of outstanding loans, which is closer to
the 60% seen globally. We have dramatically increased
the amount of resources dedicated to servicing clients
within our cash collateral lending program. We are
having more one-on-one meetings to review our
 SECURITIES LENDING PANEL DEBATE
investment strategy, credit research capability and per-
formance track record. We have also significantly
increased the amount and quality of reporting to meet
our clients’ governance objectives.
Daswani: We maintain higher levels of overnight liq-
uidity and allocate investments towards high quality
issuers such as US treasuries and agencies. Our invest-
ment process is also now more selective and has a
deeper focus on principal preservation.
d’Albrand: The best way to help beneficial owners
manage collateral is to first determine the right collat-
eral type, in accordance to their needs and risk will-
ingness, and then adapt the collateral structure on a
day-to-day basis to meet this. Maintaining an appro-
priate split between non-cash and cash collateral is
critical, as is knowing when to avoid risk. A perma-
nent dialogue with beneficial owners enables us to
offer flexible solutions such as collateral held with us
or another custodian and provide client reporting on
“Countries like Malaysia and India
present significant opportunities
...these largely untapped markets
drive up the demand for securities
lending.”
Guy d’Albrand
their underlying investments. Liquidity is increasingly
important, so we aim to stay as liquid as possible by
selecting safer investments, according to maturity and
rating.
Picone: Wachovia has always abided by the philoso-
phy that separate accounts are the best system in the
long run. While some preach the benefits of liquidity
via combined funds, the fact is that controlling the
parameters and guidelines still falls in the hands of the
agent. Over the last year, our clients have had full dis-
cretion over their portfolios.
Karczewski: Choice of counterpart is key in manag-
ing collatoral risk. Tri-Party enables borrowers to man-
age their collateral in a cost effective and efficient
way. Additionally the beneficial owner has assured
collateralisation at all times through the Tri-Party auto-
mated process. There is now increased use of Tri-Party
product both on the equity and bond side as the prime
brokers and broker dealers seek to re-hypothecate
internal pools of assets and do collateral upgrade
trades.
Seidel: Our approach has been one of close commu-
nication and transparency. Across the broader indus-
22 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL
try, beneficial owners are closely scrutinizing the
investments made by their cash collateral vehicles and
taking decisions based on their level of comfort rang-
ing from moving to a self managed model or a higher
level of non-cash collateral.
6. Malaysia & India are two of the newest Asian
market opening up to securities lending on a signif-
icant scale. Are you in or do you have plans to enter
into these or neighbouring markets?
Slater: Malaysia and India both have restrictions on
the scope of eligible lending activity for offshore par-
ticipants. CIBC Mellon continues to review opportuni-
ties for penetrating these markets, although current
activity for offshore lenders is generally limited to
American Depositary Receipts (ADR) or synthetic
equity-linked strategies.
Daswani: Northern Trust was an active lender in the
Malaysian securities lending market prior to the 1998
regulatory changes that effectively closed this market
to offshore participants, and is currently re-evaluating
its plans for this market. We have been actively work-
ing with the Bursa Malaysia, closely reviewing their
securities borrowing and lending system, which was
launched in January 2007. India recently, implemented
its long-awaited short-selling and SBL system applica-
ble to institutional investors, which previously was
only open to retail investors. The new model is heavily
reliant on onshore participants entering into on-
exchange SBL transactions with a fixed-term transac-
tion (7 days), the mechanics of which can represent a
hurdle to offshore entrants. However, the increasing
profile of the Indian economy, means it is important to
explore any opportunities that we can offer.
d’Albrand: Countries like Malaysia and India pres-
ent significant opportunities as regulators strive to
increase market liquidity and foreign investment.
Especially with the growth of hedge funds, these
largely untapped markets drive up the demand for
securities lending. With implantations already in Asia,
it is logical for us to expand our securities lending
activity into this zone, and timing will have a lot to do
with our business development there. Along with
opportunities come risks - operational, regulatory and
country stability risks, however, with our
know-how and experience in more mature markets
like the US and Western Europe, we are well equipped
to enter new markets at the right time and with the
right strategy.
Picone: Like any other agent and any other market,
Wachovia will listen to the market demands, the
inventory we have at hand, the risks involved in open-
ing a new market and will make a decision to move
forward or not. The controls often placed on securities
>> 5P ¾OE PVU NPSF MPH PO UP KQNPSHBODPNTFDVSJUJFTMFOEJOH
PS DPOUBDU

Western Hemisphere William Smith at 212-623-5664
Europe, Middle East and Africa Michael Fox at 44-207-742-0256
Australia/Japan Stewart Cowan at 61-2-9250-4647
Asia Andrew Cheng at 85-2-2800-1809
 SECURITIES LENDING PANEL DEBATE
lending by the emerging markets can make the process
quite onerous and un-economical for the agent, if you
don’t have some critical mass in the local assets. As
with everything, we must balance the returns of being
the first to move into the market with the risk to our
clients.
Karczewski: Deutsche Bank is a market leader in
access products in emerging markets in Asia, Europe
and Middle East. Our Asian platform is one of the
largest in the market and we are in the top 3 with
respect to volumes in both Malaysia and India specifi-
cally. However the majority of this business is still
traded synthetically. There has been much interest in
the India market for stock loan since SEBI changed its
rules back in October 2007 with respect to the use of
derivatives, however the current proposed structures
by SEBI (India) and BURSA (Malaysia) are not mak-
ing the stock loan product particularly viable at this
stage. The stock loan market in India is certainly more
of a fails cover product rather than a developed liquid-
ity product in the true sense of securities lending.
Deutsche Bank continues to work closely with the
onshore regulators to develop the product in both
India and Malaysia. Korea and Taiwan continue to be
popular markets, and there is still significant out per-
formance linked to either individual trades or cus-
tomised baskets.
Seidel: As is the case before we enter any new market
for lending, we are performing the necessary due dili-
gence on Malaysia and India to ensure engaging in
activity in these markets would be in our clients best
interest. Bursa Malaysia has recently implemented
several changes in order to align with international
market practice while adding liquidity to the market.
It has also recently presented the new, over the count-
“We have focussed on leveraging
EquiLend's standards and global
platform to further enhance our
STP capabilities... this standard-
ization brings more business to the
lenders with scale.”
Sunil Daswani
er/negotiated transaction model that will allow securi-
ties lending on a bilateral agreement basis. This new
model would alleviate the risk of buy-in situations
which are strictly enforced in Malaysia and allow
access to offshore investors In the case of India, the
Central Bank gave approval to Foreign Institutional
Investors (FIIs) in late 2007 to short sell and engage in
stock borrow transactions for the purpose of fulfilling
24 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL
their short obligations. The program, implemented in
April, imposed several restrictions (e.g. restricted sup-
ply to approximately 200 specific stocks eligible for
trading in the futures and options segment, standard
tenure of seven days, FII margin/collateral in the form
of non-interest bearing cash), which have so far limit-
ed demand for this market. As our due diligence
efforts unfold in these and other markets, we will pro-
vide an update to our clients on the opportunities and
profile of engaging in these markets for their consider-
ation and approval.
7. There have been many new electronic platforms
and systems developed recently. How have you
found these and what has been the market uptake?
Slater: The uptake of these systems depends on the
function they perform in our business. In dealing with
performance measurement, CIBC Mellon was an early
adopter of Data Explorer’s Performance Explorer sys-
tem. This allowed us to provide clients with greater
context to their lending activity and to demonstrate
superior added value. All major Canadian players
have now adopted this system, which is encouraging
stronger competition and more rational decision mak-
ing. As for back-office systems, CIBC Mellon is the
first Canadian user of Equilend’s offering. We have
implemented components of their back-office suite to
enhance efficiencies and reduce operational risks. The
uptake of trading systems in Canada has been slow
due to the lack of suitable products that fit our regula-
tory environment. Although these trading systems
have yet to catch up to our market’s unique require-
ments, we do see the value in using them.
Daswani: Northern Trust has always been a leader in
technology. As an owner and significant user of
EquiLend, we have focussed on leveraging EquiLend's
standards and global platform to further enhance our
straight-through-processing capabilities. We believe
that EquiLend brings standardization to the securities
lending industry and this standardization brings more
business to the lenders with scale. In addition, we have
utilized the front-end trading platform, T20, to allow
our traders to extract more value from lending portfo-
lios. We are constantly evaluating electronic solutions
to determine if they will generate additional revenue
or reduce expenses.
d’Albrand: Automated capabilities for securities
lending continue to advance, changing the way in
which we work. Specialised trading platforms support
the growth and demands of the industry, providing
more precise portfolio information, increasing market
efficiency and trading volumes, improving process
standards and reducing operational risks. However,
each platform is specialised within a specific market,
 SECURITIES LENDING PANEL DEBATE
making it difficult to find cross-industry standardisa-
tion, and further raising benchmarking issues. At
SGSS, we offer our clients our Global Performance
Benchmarking Tool, which analyses their portfolio
performance and compares it to the market. Overall,
the use of electronic platforms can optimise returns
and the uptake has been positive. One cannot ignore,
however, the fact that the value of a service provider
boils down to their ability to know when to make
judgement calls according to client requirements and
market nature on an ongoing basis.
Picone: The two major alternatives to the ICAP plat-
form, SunGard and Equilend, both offer unique capa-
bilities, particularly when it comes to US vs. non-US
assets and the ability to execute trades, maintain loans
and reconcile positions. ICAP is more in the auction
or trading end of the spectrum and seems to be mak-
ing some in-roads there but only time will tell if the
market if ready for full transparency. I think what will
be really interesting, is if one of them can develop and
sustain a central counterparty model to help with both
supply sourcing and in satisfying demand. While an
argument can be made that the cost efficiencies of
some of these platforms could result in more demand,
the platforms themselves do not seem yet to be creat-
ing exponential demand.
Karczewski: The development of electronic platforms
has substantially increased the efficiency of the mar-
ket, especially for GC flow. However this does rely
upon there being an STP process at the user end
which is not always the case. This has been prohibitive
for some of the mid to smaller tier lenders. Equilend
(for international) and Secfinex (for UK business)
have been the most widely used by Deutsche Bank
with a significant amount of our GC flow being
directed via users of the platform. This allows the
traders to concentrate on market analytics, new trading
opportunities, client relationships, specials and alter-
native sourcing methods.
Seidel: Electronic platforms are widely utilized in
the marketplace for equity general collateral (GC) and
fixed income lending given the static nature of the
loan transaction. For example, BBH actively utilizes
Equilend and SunGuard’s Loanet platforms for auc-
tion facilitation, GC lending, and to achieve opera-
tional efficiencies such as loan marking, contract
compare and dividend compare just to name a few.
However, equity special lending and yield enhance-
ment trading operate more as an over the counter
(OTC) market from a trading perspective than the GC
market. This dynamic, in addition to the increased
interest of beneficial owners to customize their lend-
ing programs under defined parameters, creates com-
26 SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL
plexity in loan transactions. These parameters may
include restrictions on markets, portfolios and asset
types as well as authorization of borrowers and
collateral options. Given the difficulty in solving for
these nuances and the need for flexible customization
options, the electronic exchange vendors will
require further enhancement to their current
technology offerings.
8. Has there been much development in the use and
popularity of 130/30 funds and exchange traded
funds?
Slater: Canada is not isolated from these global
trends and we are seeing an upturn in both alternative
investment products and ETFs, driven by the growing
sophistication of investors. According to Investor
Economics in Toronto, Canadian hedge fund man-
agers now control around USD37 billion in assets.
These hedge funds are primarily available to affluent
Canadian investors, or institutions, and are sold
through offering memoranda.Pure hedge funds are
only one part of the story and increasingly traditional
long-only managers and institutional investors are
driving additional demand for securities borrowing as
they wade into alternative strategies. Although retail
investors are not permitted to purchase 130/30 funds,
shorting has become more common among Canadian
mutual funds. Mutual funds are now permitted to
hold up to 20% of their funds in short positions, pro-
“The development of electronic
platforms has substantially
increased the efficiency of the
market.”
Jane Karczewski
vided they receive necessary regulatory exemptions.
In two years, this hybrid segment of the market has
grown from around USD7 billion in assets to USD15
billion, according to Investor Economics research.
Exchange traded funds (ETFs) are also a growing
segment of the Canadian market place bringing with
it greater competition and new entrants. There are
currently three companies active in the space with
more entrants anticipated in the coming years.
Daswani: Exchange Traded Funds (ETFs) have
become a valuable asset class in our securities lend-
ing portfolio. The number of ETFs available to lend
and the demand to borrow the ETFs has grown at a
strong pace. The buzz of 130/30 quieted down a bit
in the fourth quarter of 2007, however active exten-
sion still represents a near and long term advance-

ment both from the demand and supply side. We con-
tinuously look to strategically partner with our clients
and counterparties to deliver solutions in this space.
d’Albrand: There appears to be no clear develop-
ment one way or the other for 130/30 funds. The cur-
rent credit crisis is working against innovative devel-
opments in general, and it’s a question of timing as to
when the 130/30 funds will really catch on. Like any
fund, the 130/30 extension strategy will only be as
good as the managers running it, keeping in mind
that this strategy will also generate its own risk and
compliance requirements. From a securities lending
point of view, service providers should allow access
to both GC and hot stocks, permitting them to keep
an open dialogue with clients in order to offer a more
catered global service. At the appropriate time, the
130/30 strategy should enlarge the current securities
lending market and increase transaction volumes for
beneficial owners. For those who are able to meet the
requirements, 130/30 should present a real opportuni-
ty to build their overall business.
Picone: While it remains a hot topic amongst portfo-
lio managers and fund boards, in talking to the bor-
rowing and beneficial owner communities, the
130/30 concept seems to be on simmer. While sell-
ing short and then borrowing the securities is a sim-
ple concept to position, the mechanics and legal
dynamics can be extensive. Using synthetics and
swap transactions as alternatives to a formal prime
brokerage set-up, have also been discussed. That
said, one survey group has estimated that by 2009,
86% of all fund managers will have some form of
130/30 or similar strategy. The inherent quandary is
that traditional fund managers have worked very hard
over the last 5 years to shed expenses, reduce opera-
tions and have become very efficient. They have
burst onto the lending scene as a way of increasing
returns but overall, that has been a net revenue gener-
ator, not a cost to the funds. Prime brokerage, while
seeing some indications of commoditization, is still
an expensive operation and I believe many of them
are struggling with that concept, thus there is a hesi-
tancy to use the 130/30 or similar strategies until they
can truly estimate demand, pricing, and profitability.
Karczewski: Deutsche Bank estimates the
ActiveEnhanced Product or 130/30 to currently have
USD90bn (although the debate continues to rage on
the size of the industry). The EU Active Enhance
product launches are mainly offering fundamental
strategies, whereas conversely US launches favour
quant strategies. Although performance has been dis-
appointing with most 130/30 managers underper-
forming their benchmarks, much has been as a result
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 27
SECURITIES LENDING MARKET GUIDE
of the macroeconomic downturn and stock market
conditions. Nonetheless investor demand for the strat-
egy has been up with a recently conducted survey
saying that over 50% of public pension plans are
using, seriously considering, or evaluating 130/30
strategies. It would seem that investors continue to
believe that the 130/30 tool has both strong academic
logic and practical implementation efficiency.
Although overall inflows in 130/30 have been slightly
more disappointing than many originally predicted a
couple of years ago, an asset class experiencing phe-
nomenal growth over the last 18 months is the ETF.
The number of ETFs worldwide rose by 64% to
1,171 ETFs at the end of 2007. Deutsche Bank
launched db x-trackers in January 2007 and during
2007 saw the highest inflow in assets among all ETF
providers in Europe. Not only has this allowed fund
managers to gain long exposure in a flexible and low
cost manner, but the ETFs have also acted as a useful
investment tool in volatile markets, as they have
enabled investors to hedge their portfolios without the
use of derivatives. According to Deutsche Bank,
turnover in European ETFs increased by 88% in
2007, with assets under management increasing 22%
in the same time period. This escalation of interest
from investors and traders has also generated further
demand for borrowing ETFs, giving investors an
opportunity to add incremental returns through lend-
ing their ETFs.
Seidel: Unregistered 130/30 funds continue to pre-
dominate, although they are growing at a slower pace
than anticipated. The interest in registered funds con-
tinues although there are some operational and mar-
ket issues that are preventing the interest translating
into actual growth. Firstly, under current regulations,
the collateral pledged from a registered fund’s long
assets to satisfy margin requirements at its prime bro-
ker must be held in a tri-party account at its custodi-
an. This means the prime brokers cannot access and
re-hypothecate the collateral for funding purposes.
Until this situation changes, prime brokers will be
reluctant, especially in the current markets, to provide
managers with the funding they need for the short
component as it is effectively unsecured. Secondly,
the credit crisis has resulted in 130/30 managers fac-
ing increased margin calls from prime brokers on the
long component of their portfolios, forcing some to
close out existing short positions to cover the calls.
This has forced upward price pressure on the short
portfolio, degrading performance on the short com-
ponent and therefore the overall portfolio. In conclu-
sion, we think these strategies are here to stay, but the
timeline to reach predicted levels of critical mass has
been extended beyond initial forecasts. SLMG
 ASK THE EXPERTS
APG
Investments
Securities Lending: a back office function
or a front office investment strategy?
At APG Investments,
we place the strategy
of lending securities
directly within the
spectrum of our front
office functions.
When our passive
securities lending
program netted
USD 43 million in
2003, we researched
and implemented an
‘active management’
approach. We apply
the same rigorous
investment disci-
Mark Linklater plines to our securi-
ties lending program as we would to our other
alpha strategies. We use use a diverse range of
vendors selection and subject them to monthly
and quarterly performance evaluations.
Our program benefits from a three-vendor
diversification approach. Three times a year we
bring our attractive asset mix to the market
through eSeclending’s auction platform. This pro-
vides transparency unique in the industry, price
discovery and benchmarking. Our close vendor
relationships have been paramount in allowing
the growth of the program, and this year we stand
to generate EUR180. Our robust compliance
infrastructure allows us to manage the size of our
a program and we also offer a bundled custody
strategy to ensures that we fulfill our securities
lending needs. The program is divided between
our custodians and our third party lenders.
With more than 80% of our assets being distrib-
uted through our auction program, it provides the
desired vendor diversification and allows us to
shop for more competitive custody costs. We use
JP Morgan and State Street for custodial lending.
As our program has grown, our compliance
infrastructure has grown with the program. We
have developed a consolidated reporting network
covering lending and collateral management,
which has enabled us to install a multi- style man-
28 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
ager approach to the latter. Through the trans-
parency of auction process we are able to identi-
fy both short and core assets. This has allowed us
to diversify our asset concentration and our man-
agers are able to take longer positions with our
core cash.
Our risk management model is a key control in
the evaluation of our program. We use a variety of
risk management analytics in our formal bi-week-
ly evaluations of the program. We have standard-
ised the delivery of program data throughout our
vendor base to facilitate our reporting tools. We
analyse exposure on multiple fronts, including
counterparty, fund and country exposures. APG
Investments also reviews quarterly counterparty
credit and, our exposure to unsecured debt and as
well as Value at Risk, the latter allowing allows us
to monitor the effect of market fluctuations on
our collateral margins.
We also ensure that our securities
lending strategy does not interfere with our other
investment strategies. We have built the program
so that it requires minimal support from our back
office.
Over the past decade APG Inverstments has
developed a robust corporate governance policy
to ensure sound corporate governance. Our secu-
rities lending desk has followed suit, and now
monitors on- loan levels, which is particularly
important in the run-up to AGMs.
APG Investments sees value in both the initiative
that the securities lending desk is attempting to
achieve and that of our corporate governance
team. We have carefully struck a balance
between the two. The transparency we have devel-
oped in our program has been the key in striking
this balance.
By following the same investment management
principles of our other front office investment
strategies we have been able to identify and
manage risk throughout our securities lending
program.
Mark Linklater is head of securities lending at
APG Investments. He has 25 years of
investment experience in mergers and
acquisitions and asset management, both on the
sell side and the buy side; He has been with
APG Investments for just over seven years. Mark
was asked to take over the business of securities
lending at the end of 2003 with the mandate to
revitalise and enhance performance. Since tak-
ing over the business the team quadrupled the
return of the program.
 Single Stock Futures (SSFs)
• A very efficient tool for synthetically getting long and short delta.

• SSFs offer much more attractive financing rates than those offered
through brokerage accounts.

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

as beneficial owners can supply the delta to the market that the
short-sellers want without assuming any counter-party risk.

Increase yields Decrease risk

the exchange for Single Stock Futures

For more Information visit us at

www.onechicago.com
or call David G. Downey, CEO, at 312-424-8520

©2008 OneChicago LLC. All rights reserved. The information in this presentation has been compiled
by OneChicago, LLC for general information purposes only. Although every attempt has been made
to ensure the accuracy of the information, OneChicago assumes no responsibility for any errors or
omissions. Examples herein are hypothetical situations used for explanation purposes only and should
not be considererrors or omissions. Examples herein are hypothetical situations used for explanation
purposes only and should not be consider advice. All matters pertaining to rules and specification
herein are made subject to and are superseded by the official OneChicago rules. The Exchange for
Single Stock FuturesSM is a service mark of OneChicago, LLC.
 ASK THE EXPERTS
BBH
What impact will the credit crisis have on
securities lending programs?
A healthy securities
lending market pro-
tects investors by
striking the right bal-
ance between risk
and return. Prior to
the credit crisis,
increased competi-
tion and historically
tight credit spreads
created an environ-
ment where, in some
quarters, there was
too much emphasis
on chasing returns
and not enough on
Christine Donovan mitigating risk.
As late as the first half of 2007, beneficial
owners were exploring all options that could yield
higher returns, including direct routes to market,
accepting lower grade collateral, and expanding
cash collateral investment guidelines. As the
credit crisis emerged, beneficial owners were sud-
denly keen to ensure that their lending providers
were correctly managing their counterparty risk
and prudently investing their collateral.
Therefore in the short term, we believe there
will be a great deal of reflection on the part of
beneficial owners regarding what their aims are
with securities lending and whether these are
matched by the profile of their program. For
instance, the primary focus of many securities
lending programs is to lend as much volume as
possible to maximise cash for reinvestment.
However, with increased volume on loan comes
increased risk, so beneficial owners may consider
whether they want to shift to a securities lending
program that focuses on optimising rather than
maximising returns. It’s a subtle but important
difference and involves factoring in the risk pro-
file of each transaction to the return opportunity.
For instance, total return driven by high portfolio
utilisation has long been held up as the bench-
mark of a successful lending program. However,
with increased utilisation comes increased risk,
so the success of a lending program should be
judged upon a broader set of measures including
the risk exposure of the program and the intrinsic
fee per loan.
30 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
Recent issues related to counterparty solvency
have served to remind the industry of the value
that a third party agent provides from an over-
sight perspective. In the current climate, where
even the most highly regarded organisations can
quickly become vulnerable, the importance of an
independent third party agent performing critical
processes like collateral management and bor-
rower monitoring cannot be overstated. In this
respect, lenders who are financially stable with
robust operational and risk management proce-
dures should fare particularly well.
Beneficial owners will now have a much better
sense of how protected they really are in their
current program, another short term result of
recent events. While lending agents have indem-
nifications and risk management practices in
place to deal with borrower default, it’s not until
there’s an industry crisis that these get stress test-
ed and refined. These protections range from an
understanding of the risk management practices
of an agent to contractual provisions extended to
the beneficial owner.
Longer term, the securities lending industry
should emerge from the crisis stronger than ever.
Additional transparency and understanding by the
beneficial owner community will translate into
greater dialogue to understand the exact nature of
the risks assumed and the associated returns.
Furthermore, there is likely to be greater
emphasis on diversification from an economic as
well as a risk perspective, leading to increased
demand from beneficial owners for flexible
hybrid programs, which can combine the best of
all routes to market depending upon the composi-
tion of the asset portfolio and the prevailing mar-
ket conditions.
Recent market conditions have provided a great
stress test for the securities lending industry. The
challenges have provided an opportunity for
industry participants - from beneficial owners,
agents and borrowers - to learn valuable lessons
and enhance their risk management processes. It
is important to note that the volatility of the
broader capital markets has created significant
returns from securities lending. These can be
captured without introducing unnecessary risk
especially in relation to collateral reinvestment
and the providers that win will be those that get
this balance right.
Christine A. Donovan is managing director,
Brown Brothers Harriman Investor Services &
Markets and founded BBH’s in-house Securities
Lending Program in July 1999.

CalPERS
Using equity repo to diversify a portfolio in
an illiquid market
Billionaire financier
Warren Buffett once
said; “In the business
world, the rearview
mirror is always
clearer than the wind-
shield.” Nothing
could be truer when it
comes to today’s mar-
ket and its effects on
cash collateral for
securities lending.
The credit markets
have surprised most
investment managers,
forcing everyone to
Daniel Kiefer be on high alert. To
ensure the most efficient use of cash collateral it is
important to maintain a balance among diversifica-
tion, liquidity, and return.
Diversifying a portfolio’s assets should not be
underestimated in today’s market. It reduces risk
and benefit securities lending programs. Broker
diversity, the types of securities purchased, and the
maturity and duration of asset classes are all cate-
gories which, when properly managed, will
improve this.
CalPERS uses two main types of assets to main-
tain portfolio liquidity: money market funds and
repurchase agreements (repos) using fixed income
and/or equities as collateral. While traditional repo
and money market funds have been around for
many years, repurchase agreements collateralized
by equities are still fairly new to the US market.
In the past, equity repo has not been popular
because fixed income assets were considered the
most safe, but with the collapse in the structured
products market and as US markets have expand-
ed, banks and broker dealers have sought to
increase their financing capabilities by using alter-
native forms of repo collateral, such as equities.
Equity repo has become a strong component of
the overall repo market because of the benefits
provided by transparent pricing, which is a more
dependant book of liquidity, and reduced execution
risk. Adding equity repo to a portfolio disaggre-
gates risk and makes it more transparent.
Simply put, equity repo is a repurchase agree-
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 31
SECURITIES LENDING MARKET GUIDE
ment, which uses various types of equities as col-
lateral. The capital markets have used repos for
many years, but historically the borrower provided
US government, mortgage backs, and corporate
securities for collateral.
When establishing an equity repo program, there
are many things to consider: acceptable equity
securities, margin, corporate actions, and rates of
return. The largest categories to choose as accept-
able collateral include the following:
- Type of equities (common or preferred stock,
ADRs, etc)
- Specific indices (S&P 500, Dow Jones com-
posite, etc)
- Pre-determined exchanges (NYSE, NAS-
DAQ, etc)
Equities with a minimum price per share
- Maximum percentage of market value
The equity repo market grows daily as more
investors are willing to accept equities as collateral
and more broker/dealers are starting equity repo
programs. Using equity repo as another tool to
add diversification creates a balance between liq-
uidity and return; thus making the windshield a bit
clearer.
Margins for equity repo can range from 105% to
110%. The seller typically receives any income
paid and maintains the right to vote on securities
held as collateral. The rates of return on equity
repo will vary depending on the type of equities
accepted, required margin levels, and supply and
demand. Customarily, equity repo has paid a
spread above Federal funds. All of these aspects
would be agreed upon during the negotiation of
the transaction. Since equity repo is still a fairly
new product, not all banks and brokers are fully
engaged in offering this form of collateral.
However, all indications are that this sector of the
market will continue to grow as more banks and
brokers utilize their equity positions for funding
purposes.
Daniel Kiefer CFA, is opportunistic portfolio man-
ager within the fixed income unit, and oversees the
securities lending program, credit enhancement
program, as well the member home loan program
at California Public Employees’ Retirement
System. He provides direction and oversight for the
securities lending program and has developed an
on-line principal bidding process and in so doing,
formed a joint venture with eSecLending. A char-
tered financial analyst since September 1994 and
holds two degrees from the University of Colorado,
MBA, accounting and a BSc in finance with a con-
centration in investment and portfolio analysis.
 ASK THE EXPERTS
ICGN
“Trustee speak with forked tongue”:
The spaghetti western of securities lend-
ing governance?
Fund governance is a
subject that has seen
plenty of attention
recently, in particular
pension funds, mutual
funds and hedge
funds. Seasoned
observers see serious
conflicts of interest
between the publicly
proclaimed fiduciary
duties of funds and
their actual behavior.
If this were a West-
ern, the fund man-
Dr. Andrew Clearfield agers would be wear-
ing the black hats.
Many funds now claim to be committed to
improving corporate governance at portfolio com-
panies. But many refuse to vote shares against
management, no matter how egregious the offences
committed against shareowners. If the funds’
boards sincerely believe that shareholders ought
never oppose any decision, they should state this
clearly in their prospectus and website. If not, they
should regularly address the effect of a fund’s actu-
al behavior on shareholder-friendly governance.
Stock lending is a case in point.
A couple of years ago, a major public pension
fund commissioned a report on its lending activity
by external counsel. This lawyer made a presenta-
tion to the board, in which the trustees were told
that they would be violating their fiduciary duties if
they did not take every opportunity to get even a
few dollars by lending shares. The trustees agreed
to increase their lending program further, without
considering that they might be engaging with port-
folio companies whose policies or governance they
disagreed with. Instead, the fund’s corporate gover-
nance program was eviscerated, and the fund decid-
ed it would never recall or threaten to recall any
share for voting purposes. While the fund pro-
claimed the acceleration of lending and the
increased income, its stated commitment to corpo-
rate governance was never reduced, nor was it
noted that the fund was voting far fewer of its
shares, nor that it had reduced the activity of its
corporate governance staff. The trustees were clear-
ly trying to have it both ways.
32 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
And they are not alone. While spokespeople decry
the prevalence of ‘short-termism’, many funds
scramble to maximise short-term income at the
expense of the governance programs they claim
defend the long-term interests of their beneficiaries.
In a recent confrontation between outraged portfo-
lio managers and a European company, it was dis-
closed that more than half the shares owned by the
disgruntled owners attempting to force the compa-
ny to change its anti-minority shareholder policies
remained out on loan through the period of the
annual general meeting (AGM).
I was involved in an attempt by shareholders to
derail a merger detested by the managers who held
one of the companies. At a meeting to approve the
deal, three giant institutional managers arrived with
around a third of the shares they had threatened to
vote against management - the rest were out on
loan. Another showdown with a European execu-
tive fashioning a takeover of his own company
ended in the same pathetic result, for the same rea-
son. Incremental tens of thousands in revenues
were adjudged more important than tens of mil-
lions of dollars of capital gains on positions worth
hundreds of millions. This is short-termism with a
vengeance. Not all directors and trustees are know-
ingly committing larceny with their beneficiaries’
retirement coffers. The problem is that the firms are
set up so that no one is in a position to call their
attention to any contradictions in policy.
Corporate governance is about adherence to prin-
ciples and judgments with respect to practice, and
is a part of compliance. The rest of compliance is
about obeying specific laws and regulations. As a
revenue-generating activity, stock lending has sepa-
rate and high-level representation in all such inter-
nal debates. At the same time, the law requires that
compliance is a watchdog of portfolio management
activities. But nothing is required with respect to
stock lending a case of the right hand not knowing
what the left hand is doing.
Most pension funds have endorsed the corporate
governance principles set out by the OECD, the UK
Combined Code and the ICGN Code on Securities
Lending. But quite a few have set up management
structures in which it is difficult to test the assump-
tions of compliance. Instead, more fund trustees
should examine their own practice with respect to
corporate governance activity with the same cold
eye they expect exercised by their portfolio man-
agers and analysts in evaluating an investment.
Dr. Andrew Clearfield is chairman of the International
Corporate Governance Network’s (ICGN) Secur-
itiesLending Committee and a governor of the ICGN.
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©2008 Wachovia Corporation 084192
 ASK THE EXPERTS
OPERS
How does cash collateral affect securities
lending performance measurement?
This is a quandary that
has challenged the
securities lending
industry for a number
of years. From a his-
torical perspective, the
development of securi-
ties lending perform-
ance measurement has
morphed from anec-
dotal comparisons,
industry surveys and
benchmark services.
While all of these hold
some value, and per-
Jerry May haps all should be
utilised, as yet none
fully meet the needs of sophisticated investors.
The reason for this deficiency is the difficulty in
incorporating the reinvestment of cash collateral
into the equation. The reinvestment of cash collat-
eral is the primary risk of any well-run securities
lending program, at least from past experience in
the US. The operational and counterparty risks can
be mitigated significantly by the observation of
sound procedures and policies. The risk of cash
collateral reinvestment is not so easily mitigated, as
the cash markets in the past year have shown.
For most US beneficial owners, securities lending
performance is predicated upon the concept of
investing cash in a conservative manner in order to
generate incremental income above the liability
incurred or the rebate due to the borrower of the
assets. As is the case in most investment manage-
ment areas, this investment of cash is sometimes
open to wide interpretation as to what constitutes
acceptable risk to the beneficial owner. What is
acceptable to owner A may not be acceptable to
owner B, an indication of the divergence in the risk
tolerance of various securities lending cash collater-
al guidelines, and a clue into the difficulty in actu-
ally measuring securities lending performance.
At OPERS we have traditionally looked at all
three methods mentioned in the first paragraph of
this article; anecdotal comparisons, industry sur-
veys, and benchmark. In addition, we compare
ourselves to our peers from data that is available to
us through annual financial reports. And finally,
34 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
we look at historical performance of the program
with allowances made for market conditions or
portfolio changes that have been evident. These
efforts, though, are still not what we would like to
see in the final analysis.
I would contend that the most appropriate meas-
ure of securities lending performance is the tried
and proven risk/return formula. The ideal way for a
beneficial owner or a lending agent to tell if per-
formance is adequate is to incorporate the risk that
has been taken to earn that income. In fact it is the
only reasonable or intellectually honest way of
measuring lending performance.
If a beneficial owner is able to see the return of
the lending program per unit of risk taken, it
demonstrates real comparison to peers and histori-
cal comparisons that show how the structure of the
lending program, or the cash investment guidelines,
have affected real performance In addition, with a
return per unit of risk measure, analysis can more
easily achieved when comparing other asset classes,
or investment opportunities, or resource allocation
decisions. Cash portfolio managers will also be
able to better identify efficiencies, or inefficiencies
as the case may be, in their portfolio construction.
Guidelines may be drawn up with real risk units
desired, rather than subjective measures.
The obvious question that will arise from this pro-
posal is, what unit of risk should be used as the
denominator in this equation? Here we would look
to industry participants to help determine the cor-
rect unit of risk. It should obviously incorporate
counterparty and operational type risks, although,
as mentioned previously, it doesn’t seem that much
differentiation will be made here among industry
participants. And there may be other risks not
mentioned here that should be captured in this type
of measure. The real differentiator, though, will be
found in the cash guidelines, and specifically, the
actual cash collateral portfolio that is used to gener-
ate the income during the measurement period.
While this proposal may be self-evident, it seems
to be time for many market participants to make
more concrete efforts to characterise, develop, and
implement a risk/return lending measurement tool
on an industry-wide basis. Perhaps all market par-
ticipants will see the benefits from adopting this
type of approach to performance measurement, and
dialogue can begin in earnest to initiate the next
phase of this risk transition for the industry.
Jerry May is cash/securities lending officer at Ohio
Public Employees Retirement System(OPERS). He
has been responsible for the securities lending pro-
gram at OPERS since February 2004.
Maximize returns. Control risk.

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 ELECTRONIC TRADING EUREX SECLEND
If it’s not broken,
still fix it.
Francisco Gonzalez looks at the
advent of electrontic trading within
securities lending and borrowing
It is not an uncommon emotion to fear change,
even in the financial markets, where innovation
has always been important. One only has to think
of the attitude many futures brokers voiced when
electronic trading, pioneered primarily by Eurex’s
forebears, started to really take hold throughout
the 1990s. The move from the pits to the screens,
many proclaimed, would result in widespread job
“The benefits of electronic trading
– or perhaps more accurately
electronic processing – are starting
to be felt in securities lending and
borrowing.”
losses amid shallow liquidity and a dysfunctional
market. Few would now disagree that the advent
of electronic trading has played a key role in the
explosion of activity that has taken place in many
different asset classes. Of course, staff rationali-
sation has occurred and people’s jobs have often
36 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
changed, but the Jeremiahs have been proved
largely wrong.
But it is important to remember that financial
markets are not homogenous. Those that are sim-
ple and highly commoditised, such as futures and
spot foreign exchange, are perfectly suited to
being traded in a front-to-back electronic environ-
ment. Others, such as securities lending and bor-
rowing (SLB), have complexities which require
different and more flexible requirements.
Inevitably though, the benefits of electronic
trading – or perhaps more accurately electronic
processing – are starting to be felt in SLB as
well. But the stark reality remains that from a
technology and processing point of view, SLB is
very backward when compared to many other
market segments.
SLB has well-established bilateral dynamics,
which in many instances have served it extremely
well. Any initiative in electronic trading that does
not take this into account is doomed to failure.
The path Eurex SecLend has taken since it went
live in 2005 is to work hand-in-hand with the
industry to bring about greater efficiency, rather
than trying to foist a new trading paradigm on to
the SLB market that it does not necessarily want
it. In other words, the concept is to deliver evolu-
tion, rather than revolution.
Eurex SecLend now has 25 participants, split
almost evenly between borrowers and lenders.
Many more have expressed a strong interest to
sign up. It is a fully integrated electronic market
place whose technology is based on the proven
infrastructure that underpins Eurex Repo. The
front end consists of an electronic trading portal ,
which provides direct access to a global lending
and borrowing pool of international equity and
fixed-income securities. This can be deployed in
client sites at a minimal cost and it provides
almost instantaneous access to what is effectively
an additional SLB market, providing significant
new business and revenue opportunities. There is
no joining or annual membership fee, and com-
mission is charged on a volume rather than per
trade basis.
The way Eurex Seclend participants transact
their business can be customised. They can, if
they chose, easily upload their positions automat-
ically into Eurex SecLend, as well as access the
platform through Microsoft Excel spreadsheets or
their drag and drop from Bloomberg terminals.
Quotes can be made on an individual counterpar-
ty basis, to defined groups or to all users. This
can also be done anonymously if preferred. Deals
can also be done anonymously if preferred. Deals
can be transacted on a pre-arranged basis and
then entered into the system to benefit from its
powerful post-trade efficiencies. Eurex SecLend
participants can also define whether or not collat-
eral is re-usable, as well as automate the process-
es as existing trades mature, such as whether or
not to roll them over and return or recall either on
a full or partial basis.
The technology which supports Eurex SecLend’s
post-trade infrastructure is arguably even more
important than that at the front- end. Europe’s set-
tlement landscape is highly fragmented and this
has undoubtedly hindered cross border activity. It
has also led to the effective creation of many sep-
arate SLB markets. There is now a real demand
from a range of market participants to overcome
these barriers so they can make full and efficient
use of their collateral. It is now increasingly
recognised that collateral management can be an
important source of additional revenue for asset
managers and pension funds, and so they start to
use it more innovatively. The relatively recent
emergence of 130/30 strategies, where funds
establish a short position equal to 30% of the
portfolio’s value and use the proceeds from the
sale to increase their longs to a 130% of the
“An electronic market place,
underpinned by robust and
secure, but also flexible technolo-
gy provides many of the answers
to the problems that tomorrow’s
securities lenders and borrowers
will need to address.”
fund’s value, is one example of the need for effi-
cient collateral management.
Eurex SecLend provides its users with unprece-
dented flexibility post trade, which actually
enables them to overcome many of the barriers
that have hindered cross border SLB. The plat-
form allows deals to be settled bilaterally if that
is required, but additionally it uses
SegaInterSettle (SIS) to deliver a degree of
unprecedented and extremely secure straight-
through-processing. Once a deal has been agreed
on Eurex SecLend, a first instruction can be sent
to SIS, which confirms the transaction in real
time back to both counterparties and manages the
trade during its whole lifetime with mark to mar-
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 37
ket , corporate actions etc. SIS then monitors the
accounts and provides further security by settling
all transactions on a delivery versus delivery
basis. This effectively eliminates settlement risk,
which in the current credit conscious world has
become an extremely important consideration.
Importantly, Eurex SecLend clients do not have
to use SIS as their central securities depository
(CSD). In most cases they can continue to use
their existing service provider.
It is clear that SLB will continue to seek an
increasing level of automation. The ability to
access a more transparent market rapidly on a
global basis will become a key business differen-
tiator. This is true for prime brokers, custody
lenders and commercial banks but also for asset
and pension funds managers who are striving to
cater for the specific demands for a new breed of
investors, such as hedge funds. But in a risk con-
scious world, services have to be as secure as
possible.
An electronic market place, underpinned by
robust and secure, but also flexible technology
provides many of the answers to the problems
that tomorrow’s SLB will need to address. The
reality is that it is not that difficult to set up a
front- end trading platform, a claim supported by
the proliferation of supposed solutions that exist.
In the search for SLB liquidity though, innovation
is the strategic factor that will deliver ultimate
success. If innovative post-trade solutions do not
exist, there is no amount of bells and whistles on
the front end that will compensate.
The goal for providers such as Eurex SecLend is
to deliver the tools and services which simplify
all aspects of SLB, such as global locating facili-
ty, collateral standardisation and re-use and
secure settlement is already long. For the past 18
months, an increase in volatility across many
asset classes has helped drive volumes on Eurex
SecLend. Obviously, the degree of volatility is
not something which can be predicted with total
accuracy, but when it is there, efficiency across
the deal chain becomes of paramount importance.
SLB will always be a complex business, but
electronic trading solutions will help to smooth
out some of its arcane protocols and deliver effi-
ciencies across the entire deal chain. Eurex
SecLend has already proved itself capable of pro-
viding these and remains committed to offering
further services for all of the SLB market’s exist-
ing and future participants.
Francisco Gonzalez, head of Eurex SecLend
 GROWTH IN THE MARKET ESEC LENDING
Growing in
sophistication
Luke McCabe looks at the growth
in the numbers of market partici-
pants and lending providers
While a lack of new entrants and ongoing consoli-
dation activity among lending agents has reduced
the number of providers, the number of borrowers
and lenders continues to grow globally.
The growth has been driven largely by an increase
in the demand from borrowers for both US and inter-
national securities and the general explosion in trad-
“A primary contributor to the grow-
ing demand for securities lending
services has been the dramatic
increase in hedge fund activity,
which in turn has created greater
demand for securities borrowing to
support short positions.”
ing volumes, which also increases the demand to
borrow. Specifically, the demand can be attributed
to the growth in the size and number of hedge funds
and newly adopted 130/30 funds; the growth of
increasingly sophisticated trading strategies utilized
38 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
by banks, proprietary trading desks, and investment
managers; the increased globalisation of financial
markets; and the growth of emerging markets. In
addition to this increased demand to borrow, benefi-
cial owners are increasingly recognising securities
lending as a valuable source of alpha leading to an
increased supply of lendable securities.
Growing demand to borrow
A primary contributor to the growing demand for
securities services has been a dramatic increase in
hedge fund activity, which in turn has created
greater demand for securities borrowing to support
short positions. Lenders and their agents benefit
from this increased demand as broker-dealers, who
typically provide prime brokerage services to hedge
funds, look to borrow from the agent lenders. At the
end of 2007, hedge fund assets stood at an estimat-
ed USD1.9 trillion; by 2012 hedge fund assets could
reach USD3.5 trillion. 130/30 funds are also expect-
ed to experience robust growth over the next few
years. According to a Merrill Lynch report released
in January 2008, the amount of US-managed assets
employing a 130/30 strategy could increase seven-
fold to USD350 billion over the next three years,
with total global funds invested in 130/30 strategies
topping more than USD1 trillion. Intense competi-
tion from prime brokers to lock up supply has
increased bids for exclusive securities lending
arrangements.
Most of the volume gains during the past decade
in the larger stock markets have been driven by
quantitative trading. Quantitative trading strategies,
which include index arbitrage, relative value pairs
trading, and various high-frequency algorithmic
techniques, are being employed not only by hedge
funds, but also by proprietary desks of banks and
broker-dealers. This has equated to significant
demand by fund managers seeking to capture large
positions with certain securities. Additionally, the
boom in synthetic vehicles, including swaps, only
adds to the demand for hedging strategies that
require short sales and the associated need to bor-
row stocks. NYSE Euronext statistics show that
this trend continues to accelerate, especially in the
global markets. US stock trading volume increased
by 23.6% for the first four months of 2008 relative
to the same period in 2007, and European volume
jumped by 38.6%, despite the recent difficult
financing conditions and the NYSE’s continued
decline in market share of its own NYSE-listed
stocks.
The greater need for cross-border financing result-
ing from corporations expanding their activities
beyond national boundaries and the financial liber-

alisation of markets has driven the increased global-
isation of capital flows. Regulatory arbitrage has
added to this trend, as the increased cost of
Sarbanes-Oxley compliance has led to issuers
increasingly seeking alternatives to a US listing. All
told, foreign holdings of US securities grew at a
19% compounded annual growth rate in the period
from 2002 through 2007, while US holdings of for-
“Various emerging markets are
introducing securities lending and
borrowing services to support
increased trading strategies and
opportunities, attract off-shore
investment and provide a competi-
tive trading environment.”
eign securities increased at a 28% over the same
time period. As the barriers to global flows of capi-
tal break down, securities lending is expected to
accelerate.
Emerging opportunities
Emerging markets have also played a role in the
increased demand for securities lending services
abnd have created new opportunities for lending
agents. Countries such as Greece, Israel, India,
Poland, and Taiwan, have improved their regulatory
infrastructure, such as implementing short selling
regulations or relaxing existing restrictions to add
liquidity and efficiencies to the local markets.
Various emerging markets are introducing securities
lending and borrowing services to support
increased trading strategies and opportunities to
attract off-shore investment and provide a competi-
tive trading environment. These markets were pre-
viously unattractive given their higher risks and the
lack of infrastructure and/or liquidity; however,
improvements in legal, regulatory, tax and opera-
tional infrastructures are leading to an acceleration
in activity.
Beneficial owners viewing securities lending as
investment decision
Beneficial owners are increasingly recognizing
securities lending as an alpha-generating activity
and a valuable source of incremental returns. The
securities lending industry is a trillion dollar busi-
ness, estimated to generate more than USD2 billion
in revenues for lending agents annually. Since the
end of 2003, the value of securities for loan in the
global markets has grown at an estimated com-
pound annual rate of 15% to 20%. More beneficial
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 39
SECURITIES LENDING MARKET GUIDE
owners are getting involved in securities lending
globally as they search for alpha while the demand
to borrow increases due to the evolution of invest-
ment strategies.
There is a growing trend toward the unbundling of
securities lending from custody services as more
beneficial owners view lending as an investment
management and trading decision. Beneficial own-
ers are unbundling lending and using multiple
providers, which allows them to choose the provider
with the greatest expertise and ability to add value
in each particular market, asset class, or route to
market.
In recent years, the demand for greater transparen-
cy and best execution in the securities lending mar-
ket has been fueled by increased regulatory scruti-
ny, as well as changing views and expectations of
beneficial owners. Since beneficial owners are
increasingly viewing securities lending as an invest-
ment function they are demanding more informa-
tion from their lending agents so that they can bet-
ter understand and evaluate the risk, returns and
exposures in their programs.
Beneficial owners want to see where returns are
being generated from, what risks they are taking to
achieve these returns. They want to ensure that earn-
ings are being allocated appropriately and not sub-
sidising other clients’ accounts. This increased
demand for transparency has been one of the factors
contributing to the growth of auctions in recent
years as the auction process enables lenders to opti-
mise performance for every portfolio or asset class
which allows for objective decision making on how
to best allocate portfolios for lending.
We expect the demand for transparency to increase
as lenders look to ensure an objective, regulatory-
friendly, and auditable program that can be easily
presented to their management teams, boards, and
governing bodies.
Luke is the head of the client relationship manage-
ment team at eSecLending. Prior to joining
eSecLending in 2004, Luke worked for Brown
Brothers Harriman as vice president of client serv-
ice. Prior to joining BBH, Luke worked for State
Street Corporation for 10 years; most recently he
was vice president and business head of State
Street's Defined Contribution Services Group.
Luke's other roles at State Street included time as
head of emerging market business and product
development (Latin America and Africa).
Additionally, Luke served as the relationship man-
ager for some of State Street's largest institutional
clients. team of nine members, including on-site
representatives.
 INTEGRATION OF ASSET SERVICING SOCIETE GENERALE
All in one and
one in all?
There is an overall push within the
market for more integrated asset
servicing on behalf of service
providers. Guy d’Albrand discuss-
es the extent to which securities
lending should become integrated
within asset servicing.
Asset servicing is becoming more streamlined. It
is becoming faster, better and more standardised,
and is integrating securities lending in the
process. This integration is a logical transition,
yet securities lending needs to remain a stand-
alone business to a certain extent.
Standardisation ensures the benefits of consis-
tency. We are seeing the development of a stan-
dardised process for many of our depositories,
however with non-standard fees in the structure
and the amount the cost to the borrower can vary
significantly. The agreement of a fee needs to
consider the counterparty in particular; what they
do, what they are worth and the potential duration
of the relationship, as well as the supply and
demand of a particular security and collateral
flexibility.
40 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
Securities lending is a complex activity and no
two portfolios are alike. Standardisation can be
applied only so far – at some point securities
lenders need to offer flexible options. In tailoring
options, service providers take into consideration
each portfolio individually and adapt their offers
according to overall market conditions and the
client’s investment criteria: their guidelines, con-
straints, risk comfort level and overall asset strat-
egy on an ongoing basis. This kind of flexibility
on behalf of service providers paves the way for
performance maximisation and operational effi-
ciency in the long term. The key lies in being in a
constant position to anticipate, make judgements
and react in an appropriate manner, achieving the
balance between profitability and risk control.
Securities lending practitioners need to have a
global vision of the industry. With the standardis-
ation of asset servicing, most custodian banks
have integrated securities lending to their core
businesses. They offer beneficial owners, as well
as other services such as foreign exchange, trade
execution and fund accounting. Custodian banks
are able to mobilise large pools of securities
available for lending. Owners and agents split the
revenues, which are based on many factors, such
as the service level and provision. Securities
lending is often part of a much bigger relation-
ship and the split negotiation can become part of
bundled approach to the pricing of a wide range
of services.
For beneficial owners, a custodian as agent is
convenient. Custodians can provide seamless
lending activity, managing client’s collateral in
accordance with their investment guidelines,
while ensuring risk management controls, com-
mitment, global reach, and the added security of
indemnification.
The advantages of an integrated approach
include: existing client relationships, investment
in technology and global coverage of markets, the
ability to pool assets from many smaller underly-
ing funds, and experience in developed markets.
Custodian banks can also provide indemnities and
manage cash collateral efficiently: two critical
factors for underlying clients.
The integrated approach of custodial lending
offers a conservative and streamlined means of
combining custody, securities lending and cash
management through one provider. Some lenders,
such as Société Générale Securities Services, can
provide not only agency lending programmes for
clients with securities already held in custody by
Société Générale, but can also act as a third party

agent for portfolios not in our custody. In the
case of third party lending, there is no disruption
to the portfolio management from an availability
point of view nor are relationships impacted with
the non-SG securities custodian.
From custody to securities lending, value-added
services pave the way for more seamless transac-
tion processing. A comprehensive service
provider offering a complete value chain has a
better grasp of the overall process and is able to
integrate different services efficiently and cost-
effectively, and can offer individualised pro-
gramme enhancements, and include, if needed,
some exclusives within the lending programmes.
At SGSS, our Global Performance Benchmarking
Tool provides clients with an online real-time
tracking method to see how their portfolio per-
formance measures up, with regular reporting
updates and commentaries directly from our
traders.
Operational efficiency is an increasingly impor-
tant contributor to overall fund performance. It
keeps users up-to-date while processing and
checking transactions, monitoring and allocating
“Securities lending is an activity
that will continue to stand apart
to a certain extent. A standard
offer does not exist .”
collateral, processing recalls and reallocation,
coupon payment and corporate actions, allocation
of lending revenues, and measuring exposures
and risks. For large portfolios, the agent should
provide performance benchmarking for market
levels.
Constraints such as accepted types of trades,
loan periods, counterparties, collateral, percent
on loan limit per issue, overall percent on loan
limit per fund, and limits per counterparty often
make each trade a specific transaction. Agent
lenders are able to apply these constraints and
have the market knowledge to enforce stringent
rules, monitor counterparties and verify compli-
ance both pre and post-trade. It is the agent
lender’s role to ensure that risks are in-line with
clients’ investment policies, and promptly miti-
gate risks arising from market conditions or regu-
lations and to optimise revenues accordingly, as
well as continually reassess the risk/reward ratio
and monitor credit risk by in-house counterparty
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 41
SECURITIES LENDING MARKET GUIDE
analysis. Diversification and reporting of counter-
parties is critical in determining where exposures
lie.
Cash reinvestment can generate further
income. Beneficial owners should be able to rein-
vest cash collateral in different currencies for var-
ious durations and to process FX trades. When
direct investment of cash collateral is allowed in
fixed-income products - such as short-term paper,
debt, asset-backed securities or funds - beneficial
owners bear a primary risk on issuers as with
their underlying portfolio. Thus, the agent lender
needs to approve the proposed guidelines and
perform constant risk measurement and report-
ing.
Indemnification provision by the agent lender
provides security in the case of borrower default
or when the pledged collateral has become insuf-
ficient due to adverse market movements.
Borrower default can be indemnified in various
ways, but the collateral remains the first level of
protection. It is essential to agree on the accepted
collateral and related haircuts and to understand
what insurance an agent provides. Thus, the cred-
itworthiness and operational strength of the agent
is paramount to proper risk control, with regular
and stringent risk monitoring and efficient mar-
gin calls.
Overall, the integrated asset servicing approach
presents many attractive benefits to beneficial
owners. Sec lending is an activity that will con-
tinue to stand apart to a certain extent. A standard
offer does not exist – securities lending pro-
grammes need to be flexible to enable clients to
implement multiple strategies. A securities
lender’s ability to maximise revenue, manage
risk, automate processing and deliver seamless
integration with the client’s investment manage-
ment activities are key to differentiating their per-
formance. Beneficial owners should be on the
lookout for integrated asset servicing offers that
bring the benefits of standardisation, yet is also
tailored to better meet their individual needs.
At SGSS, our liquidity management experts
offer a full range of flexible securities lending
programmes, tailored individually and built to
boost portfolio performance. Backed by strong
post-trade support and reporting, we offer indem-
nities, closely monitor collateral, and rigorously
benchmark our performance and market access,
while you remain in full control over your assets.
Guy d’Albrand global head of liquidity manage-
ment Société Générale Securities Services
 RISK MANAGEMENT COMIT
Technology and
risk management
Felix Oegerli considers whether
technology can help with risk
management in securities lending.
The continuing financial crisis has impacted the
securities lending industry in different ways. Most
lenders are probably able to benefit from the high-
er demand for good quality General Collateral
(GC) securities such as central bank-eligible fixed
income instruments. End-users and prime brokers,
however, may be hit by the higher cost of liquid
high-quality collateral. The market turbulence has
also raised awareness of risk versus return and
subsequently also of internal risk management
processes.
Let us first define the main risk in securities
lending. The key risk factors are counterparty and
operational risk. I have intentionally left out the
cash reinvestment risk because from my perspec-
tive this is a separate risk category, which is not
directly related to the securities lending process.
Counterparty risk
Counterparty risk is mitigated by collateral, which
is typically cash or different security instrument
types such as bonds and equities. In the past most
lenders have allocated counterparty risk limits on a
market value basis mainly due to a lack of internal
credit and risk frameworks and system support.
These days most securities lending market partici-
42 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
pants measure counterparty risk in a more sophisti-
cated manner. The typical approach to counterparty
risk assessment is to calculate the replacement
value of the difference between the securities
lent/borrowed and the collateral received/delivered
plus risk add-ons reflecting the volatility and liq-
uidity risk of the securities lent or borrowed and the
collateral received or delivered. The risk add-ons
are calculated on a Value at Risk (VaR) basis, for
example using a close-out risk period of between
five and ten days and applying a confidence level
of somewhere between 95% and 99.99% (between
two and four standard deviations). In addition, neu-
tral or positive correlations between transactions
and collateral are sometimes assumed within cer-
tain instrument types and indices. The implementa-
tion of such risk management frameworks has
raised the comfort level of market participants and
their risk management departments. Although it is
a very positive development to use VaR-based
models to assess the counterparty risk, these mod-
els may not fully reflect the implications of tail
events. Such events, which in current times are
more realistic, would, for example, trigger a fire
sale of the relevant collateral assets with the follow-
ing negative effects on the assumed replacement
values including the risk add-ons.
Credit spreads will result in rapid widening of
the fixed income credit spreads.Liquidity squeeze
in the financial markets will widen the bid/offer
spread on certain fixed income asset classes dra-
matically and further negatively impact liquidity in
bond trading markets.Dramatic volatility in the
equity capital markets, however with a potential
correlation between the equities lent/borrowed and
received as collateral.
Depending on the structure of the fixed income
transaction and collateral book possible negative
correlation (eg, loans in bonds with short-maturi-
ties and low credit-spreads and collateral with long
maturities with wide credit spreads), the market
crisis could lead to problems with other financial
market participants and therefore further increase
the financial sector counterparty risk exposure.
Therefore static VaR-based counterparty risk may
not be sufficient to measure counterparty risk. Just
calculating a risk equivalent amount based on stat-
ic VaR based counterparty risk is not good enough.
We should not forget that concentration and con-
solidation in the financial sector has also had a big
impact on the securities finance and collateral
management market. It is therefore important to
understand that collateral mitigates counterparty
risk and reduces systemic risk to a certain extent,
but at the same time it also takes systemic risk to
the next level.
The risk management unit and the business
should therefore know where the counterparty risk
comes from (e.g. FX mismatches, credit spreads,
exposures to equity indexes etc.) and should also
conduct stress tests. The results of the stress tests
should then be the basis of potential changes in
the business mix or collateral rules and haircuts.
Although stress testing is long established in other
parts of the financial markets, it is still not very
common in securities finance.
Although it would be beneficial for day-to-day
business control, this type of sophisticated risk
management process does not necessarily need to
be supported within a securities finance system. It
is possible to upload the transaction data from the
securities lending system to a risk system.
Operational risk
From my perspective, the bigger area of concern
from a risk management standpoint is the opera-
tional risk which directly and indirectly impacts
securities lending counterparty risk. Some of the
most import risk elements are the following:
-Legal documentation
-Data granularity and quality
-Shortcomings in business standards
-Process breaks
Legal documentation
Comprehensive legal documentation should con-
tain the right to modify important risk drivers such
as the business mix and, in particular, the collater-
al schedule. Furthermore, it is also important to
have clearly defined default processes in place
depending on the nature of the legal agreement.
We often find that this is not the case.
Data granularity and quality
When undertaking business consulting work we
are often confronted with system functionality,
which cannot cope with the business rules such as
highly granular collateral agreements. Further, the
lack of granularity of available securities master
data (eg, no exclusion of sector risk such as finan-
cial institutions, possible missing rating mapping
table between rating agencies, missing daily
turnover in equities) or price feeds (e.g. different
bid/offer prices for transactions and collateral) can
increase the operational risk substantially. Spot-
checks or tactical batch-fed collateral and risk sys-
tems are not sufficient to make up for the missing
functionality in the securities lending system or
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 43
lack of key data in the securities master.
Short comings in business standards
Some of the business standards do not make a lot
of sense from a risk standpoint, although this is
now slowly changing. I often find simple collater-
al rules, which state that the margin is, for exam-
ple, 10% for equity collateral and 2% for fixed
income instruments. Under these business stan-
dards, lending equities and receiving bonds as col-
lateral would result in a positive net replacement
value of 2% and lending bonds and receiving
equities would result in a positive net replacement
value of 10%, although the risk is exactly the
same in both transactions. Some of the securities
lending systems cannot add different margins on
the loan side as it would haircut collateral.
Process breaks
From a processing standpoint, securities lending is
a complex business with a lot of potential process
breaks. However, certain processing gaps in risk
and collateral management are often just accepted
as business process facts, which may lead to addi-
tional operational and subsequently counterparty
risk. The obvious process with a high degree of
risk is the intra-day or even overnight settlement
risk, which is often the case for non-cash collateral
securities lending transactions. Because of this,
and also for process efficiency reasons, tri-party
collateral agents are used, thereby mitigating the
settlement risk.
However, it could well be that the collateral data
imported via file from the tri-party collateral agent
and the exposure calculation from the lending
intermediary may not always be in-sync. This may
be because of a lack of integration of the tri-party
collateral data and a sub-optimal mapping of the
internal collateral management processes with the
tri-party collateral management process for collat-
eral re-hypothecation.
The crisis in the international financial markets
has triggered internal securities lending risk
reviews which will then hopefully lead to process
improvements. The key to this is the risk and col-
lateral management frameworks, which should
then be implemented with the required data and
IT-functionality. To define a risk framework,
which cannot be supported on the IT-side does not
make sense - IT is a risk process enabler and the
key is the risk framework and the availability of
the base data.
Felix Oegerli is a member of the executive com-
mittee at COMIT.
 SINGLE STOCK FUTURES ONE CHICAGO
SSFs explored and explained by
David Downey
Securities lending is
effectively the lending of
mutual and pension
funds’ assets with an
agreement that they will
be returned at some
point in the future. They
receive additional com-
pensation for participa-
tion and will not lose
economic exposure to the
position. This transaction
is substantially similar to
an EFP (exchange future
for physical) transaction
using single stock futures (SSF) but with some very impor-
tant differences. The SSF EFP is a trade on a regulated
exchange and trades in a competitive
environment where multiple market participants establish
market rates. There is transparency in pricing and no coun-
terparty risk as all trades are cleared through the AAA rated
Options Clearing Corporation (OCC).
Securities lending has two sides. The first is cash driven,
whereby institutions finance their operations by borrowing
cash in return for securities. The second part is securities-
driven, whereby hedge funds firms employing short delta
strategies such as the 130/30 are required to borrow securi-
ties prior to shorting. This activity is increasing the
demand for the available supply of stock to borrow. Hedge
funds look to the brokerage firm to service the request. The
brokerages can meet some of the demand from their own
inventory, but must look to the beneficial owners (the pen-
sion and mutual funds) to satisfy the total demand. These
owners make securities available by contracting with either
a custodian or the brokerage firms for the wholesale distri-
bution of all or some of their portfolio. For this they receive
a guaranteed fee and/or a split of the reinvestment of the
cash collateral the contracted party receives.
The disadvantages to this arrangement are the concentra-
tion of credit risk with a sole counterparty and the ceding
of potential profits to these agents. The funds can provide
the market with the assets they need but not have to split
the profits with a third party. Funds argue that securities
lending involves a variety of complex administrative, opera-
tional and accounting activities, including credit evaluation
and cash management, which may be better handled by
specialists in that field. Fair enough. However, with SSFs
they can participate in this process and earn higher returns
44 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
on their assets under management.
Off-balance sheet transactions such as equity swaps, total
return swaps and contracts for difference (CFD) produce
the same economic effect as securities lending that do not
involve any securities being exchanged. But unlike SSF
these products still entail some counterparty risk.
SSF Pricing SSFs are the simplest derivative product. An
SSF’s price is the forward value of today’s stock price,
which is derived by multiplying today’s price by the risk-
free rate of interest out until expiration of the future, then
subtracting any dividend that is paid (if any) during that
time period.
For stocks that do not pay a dividend:
Where r is the effective federal funds rate, tx is the expira-
tion date of the future and t0 is the date of evaluation.
For stocks that pay a dividdend:
Where r is the interest rate prevailing starting at the ex-div-
idend date, tx is the futures expiration date and td is the ex-
dividend date.
So, for a USD100 stock that pays no dividend in a 2%
interest rate environment the six-month SSF will have a
fair value of UD101. If the stock paid a 20 cent dividend
then the six month future would have a fair value of
approximately USD100.80 (approximate only because a
higher resolution fair value could be obtained by taking the
present value of the future dividend stream into considera-
tion but for simplicity, deducting the full value works.)
The physical settlement of the SSF means that upon expi-
ration the fund holding the long SSF will receive the
CUSIP as the future expires and the party holding the short
SSF will be required to deliver. Unlike other futures prod-
ucts where the positions are offset prior to expiration, more
than 95% of the SSF positions traded on OneChicago actu-
ally make or take delivery upon expiration. So for funds
who invest by buying and holding there is no difference in
the two transactions of either buying today at one price or
buying a SSF for delivery of the underlying at expiration,
except that they may be able to purchase the SSF at a lower
net cost and therefore reduce the price they pay for the
resulting position.
Pricing of the EFP An EFP trade allows for the substitu-
tion of a long or short stock position for a long or short
SSF position. EFPs allow one to decrease finance charges

for long stock positions or increase the interest received on
short stock positions. That is because the interest rate is
built into the price of an SSF and hence its EFP is competi-
tively determined by numerous market participants rather
than by a single broker who can set less advantageous mar-
gin loan and stock borrow rates. Further, EFP’s can be used
as a synthetic stock loan transaction as funds can offer
their long stock out in return for a SSF that will expire back
into long stock at expiration but with greater returns than
those received for lending the stock to an intermediary.
An EFP is a combination order to sell (buy) an amount of
stock and simultaneously buy (sell) a proportionate number
of SSFs. Taking a long position in the EFP involves buying
the SSF and selling the underlying stock. The stock position
becomes flat due to the sale of the existing long stock posi-
tion and the position now holds a SSF with the same eco-
nomic exposure. The EFP is priced in interest rates as there
is no underlying price risk since the stock and the SSF are
equivalents. Hopwever, it does involve interest rate risks as
the two parties are simply engaging in a loan as they switch
positions. Selling the EFP has the opposite positioning as
the SSF is sold and the underlying is purchased. Hedge
funds and other short sellers who are currently short and
paying for the privilege would be able to lower their costs of
financing this position by executing an EFP at a much more
favorable rate without changing their economic position vis-
à-vis the stock moves.
Cost of buying an EFP The cost of buying an EFP in basis
points is determined by solving the following equation for
the interest rate (r) that reproduces the EFP ask price from
the stock trade price given certain dates and dividend
amounts.
F - Price at which the SSF is bought. This price is deter-
mined by the price at which the stock is sold plus the
EFP Ask Price.
S - Price at which the stock is sold.
r - The average bank year, exponential interest rate that
reconstructs the EFP and stock trade prices.
Nexp - No. of calendar days to expiration of the SSF.
Di - The ith stock dividend payment that goes ex-divi-
dend between now and the expiration of the SSF.
Ni - Number of calendar days to the ex-dividend date for
the ith stock dividend payment
and exp{x} = ex.
Note that F = S + EFP Ask Price.
Once the Interest Rate is known the Basis points Paid is cal-
culated as follows-
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 45
SECURITIES LENDING MARKET GUIDE
Basis Points Paid = r x 10,000
An approximation formula for Basis Points Paid is
This formula is valid when (r Nexp) is small compared to
360.
Price of selling an EFP
The amount received on selling an EFP also takes into
account the estimated dividends in the period and is shown
on an annualised basis. The cost of selling an EFP in basis
points is calculated by solving the equation below for the
interest rate that gives us the implied SSF Bid price from a
known stock ask price & estimated dividends in the period.
Where,
SSFiBid = Implied SSF Bid Price, which is the sum of the
EFP Bid Price and Stock Ask Price
Stock Ask = Stock Ask Price
r = Interest Rate
Nexp = Number of days from the day of trade to the expiry
of the futures contract
Ndiv = Estimated number of dividends from the time an
EFP is entered into till expiry
Di = Estimated dividend in the current period
Ni = Number of days from the day on which the dividend
is received till expiry
Once the interest rate is known the received basis points are
calculated as:
Basis Points Received = r x 10,000
An approximate calculation can be obtained by using :
Lending is essentially the exchange of an asset for a
short term Lenders can deliver the asset to the borrowers
through an SSF transaction by either purchasing outrights
for future delivery or pricing the EFPs in such a way to
increase the basis points received for the ‘loan’. Funds have
a fiduciary responsibility to their participants to maximise
returns without exposing the assets to unnecessary risk.
The competitive, transparent trading of an SSF without
counterparty risk exposure is a viable alternative.
David G. Downey is CEO of OneChicago
 RISK MANAGEMENT NORTHERN TRUST
Risk
Management
Sandra Linn on risk management
in securities lending programs
Securities lending can usually be tailored to a ben-
eficial owner depending on the level of risk they
are willing to accept. However, with the turbulence
in the market over the past year, beneficial owners
and consultants are delving deeper into the risks in
securities lending and how these risks are mitigat-
ed in their program. Below are the primary risks in
securities lending, how these risks can be mitigat-
ed, questions that beneficial owners should be ask-
ing their agent lender, and how beneficial owners
can monitor their own program.
What are the primary risks in securities
lending?
There are four primary risk areas in securities
lending; borrower default, collateral, interest rate,
and trade settlement.
Borrower default risk is an event in which the
borrower does not return the loaned securities and
there is insufficient collateral to buy in the security.
Collateral risk occurs when the investment in the
cash collateral option or the non-cash collateral
46 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
becomes impaired or decreases in value.
Interest rate risk relates to the possibility of nega-
tive spreads on securities lending transactions due
to the rebate rate owed to borrowers exceeding the
income earned from the reinvestment of cash.
Trade settlement risk occurs when a beneficial
owner or their investment manager sells an on-loan
security and the borrower is unable to return the
security to the agent lender to settle the trade.
How are these risks mitigated?
Borrower default risk can be mitigated in several
ways. The practice begins with a borrower
approval process in which the agent lender reviews
and selects borrowers to participate in the agent
lender’s program. This should be completed by a
group independent of securities lending. The agent
lender should then set exposure limits on each bor-
rower. After approval is set, the agent lender
should have a process in place for continuously
monitoring the borrower’s financials, credit ratings,
performance, overall credit risk, and usage towards
the exposure limits. Borrowers are required to
pledge collateral in excess of the value of securi-
“Collateral risk can be managed
through investment research,
portfolio management expertise
and guidelines that reflect the
beneficial owner’s risk.”
ties out on loan. Agent lenders should complete a
mark-to-market on the loan and the collateral posi-
tions for each borrower daily to ensure the proper
amount of collateral is held. Agent lenders often
offer borrower default indemnification to protect
their clients should a default occur.
Collateral risk can be managed through invest-
ment research, portfolio management expertise and
guidelines that reflect the beneficial owner’s risk
and reward objectives. Agent lenders should have a
team dedicated to investment research and moni-
toring. It is important to monitor the credits and
the short and long-term ratings of each security
that cash is invested in. Agent lenders should have
a portfolio structure to review the following limits:
total dollar exposure, percentage of the portfolio,
maturity and country exposure. It is important that
the investment portfolio remains diversified and
does not skew to any one type of security.
Compliance with guidelines is another important

factor in mitigating collateral risk. Agent lenders
should have a process in place for monitoring
compliance with investment guidelines, as well as
credit quality, maturity, liquidity and diversifica-
tion within the guidelines. To manage non-cash
collateral risk, it is necessary for the agent lender
to complete a mark-to-market on a daily basis to
ensure that the amount of collateral held is higher
than the amount of collateral that would be needed
to replace the security on loan.
Interest rate exposure is managed by the agent
lender. Close coordination between the trading
team negotiating terms with the borrowers and
portfolio managers investing the cash collateral is
necessary. The agent lender should take an
asset/liability management approach towards lend-
ing activity. Agent lenders should use statistical
and objective duration risk measures to determine
interest rate sensitivity. Portfolio structure should
be based on relative sensitivity of the underlying
loans and interest rate forecasts. Portfolios should
be stress tested to assure that the structure is
appropriate and revenue should be measured for
risk and market value sensitivity. Agent lenders
should have models that show the effects of rising
and declining interest rates on the portfolio.
Trade settlement risk can often be managed by
security substitution. Agent lenders with a large
diverse pool of lendable assets can frequently sub-
stitute one client’s security for another client’s
security when a loan is recalled. Recalling a loan
requires timely notification by the client. The agent
lender’s agreement with the borrower should clear-
ly state the time period allowable for the return of
securities. It is important to note that securities in
high demand will likely all be out on loan, which
can make substitution difficult. Some agent
lenders provide trade settlement protection in the
event a trade does not settle due to securities lend-
ing. Agent lenders can also penalise borrowers for
failing to return securities, such as reducing the
rebate rate paid to borrowers until the trade settles.
What should beneficial owners be asking their
agent lender?
Beneficial owners should review their program
parameters with their agent lender to learn more
about the processes and procedures in place for
managing each of the above risks. Questions that
should be asked include: how are borrowers select-
ed and monitored, how are guidelines monitored,
who makes up the shortfall if any of these risks
occur, does the risk I am taking match my toler-
ance level? Beneficial owners should also ask
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 47
SECURITIES LENDING MARKET GUIDE
about the strength of their securities lending
provider such as credit ratings and capital available
to support lending. It is not enough for beneficial
owners to be aware of their investment guidelines.
Beneficial owners should understand the approach
to the research on investments for their cash collat-
eral, if this is independent of securities lending,
what approach the portfolio manager takes within
the guidelines and how much experience these
people have. They should also understand their
agent’s approach to cash investment; outside of the
guidelines, what is their practice and philosophy.
Beneficial owners should be aware of what their
indemnification covers and what it does not. Agent
lenders typically offer two types of indemnifica-
tion, operational and borrower default. Operational
indemnification covers direct losses when the
agent lender is unable to recover borrowed securi-
ties and distributions, such as dividends and inter-
est, as a result of the agent lender’s negligence.
Borrower default indemnification covers direct
losses when the agent lender is unable to recover
securities and distributions due to borrower insol-
vency or default. Indemnification varies by agent
lender.
What should beneficial owners do to monitor
their program?
Beneficial owners should proactively monitor
their program through reporting, periodic due dili-
gence reviews, and access to knowledgeable staff
at their agent lender. Agent lenders supply clients
with daily and monthly reports that contain infor-
mation on borrower utilization, account utilisation,
collateral by security type, collateralisation levels
and earnings and performance comparisons.
Beneficial owners should actively review reports
to know who is borrowing their securities and
what collateral they are receiving in turn.
Beneficial owners should ensure that they under-
stand their legal agreement and make sure that it is
up to date. They should ask questions of their
agent lender if they have concerns or want more
information on their program.
Sandra Linn, is a senior vice president at The
Northern Trust Company, Chicago and is head of
sales and relationship management for North
America in the Global Securities Lending
Division. She is a member of the global strategic
management team. Sandra has held various man-
agement roles, including securities lending risk
manager and head of global cash management in
the London office. She is a member of the RMA
Committee on Securities Lending.
 TECHNOLOGY PANEL DEBATE

THE TECHNOLOGY PANEL DEBATE

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

Benjamin Glicher is chief technology officer of Equilend and is involved with

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

Francisco Gonzalez is head of securities lending at Eurex and is responsible for

market management regarding business and product development of the electron-
ic market place for international securities lending and borrowing. Before joining
Eurex in 2001, he was head of systems development and in charge of the systems
design for the electronic stock market at SWX Swiss Exchange.

Felix Oegerli is member of the executive committee of COMIT. He was the founder
and CEO of IFBS, which was recently sold to COMIT. Prior to launching IFBS, Oegerli
worked at UBS in Zurich, New York, and London for over 20 years in different func-
tions, including creating and expanding of the securities lending, repo and prime
brokerage business at UBS Zurich.

Christopher K. Poikonen is managing director and head of auctions & trading at

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

48 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009


1. Electronic trading is in its infancy within
securities lending. Why has there been little
penetration and what needs to change for
there to be a greater uptake?
Oegerli: It is important to consider that changes
in market demand drive the business model
transformation and not vice versa. Until the pric-
ing structure for specials and large, price sensi-
tive general collateral(GC) trades is fully trans-
parent (ie, does not just consider supply and
demand, but also takes into account the detailed
collateral quality and the overall relationship
between lenders and borrowers), electronic trad-
ing will cover mainly smaller shorter-term, GC
tickets.
Glicher: The reason is behavioural. Securities
lending is one of the last areas of financial serv-
ices to automate. The automation first initiated
in the post trade environment then worked its
way towards trading GC. Now it’s starting to find
its way to warm or hot stocks. Attitudes need to
change, however. Securities lending is a relation-
ship-oriented business, but people will have to
find ways to maintain relationships while
automating technology is integrated.
Poikonen: Electronic platforms have certainly
created significant efficiencies and increased the
level of automation for many participants in the
securities lending marketplace. The use of these
systems has enabled firms to increase their distri-
bution, increase their volumes, and reduce their
costs. However, the majority of the value-add to
date has been realised post-trade. Despite recent
developments on the pre-trade side, electronic
methods of negotiation have only realized a mod-
est uptake by the majority of industry partici-
pants. Given the increased focus on best execu-
tion and transparency, we expect this to change
and see a more rapid progression towards screen
based trading.
Gonzalez: SLB is backward in terms of its trad-
ing technology. There are several reasons why
this is the case. There is a lack of standardisation
in SLB – there are thousands of different issues,
which can trade in unique ways. This requires a
degree of human intervention that is far greater
than in many other markets. Change is not
always embraced. It is often perceived that the
efficiencies brought about by electronic trading
come at a human cost, especially in terms of
jobs, and it is natural that if a market is seeming-
ly functioning well, its participants will naturally
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 49
SECURITIES LENDING MARKET GUIDE
question why it needs to be changed. However,
there really is no doubt that more efficient pro-
cessing right along the deal chain is something
that most SLB players want to see and there is a
growing acceptance that electronic trading solu-
tions offer the best way of achieving this.
Downey Electronic trading solves the time and
space dislocation between buyers and sellers.
Prior to the technology being available buyers
and sellers had to go through intermediaries for
access to the exchange floors so that another
group of intermediaries could match the two
sides and of course take a profit from that activi-
ty. Securities lending markets are very similar
except that there is no centralized floor to auto-
mate, instead it is a complicated arrangement
between a relatively few firms who find the
activity profitable.
In order for the process to change it would take
a liquid, centralised and transparent marketplace,
where the beneficial owners and the hedge funds
could trade with each other. Single Stock
Futures at OneChicago offer such a market, in
that short delta seeking hedge funds can transact
with revenue seeking beneficial owners without
taking any counterparty risk as all trades clear
through the AAA rated Options Clearing
Corporation(OCC). Both sides would benefit as
hedge funds would get the delta at a lower cost
and the beneficial owners would receive greater
returns on their lent assets. But the middlemen
who currently controls this process will be slow
to embrace this.
2. What are the benefits of embrace trading
technology and what are the risks?
Oegerli: There is a potential reduction in unit
cost on the trading side if the relevant trading
platform is fully integrated into its internal pre-
trade and post-trade processes. However, every
firm needs to conduct its own business case
analysis comparing the potential unit cost reduc-
tion with the possible investment cost of integrat-
ing the platform. They will also need to consider
the possible indirect opportunity cost on the trad-
ing side.
Glicher: The benefits of straight-through pro-
cessing and integration into proprietary systems
is the mitigation of risk and increased efficiency
of trade life-cycles.The most largely perceived
risk is that people will feel that they will lose
control over their inventory – this is a miscon-
ception because it is possible to build con-
 TECHNOLOGY PANEL DEBATE
straints/restrictions/logic to simulate these rela-
tionships.
Poikonen: From a pure volume perspective, trad-
ing technology has increased efficiency of pro-
cessing and has reduced operational risk and
costs.
Gonzalez: The main benefit that electronic trad-
ing brings is an overall improvement in efficiency
and an additional source of trading opportunities
with existing and new counterparties. There is
ample evidence of this from all the other markets
that have embraced it. It has to be remembered
that this greater efficiency covers almost all
aspects of what takes place in a market, starting
with price discovery, agreeing trades, through to
processing and then settlement.
Electronic trading generally leads to greater
transparency. Some participants will be wary that
this tends to lead to spread compression, but the
evidence from those other assets where electronic
trading has been embraced is that volumes rise to
such a degree that this potential negative is more
than offset.
The overall benefits, including the potential to
mitigate counterparty and settlement risk, are far
greater than any of the negatives.
Downey: The benefits can be simplty stated -
higher returns for their customers’ assets.
Beneficial owners have a fiduciary responsibility
to maximise returns under acceptable risk param-
eters. Today they lend the assets for a modest
return but cede the majority of the benefit to the
custodians and the prime brokers. They could in
fact participate but realize much higher returns
without taking any counterparty risk and avoid
the administrative hassles associated with stock
lending today. The risk is that they do not do this.
3. Has the recent financial crisis had any
affect on companies’ willingness to invest in
technology?
Oegerli: The recent financial crisis has led to
more complex collateralization and risk measure-
ment rules, which cannot always be supported in
an automated manner by the current system
infrastructure. This may certainly lead to further
investment in technology, mainly focused on data
quality and on the creation of flexible rules for
risk and collateral management functionality.
Glicher: With lay-offs and budget cuts, institu-
tions are more willing to consider investment in
technology. On the other hand, people that have
understood what led to this crisis and know how
to minimize risk in the future. Increased spend
50 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
on technology will lead to systems that provide
greater transparency of the inner workings of a
firm’s books and records. This should provide
the tools for a more comprehensive analysis.
Poikonen: As our business continues to grow, we
remain focused on implementing industry stan-
dard solutions to further increase our operational
efficiencies and scalability, we make significant
investments in technology as part of this. In
January of this year, we added EquiLend to our
list of operational and administrative system
service providers to enable us to communicate
and facilitate operational processing and trade
instructions with other EquiLend participants.
This has enhanced our straight through process-
ing with our borrowing counterparties. In addi-
tion to EquiLend, we incorporate the use of
industry standard tools such as SWIFT, 4Sight,
Loanet, and Pirium.
Gonzalez: There is no definitive answer to this,
but all costs are being very closely scrutinised by
many institutions. There is no single factor that
can be cited as having caused the financial crisis,
but the inability to accurately mark-to-market
was an important element. This has increased the
desire for transparency, even in SLB, which has a
long tradition of trading bilaterally and some-
times being opaque. The financial crisis has
revealed all the problems of credit risk and it has
been well documented that at times the tradition-
al money markets either became extremely tight
or even completely dried up. It is not surprising
that in such an environment secured financing
became a far more attractive proposition. So for
many companies there is now a much clearer
rationale of why they should invest in their trad-
ing technology across the entire deal chain
because they realize that if they penny pinch
now, they are likely to have to spend pounds
later.
Downey: I think the recent crisis has raised the
spectre of counterparty risk to a higher level.
Funds do not want to expose their customer’s to
a situation where they won’t get their assets back,
which is reasonable and justified. On the other
hand they can actually increase their participa-
tion while reducing this counterparty risk with
just a little education on the alternative paths to
market that they use today.
4. Is the ‘hard to borrow’ market ready to be
traded through an automated electronic mar-
ket place?
Oegerli: The market is still not mature enough to

trade the hard to borrow stocks via an electronic
exchange. The distribution of hard to borrow
stocks is still mostly dependent upon the overall
relationship between lenders and borrowers.
Glicher: There are existing services that trade
hot and warm stocks, but this process is not com-
pletely automated. It is a combination of elec-
tronic trading tools and people directing them
(EquiLend service Trade2O)
Poikonen: There is no reason why hard to borrow
securities cannot be successfully negotiated and
confirmed over an electronic trading platform
today as the technology to facilitate these transac-
tions currently exists. That said, one can easily see
why this has been slow on the uptake. Most of the
hard to borrow securities are still negotiated bilat-
erally over the phone or via a Bloomberg terminal
so until the majority of the supply side changes
their trading behaviour and utilizes these new for-
mats the progression will remain slow. Should the
supply side actively embrace electronic trading as
a primary method of distribution, the demand side
will adapt accordingly.
Gonzalez: It is a false argument to say that spe-
cial issues can only be traded on the telephone. If
something is special, it makes sense to advertise
its availability to as many bidders as possible.
Trading it on screen makes this far easier than
ringing around laboriously to try and find the
best bid. Also, once a trade has been agreed, it is
more efficient to process it if it has been done
electronically. It is not envisaged that Europe is
going to have a single Central Securities
Depository(CSD) in the near future, so trading
on a market place which has the technology to
link all of the major custodians is a very attrac-
tive business proposition. This facility enables
users of Eurex SecLend to manage and utilise
their collateral far more efficiently.
Downey: Hard to borrow markets are a bit tricky
and represent the bulk of the profits generated by
securities lending. The beneficial owners may not
even be aware of the mark-ups that are being
charged to the hedge funds when the prime bro-
kers allocate the lent asset. If the beneficial
owners knew what types of returns are being
generated they would be motivated to do the
trade themselves and reap more of the profits.
Since the trading of single stock futures (SSF) do
not represent counterparty risk exposure they
may even be willing to expand the percentage of
their portfolio they are willing to lend, which is
all good for the marketplace.
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 51
SECURITIES LENDING MARKET GUIDE
5. With the vast number of solutions and sys-
tems out there, do you think we will see much
consolidation with some of systems disappear-
ing within the next twelve months?
Oegerli: I presume that market service providers
and vendors have medium to long-term business
plans. Therefore I do not anticipate consolida-
tions within the next 12 months. That said, the
consolidation process for the electronic
exchanges may start within the next three to five
years. There will be a “survival of the fittest” test
whereby the platforms, which can attract the
most liquidity in their market niche, will have an
important market impact and others will disap-
pear over time.
Glicher I would challenge this question in that
there are not a “vast” number of solutions out
there.
Poikonen Competition is good for any industry.
It forces firms to consistently improve their prod-
uct and service offerings, and to continually
innovate. There is certainly room for multiple
technology platforms to exist and thrive within
the securities lending marketplace. In many
cases the various systems can be seen as comple-
mentary and used interchangeably, they provide
clear and relevant advantages to users. It is diffi-
cult to speculate on whether further consolidation
will occur in this space. Also, from a long-term
perspective, consolidation in this space is not
necessarily in the best interests of the greater
community.
Gonzalez The SLB ‘pie’ is big enough to provide
a decent meal for lots of different providers.
Ultimately, the SLB market will determine how
many marketplaces it wants to support. The mar-
ket has not yet reached the stage where it is like-
ly to see consolidation. In fact, the existing chal-
lenges that exist probably make it more likely
that new platforms will emerge to try and pro-
vide some of the solutions that Eurex SecLend is
already offering.
Downey Competition is always good but none of
the systems out there today address the issue of
transparency for the entire marketplace or the
issue of counterparty exposure. As seen in the
Bear Stearns melt down, there is no safe haven
when your counterparty is a single point of fail-
ure. A centralised clearing organisation such as
the OCC is the answer to the problem.
6. Is MiFID best execution changing market
behaviour?
Oegerli: Although this may not occur “formally”
 TECHNOLOGY PANEL DEBATE
MiFID will certainly increase the awareness of
lending fees and split arrangements between
lending intermediaries and beneficial owners.
Glicher: The focus of MiFID is to provide
increased transparency, which in turn will change
market behaviour.
Poikonen: Regulation has increased the demand
for transparency, which has accelerated the trend
of unbundling and use of multiple routes to mar-
ket. While securities lending transactions have
been excluded from Europe’s MiFID trade and
transaction reporting requirements, there remains
continued uncertainty as to whether MiFID’s best
execution requirements will or can be applied to
securities lending activity. We believe an auction
is a well-positioned response since it enables
lenders to optimise performance for every portfo-
lio or asset class through an objective process.
Auction results for each lender’s program form
the objective basis for how lending activity is
best allocated and awarded to approved borrow-
ers. Award decisions are well documented and
easily explained to management, boards, regula-
tors and auditors alike.
Gonzalez: MiFID does not cover SLB at the
moment. However, most financial institutions
tend to work on the basis that they need to be
able to demonstrate best execution to their
clients. The reality is that it is easier to do this in
an electronic trading environment. Every aspect
of a trade can be time stamped, from the point of
order submission through to execution and then
settlement. Electronic trading makes it easier to
conduct pre- and post trade transaction analysis.
Buy-side firms are increasingly monitoring all of
their trading costs and their sell-side counterpar-
ties have to be willing to help them analyse them
in all markets, including SLB. So a MiFID-like
environment is developing in SLB, even if it is
not compulsory.
7. Where do you see the market going within
the next five years and what are your predic-
tions for the future?
Oegerli: The demand for securities lending will
increase further mainly based on the growth of
the alternative investment industry and the emer-
gence of new securities lending markets in Asia,
Eastern Europe and Latin America. On the other
hand, because of the ongoing commoditisation,
the business will be managed increasingly via a
more sophisticated approach to the management
of risk and capital, post-trade process improve-
ment and cost efficiency, including distribution
52 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
costs.
Glicher: There will be more willingness to use
automated trading tools. Potentially there will be
a move towards an exchange or utility model.
There will be increased automation, particularly
in trading.
Poikonen: The number of market participants
continues to grow globally as more non-tradition-
al borrowers and lenders are entering the market.
This growth has been largely driven by the
increase in the size and number of hedge funds,
asset managers, and 130/30 funds, the increased
focus on emerging markets and their economies,
and the emergence of sovereign wealth funds as
more dominant players in the global financial
markets. As a result, the market should expect to
see new lending and borrowing opportunities,
increased volumes, and new sources of supply
and demand.
Gonzalez: The efficient use of collateral is
already recognised as a potential business differ-
entiator. Increasingly though, this has to be
looked at from a global perspective. Global trade
is increasing and the way that financing and liq-
uidity management is conducted will change to
reflect this, which will inevitably lead to an
increase in electronic trading. As this occurs,
spreads will tighten and margins will decrease.
SLB participants will look to offset their fixed
costs by increasing their volumes and overall
efficiency. The use of a central counterparty will
emerge, because not only does it remove counter-
party risk but it also facilitates straight through
processing. Electronic trading will never fully
replace personal communication in SLB, but it
will grow and eventually account for approxi-
mately a third of activity.
Downey: The cost of securities lending in terms
of the fees that hedge funds pay and the returns
that the beneficial owners are forgoing will bring
about change. Once the buyer and the seller
realise that they can meet directly without
accepting each other’s credit risk, the volume will
move and both sides will benefit. The beneficial
owners must move securities lending out of the
operations sphere and into the investment
managers’ field of responsibility. One of the
beneficial owners will catch-on and their returns
will differentiate them from their peers. At that
point the transition will accelerate, as they will
see that they can increase their yields
substantially, without lowering risk.
SLMG
“ Securities Lending is an
essential utility that satisfies
a myriad of investor and
internal demands; deploying
the most effective technology
for our business is essential “

Chris Donald,
Global Prime Finance, Japan,
Deutsche Securities Inc

SECURITIES FINANCE

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 GUIDE SECURITIES LENDING
SECURITIES LENDING GUIDE
A guide to the essentials of the securities lending market
Securities lending began as an informal practice
among brokers who had insufficient share certifi-
cates to settle their sold bargains, commonly because
their selling clients had mislaid their certificates or
just not provided them to the broker by the settle-
ment date of the transaction. Once the broker had
received the certificates, they would be passed on to
the lending broker. This business arrangement was
subject to no formal agreement and there was no
exchange of collateral.
Securities lending is now a significant business
that describes the market practice whereby securities
are temporarily transferred by one party (lender) to
another (borrower). The borrower is obliged to
return the securities to the lender, either on demand,
or at the end of any agreed term. For the period of
the loan the lender is secured by acceptable assets
delivered by the borrower to the lender as collateral.
Under English law, absolute title to the securities
“lent” passes to the “borrower”, who is obliged to
return “equivalent securities.” Similarly the lender
receives absolute title to the assets received as collat-
eral from the borrower, and is obliged to return
“equivalent collateral.”
Definitions
Transactions are collateralised and the “rental fee”
charged, along with all other aspects of the transac-
tion, are dealt with under the terms agreed between
the parties. It is entirely possible and very common-
place that securities are borrowed and then sold or
on-lent.
There are some consequences arising from this
clarification:
- Absolute title over both the securities on loan and
the collateral received passes between the parties.
- The economic benefits associated with ownership,
for example, dividends, coupons etc are “manufac-
tured” back to the lender, meaning that the borrower
is entitled to these benefits as owner of the securities
but is under a contractual obligation to make equiv-
alent payments to the lender.
- A lender of equities surrenders its rights of owner-
ship, for example, voting. Should the lender wish to
vote on securities on loan, it has the contractual right
to recall equivalent securities from the borrower.
- In the United Kingdom appropriately documented
securities lending transactions avoid stamp duty cap-
ital gains tax.
Different types of securities loan transaction:
Most securities loans in today’s markets are made
against collateral in order to protect the lender
54 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
against the possible default of the borrower. This col-
lateral can be cash, or other securities or other assets.
(a) Transactions collateralised with other
securities or assets
Non-cash collateral would typically be drawn from
the following collateral types:
* government bonds - Issued by G7, G10 or Non-
G7 governments
* corporate bonds - Various credit ratings
* convertible bonds - Matched or unmatched to the
securities being lent
* equities - Of specified Indices
* letters of credit - From banks of a specified cred-
it quality
* certificates of deposit - drawn on institutions of
a specified credit quality
* delivery by value (DBV)1 - concentrated or
unconcentrated - of a certain asset class
* warrants - matched or unmatched to the securi-
ties being lent
* other money market instruments
The eligible collateral will be agreed between the
parties, as will other key factors including:
* Notional Limits - The absolute value of any asset
to be accepted as collateral
* Initial margin - The margin required at the outset
of a transaction
* Maintenance margin - The minimum margin
level to be maintained throughout the transaction
* Concentration limits - The maximum percentage
of any issue to be acceptable, for example less than
5% of daily traded volume - The maximum per-
centage of collateral pool that can be taken against
the same issuer, ie, the cumulative effect where
collateral in the form of letters of credit, CD, equi-
ty, bond and convertible may be issued by the same
firm
The example in the diagram (top left) shows collat-
eral being held by a tri-party agent. This specialist
agent (typically a large custodian bank or interna-
tional central securities depository) will receive only
eligible collateral from the borrower and hold it in a
segregated account to the order of the lender. The tri-
party agent will mark this collateral to market, with
information distributed to both lender and borrower
(in the diagram, dotted “reporting” lines). Typically
the borrower pays a fee to the tri-party agent.
There is debate within the industry as to whether
lenders that are flexible in the range of non-cash col-
lateral they are willing to receive are rewarded with

TRANSACTIONS COLLATERALISED WITH OTHER
SECURITIES OR ASSETS
Borrower
Lender
Reporting
Reporting Collateral
Tri Party
Loan Commences Agent
Lender Borrower
Collateral
Tri Party
Agent
Loan Terminates
correspondingly higher fees. Some argue that they
are, others claim that the fees remain largely static
but that borrowers are more prepared to deal with a
flexible lender and therefore balances and overall
revenue rise.
(b) Transactions collateralised with cash
Cash collateral is, and has been for many years, an
integral part of the securities lending business, par-
ticularly in the United States. The lines between two
distinct activities.
Securities lending and cash reinvestment have
become blurred and to many US investment institu-
tions securities lending is virtually synonymous with
cash reinvestment. This is much less the case outside
the United States but consolidation of the custody
business and the important role of US custodian
banks in the market means that this practice is
becoming more prevalent. The importance of this
point lies in the very different risk profiles of these
increasingly intertwined activities.
The revenue generated from cash-collateralised
securities lending transactions is derived in a differ-
ent manner from that in a non-cash transaction. It is
made from the difference or “spread” between inter-
est rates that are paid and received by the lender.
Other transaction types
Securities lending is part of a larger set of interlinked
securities financing markets. These transactions are
often used as alternative ways of achieving similar
economic outcomes, although the legal form and
accounting and tax treatments can differ. The other
transactions include:
(a) Sale and repurchase agreements
Sale and repurchase agreements or repos involve
one party agreeing to sell securities to another
against a transfer of cash, with a simultaneous agree-
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 55
SECURITIES LENDING MARKET GUIDE
ment to repurchase the same securities (or equivalent
securities) at a specific price on an agreed date in the
future. It is common for the terms ”seller” and
“buyer” to replace the securities lending terms
“lender” and ”borrower”. Most repos are governed
by a master agreement called the TBMA/ISMA
Global Master Repurchase Agreement (GMRA)2.
Repos occur for two principal reasons – either to
transfer ownership of a particular security between
the parties or to facilitate collateralised cash loans or
funding transactions.
The bulk of bond lending and bond financing is
conducted by repo and there is a growing equity repo
market. An annex can be added to the GMRA to
facilitate the conduct of equity repo transactions.
Repos are much like securities loans collateralised
against cash, in that income is factored into an inter-
est rate that is implicit in the pricing of the two legs
of the transaction.
At the beginning of a transaction, securities are val-
ued and sold at the prevailing “dirty” market price
(including any coupon that has accrued). At termina-
tion, the securities are resold at a predetermined
price equal to the original sale price together with
interest at a previously agreed rate (the repo rate).
In securities-driven transactions (where the motiva-
tion is not simply financing) the repo rate is typical-
ly set at a lower rate than prevailing money market
rates to reward the “lender” who will invest the funds
in the money markets and thereby seek a return. The
“lender” often receives a margin by pricing the secu-
rities above their market level.
In cash-driven transactions, the repurchase price will
typically be agreed at a level close to current money
market yields, as this is a financing rather than a
security specific transaction. The right to substitute
repoed securities as collateral is agreed by the parties
at the outset. A margin is often provided to the cash
“lender” by reducing the value of the transferred
securities by an agreed “haircut” or discount.
(b) Buy/sell backs
Buy/sell backs are similar in economic terms to
repos but are structured as a sale and simultaneous
purchase of securities, with the purchase agreed for
a future settlement date. The price of the forward
purchase is typically calculated and agreed by refer-
ence to market repo rates.
The purchaser of the securities receives absolute
title to them and retains any accrued interest and
coupon payments during the life of the transaction.
However, the price of the forward contract takes
account of any coupons received by the purchaser.
Lenders and intermediaries
The securities lending market involves various types
of specialist intermediary which take principal
and/or agency roles. These intermediaries separate
the underlying owners of securities – typically large
pension or other funds, and insurance companies –
 GUIDE SECURITIES LENDING
from the eventual borrowers of securities
1. Agent intermediaries
Securities lending is increasingly becoming a vol-
ume business and the economies of scale offered by
agents that pool together the securities of different
clients enable smaller owners of assets to participate
in the market. The cost of running an efficient secu-
rities lending operation are beyond many smaller
funds for which this is a peripheral activity.
Owners and agents “split” revenues from securities
lending at commercial rates. The split will be deter-
mined by many factors including the service level
and provision by the agent of any risk mitigation,
such as an indemnity.
(a) Asset managers
It can be argued that securities lending is an asset
management activity – a point that is easily under-
stood in considering the reinvestment of cash collat-
eral. Particularly in Europe, where custodian banks
were perhaps slower to take up the opportunity to
lend than in the United States, many asset managers
run significant securities lending operations.
What was once a back office low profile activity is
now a front office growth area for many asset man-
agers. The relationship that the asset managers have
with their underlying clients puts them in a strong
position to participate.
(b) Custodian banks
The history of securities lending is inextricably
linked with the custodian banks. Once they recog-
nised the potential to act as agent intermediaries and
began marketing the service to their customers, they
were able to mobilise large pools of securities that
were available for lending. This spurred the growth
of the market.
Most large custodians have added securities lend-
ing to their core custody businesses. Their advan-
tages include: the existing banking relationship with
their customers; their investment in technology and
global coverage of markets, arising from their cus-
tody businesses; the ability to pool assets from many
smaller underlying funds, insulating borrowers from
the administrative inconvenience of dealing with
many small funds and providing borrowers with pro-
tection from recalls; and experience in developing as
well as developed markets.
Banks also have the capability to provide indemni-
ties and manage cash collateral efficiently – two crit-
ical factors for many underlying clients. The custodi-
ans can also provide a range of additional services,
including foreign exchange, trade execution, securi-
ties lending and fund accounting.
(c) Third-party agents
Advances in technology and operational efficiency
have made it possible to separate the administration
of securities lending from the provision of basic cus-
56 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
tody services, and a number of specialist third-party
agency lenders have established themselves as an
alternative to the custodian banks.
Their market share is growing from a relatively
small base. Their focus on securities lending and
their ability to deploy new technology without refer-
ence to legacy systems can give them flexibility.
2. Principal intermediaries
There are three broad categories of principal inter-
mediary: broker dealers, specialist intermediaries
and prime brokers
In contrast to the agent intermediaries, they can
assume principal risk, offer credit intermediation and
take positions in the securities that they borrow.
Distinctions between the three categories are blurred.
Many firms would be in all three.
In recent years, securities lending markets have
been liberalised to a significant extent so that there is
little general restriction on who can borrow and who
can lend securities. Lending can, in principle, take
place directly between beneficial owners and the
eventual borrowers. But typically a number of layers
of intermediary are involved.
The added value of intermediaries
A beneficial owner may be an insurance company or
a pension scheme while the borrower could be a
hedge fund. Institutions are often reluctant to take on
credit exposures to borrowers that are not well recog-
nised, regulated, or who do not have a good credit
rating, which would exclude most hedge funds.
In these circumstances, the principal intermediary
(often acting as prime broker) performs a credit
intermediation service in taking a principal position
between the lending institution and the hedge fund.
Intermediaries also take on liquidity risk. Typically
they will borrow from institutions on an open basis –
with the option to recall the underlying securities if
they want to sell them or for other reasons – while
lending to clients on a term basis, giving them cer-
tainty they will be able to cover their short positions.
In many cases, as well as serving the needs of their
own propriety traders, principal intermediaries pro-
vide a service to the market in matching the supply
of beneficial owners that have large stable portfolios
with those that have a high borrowing requirement.
They also distribute securities to a wider range of
borrowers than underlying lenders, which may not
have the resources to deal with a large number of
counterparts.
These activities leave principal intermediaries
exposed to liquidity risk if lenders recall securities
that have been on lent to borrowers on a term basis.
One way to mitigate this risk is to use in-house
inventory where available. For example, proprietary
trading positions can be a stable source of lending
supply if the long position is associated with a long-
term derivatives transaction.
Efficient inventory management is seen as critical
and many securities lending desks act as central

clearers of inventory within their organisations, only
borrowing externally when netting of in-house posi-
tions is complete.
This can require a significant technological invest-
ment. Other ways of mitigating ‘recall risk’ include
arrangements to borrow securities from affiliated
investment management firms, where regulations
permit, and bidding for exclusive (and certain)
access to securities from other lenders.
On the demand side, intermediaries have historical-
ly been dependent upon hedge funds or proprietary
traders that make trading decisions. But a growing
number of securities lending businesses within
investment banks have either developed “trading”
capabilities within their lending or financing depart-
ments, or entered into joint ventures with other
departments or even in some cases their hedge fund
customers. The rationale behind this trend is that the
financing component of certain trading strategies is
so significant that without the loan there is no trade.
(a) Broker dealers
Broker dealers borrow securities for different rea-
sons, including market makingand to support propri-
etary trading on behalf of clients
Many broker dealers combine their securities lend-
ing activities with their prime brokerage operation
(the business of servicing the broad requirements of
hedge funds and other alternative investment man-
agers). This can bring significant efficiency and cost
benefits. Typically within broker dealers the fixed
income and equity divisions duplicate their lending
and financing activities.
(b) Specialist intermediaries
Historically, regulatory controls on participation in
stock lending markets meant that globally there were
many intermediaries. Some specialised in intermedi-
ating between stock lenders and market makers in
particular, e.g. UK Stock Exchange Money Brokers
(SEMB). With the deregulation of stock lending
markets, these niches have almost all disappeared.
(c) Prime brokers
Prime brokers serve the needs of hedge funds and
other ‘alternative’ investment managers. The busi-
ness was once viewed, simply, as the provision of six
distinct services, although many others such as cap-
ital introduction, risk management, fund accounting
and start up assistance have now been added:
Services provided by prime brokers
Securities lending is one of the central components
of a successful prime brokerage operation, with its
scale depending on the strategies of the hedge funds
for which the prime broker acts. Two strategies that
are heavily reliant on securities borrowing are
long/short equity and convertible bond arbitrage.
The cost associated with the establishment of a full
service prime broker is steep, and recognised
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 57
SECURITIES LENDING MARKET GUIDE
providers have a significant advantage. Some of the
newer entrants have been using total return swaps,
contracts for difference and other derivative transac-
tion types to offer what has become known as “syn-
thetic prime brokerage”.
Beneficial owners
Those beneficial owners with portfolios of sufficient
size to make securities lending worthwhile include
pension funds, insurance and assurance companies,
mutual funds/unit trusts and endowments.
When considering whether and how to lend secu-
rities, beneficial owners need first to consider the
characteristics of their organisations and portfolio.
1. Organisation characteristics
(a) Management motivation
Some owners lend securities solely to offset custody
and administrative costs. Others are seeking more
significant revenue.
(b) Technology investment. Lenders vary in their
willingness to invest in technological infrastructure
to support securities lending.
(c) Credit risk appetite. The securities lending mar-
ket consists of organisations with a wide range of
credit quality and collateral capabilities.
A cautious approach to counterpart selection
(AAA only) and restrictive collateral guidelines (G7
Bonds) will limit lending volumes.
2. Portfolio characteristics
(a) Size. Other things being equal, borrowers prefer
large portfolios.
(b) Holdings size. Loan transactions generally
exceed USD250,000. Lesser holdings are of limited
appeal to direct borrowers. Holdings of under
USD250,000 are probably best deployed through an
agency programme, where they can be pooled with
other inventories.
(c) Investment strategy. Active investment strategies
increase the likelihood of recalls.
(d) Diversification. Borrowers want portfolios where
they need liquidity. A global portfolio offers the
greatest chance of generating a fit, although there are
markets that are particularly in demand from time to
time and there are certain borrowers that have a geo-
graphic or asset class focus.
(e) Tax jurisdiction and position. Borrowers are
responsible for "making good" any benefits of share
ownership (excluding voting rights) as if the securi-
ties had not been lent. They must pay the economic
value of dividends to the lender. An institution's tax
position compared to that of other possible lenders is
therefore an important consideration.
 GUIDE SECURITIES LENDING
(f) Inventory attractiveness
‘Hot’ securities are those in high demand while gen-
eral collateral or general collateral securities are
those that are commonly available. The ‘hotter’ the
portfolio, the higher the returns to lending.
Having examined the organisation and portfolio
characteristics of the beneficial owner, we must now
consider the various possible routes to market.
The possible routes to the securities lending market:
(a) Using an asset manager as agent. A beneficial
owner may find the asset manager they have chosen
already operates a securities lending programme.
(b) Using a custodian as agent. This is the least
demanding option for a beneficial owner.
(c) Appointing a third party specialist as agent.
(d) Auctioning a portfolio to borrowers.
e) Selecting one principal borrower. Many borrowers
effectively act as wholesale intermediaries using
their expertise and capital to generate spreads
between two principals that remain unknown to one
another. These principal intermediaries are some-
times separately incorporated organisations, but
more frequently, parts of larger banks, broker-dealers
or investment banking groups. Acting as principal
allows them to deal with organisations that the typi-
cal beneficial owner may choose to avoid for credit
reasons; for example, hedge funds.
(f) Lending directly to proprietary principals. A ben-
eficial owner that is large enough in its own right,
may wish to explore the possibility of establishing a
business “in house”, lending directly to a selection of
principal borrowers that are the end-users of their
securities. The proprietary borrowers include broker-
dealers, market makers and hedge funds.
(g) A combination of the above. Deciding not to lend
one portfolio does not preclude lending to another;
similarly, lending in one country does not necessitate
lending in all. Choosing a wholesale intermediary
that happens to be a custodian in the US and Canada
does not mean that a lender cannot lend Asian assets
through a third-party specialist, and European assets
directly to a panel of proprietary borrowers.
The borrowing motivation
If securities were not issued, they could not be lent.
When Initial Public Offerings are frequent and cor-
porate merger and acquisition activity is high, the
securities lending business benefits. At the begin-
ning of this decade the fall in the level of such activ-
ity depressed the demand to borrow securities lead-
ing to a depressed equity securities lending market
and issuer concern about securities lending.
58 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
There is a lot more information on the long side of
the market than the short side. Securities lending
activity is not synonymous with short selling. But it
is often, although not always, used to finance short
sales (see below) and might be a reasonable and
practical proxy for the scale of short selling activity
in the absence of full short sale disclosure. It is there-
fore natural that issuers would want to understand
how and why their securities are traded.
Reasons to borrow
Borrowers, when acting as principals, have no obli-
gation to tell lenders or their agents why they are bor-
rowing securities. In fact they may well not know
themselves as they may be on- lending the securities
to proprietary traders or hedge funds that do not
share their trading strategies openly. Some prime
brokers are deliberately vague when borrowing secu-
rities as they wish to protect their underlying hedge
fund customer’s trading strategy and motivation.
Borrowing to cover short positions
(a) Settlement coverage
Historically, settlement coverage has played a signif-
icant part in the development of the securities lend-
ing market. Going back a decade or so, most securi-
ties lending businesses were located in the back
offices of their organisations and were not properly
recognised as businesses in their own right, particu-
larly for less liquid securities such as corporate
bonds and equities with a limit free float.
(b) Naked shorting
Naked shorting is borrowing securities in order to
sell them in the expectation that they can be bought
back at a lower price and returned to the lender.
Naked shorting is a directional strategy, speculating
that prices will fall, rather than a part of a wider trad-
ing strategy, usually involving a corresponding long
position in a related security.
Naked shorting is a high risk strategy. Although
some funds specialise in taking short positions in the
shares of companies they judge to be overvalued, the
number of funds relying on naked shorting is rela-
tively small and probably declining.
(c) Market making.
Market makers play a central role in the provision of
two-way price liquidity in many securities markets
around the world. They need to be able to borrow
securities in order to settle buy orders from customer-
s and to make tight, two-way prices.
Making markets in illiquid small capitalisation
securities is sometimes hampered by a lack of access
to borrowing, and some of the specialists in these
less liquid securities have special arrangements to
enable them to gain access to securities, such as
guaranteed exclusive bids with lenders.
Borrowing is typically short term for an unknown

period of time. The need to know that a loan is avail-
able tends to mean that the level of communication
between market makers and the securities lending
business has to be highly automated. A market maker
that goes short and then finds there is no loan avail-
able would have to buy that security back to flatten
its book.
(d) Arbitrage trading
Securities are often borrowed to cover a short posi-
tion in one security that has been taken to hedge a
long position in another.
(i) Convertible bond arbitrage
Convertible bond arbitrage involves buying a con-
vertible bond and simultaneously selling the underly-
ing equity short and borrowing the shares to cover
the short position.
(ii) Pairs trading or relative value “arbitrage”
This is an investment strategy that seeks to identify
two companies with similar characteristics whose
equity securities are trading at a price relationship
that is out of line with their historical trading range.
The strategy entails buying the apparently under-
valued security while selling the apparently overval-
ued security short, borrowing the latter security to
cover the short position.
Focusing on securities in the same sector or indus-
try should normally reduce the risks in this strategy.
(iii) Index arbitrage
In this context, arbitrage refers to the simultaneous
purchase and sale of the same commodity or stock in
two different markets in order to profit from price
discrepancies between the markets.
Stock index arbitrage involves buying or selling a
basket of stocks and, conversely, selling or buying
futures when mispricing appears to be taking place.
(2) Financing
As broker dealers build derivative prime brokerage
and customer margin business, they hold an increas-
ing inventory of securities that requires financing.
This type of activity is high volume and is between
two counterparts, eg, one has cash that they would
like to invest on a secured basis and pick up yield,
and the other has inventory that needs to be financed.
(3) Temporary transfers of ownership
(a) Tax arbitrage. Tax driven trading is an example of
securities lending as a means of exchange.
Markets that have historically provided the largest
opportunities for tax arbitrage include those with sig-
nificant tax credits that are not available to all
investors – such as Italy, Germany and France.
The different tax positions of investors around the
world have opened up opportunities for borrowers to
use securities lending transactions, in effect, to
exchange assets temporarily for the mutual benefit of
purchaser, borrower and lender. The lender’s reward
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SECURITIES LENDING MARKET GUIDE
comes in one of two ways: either a higher fee for
lending if they require a lower manufactured divi-
dend, or a higher manufactured dividend than the
post-tax dividend they would normally receive (quot-
ed as an “all-in rate”).
(b) Dividend reinvestment plan arbitrage
Many issuers of securities create an arbitrage oppor-
tunity when they offer shareholders the choice of tak-
ing a dividend or reinvesting in additional securities
at a discounted level.
Income or index tracking funds that cannot deviate
from recognised securities weightings may have to
choose to take the cash option and forgo the oppor-
tunity to take the discounted reinvestment.
One way that they can share in the potential prof-
itability of this opportunity is to lend securities to
borrowers that then take the following action:
1) borrow as many guaranteed cash shares as possi-
ble, as cheaply as possible,
2) the borrowed securities to receive the new dis-
counted share,
3) the new shares to realise the “profit” between the
discounted share price and the market price,
4) the shares and manufacture the cash dividend to
the lender.
Market mechanics
This section outlines the detailed processes in the life
of a securities loan including:
Loan negotiation
Traditionally, securities loans have been negotiated
between counterparts (whose credit departments
have approved one another) on the phone, and fol-
lowed up with written or electronic confirmations.
Normally the borrower initiates the call to the lender
with a borrowing requirement. However, lenders
may also offer out in-demand securities to their
approved counterparts. This would happen particu-
larly where one borrower returns a security and the
lender is still lending it to others: they will contact
them to offer additional securities.
There is an increasing amount of bilateral and mul-
tilateral automated lending whereby securities are
broadcast as available at particular rates by email or
other electronic means. Where lending terms are
agreeable, automatic matching can take place.
An example of an electronic platform for negotiat-
ing equity securities loan transactions is EquiLend,
which began operations in 2002 and is backed by a
consortium of financial institutions. SecFinex offers
similar services in Europe.
Confirmations
Written or electronic confirmations are issued,
whenever possible, on the day of the trade so that any
queries by the other party can be raised as quickly as
possible. Material changes during the life of the
transaction are agreed between the parties as they
occur and may also be confirmed if either party
 GUIDE SECURITIES LENDING
wishes. Collateral adjustments or collateral substitu-
tions are two examples. The parties agree who takes
responsibility for issuing loan confirmations.
Confirmations would normally include contract and
settlement dates, details of loaned securities, identi-
ties of lender and borrower (plus any underlying prin-
cipal), acceptable collateral and margin percentages,
term and rates and bank and settlement account
details of the lender and borrower.
Term of loan, and selling securities while on loan
Loans may either be for a specified term or open.
Open loans are trades with no fixed maturity date. It
is more usual for securities loans to be open or “at
call”, especially for equities, because lenders typical-
ly wish to preserve the flexibility for fund managers
to be able to sell at any time. Lenders are able to sell
securities despite their being on open loan because
they can usually be recalled within the settlement
period of the market concerned. Nevertheless open
loans can remain on loan for a long period.
Term trades – fixed or indicative?
“Term trade” is used to describe differing arrange-
ments in the securities lending market. The parties
have to agree whether the term of a loan is “fixed”
for a definite period or merely “indicative” and
therefore the securities are callable. If fixed, the
lender is not obliged to accept the earlier return of
the securities; nor does the borrower need to return
the securities early if the lender requests it. Securities
on a fixed loan should not be sold while on loan.
Where the term discussed is intended to be “indica-
tive”, it usually means that the borrower has a long
term need for the securities but the lender is unable
to fix for term and retains the right to recall the secu-
rities if necessary.
Putting securities on hold (“icing”)
Putting securities “on hold” is where the lender will
reserve securities at the request of a borrower on the
borrower’s expected need to borrow those securities
at a future date. This occurs where the borrower must
be sure that the securities will be available before
committing to a trade that will require them.
While some details can be agreed between the par-
ties, it is normal for any price quoted to be purely
indicative, and for securities to be held to the follow-
ing business day. The lender does not receive a fee
for reserving the securities and they are generally
open to challenge by another borrower making a
firm bid. In this case the first borrower would have
30 minutes to decide whether to take the securities at
that time or to release them.
“Pay-to-hold” arrangements
“Pay-to-hold” is where the lender does receive a fee
for putting the securities on hold. As such, they con-
stitute a contractual agreement and are not open to
challenge by other borrowers.
60 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
How are loans settled?
Securities lenders need to settle transactions on a
shorter timeframe than the customary settlement
period for that market. Settlement will normally be
through the lender’s custodian bank and this is likely
to apply irrespective of whether the lender is con-
ducting the operation or delegating to an agent. The
lender will usually have agreed a schedule of guaran-
teed settlement times for its securities lending activ-
ity with its custodians. Prompt settlement informa-
tion is crucial to monitoring a lending programme.
In most settlement systems securities loans are set-
tled as ‘free-of-payment’ deliveries and the collater-
al is taken quite separately, possibly in a different
payment or settlement system and maybe a different
country and time zone. This can give rise to “day-
light exposure”, a period during which the loan is not
covered as the lent securities have been delivered but
the collateral securities have not yet been received.
To avoid this exposure some lenders insist on pre-
collateralisation.
Termination of the loan
Open loans may be terminated by the borrower
returning securities or by the lender recalling them.
The borrower will normally return borrowed securi-
ties when it has filled its short position. A borrower
will sometimes refinance its loan positions by bor-
rowing more cheaply elsewhere and returning secu-
rities to the original lender.
Redelivery, failed trades and legal remedies
Securities lenders must consider how certain they
can be of having their securities returned on time
when called, and what remedies there are under the
legal agreement in the event of a failed return.
Procedures to be followed in the event of a failed
redelivery are usually covered in legal agreements or
otherwise agreed between the parties at the outset of
the relationship. Financial redress may be available
to the lender if the borrower fails to redeliver loaned
securities or collateral on the intended settlement
date. Costs that would typically be covered include:
Costs reasonably and properly incurred as a result of
the borrower’s failure to meet its sale or delivery
obligations. Total expenses reasonably incurred by
the lender as a result of a “buy-in” (ie, where the
lender is forced to buy securities in the open market
following the borrower’s failure to return them).
Costs that would usually be excluded are those aris-
ing from the transferee’s negligence or wilful default
and any indirect or consequential losses, eg, when
the non-return of loaned securities causes an onward
trade for a larger amount to fail.
Corporate actions and votes
The basic premise underlying securities lending is to
make the lender “whole” for any corporate action

event – such as a dividend, rights or bonus issue – by
putting the borrower under a contractual obligation
to make equivalent payments to the lender, for
instance, by “manufacturing” dividends. However a
shareholder’s right to vote as part owner of a compa-
ny cannot be manufactured. When securities are lent,
legal ownership and the right to vote in shareholder
meetings passes to the borrower, who will often sell
the securities on. Where lenders have the right to
recall securities, they can use this option to restore
their holdings and voting rights. The onus is on the
borrower to find the securities, by borrowing or pur-
chasing them in the market if necessary.
The SLRC’s code of guidance states in section
2.5.4 that lenders should make it clear to clients that
voting rights are transferred. A balance needs to be
struck between the importance of voting and the
benefits derived from lending the securities.
Beneficial owners need to ensure that any agents
they have made responsible for their voting and
stock lending act in a co-ordinated way.
Borrowing securities in order to build up a holding
in a company to influence a shareholder vote is not
necessarily illegal in the United Kingdom. However,
institutional lenders have recently become more
aware of the possibility, and tend not to see it as a
legitimate use of securities borrowing.
UK tax arrangements and LSE reporting by
member firms
London Stock Exchange rules require lending
arrangements in securities on which UK Stamp
Duty/Stamp Duty Reserve Tax (SDRT) is chargeable
to be reported to the Exchange.
This enables firms to bring their borrowing and
lending activity ‘on Exchange’ and to allow them to
be exempt from Stamp Duty/SDRT.
Firms which are not members of the Exchange but
which conduct borrowing and lending through a
member firm are also eligible for relief from stock
lending Stamp Duty/SDRT. On Exchange lending
arrangements are evidenced by regulatory reports
transmitted to the Exchange by close of business
on the day the lending arrangement is agreed.
Transparency in the UK market
CREST provides time-delayed information on the
value of securities financing transactions in the top
350 UK equities.
UK Takeover Panel
If it is proposed that any securities lending should
take place during an offer period for a UK compa-
ny, the Takeover Panel should be consulted to
establish whether any disclosure is required and
whether there are any other consequences.
Risks, regulation and market oversight
Financial risks are primarily managed through the
use of collateral and netting. The market value of
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SECURITIES LENDING MARKET GUIDE
the collateral is typically greater than that of the
lent portfolio. This margin is intended to protect
the lender from loss and reflect the practical costs
of collateral liquidation and repurchase of the lent
portfolio in the event of default. Any profits made
in the repurchase of the lent portfolio are normal-
ly returned to the borrower’s liquidator. Losses are
borne by the lender with recourse to the borrower’s
liquidator along with other creditors.
Risk management with cash collateral
Because of its wide acceptability and ease of man-
agement, cash can be highly appropriate collateral.
However, the lender needs to decide how best to
utilise this form of collateral. A lender taking cash
as collateral pays rebate interest to the securities
borrower, so the cash must be reinvested at a high-
er rate to make any net return on the collateral.
This means the lender needs to decide on an appro-
priate risk-return trade-off. Reinvesting in assets
that carry a higher credit risk (chance of loss in the
event of defaults or a longer maturity in relation to
the likely term of the loan) expect higher returns.
Many of the large securities lending losses over
the years have been associated with reinvestment
of cash collateral.
Typically, lenders delegate reinvestment to their
agents although agents do not usually offer indem-
nities against losses on reinvestment activity.
Taking securities as collateral
Compared with cash collateral, taking other secu-
rities as collateral avoids reinvestment risk. In
addition to the risks of error, systems failure and
fraud always present in any market, problems then
arise on the default of a borrower. In such cases the
lender will seek to sell the collateral securities in
order to raise the funds to replace the lent securi-
ties. Transactions collateralised with securities are
exposed to a number of different risks:
1) Reaction and legal risk. If a lender experiences
delays in either selling the collateral securities or
repurchasing the lent securities, it runs a greater
risk that collateral’s value will fall below that of
the loan in the interim.
2) Mispricing risk. The lender will be exposed if
either collateral securities have been over-valued
or lent securities under-valued because the prices
used to mark-to-market differ from prices that can
actually be traded in the secondary market.
3) Liquidity risk. Illiquid securities are more like-
ly to be realised at a lower price than the valuation
used. Valuation “haircuts” are used to mitigate this
risk (eg, collateral is valued at 98% or 95% of the
current market value). The haircuts might depend
upon the proportion of the total security issue held
in the portfolio; the security’s average daily traded
volume or sometimes the volatility of the security.
 GUIDE SECURITIES LENDING
4) Mismatch risk. If the lent and collateral portfo-
lios were identical, there would be no market risk.
In practice, the lent and collateral portfolios are
often very different. The lender’s risk is that the
market value of the lent securities increases but
that of the collateral securities falls before rebal-
ancing can be effected. Provided the counterpart
has not defaulted, the lender will be able to call for
additional collateral on any adverse collateral/loan
price movements. However, following default, it
will be exposed until it has been able sell the col-
lateral and replace the lent securities.
The size of mismatch risk depends on the expect-
ed co-variance of the value of the collateral and
lent securities. The risk will be greater if the value
of the collateral or the lent securities is more
volatile or if their values do not tend to move
together.
Many agent intermediaries will offer beneficial
owners protection against these risks by agreeing
to return (buy-in) lent securities immediately for
their clients following a fail, taking on the risk that
the value of the collateral on liquidation is lower.
Realistic valuations
The first consideration is whether the valuation
prices are fair. Assuming the portfolios have been
conservatively valued at bid and offer (not mid)
prices, then the lender might require some adjust-
ment (haircut) to reflect concentration and price
volatility of the different assets.
Haircuts might be based on the average daily liq-
uidity for the asset class, its price volatility and the
residual risk on individual securities.
Using the adjusted portfolios, the lender can then
calculate the risk of a collateral shortfall in the event
of the borrower defaulting. Broadly, this will need to
assess the volatility of each asset class, the correla-
tion between them and the residual risk of securities
within them to derive a range of possible scenarios
from which probabilities of loss can be estimated. By
increasing the volatility assumption or reducing the
liquidity assumption, the probability and scale of
expected losses increase.
Netting
Netting is an important part of risk management as
market participants will often have many outstand-
ing trades with a counterpart. If there is a default the
various standard industry master agreements for
securities lending should provide for the parties’ var-
ious obligations under different securities lending
transactions governed by a master agreement to be
accelerated, payments become due at current market
values. So instead of requiring the parties to deliver
securities or collateral on each of their outstanding
transactions gross, their respective obligations are
valued (given a cash value) and the value of the obli-
gations owed by one party are set off against the
62 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
value of the obligations owed by the other, and it is
the net balance that is then due in cash.
UK regulation
Any person who conducts stock borrowing or lend-
ing business in the United Kingdom would general-
ly be carrying on a regulated activity under the terms
of the Financial Services and Markets Act 2000
(Regulated Activities) Order 2001.
The stock borrower or lender would, as an autho-
rised person, be subject to the provisions of the FSA
Handbook, including the Inter-Professional chapter
of the Market Conduct Sourcebook. They would also
need to have regard to the market abuse provisions of
the Financial Services and Markets Act 2000, and
the related Code of Market Conduct issued by the
Financial Services Authority (FSA). The Conduct of
Business Sourcebook requires a beneficial owner’s
consent to carry on stock lending on its account. The
FSA Handbook is relevant to the conduct of the firm
in relation to the FSA’s High Level Standards.
Stock borrowing and lending code
In addition to the essentially prudential standards set
by the FSA, market participants have drawn up a
code, the Stock Borrowing and Lending Code. This
is a code that UK-based participants in the lending
markets of both UK and overseas securities observe
as a matter of good practice.
Securities lending and repo committee
The Stock Borrowing and Lending Code was pro-
duced by the Securities Lending and Repo
Committee (SLRC), that is a UK-based committee
consisting of market practitioners, members of bod-
ies such as CREST, the United Kingdom Debt
Management Office, the Inland Revenue, the
London Clearing House, the London Stock
Exchange and the FSA. It liaises with similar market
bodies and trade organisations covering the repo,
securities and other financial markets, both in
London and internationally.
The SLRC complements the work of the various
market associations, including the International
Securities Lending Association (ISLA). The objec-
tives of ISLA include representing the common
interests of securities lenders and assisting in the
orderly, efficient and competitive development of the
securities lending market. ISLA has helped to pro-
duce standard market agreements, including the
Overseas Securities Lending Agreement (OSLA
1995 version), the Master Equity and Fixed Interest
Securities Lending Agreement (MEFISLA 1999
version) and the Global Master Securities Lending
Agreement (GMSLA May 2000).
Securities lending and corporate governance
Corporate governance has increased in importance
over recent years. It deals with the rights and respon-
sibilities of a company’s management, its board,

shareholders and various stakeholders. Good corpo-
rate governance is therefore essential for companies
that want access to capital and for countries that want
to stimulate private sector investment. The exercising
of a right to vote is the ultimate sanction that a share-
holder has and can be seen as a major step in mean-
ingful engagement with the company.
Avoiding conflict
The legal position
“The word ‘lending’ is in some ways misleading. In
law the transaction is, in fact, an absolute transfer of
title against an undertaking to return equivalent secu-
rities.” This results in some important consequences:
- Absolute title over both lent and collateral securi-
ties passes between parties, meaning that these secu-
rities can be sold outright or “on lent”.
- Once securities have been passed, the new owner
can sell or lend them and vote in the AGMs/EGMs if
they are the holder at the record date.
- The lender of equities no longer owns them and
has no entitlement to vote. But they are still exposed
to price movements on them since the economic
exposure to owning those securities is not passed.
Typically lenders reserve the right to recall equiva-
lent securities from the borrower and must exercise
this option if they wish to vote.
Shares should not be borrowed for voting
As Paul Myners writes in the March 2005 Report to
the Shareholder Voting Working Group, ‘Review of
the Impediments to voting UK shares’: “Borrowing
shares for the purpose of acquiring the vote is inap-
propriate, as it gives a proportion of the vote to the
borrower which has no relation to their economic
stake in the company.”
Collateral held, which can be of equal or greater
value than the shares lent, should also not be voted.
The right to recall
Securities on loan cannot be voted by the lender.
Should they wish to exercise their right to vote, they
need to recall these securities by the pre-determined
time, ie, record date.
But not all votes on lent shares are lost. Some bor-
rowed shares will be delivered into the market to set-
tle sales and end up with buyers. These buyers will
be oblivious that these shares have been borrowed
and will view them as their property and choose to
vote as they see fit.
There may be some loss of votes associated with
collateral positions or positions sitting long in trad-
ing books because shares held as collateral or in trad-
ing books are not normally voted.
The right to recall any security on loan is enshrined
in the legal agreement underpinning this activity and
typically the lender recalling securities must provide
their agent or borrower with “standard settlement
period notice.” At all times it is the owner who deter-
mines what can be done with their securities.
The lenders’ choices
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 63
SECURITIES LENDING MARKET GUIDE
1) Voting (and therefore recalling) securities at every
opportunity. This is quite a rare position to take and
is often only made in a subset of markets that are
very important to the owner.
2)Voting (and therefore recalling) securities only
when the vote is deemed important enough, for
example when a takeover is being considered.
Not voting securities at all
There are still organisations that choose, for their
own reasons, not to vote. This is their decision
although increasing pressure in the UK from the
government and others with regulatory responsi-
bility may well encourage greater voting over time.
Buffers of at least one share in all holdings
To ensure that the beneficial owner or asset man-
ager receives direct advice on voting and all corpo-
rate actions the retention of at least one share in
their account is advisable.
Market practice
The majority of lenders of securities do not recall
securities for voting except for the more con-
tentious votes. Typically a lender of securities
would let their counterparts know their position
regarding corporate governance and propensity to
vote before joining a lending programme.
The scale of securities lending does not typically
exceed the voluntary disenfranchisement one sees
at typical AGMs. In other words more investors
choose not to vote (for whatever reason) than
choose to lend (and not recall).
Possible solutions
1) Transparency. All stakeholders should under-
stand the established legal framework underpin-
ning the lending arrangement, that securities must
be recalled to vote and the exact notice required to
recall the shares to vote.
2) Consistency. A clear policy is required so that
the inherent conflict between the securities lending
income forgone and the “value” of recalling to vote
is addressed explicitly.
3) Communication. It is imperative that all stake-
holders have access to all necessary information in
time to make informed decisions.
4) Timing. Given the scale of lending activity
around the dividend record date it is constructive to
maintain the separation of the record date from the
AGM. However, the issuers should ensure that the
necessary documentation regarding the meeting
are distributed prior to the record date.
5) Guidance. It is clear from the SLRC Code of
Guidance and the Myners reports on the subject of
securities lending and voting that the practice of
 GLOSSARY SECURITIES LENDING
Accrued interest: Coupon
interest earned on a bond
from the last coupon date to
the present date.
All-in dividend: The sum of
the manufactured dividend
plus the fee owed by the
borrower to the lender,
expressed as a percentage
of the dividend on the
loaned stock.
Bearer securities:
Securities that are not regis-
tered to anyone on the
books of the issuing compa-
ny and hence are payable to
the party that is in posses-
sion.
Beneficial owner: A party
entitled to the rights of own-
ership of property. In securi-
ties, the term is usually used
to distinguish this party from
the registered holder of the
securities.
Buy-in: The practice where-
by a lender enters the open
market to buy securities in
order to replace those that
have not been returned by a
borrower. Strict market prac-
tices govern the buy-in
process.
Carry: The difference
between interest return on
securities held and financing
costs.
Cash trade: Where a pur-
chase or sale of securities is
made for a purpose other
than financing.
Central Securities
Depository (CSD): an
organisation which holds
securities either in certificat-
ed or uncertificated form, to
enable book entry transfer of
securities.
64 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
Close-out (and) netting: An
arrangement to settle all
existing obligations to and
claims on a counterpart
falling under that arrange-
ment by one single net pay-
ment upon a default.
Collateral: Securities or
cash delivered by a borrower
to a lender to support a loan
of securities or cash.
Conduit borrower: A party
that borrows a security in
order to on-deliver it to a
client, rather than borrowing
it for its own in-house needs.
Corporate event: An event
in relation to a security as a
result of which the holder
will be or may become enti-
tled to either a benefit (eg,
dividend) or securities other
than those held prior to that
event.
Coupon date: The date
upon which the issuer of an
interest paying security
makes an interest payment
to the registered holder (as
of the ex-coupon date) of
that security.
Daylight exposure: The
period when one party to a
trade has a temporary credit
exposure to the other due to
one side of the trade having
settled before the other.
Dividend date: The date
upon which the issuer of the
share pays the dividend to
the owner of the security.
Equivalent: The securities or
collateral returned must be
of an identical type, nominal
value, description and
amount to those originally
provided.
Free-of-payment delivery:
Delivery of securities with no
corresponding payment of
funds.
General Collateral (GC):
Securities that are not "spe-
cial" in the market and may
be used, typically, simply to
collateralise cash borrow-
ings.
Global Master Securities
Lending Agreement
(GMSLA): A market stan-
dard legal agreement drafted
with a view to compliance
with English law.
Haircut: Initial margin on a
repo transaction. Generally
expressed as a percentage
of the market price.
Hold in Custody (HIC)
repo: Repo whereby the
borrower of cash segregates
collateral in a specific inter-
nal account for the cash
lender, rather than delivering
out collateral.
Icing/putting stock on
hold: The practice whereby
a lender holds securities at a
borrower's request in antici-
pation of that borrower tak-
ing delivery.
vIndemnity: A form of guar-
antee or insurance, frequent-
ly offered by agents.
ISLA: The International
Securities Lenders
Association.
ISMA: The International
Securities Market
Association.
LIBA: London Investment
Banking Association.
Manufactured dividends:
The borrower of the securi-
ties is generally contractually
obligated to pass on any

cash dividends to the lender.
Margin, initial: The excess
of cash over securities or
securities over cash in a
repo/reverse repo, sell/buy-
buy/sell, or securities lending
transaction. Fixed-income
transaction margins normally
ranges from 1% to 3%.
Margin, variation: Refers to
the band within which the
value of the security used as
collateral may fluctuate
before triggering a margin
call.
Margin call: A request by
one party in a transaction for
the initial margin to be rein-
stated or to restore the origi-
nal cash/securities ratio to
parity.
Mark-to-market: Revaluing
the securities collateral in a
repo or securities lending
transaction to current market
values.
Matched/mismatched
book: The interest rate arbi-
trage book that a repo trader
may run.
Moving average: A statisti-
cal measure that reports the
average of the previous stat-
ed number of day's data in
preference to the actual
value for that day.
Net paying securities:
Securities which interest or
other distributions are paid
net of withholding taxes.
Open transactions: Trades
with no fixed maturity.
Pair off: The netting of cash
and securities in the settle-
ment of two trades in the
same security for the same
value date.
Partialling: Market practice
SECURITIES LENDING MARKET GUIDE
or a specific agreement
between counterparts that
allows a part-delivery
against an obligation to
deliver securities.
Pay for hold: The practice
of paying a fee to the lender
to hold securities for a par-
ticular borrower until the
borrower is able to take
delivery.
Prime brokerage: A service
offered by both bank and
non-bank financial institu-
tions to support customers'
proprietary trading, invest-
ment and hedging activities.
Principal: A party to a loan
transaction that acts on its
own behalf or substitutes its
own risk for that of its client
when trading.
Proprietary trading: A secu-
rities firm trading for its own
account rather than for its
clients.
Proxy voting: delegation to
another member of a voting
body of that member's
power to vote in his
absence.
Rebate rate: The interest
paid on the cash side of a
securities lending transac-
tion. A rebate rate of interest
implies a fee for the loan.
Recall: Request by a lender
for the return of securities.
Repo: A transaction where-
by one party sells securities
to another party and agrees
to repurchase the securities
at a future date at a fixed
price.
Repricing: Occurs when the
market value of a security in
a repo or securities lending
transaction changes and the
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 65
parties agree to adjust the
amount of securities or cash
in a transaction accordingly.
Reverse repo: A transaction
whereby one party purchas-
es securities from another
party and agrees to resell
the securities at a future
date at a fixed price.
Securities lending: The col-
lateralised (usually) borrow-
ing and lending of securities,
allowing large investors (eg,
pension funds) to generate
more income from their
investments.
Short squeeze (bear
squeeze): Where one or
more market participants
reduce liquidity by withhold-
ing “special” (ie, in demand)
securities.
Specials: Securities that for
any of several reasons are
sought after in the market by
borrowers.
Substitution: The ability of a
lender of general collateral to
recall securities from a bor-
rower and replace them with
other securities of the same
value.
Term transactions: Trades
with a fixed maturity.
Third party lending: The
system whereby an institu-
tion lends directly to a bor-
rower and retains decision-
making power, while all
administration is handled by
a third party (eg, custodian).
An edited extract from 'An
Introduction to Securities
Lending' by Mark Faulkner,
prepared with Mr Faulkner's
permission.
© Spitalfields Advisors
 MARKET UPDATE FINTUITION
THE DOWNTURN
& LENDING
TIMEWARP TO THE 1970s. With the
economy expected to slow dramatically
and inflation worse than it has been in
over two decades, we maybe in for a bit
of a time warp back to the days of
polyester shirts, when spiraling inflation
joined forces with economic stagnation -
slow to no growth, combined with rising
unemployment - leading to a stagflation.
Status Quo
Oil and other basic commodities are surging in
price to new heights, with double digit growth
rates. At the same time the growth picture is just
as bleak. Now that consumer power has been
weakened by the credit crunch some economists
are predicting anemic growth for 2008, and a
growing number of experts are even predicting a
recession. Sectors like automotives, airlines or
retail which are sensitive to oil prices, consumer
confidence and – due to high leverage – to inter-
est rates, are facing fresh downgrades by analysts.
How will the future look?
Slowing economic growth and the insatiable need
for liquidity has been triggering the Federal
Reserve’s policy of lowering interest rates but it
seems as if this time is now over. Bernake could
not be in a worse position. The Federal Reserve
now has to fight inflation and at the same time
stabilise the deeply disturbed financial markets,
which means that the liquidity drain will stay and
asset values should face more write-downs at
least until next year.
Custodian banks are the winners
Global custody banks have experienced unprece-
dented growth in their securities lending busi-
nesses in the past year thanks partly to the global
credit crunch. The explosion in revenues can be
put down to the impact of the credit crisis, which
has pushed up collateral reinvestment returns.
This anomaly has not only affected returns but
also inherent risk profiles have changed signifi-
cantly. On top of this, we have learnt from clients
that some banks have earned the best margins by
lending cash internally.
66 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
THE IMPORTANCE OF FINANCIAL
TUITION
FinTuition as a leading provider for securities
related training programs and offers a variety of
courses covering today’s challenges:
Collateral management
Post credit crunch custodians face new chal-
lenges. Is my counterparty engaged in Alt-A or
leveraged loans? Do my assumptions concerning
the probability of default differ from the rating or
models? How can I improve my collateral posi-
tion and how will collateral be affected in a con-
tinuation of the downward spiral?
Securities Lending
Understanding the mechanics of a securities
loan is challenging. You have to understand the
relationship between the risks and returns and
the risks are complex. We all know the devil is in
the details. These are two simple examples how a
small mistake can corner you in these volatile
markets:
- Using the wrong day-count convention
trading with a foreign counterparty will
probably delay the settlement.
- Marking to market every month or week
can prove lethal as collateral fluctuates and
the longer the period of time you mark to
market you are more exposed to risk.
Collateral margining is a common way to avoid
mishaps but the question of whether counterparti-
eties under these circumstances will do business
with you is a different matter. Understanding you
and your counterparties’ collateral can give you
better risk- adjusted returns.
Hedge funds are your clients
Understanding the motivations, strategies and
needs of hedge funds, trading desks and asset
managers is key to improving your products and
processes and to maximising your fee income.
New experts need fresh courses
As market conditions are changing we are adapt-
ing our courses to ensure that they are practical
and relevant. We have also expanded our trainer
pool with Jens Ebinger, head of short term prod-
ucts structuring and sales at Dekabank, Grant
Saunders, head of short term products trading at
Dekabank, and Alex Krunic, senior sales custody
client services at citigroup.

Global Collateral Management
15-16 October 2008 – London
Trainer: Alex Krunic /Kathleen Tyson-Quah
This course explains the rationale and current
best-practice functioning of collateral management
programmes for financial institutions. It is designed
to build up a sufficient level of expertise to give
attendees a good grasp of the legal, technical,
process and economic issues and drivers affecting
the profession. It is therefore suited to individuals
who are either starting up a collateral management
function or seeking to improve their unit’s capability
to add value to the front and middle offices through
adoption of more efficient collateral management
processing.
International Securities Lending
9-10 September 2008 – London
18-19 September – Hong Kong
7-8 October 2008 – New York
Trainer: Walter Kraushaar / Jens Ebinger
This course explains the mechanics of securities
lending as well as the motivations of the various
market players. The focus is on how the economic
benefits of securities ownership are retained even as
legal title is transferred. Lending and collateral
options are outlined and assessed. We then examine
the borrowers perspective and the trading strategies
that drive securities lending. Why borrowers reward
lenders for collateral flexibility will become clear.
Following a review of the risks incurred in a securi-
ties lending programme, and the protection offered
by good documentation, the course explains the dif-
ferent routes to the lending market and provides a
comparative review of the main electronic securities
lending exchanges and their impact on the industry.
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 67
SECURITIES LENDING MARKET GUIDE
FinTuition Upcoming Courses
Equity Finance & Structured Products
23-24 July 2008 – London
16-17 September 2008 – Hong Kong
9-10 October 2008 – New York
5-6 November 2008 – London
Trainer: Grant Saunders
Moving on from plain vanilla stock borrowing and
lending, this intermediate-level course examines the
expanded product range that comprises equity
finance, including collateral swaps, repos, structured
repos, and derivatives. The course explains how
these structures are used to reduce dealer funding
costs and enhance yields through tax and balance
sheet management. Ample hands-on opportunities
are provided through the use of exercises and case
studies to develop participants’ understanding of
how and why trades are structured using various
economically equivalent derivative instruments.
Bond Financing (REPO)
8-9 July 2008 – New York
12-13 November 2008 – London
Trainer: Paul Carroll
This course provides a comprehensive overview of
the fixed income repo product. You will be introduced
to the economic motivations of market players and
learn the main trading structures, delivery methods,
risk elements and documentation. As part of a small
group, you will employ alternative trading structures
in an extensive case study using SunGard’s Personal
Martini trading software. You will gain an under-
standing of the role of the repo desk as the ‘hub’ of
the fixed income trading floor. You will learn what
factors drive demand to borrow specific securities
and create ‘specials’ in the market through a review of
the main bond trading strategies.
 SECURITIES LENDING MARKET GUIDE

Christine Donovan
Company Brief: banks, trusts, VEBA, defined contribution, not-for-
A global leader with close to 200 years of experi- profits, and insurance companies.
ence, BBH helps many of the world’s most sophisti- www.bbh.com
cated mutual funds, investment managers, banks and Christine Donovan is managing director at Brown
insurance companies achieve their international busi- Brothers Harriman Investor Services & Markets.
ness objectives. BBH provides specialist services She founded BBH’s in-house Securities Lending
and innovative solutions to clients in close to 100 Program in July 1999. She currently oversees BBH’s
markets for custody, accounting, administration, lending business globally.
securities lending, foreign exchange, and brokerage
services. Combining entrepreneurial thinking, inno- Key Locations:
vative technology, and award-winning client service, London:
BBH is consistently ranked among the world’s top Brown Brothers Harriman Ltd
global custodians and maintains a presence in each Veritas House
of the principal financial centers around the globe. 125 Finsbury Pavement
BBH Global Securities Lending leverages these London EC2A 1PN
resources to provide award winning, customized
securities lending solutions to sophisticated global Boston:
institutional investors. Our independent, privately- Brown Brothers Harriman & Co
owned structure means our clients can be assured of 40 Water Street
a tailored program which combines compelling eco- Boston, MA 02109
nomics with an unwavering focus on their long-term
best interests. BBH wraps the following benefits into Key Services:
a single service offering underpinned by our long- - Award-winning custodial and third party
standing reputation for service excellence: agency lending
- Traditional Agency Model: Custodial and - Auction/exclusive platform
Third-Party Lending. A tailored program com- - In-house cash collateral reinvestment option
bining multiple routes to market: including -Relationship excellence
auctions and borrower exclusives. Experienced -Critical market intelligence provided via daily
traders focused on thoughtfully optimizing the trading summaries, specials lists, newsletter
value of our clients’ portfolios.
- Transparent, integrated, web based reporting. - Key Contacts:
Cutting edge technology and automation. Americas/Europe/Middle East:
- Thorough risk management, legal and tax
resources dedicated to protecting our clients’ Andrew Pettit
assets and reputation. +1 617.772.6553
- An experienced and dedicated relationship andrew.pettit@bbh.com
management team.
- Multiple routes to market. Keith Haberlin
- Our long standing reputation for relationship +1 617.772.1190
excellence, transparent reporting, operational keith.haberlin@bbh.com
efficiency and a strong risk management
discipline. Asia:
BBH has extensive experience in managing both Richard Meek
custodial and third-party programs and have auto- +44.20.7614.2489
mated links in place with the major custodians glob- richard.meek@bbh.com
ally. Our clients include mutual funds, pension plans,
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 69
 SERVICE PROVIDER PROFILES

Eugene Picone

Company Brief:
Wachovia Global Securities Lending (WGSL) is an
investment advisory firm specializing in securities
lending and short-term fixed-income asset manage-
ment. Fully focused on servicing clients, we have
emerged as one of the largest, most respected third-
party securities lending firms in the country, with a
client base consisting of major institutional funds
and corporate portfolios, including some of the
largest and most respected public funds. WGSL
operates as a division of Wachovia Bank, N.A., and
is a part of the bank's long-standing tradition to meet
the needs of customers with new and exciting finan-
cial options. Wachovia is one of the largest bank
holding companies in the United States based on
assets. Additionally, Wachovia Global Securities
Lending is a NASD member.
Eugene Picone is managing director of global
distribution and is responsible for distribution, client
service and product development in the Western
Hemisphere. He works with WGSL and the rest of
the Wachovia franchise to expand business in Europe
and Asia. He is a member of the firm's executive,
investment, and credit committees. Prior to joining
WGSL Picone spent 19 years at JP Morgan and had
various senior roles within the securities lending.
Key Contacts:
Robert R. Womack, Jr.
Managing Director
+(1) 310 979-6300
Rob.Womack@WGSL.com

Key Locations: Christopher Fay

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

WGSL provides securities-lending services across

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

70 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009


Company Brief:
Eurex is one of the largest derivatives exchanges and
the leading clearing house in Europe. Wherever you
are located, we provide you with access to the
benchmark futures and options market for European
derivatives. Eurex also offers short term funding
products, such as Eurex Repo. Eurex Repo is among
the forerunners in providing integrated trading and
clearing for repo transactions. Eurex's latest innova-
tive marketplace is called Eurex SecLend, which is
playing a pioneering role in the SLB market's devel-
opment. By delivering efficiency across the deal
chain and providing innovative solutions to the needs
of all SLB market participants, Eurex SecLend help
volumes grow for the benefit of all its clients.
Key Locations:
Zurich Office
Eurex Zürich AG, Selnaustrasse 30,
8021 Zurich, Switzerland
+41 58 854 20 66
Frankfurt Office
Eurex Repo GmbH, Neue Börsenstrasse 1,
60487 Frankfurt/Main, Germany
+49 69 211 14193
London Office
+44 207 862 7243
Paris Office
+33 1 5527 6769
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 71
SECURITIES LENDING MARKET GUIDE
Francisco Gonzalez
Francisco Gonzalez is head of Eurex SecLend is
responsible for the market management regarding
business and product development of the electronic
market place for international securities lending and
borrowing at Eurex. Before joining Eurex in 2001,
Francisco was head of Systems Development, in
charge of the systems design for the electronic stock
market at SWX Swiss Exchange.
Key Services:
Eurex SecLend and Eurex Repo are electronic mar-
kets for collateralized funding and financing prod-
ucts such as securities lending and borrowing and
repo.
Key Contacts:
Francisco Gonzalez
Flavio Morganti
Malcolm Stevens
Markus-Alexander Flesch
Samuel Akermann
info@eurexseclend.com
www.eurexseclend.com
 SERVICE PROVIDER PROFILES
Company Brief:
eSecLending is a global securities lending manag-
er focussed on treating securities lending as an
investment management function. Offering
institutional investors highly-customized securities
financing solutions while providing greater
transparency and higher returns relative to the
programs offered by other securities lending
providers. eSecLending's clients include some of
the world's largest and most sophisticated
institutional investors, including pension funds,
mutual funds, investment managers, and insurance
companies.
eSecLending offers full-service securities
financing solutions, including trading, risk man-
agement, operations, reporting, collateral manage-
ment, and legal/compliance. Within
eSecLending's program, each client is treated as a
separate book of
business rather than being combined in a pooled
lending structure. The use of specialists, multiple-
managers, unbundling, price transparen cy, and
competition ensures best execution and also
provides clients with greater control over their
programs, allowing them to more effectively
monitor and mitigate risks and counterparty rela-
tionships.
It provides significantly increased returns for
lenders within a transparent and auditable process.
For borrowers, eSecLending provides exclusive
access to desirable securities by an equitable auc-
tion process based on price rather than relation-
ships or the loan volume-driven methodology.
Managing over USD500 billion in lendable
assets with USD120 billion on-loan, eSecLending
is one of the largest lending agents in the market.
eSecLending has a dominant position in the secu-
rities lending exclusives market globally and has
auctioned over USD1.5 trillion in lendable assets
across all lendable market sectors since inception.
eSecLending also manages approximately
USD50 billion in cash collateral for its clients
72 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
Christopher R. Jaynes
across separately-managed accounts and
commingled products.
Securities Finance Trust Company, a Maryland
USA trust company, Securities Finance Global
Advisors LLC, an SEC registered investment
advisor and/or eSecLending (Europe) Ltd.,
authorized and regulated by the Financial Services
Authority, perform all regulated business
activities.
Key Location:
eSecLending
175 Federal Street, 11th Floor
Boston, MA 02110
United States
+1.617.204.4518
cjaynes@eseclending.com
Christopher R. Jaynes serves as president of
eSecLending and is a member the firm's executive
committee. His primary responsibilities are prod-
uct strategy and execution which includes over-
sight of the company's global trading, collateral
management, business development and relation-
ship management with clients and borrowers. He
is one of the founding members of eSecLending
and was part of the team that developed the auc-
tion model and built the firm's service capabili-
ties. Prior to eSecLending, he served as senior
vice president at UAM Global Securities Lending.
Before that, he served as vice president and com-
pliance officer for UAM Trust Company and as a
client service manager at State Street Bank. Chris
is a CFA charter holder and received his Bachelor
of Science from the University of Vermont.
Key Contact:
Christopher R. Jaynes
president
eSecLending

Company Brief:
EquiLend is the leading provider of trading and
post-trade solutions for the securities finance
industry. Owned by eleven preeminent financial
firms, EquiLend revolutionizes straight-through
processing by using a common standards-based
protocol and infrastructure, which automates for-
merly manual business processes. Used by bor-
rowers and lenders throughout the world, the
EquiLend platform creates efficiency and pro-
vides access to additional liquidity.
EquiLend's end-to-end solutions reduce the risk
of potential errors and eliminate the need to
maintain costly point-to-point connections. They
include Availability, AutoBorrow, Trade2O,
EquiLend AuctionPortSM, Contract
Comparison, Mark-to-Market Comparison,
Returns, Recalls, Billing Comparison and
Delivery, Dividend Claims Comparison, and
Agent Lender Disclosure (ALD). The EquiLend
platform also supports the execution of payment
and delivery instructions through the DTCC.
Key Locations:
New York
17 State Street, 9th Floor
New York NY 10004
+1 212 901 2200
London
14 Devonshire Square
London EC2M 4TE
+44 20 7426 4426
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 73
SECURITIES LENDING MARKET GUIDE
Brian Lamb
As CEO, Brian Lamb is responsible for all global
operations for EquiLend, its affiliates and sub-
sidiaries. He brings 20 years of hands-on experi-
ence and a deep knowledge of the global securi-
ties finance industry with an emphasis on tech-
nology solutions.
Prior to joining EquiLend, Brian spent 17 years
with Barclays Global Investors (BGI). Brian
spent many years in securities finance while at
BGI. His roles in that area ranged from product
manager for Fixed Income Securities Lending, as
well as program manager and alternate board
member of EquiLend. He is one of the thought
leaders among the initial ownership group that
helped design the EquiLend platform.
Brian is a graduate of the University of Notre
Dame, and holds a BS in business administration
with a concentration in finance.
www.equilend.com
Key Contacts:
Brian P Lamb, CEO
Benjamin Glicher, Chief Technology Officer
 SERVICE PROVIDER PROFILES

Company Brief:
Deutsche Bank is a leading global investment
bank with a strong and profitable private clients
franchise. A leader in Germany and Europe, the
bank is continuously growing in North America,
Asia and key emerging markets. With 78,275
employees in 76 countries, Deutsche Bank offers
unparalleled financial services throughout the
world. The bank competes to be the leading glob-
al provider of financial solutions for demanding
clients creating exceptional value for its share-
holders and people.

Key Locations:

Deutsche Bank AG
Theodor-Heuss-Allee 70
60486 FRANKFURT
(for letters and postcards: 60262)
GERMANY
+49 69 910-00

Deutsche Bank AG
60 Wall Street
NEW YORK, NY 10005
USA
+1 212 250 2500

Deutsche Bank AG
1 Great Winchester Street
EC2N 2DB LONDON
GREAT BRITAIN
+44 20 754 58000

Deutsche Bank AG
One Raffles Quay
South Tower Level 17
SINGAPORE 048583
+65 6423 8001

74 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009


Company Brief:
COMIT offers the financial industry a wide range
of consulting services, individual software devel-
opment and standard software solutions such as
FINACE. FINACE is the leading modular and
fully integrated solution in the area of securities
lending, repo and collateral management covering
front to back processes.
Key Locations
Austria, Germany, Luxembourg and Singapore
Key Services:
FINACE is the leading modular and fully inte-
grated solution in the area of securities lending,
repo and collateral management covering front to
back processes.
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 75
SECURITIES LENDING MARKET GUIDE
Felix Ogerli
Felix Oegerli is member of the executive commit-
tee of COMIT, a consulting, IT solutions and inte-
gration partner of the finance industry. He was
the founder and CEO of IFBS, an IT application
solutions and consulting firm specialising in
securities lending, repo and collateral manage-
ment, which was recently sold to COMIT.
Prior to launching IFBS, Oegerli held a
number of business leadership roles at UBS in
Zurich, New York, and London for over 20 years
in different functions. Between 1990 and 1999, he
was responsible for the
creation and expansion of the securities lending,
repo and prime brokerage business at UBS
Zurich, was deputy global head of securities
lending and repo, global head of prime brokerage
and head of global product management collater-
al trading and
management. Oegerli holds a degree as Swiss
federal certified banking expert, and is a frequent
conference speaker and industry expert on securi-
ties lending, repo and
collateral trading and management.
Key contacts:
Felix Oegerli
member of the executive management of COMIT
Email: felix.oegerli@comit.ch
+41 44 298 92 00
Igor Salzgeber,
FINACE product manager
Email: igor.salzgeber@comit.ch
+41 44 298 92 00
 SERVICE PROVIDER PROFILES

Guy d'Albrand

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

76 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009


Company Brief:
OneChicago is the exchange for Single Stock
Futures (SSF) in the United States. Using SSF
trader can reduce their finance cost of carrying
their position on margin and get their short delta
without having to locate stock and pay the associ-
ated fees. Over 800 SSF on individual equity
names and 35 ETF products all traded electoni-
cally via either the CBOEDirect matching engine
or the OneChicago BLock and EFP Trading
System (BETS) which is used for institutional
transactions. All trades clear at the AAA rated
Options Clearing Corporation eliminating any
counterparty credit exposure.
Key Location:
141 W. Jackson Boulevard
Suite 2240
Chicago, IL 60604
Phone: 312-424-8500
Toll Free: 800-752-4100
Fax: 312-424-8529
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 77
SECURITIES LENDING MARKET GUIDE
David Downey
David G. Downey serves as chief executive offi-
cer of OneChicago. He began his career in the
securities and futures industry in 1983 on the
American Stock Exchange in New York. In 1985
he joined Timber Hill Inc., a firm specializing in
the business of market-making on the floors of
various stock, future and derivative exchanges
around the world. After moving to Chicago in
1985 he began trading as a member of the CBOE
and over the years held memberships at the
CBOT and the CME. In 1995, he turned his
attention to the development of Interactive
Brokers where he served as EVP Operations.
Key Contacts:
David G. Downey CEO
Thomas McCabe COO
Donald Horwitz General Counsel
Mark Esposito MD Sales
 SERVICE PROVIDER PROFILES
Company Brief:
4sight Financial Software is a leading supplier of
innovative software solutions to the securities
finance, settlement and connectivity markets with
offices and clients worldwide.
4sight Securities Finance is a flexible modular
solution that empowers financial institutions of all
sizes, from the smallest direct lender to the global
custodian, broker or intermediary on an agency or
principal basis. It supports borrowing, lending,
repo, swaps and collateral management across the
equity and fixed-income markets and provides 24
hour continuous operation, inter-desk trading, a
‘global book’, real-time value dated position keep-
ing and a powerful web reporting module, allow-
ing full front to back office processing.
4sight Securities Finance also integrates seam-
lessly with external systems and employs a data
model that enables quick and easy real time access
to your data, with the ability to import and export
data in any required format.
As a company 4sight delivers:
- Ground breaking securities lending software
at the cutting edge of technology
- Expert industry knowledge
- Outstanding responsiveness to our clients
- The reliability of a company that has
worked with the world’s largest financial
institutions to deliver successful projects
Visit www.4sight.com for further details
Key Locations:
4sight Financial Software Ltd
Conference House
152 Morrison Street
Edinburgh, EH3 8EB
United Kingdom +44 (0) 131 557 5522
4sight Financial Software Ltd
11-29 Fashion Street
London, E1 6PX
United Kingdom +44 (0) 207 043 8300
78 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
Alastair Chisholm
Alastair Chisholm is managing director of 4sight
Financial Software. 4sight was formed in 2003
when he led an MBO of the Securities Finance
and Settlement business units from OM
Technology, where he was general manager.
Chisholm has been involved in software develop-
ment for the financial markets for the last 18
years in a variety of roles, both with software
houses and financial organisations. Prior to join-
ing OM in 1999, he was a director at TCAM
Systems and held senior positions with Accenture,
NatWest Markets and Wood Mackenzie.
Key Services:
- Highly configurable software solutions to
meet each client’s unique individual require-
ments.
- Quick and easy integration with third party
solutions.
- A professional implementation, ensuring a
minimum of disruption to business during
system changeover.
- Many years of expertise in our chosen
fields.
- A strong focus on development and cus-
tomer service to ensure our products stay at
the forefront of market requirements, and
our clients continue to remain happy.
Key Contacts:
Judith McKelvey, Global Sales Director
T: +44 (0) 207 043 8319
judith.mckelvey@4sight.com
Jason Hayes, North American Sales Director
+1 416 548 7922
jason.hayes@4sight.com
Peter Sanders, Asia Pacific General Manager
+61 (0) 2 90378416
peter.sandlers@4sight.com
 SECURITIES LENDING MARKET GUIDE
Company Brief:
CIBC Mellon Global Securities Services
Company is a specialist Canadian asset servicing
provider. We help institutional investors increase
their efficiency, while minimizing operational risk
and enhancing portfolio returns.
CIBC Mellon is backed by The Bank of New
York Mellon, the world's largest asset servicing
provider with assets under administration of more
than USD23 trillion. We are well-placed to deliver
the benefits of global scale, long-term stability,
geographic reach and product innovation to the
Canadian marketplace.
As the largest lender of Canadian securities
offering a cash collateral product, and the number
one relationship manager to securities borrowers
(ISF Magazine), we strive to:
- Consistently outperform our peers in terms
of revenue generation
- Clearly demonstrate superior value by
using the third-party Performance
ExplorerTM analytics service
- Respond quickly to borrower needs
- Leverage our integrated lending and collat-
eral management system for reduced risk
and seamless integration with clients
- Control cash reinvestment risks through
oversight by asset/liability and credit com-
mittees.
CIBC Mellon is 50-50 jointly owned by
Canadian Imperial Bank of Commerce and The
Bank of New York Mellon Corporation
Performance Explorer is a trademark of Data
Explorers Limited. CIBC Mellon is a licensed
user of the CIBC and Mellon trademarks
www.cibcmellon.com
SECURITIES LENDING MARKET GUIDE 2009 INVESTOR SERVICES JOURNAL 79
James Slater
James Slater is senior vice president and head of
capital markets at CIBC Mellon. He is also a
member of the company's executive management
committee. Mr. Slater has overall leadership
responsibility for CIBC Mellon's capital markets
function, which includes global securities lending,
treasury and cash management. Mr. Slater's
accountabilities also include providing strategic
client service engagement in relation to his trad-
ing and financial markets responsibilities. He
also chairs the company's asset liability commit-
tee. He has 20 years of experience in the finan-
cial services industry with CIBC World Markets
and CIBC Mellon. While at CIBC World Markets,
he was part of the team charged with the forma-
tion of CIBC Mellon. He has an MBA from
Queen's University.
Key Contacts:
James Slater
Senior Vice President & Head of Capital Markets
+1 (416) 643-5130
Email: james_slater@cibcmellon.com
Rob Ferguson
Vice President, Product & Client Service
+1 (416) 643.5260
Email: rob_ferguson@cibcmellon.com
Jeffrey Alexander
Director, Business Development
+1 (416) 643-5773
Email: jeffrey_alexander@cibcmellon.com
 SERVICE PROVIDER PROFILES
Company Brief:
Northern Trust Corporation (Nasdaq: NTRS) is a
leading provider of investment management,
asset and fund administration, fiduciary and
banking solutions for corporations, institutions
and affluent individuals worldwide. Northern
Trust, a multibank holding company based in
Chicago, has a growing network of 85 offices in
18 US states and has international offices in 12
locations in North America, Europe and the Asia-
Pacific region.
Since 1981, Northern Trust has offered securi-
ties lending to clients whose assets are custodied
at Northern Trust and elsewhere. Leveraging its
superior investment management capabilities,
Northern Trust Global Securities Lending is a
leader in the industry, operating trading centers
throughout the United States, Europe, Canada
and the Asia/Pacific region to take advantage of
markets throughout the world 24-hours a day.
Northern Trust's Global Securities Lending
program is consistently recognized as a top
lender by beneficial owners and borrowers; con-
tinuously outperforms the Risk Management
Association's Aggregate Composite; holds top
positions at the ISLA, PASLA and RMA industry
organizations; maintains an exceptional 27-year
track record; and is a founding member of
EquiLend, the open, global, standards-based
securities lending platform focused on standardi-
zation and maximizing efficiencies in the global
securities lending industry. Northern Trust's
Global Securities Lending program is focused on
relationship management, performance and risk
management. We strive for the highest level of
risk-adjusted performance, understanding the
customization necessary to enhance each
client's portfolio.
www.northerntrust.com
80 INVESTOR SERVICES JOURNAL SECURITIES LENDING MARKET GUIDE 2009
Mark Van Grinsven
Mark Van Grinsven is senior vice president and
head of global securities lending at The Northern
Trust Company. As head of global securities
lending, Mark oversees all lending activity
worldwide and is responsible for the risk and
return profile of all market-related activity. In
addition, he is responsible for client sales and
relationship management, product development
and technology strategy for securities lending.
Securities lending trading locations currently
include Chicago, London, Hong Kong and
Toronto. Mark has worked at Northern Trust for
31 years.
Key Locations:
Chicago: 50 S. LaSalle Street, 12th Floor,
Chicago, IL 60603
London: 50 Bank Street, Canary Wharf, London,
GB E14 5NT
Hong Kong: One Pacific Place, 88 Queensway,
Suite 703-4, Hong Kong, HK
Toronto: 145 King Street W, Suite 1910, Toronto,
ON CA M5H 1J8
Key Contacts:
International: Sunil Daswani +44 20 7982 3850
North America: Sandra Linn +1 312 557 2908
 Time to change?
Choose a flexible Securities Finance solution
that integrates seamlessly
4sight Securities Finance provides a full front
to back office system for lending, borrowing,
repo, swaps, and collateral management of
both Equities and Fixed Income Securities.
4sight Securities Finance is a proven solution
used globally by a wide range of financial
institutions, and can be used on an agency
or principal basis.
Financial Markets Solutions
• Software with the flexibility to be tailored to your
unique business requirements
• Maximise efficiency through quick and seamless
integration with your existing systems
• Quick and easy real time access to your data,
with the ability to import and export in any
required format.
email: info@4sight.com www.4sight.com
EDINBURGH • LONDON • TORONTO • SYDNEY
Crowded Pool or Exclusive Access?
Crowded Pool or Exclusive Access?
The choice is yours.

eSecLending takes an active

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

Our clients receive more lending

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

United States +1.617.204.4500

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

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