North America Securities Lending Summit - 12 May, Chicago

Fundamentals
Securities Services & Securities Lending for Funds, Managers and Investors
ISSUE 03 SPRING 2011

Slow and
steady
Lord Hutton - the long term
Custody fees, CEE & Russia
US Senate sec lending hearing

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 Editor's Letter

Welcome to Fundamentals
Spring 2011
The sun has finally started shining in the UK, making it a
good time to shed light on what the Fundamentals team
has been up to over the first three months of the year.
It has been conferences galore, with our own London
and Nordic Securities Lending Summits and a host of
industry events.
One major event was the National Association of
Pension Funds’ Investment Conference in Edinburgh
and this issue features a heavy pensions focus as a
result.
We speak to Lord Hutton, architect of proposals to
overhaul the UK’s public pension sector, while from
the USA we feature an article on the funding problems
Stateside.
The theme of pensions carries through to the
securities lending section of the magazine, as lending of
pension fund assets was scrutinised by the US Senate,
while in investor services we have a heavy focus on the
Central and Eastern European region, outsourcing and
domiciles.
We have a look at various Asian issues, from clearing
in Hong Kong to the effects of the Japanese tsunami
on the country’s securities lending market and we have
a profile on State Street’s Steve Smit and Brandes
Investment Partners.
I hope you enjoy the magazine – as well as the
sunshine.
Craig McGlashan, Editor

The
Securities
Sec
Lending
Le
Industry
Ind
Awards
Aw
2011 GSL

Save the date

The 2011 Securities Lending Industry Awards
3rd November, London

GSL Summits remaining in 2011

Thu 12 May GSL North American Summit - Chicago

Thu 15 Sep GSL Boston Summit
Thu 6 Oct GSL Dutch Summit - Amsterdam
Thu 3 Nov GSL London Summit
Thu 1 Dec GSL Middle East Summit - Abu Dhabi
TBC GSL Asian Summit - Tokyo

:WYPUN 2011|Fundamentals4HNHaPUL| 1
 Contents

Contents Editor
Craig McGlashan
craig.mcglashan@2i.tv
FundFront

Contributing Editors
FundFront InvestorServices SecuritiesLending Brian Bollen
Roy Zimmerhansl
P.3 P.28 P.60
People Moves Executive Profile: US Senate hearing Correspondent
Steve Smit Stephanie Baxter
stephanie.baxter@2i.tv
P.4 P.66
News Round P.30 Fixed income: Contributor
Future trading Short selling Ugo Bonaugurio
P.7
Mandates P.31 P.68 Design
OTC Clearing focus CCP: Eurex Luke Merryweather
P.10
InvestorServices

UK Pensions: Hutton P.33 P.70 Senior Account Manager

Russia gets ready Neil McPhee
report CCP: Diana Chan
neil.mcphee@2i.tv
P.14 P.34 P.72 Subscriptions
US Pensions provision CEE outline Market focus: Japan Afuah Agyekum-Hene
afuah.agyekum-hene@2i.tv
P.16 P.36 P.73
OTC derivatives Corporate actions Islamic banking Finance
automation Elliot Ainley
P.18 P.76 finance@2i.tv
Fund manager profile: P.38 Repo: Asia
Chief Technology Officer
Brandes Investment Third-party clearing:
Peter Ainsworth
Partners Hong Kong P.78 peter.ainswoth@2i.tv
ISLA: Kevin McNulty
SecuritiesLending

P.20 P.40 Editorial Advisory Board

EFSF bonds Regulation: P.80 Chairman
Dodd Frank GSL Summit: Clive Gande
P.22 Nordic 2011 Clive.Gande@2i.tv
Private Equity: P.42
Endless-Liberata Domiciles: P.82
Pearson-SEB On and off again IMN Beneficial Owners
Guernsey focus Conference Sales Director
Marc Young
P.48 marc.young@2i.tv
Stock exchange
consolidation
BackOffice Director
Jon Hewson
P.84 jon.hewson@2i.tv
P.50 Glossary
Sustainable investment
Publisher
BackOffice

P.86 Mark Latham

P.54
Directory mark.latham@2i.tv
Outsourcing
administration
P.88
Pensions: Dinnae tell
P.56 P<26UL(UNLS>OHYM
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2 | Fundamentals4HNHaPUL |:WYPUN2011

People M o ve s
International Capital
Market Association
(ICMA) has named
Sberbank custody director
Yury Dubin as chairman
of its newly appointed
regional committee for
Russia and the CIS.
ICMA also appoints Alfa-
bank’s Denis Soloviev
as managing director,
Sergey Shvetsov as
director of financial markets
operation, and MDM
Bank’s Ilya Vinichenko as
head of securities market
trade. Dubin and the new
committee members will
build on ICMA’s involvement
in Russia’s market.
Daiwa Capital Markets
has hired Ali Khan to head
up its Asian equity sales
unit as part of the bank’s
wider plans to expand its
non-Japan Asia business.
Khan joins Daiwa after four
years at Deutsche Bank as
head of Indian equity sales.
Alex Lewis has also been
appointed as managing
director for Asia equity
sales.
Ali Khan
International Standard
Asset Management (ISAM)
has strengthened its team
by appointing Alexander
Lowe to expand business
capabilities and drive new
product development,
while Riva Waller joins as
COO and Brian McHugh
joins the institutional sales
team in New York. ICAM
principal Rod Barker quits
the firm to join a new asset
management business.
John van Verre has
been named head of
global custody at HSBC
Securities Services (HSS)
to develop the firm’s global
product proposition and
drive the establishment of a
consistent global operating
model. He joined the bank
in 2008, acting as head of
HSS in Singapore and then
managing director for HSS
Ireland.
Matthew Pinnock has quit
Nomura, where he has
acted as managing director
of capital markets prime
services. The move follows
reports that the bank is
trimming its prime brokerage
staff to keep its business
in good shape. Most of
the cuts are expected to
occur in Nomura’s London
headquarters.
Matthew Pinnock
Nomura has also made
key management hires
and established a new
office to improve the firm’s
management structure
across the group. David
Benson becomes vice
chairman of Nomura
Holdings and Masafumi
Nakada becomes president
of The Nomura Trust
& Banking Co, while
Hajime Usuki is hired as
president of Nomura Bank
Luxembourg.
Roger Harrold has resigned
from his position as head of
domestic securities services
at Deutsche Bank due to
“personal reasons”. Howard
Topf replaces Harrold with
the full title of global head of
direct securities services.
State Street has re-hired
Phil McGowan as senior
vice president and EMEA
head of private equity and
real estate services after
leaving the bank in 2008.
McGowan, who was COO
for HFX Capital’s alternative
investment distribution and
sales efforts from 2009 to
2010, will help continue
State Street’s plans to
develop solutions for clients’
changing needs.
RBC Dexia Investor
Services has appointed
Sebastien Danloy
as its new managing
director for Luxembourg.
Luxembourg operations are
central to the promotion
of our onshore/offshore
strategy, says the firm’s
CEO, Jose Placido.
State Street Global
Markets has strengthened
its global portfolio solutions
team with the appointment
of four senior transition
managers. Brian Berg
and Brian Moniz join the
bank’s Boston team while
Tadateru Makino will be
based in Tokyo and Greg
Metzmacher in Sydney.
Bank of America Merrill
Lynch has snapped up
Stuart Hendel as its new
global head of prime
:WYPUN 2011|Fundamentals4HNHaPUL| 3
People Moves
brokerage after he resigned
from UBS in March. Prime
brokerage executives
Jonathan Yalmokas and
Charlotte Burkeman have
also quit, reports said.
BofA plans to expand its
prime brokerage team as
it continues to compete
with prime broking giants
Goldman Sachs and Morgan
Stanley.
Cornelia Keth has joined
State Street in Germany as
head of sales and account
management to help State
Street to maintain its
strong position in German
outsourcing. Keth moves
from BNY Mellon.
SunGard Astec Analytics
has appointed Tom Kirdahy
and Bill Mauer to build on
relationships with beneficial
owners as they show more
interest in their securities
lending programmes.
The firm plans to develop
an experienced sales
team to “empathise” with
stakeholders.
David Becker has left the
Securities and Exchange
Commission (SEC) to
return to the private sector
after acting as the SEC’s
chief legal officer and
senior advisor since 2009.
Becker first joined the
Commission in 1998 before
leaving in 2002 to go back
to the private sector. He has
helped shape many SEC
initiatives, the Commission
said.
 News Round
FundFront
NEWS
10th January 2011
Goldman Sach’s last big
prop trader team has quit
to start raising money for
a new independent hedge
fund in London. The team,
led by Daniel Benatoff
and Ariel Roskis, has
received a $300m (£193.7m)
investment from Brummer
& Partners. Benatoff and
Roskis are senior traders at
Goldman Sachs’ Principal
Strategies desk (GSPS)
which has been forced
to wind down since the
introduction of the Volcker
rule to limit banks on putting
capital in speculative trades.
UK final salary pension
schemes are locking out
both new and existing
members, according to
National Association of
Pension Funds’ annual
survey for 2010. One in
five UK final salary pension
schemes are restricting
future contributions from
existing members, a 7%
increase from the NAPF’s
2009 survey. The results
follow Lord Hutton’s
independent review which
says that public sector
pensions should no longer
be based on final salaries.
Brown Brothers Harriman
has joined the mobile app
revolution by introducing
a securities lending
application for smartphones,
allowing lenders access
4 | Fundamentals4HNHaPUL |:WYPUN2011
to information while
on the move. The app,
which is available on
iPhone and BlackBerry,
provides access to
revenues, balances and
loan distribution, as well
as market news and
developments which may
affect lending revenues.
The product was created
in response to recent
market events and volatility
that have “intensified”
clients’ need for financial
information in real time.
7th January 2011
The Swiss regulator, FINMA,
has granted Newedge
branch licenses which
upgrade its representative
offices in Zurich and Geneva
into branches. The company
will now be able to expand
the scope of its execution
service, where its Swiss
clients will have global
coverage through a single
local office. Newedge says
that it is in the process of
hiring additional staff with
the aim of increasing its
sales force by one third by
the end of the first quarter
of 2011.
12th January 2011
Tiffany & Co and Adobe
Systems have been named
as attractive targets for
takeover in 2011, according
to research by Bernheim,
The top stories from
Fundamentalsmagazine.com
this quarter
Dreyfus. Swatch Group and
LVMH are likely acquirers for
Tiffany, while Adobe could
be a target for Apple and
Google. The research said
that both companies are in
consolidating markets and
that there is an “intense
fight for pole position” in the
software market. Ingenico
and Meggitt were also
cited as possible takeover
targets.
The Australian securities
lending market needs
further changes to attract
funds and avoid falling
behind Asian markets,
Peter Martin, chairman of
the Australian Securities
Lending Association
(ASLA), said in an
exclusive interview with
Fundamentals.
While Martin calls ASIC
the “front runner” among
global regulators on
disclosure requirements
of short positions, he says
that aligning Australian
regulations closer to those
in neighbouring markets
such as Hong Kong, is
necessary for additional
transaction flow.
17th January 2011
A survey from BarCap
showed that the majority of
investors and managers are
optimistic about 2011, with
new products, hiring sprees,
and higher returns on the
horizon. Key findings were:
60% of managers planned
to increase headcount; the
best investment
opportunities were in North
America; and investors were
keen on endowments and
foundations.
19th January 2011
BNP Paribas Securities
Services announced it
was the first custodian to
offer funds of hedge funds
an integrated liquidity
management solution.
Fund managers now have
a committed financing and
FX hedging service which
is fully integrated with
their asset servicing needs
across the entire trade
lifecycle, said BNPP SS.
20th January 2011
A new survey from
Finadium found that US
plan sponsors now view
securities lending as an
investment product and
recognise that custody fees
“rarely reflect the true cost
of service delivery”.
Through interviews and
annual reports, the study
gauged the opinions of 98
sponsors handling more
than $2.33 trillion in assets.
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 News Round
26th January 2011
Short selling in the Indian
cash market has risen
dramatically in recent
months according to data
FundFront
from the National Stock
Exchange (NSE) of India.
The volume of stock
lending and borrowing
rose by nearly 20 times in
the second half of 2010,
where 900,000 lakh shares
were traded this January
alone. The results follow
steps by the Securities
and Exchange Board of
India (SEBI) last year to
enable short selling, where
it removed the guideline
on valuing collateral in
securities transactions and
extended securities lending
contracts from 30 days to
12 months.
28th January 2011
South Carolina has issued
a $200m lawsuit against
BNY Mellon to recover
losses from the bank’s
alleged failure to stick to
investment guidelines in a
securities lending contract
with the State. State
treasurer Curtis Loftis
claims the bank invested in
mortgage-backed securities
that contained risky
subprime mortgages, and
made allocations to debt
instruments in the Lehman
Brothers investment
bank. Loftis added that
the State plans to “recover
every penny due to South
Carolina citizens”. A BNY
spokesperson said that the
bank believes the lawsuit
is without merit and that
it intends to defend itself
“vigorously”.
31st January 2011
Deutsche Bank’s Asian
prime finance business
has doubled its share of
the market by supporting
6 | Fundamentals4HNHaPUL |:WYPUN2011
funds that have as much
as 20% of the Asian hedge
fund market. David Murphy
- co-head for the Asian
prime finance unit - revealed
in an interview that the
Bank plans to increase the
unit’s headcount by up to
10% this year in plans to
capitalise on the growing
interest and increasing
number of hedge funds
in the region. He claims
the recession provided
Deutsche Bank with a path
into Asia’s prime brokerage
business.
23rd February 2011
Finadium released a report
on the implications of Basel
III for the securities lending
and collateral management
industries.
The report is aimed at
educating professionals
about the opportunities
and challenges in the
forthcoming Basel III
regulations and looks
at potential scenarios
that could have negative
consequences if not
addressed properly.
1st March 2011
State Street’s securities
lending programme is still
under investigation from
the US Securities and
Exchange Commission
(SEC), according to a filing
made by the company.
The SEC is concerned
with the “adequacy” of
State Street’s disclosures
regarding its collateral pools
at points when these pools
had fallen in market value,
as well as the redemption
policy available to direct
lenders. The bank says it
is “cooperating” with the
inquiry but is unsure about
the potential outcome.
8th March 2011
Deutsche Bank released
the results of its ninth annual
Alternative Investment
Survey, which indicates a
strong recovery in the hedge
fund industry despite a
difficult market in 2010. The
survey reveals that investors
predict $210bn of net
inflows into the hedge fund
industry in 2011 to bring
the total AUM to a record
$2.2 trillion by the end
of the year. Investors are
increasing their allocations
and hedge fund teams,
and smaller funds will have
growth opportunities where
65% said they will invest in
hedge funds under $1bn.
9th March 2011
HSBC Securities Services
(HSS) has launched its
global Islamic securities
services offering in response
to a growing demand for
standardisation in the
Islamic banking world.
The new offering is spread
out among 17 markets
across the Middle East,
Asia-Pacific, Europe
and the Americas and is
‘globally consistent’. HSBC
Amanah Securities Services
complies with Sharia law
and is available to Islamic
investment managers
and traditional investment
managers in charge of
Islamic funds.
11th March 2011
Northern Trust has
expanded its custody
and securities lending
business that services UK
local government pension
schemes, by winning $10bn
of new client assets in 2010.
The bank now provides
custody to 36% of UK
local government pensions,
and provides securities
lending to 20% of UK local
schemes. Northern Trust
claims that local schemes
are looking for ‘tailored’
securities lending solutions.
Newedge has reinforced its
claims to be a global leader
in multi-asset brokerage and
clearing.
17th March 2011
US senator Herb Kohl,
chairman of the special
committee on aging,
has made a series of
recommendations to how
securities lending operates
in 401(k) plans during a
hearing on the matter. He
said that securities lending
withdrawal restrictions are
“troubling” and that more
efforts should be made to
make the industry more
transparent. “The economic
downturn showed that
securities lending is not a
free lunch,” Kohl said. The
hearing was held following
a three-month investigation
into securities lending in the
largest 401(k) plans in the
USA.
4th April 2011
The Salvation Army’s
southern division in the US
has filed a $22m lawsuit
against the Bank of New
York Mellon for losses
incurred in its securities
lending program. The
charity claims the bank had
mismanaged its assets by
investing the collateral used
for securities lending in
mortgage-backed securities
and other risky investments,
according to reports. The
Salvation Army says it now
cannot use those “toxic”
assets for its projects. BNY
Mellon claims its actions
were “appropriate”.

Deutsche Bank has signed a deal to
provide third-party securities lending
services to the Missouri State
Employees’ Retirement System
(MOSERS), which has been a “long-
time participant” in securities lending,
according to sources. The bank claims
its approach addresses the evolving
needs of investors who are looking
for higher sophistication from their
providers.
BNY Mellon Asset Servicing has
won a mandate from Standard Life
Investments Global to service 8
billion in assets in its Global SICAV.
The bank will provide services to
the Luxembourg-domiciled SICAV
including fund accounting, transfer
agency and custody. SICAV has assets
split across 20 sub-funds.
Brown Brothers Harriman has won a
mandate to provide custody and other
services for a new series of fixed-
income exchange-traded funds (ETFs)
from PIMCO. The first two ETFs to be
launched, PIMCO Euro EUR Enhanced
Short Maturity Source ETF and PIMCO
European Advantage Government
Bond Index Source ETF, are Irish-
domiciled UCITS recently listed on
the Deutsche Börse Exchange’s
Xetra trading platform. BBH will also
provide accounting, administration and
transfer agency services.
J.P. Morgan Treasury & Securities
Services has snapped up a $1.5bn
custody mandate from City Super, the
superannuation fund for current and
former employees of Brisbane City
Council, Australia. Bryan Gray, head
of TSS sales and client management,
claims the new mandate strengthens
the bank’s position in the investment
and administration sector. The
mandate win reinforces J.P. Morgan
TSS’s commitment to the Australian &
New Zealand market after hiring more
than 100 additional employees during
2010, many in senior positions.
BNY Mellon Asset Servicing has
been selected to provide Virtus
Investment Partners with mutual fund
transfer agency services. The firm will
provide shareholder services, financial
and regulatory reporting, and money
market stress testing for the Virtus
Mutual Funds, which had $14.9bn
in assets and 290,000 shareholder
accounts as of December 31, 2010.
Virtus said it chose BNY Mellon for its
operational efficiencies and technology
platform, and that it can help it commit
to generating investor success.
Brazil’s state-run energy giant,
Petroleo Brasileiro SA (Petrobas)
has chosen BNY Mellon Corporate
Trust to act as trustee, paying agent,
registrar and transfer agent for $6bn
in bond issue. The new mandate
builds on the longstanding relationship
between the two firms. Petrobas will
use the proceeds to pay for its project
to tap into and refine oil reserves in
Brazil. BNY Mellon said it expects
mandate activity in Brazil, Russia, India
and China to increase in 2011.
Northern Trust has been selected
to provide global custody, securities
lending and other services to the
Lothian Pension Fund, which holds
$5bn (£3.2bn) in assets. The bank says
that the move brings Northern Trust’s
share of the Scottish local government
pension schemes (LGPS) market to
more than 60%, providing for seven
schemes. Lothian is one of the top
10 LGPS by asset size in the UK with
more than 170 associated employers
and serving more than 65,000
members.
BNY Mellon Asset Servicing has
:WYPUN 2011|Fundamentals4HNHaPUL| 7
Mandates
been selected by China Construction
Bank (CCB) as the global custodian
for the upcoming Yinhua Qualified
Domestic Institutional Investor (QDII)
fund to be launched by Yinhua Fund
Management Company. The new fund
is called Yinhua Anti-Inflation Theme
Fund (LOF). Chong Jin Leow, head
of Asia, BNY Mellon Asset Servicing,
says this win indicates that confidence
in QDIIs is returning after being out of
favour for two years, and he expects
to see a steady increase in QDII
launches.
Northern Trust has picked up
a mandate to provide Stenham
Asset Management with custody,
fund administration, credit and
foreign exchange services for $3.5
billion in hedge fund assets under
management. Stenham will use Hedge
Fund Monitor, a Northern Trust online
portfolio management tool, to provide
information and analytics, to its hedge
fund of fund portfolios. The firms
claim this will boost transparency
on the performance and liquidity of
Stenham’s hedge fund investments.
Citi Global Transaction Services
has been awarded a new mandate
by the online trading and investment
specialist Saxo Bank Group to
provide global custody services
for cash equities and fixed-income
instruments traded globally by its
clients. The mandate is an extension
of Citi’s existing relationship with Saxo
Bank. Saxo also said that has plans
to strengthen its global footprint and
widen its product range.
CIBC Mellon has been selected to
provide custody, fund accounting,
securities lending and performance
& risk analytics to the Canadian
Christian School Pension Trust
Fund. The bank’s president and
 Mandates
CEO, Thomas Monahan said he has
seen increased demand from other
pension administrators looking for an
asset servicing provider to “navigate
FundFront
them through market and regulatory
changes”.
Northern Trust Global Investments
– the asset management arm of
Northern Trust – has been appointed
by the Royal Borough of Kensington
and Chelsea in London to provide
transition management services and
run an £80m index portfolio for six
months. This latest appointment adds
to the bank’s existing asset servicing
mandate with the Borough to provide
custody services for around £450m
in assets. Northern Trust said that
it remains committed to the local
government pension sector.
RBC Dexia Investor Services has
been selected by Beverly Hills-based
Paratum Inc to provide custody, fund
administration, shareholder services,
domiciliary and financial reporting
services for a new Luxembourg-based
private equity SICAV-SIF fund. RBC
Dexia says this umbrella fund includes
several sub-funds, the first being
the US Renewable Energy Feeder
Fund, designed to generate attractive
risk adjusted returns by investing, in
renewable power generation, clean
fuels and renewable energy. Paratum
claims it wanted to capitalise on the
growing renewable energy market.
J.P. Morgan has been chosen
by Maine Public Employees
Retirement System (MainePERS)
to service the State’s $10.5bn in
assets. The custodian will provide
global custody, securities lending
and foreign exchange, among other
services. Andrew Sawyer, chief
investment officer for MainePERS,
said J.P. Morgan was chosen for its
commitment to the public pension
market as the pension scheme looks
to increase allocations to alternative
investments. The deal is the latest in
a series of J.P. Morgan’s mandates
in the public pension space, which
reflects the bank’s commitment to this
market segment.
8 | Fundamentals4HNHaPUL |:WYPUN2011
Northern Trust has snapped up a
£1bn mandate to provide securities
lending services to Shropshire
County Pension Fund, adding to
the firm’s commitment to the local
government sector. The fund, which
has been a client of Northern Trust
since 2009, is now looking for a
lending solution to allow it optimises
returns at the same time as managing
risk. The move follows “increasing
appetite” for securities lending
solutions, says Mark Snowdon, senior
sales and relationship manager for
securities lending at the bank.
BNY Mellon has been selected
by Fatima Fertilizer Company
Limited as the depositary bank
for its American depositary receipt
(ADR) program. Each Fatima ADR
represents 50 ordinary shares and
trades on the over-the-counter (OTC)
market under the symbol "FTMFY."
As the first Pakistan-based company
to begin trading on the US OTC
markets, Fatima Pertilizer will be the
first Pakistani stock available for retail
and institutional investors. BNY Mellon
hopes to offer the company enhances
exposure to the global capital markets.
BNY Mellon has been also been
selected as sole sponsored
depositary bank by QBE Insurance
Group Limited (QBE) for its ADR
program. Previously, QBE traded
as an unsponsored ADR program
serviced by multiple depositaries. BNY
Mellon said it will provide the company
with a comprehensive suite of support
services to allow it to unlock the full
potential of its sponsored DR program.
The bank has also been mandated
to act as successor depositary
bank for AIXTRON SE ‘s (AIXTRON)
American depositary receipt (ADR)
program. AIXTRON said that BNY
Mellon’s services will help it to further
strengthen our U.S. shareholder base,
as well as increase visibility of its DR
program. BNY Mellon said it work
closely with the company to broaden
its outreach to global investors,
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 UK Pensions: Hutton report

Hutton: In it for the long term

FundFront

Craig McGlashan talks to Lord Hutton of Furness about his report on the future of public
sector pension provision in the UK; its benefits, potential problems and the risk of backlash
as some in the media and the public associate the reforms with the government's
unpopular austerity programme
In the UK in March, Lord Hutton unveiled a from final salary to career average schemes is
report aimed at reforming the country’s public nothing to do with current fiscal challenges or any
sector pension system. future challenges.
Hutton outlined his three main recommendations “The reason I have made that recommendation
during a speech at the National Association is fundamentally about fairness and the way these
of Pension Funds Investment Conference in schemes work within the professions and across
Edinburgh. workforces in the public services.
“First, I am recommending that the current “They are fundamentally unfair to the majority
defined benefit schemes are replaced by of people whose careers don’t follow the
new career average schemes... Second, path of a high flyer. So that’s why I
I have recommended that the recommending that we change the
pension ages in most of these basic financial model; it’s not
schemes is linked to the State because I’m trying through
pension Age... Third, I have I think there is far too that vehicle to save money for
recommended that a clear much lazy journalism the taxpayer. I think it’s the
cost ceiling is set for these around this issue best way to achieve financial
schemes going forward - I and that doesn’t sustainability for what will
have suggested basing this on help get some of the be very good defined-benefit
the percentage of pensionable pensions going forward.”
arguments across to
pay paid by the taxpayer,” he Does he feel that some of
said. people the more negative headlines
At a time of cuts and austerity and backlash have been down
in the UK, many in the mainstream to a general lack of education
press and a number of unions have about financial matters in the UK,
derided the proposals (it should be noted something that should be addressed at the
the government does not have to accept them). school level?
Hutton spoke to Fundamentals about some of these “I agree very much with that,” he says. “It’s
issues. very clear to me that there isn’t a great level of
Just how worried is he that his proposals will get understanding on some of the issues around
caught up in the language of deficit reduction? pensions, which I understand because these are
“Obviously I am concerned about that because I issues often one doesn’t really turn to until later on
don’t think my reforms are anything whatsoever in life. It would certainly help the reform process
to do with the current fiscal challenges the country if there was an improved level of awareness
faces,” he explains. about pensions. I think there is far too much lazy
“These are long-term reforms and questions that journalism around this issue and that doesn’t help
I’m trying to address and they have implications get some of the arguments across to people.”
over the next several decades. I understand the One particular detail of the report indicated
background, I know how complicated and difficult that existing scheme members should be able to
these issues are, but my reforms I hope will be maintain the final salary link for their past service.
looked at on their own merit. They are not about From an operational point of view, does Hutton
saving money in the short term, and the switch foresee any potential difficulties in having two

10 | Fundamentals4HNHaPUL |:WYPUN2011
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 UK Pensions: Hutton report

types of employee within the system?

“I think that there is an issue there,” he
concedes, “although it’s not an insurmountable
issue, either on cost grounds or complexity of
FundFront

scheme administration. We looked very carefully

at some evidence of that but I’ve made that
recommendation with a very clear focus on the
accrued rights position and so in a sense that marks
out the ground pretty clearly. You have to respect
all of the accrued rights position.”
Another area that Hutton investigated was
something that attracted a large amount of
attention in December 2010. A report published by
the Royal Society for the encouragement of Arts,
Manufactures and Commerce (RSA) suggested
that the UK should look to the Netherlands and
Denmark for inspiration, creating a collective
defined contribution scheme that would allow risk-
sharing between individuals and reduce costs. I’m proposing but I perfectly understand that there
Did Hutton consider this as an option? “For the are some very big ticket issues at stake here and
local government funded scheme I have made they will need to reflect on all of those.
a series of recommendations about improving “My mission as I saw it was to find a way of
the operations of the funds, having fewer funds, allaying and addressing the concerns of taxpayers
looking at the opportunities to consolidate in that about the long-term costs of these pensions. I think
area, and I think that will lead to better governance that we tried to show and most people understand
and better returns for scheme - I hope - that most of the
members,” he explains. I decided not to go pensions that are paid out are
“So I think there are a range down the path of pretty modest. But we have
of things that should be looked to address the underlying
collective defined
at within the funded area of the pressures that are bringing
contribution schemes problems to bear within these
public sector schemes. I decided
not to go down the path of which is essentially schemes and find a way for
collective defined contribution as I understand it the maintaining defined benefit
schemes which is essentially as I basic model in the for the future. That’s how I
understand it the basic model in Netherlands defined by task, my reforms are
the Netherlands. We set out the designed to help to do that.
reasons why in the final report.” “If at all I’ve been encouraged by the
Of course, all of Hutton’s work will come to government’s response to date. I was particularly
naught if the government does not accept his struck by what the chancellor said in his initial
proposals. Some more cynical Westminster reaction to my report on 10th March when he said
watchers have felt appointing Hutton - an he wanted public services to set a gold standard, I
ex-Labour minister - was a canny move by hope that is a very good indication of the direction
a Conservative-Liberal Democrat coalition, that ministers will take.”
already facing huge controversy over its austerity Hutton firmly believes that his proposals are
programme and unlikely to make itself any more the best way for public sector pensions in the
popular by changing public sector workers’ UK to move forward and it would appear that
pension provisions. the government is in agreement. However, the
But given all this, is Hutton confident that his coalition still needs the political wind to blow in its
reforms will be taken on board? “I haven’t really direction and have the will to stay the course for
had any feedback from ministers,” he says. “I hope these recommendations to become reality.
they will be able to take forward the set of reforms

12 | Fundamentals4HNHaPUL |:WYPUN2011
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 US Pensions provision

Us vs Us: a cold look at the future of

FundFront

pension provision - who benefits, and who pays?

Jeff Muhlenkamp, Investment Analyst at Muhlenkamp & Company Inc, a Pennsylvania,
USA-based independent investment firm, uses the example of teachers to describe the
challenges facing the future funding of pensions

In the 1930s, labour unions drew the battle lines can get the benefits they have contractually been
between the owners of labour - the workers - and promised when they retire:
the owners of capital. The unions fought to improve
the conditions for the workers at the expense of the 1. The returns on the invested assets can
owners, shifting a portion of profits from owners to improve to make up the difference between
workers. pension assets and liabilities.
Unlike the ‘30s, today’s union workers 2. The school districts can contribute
ARE the owners - through their more money to the pension.
pension plans - and they are, 3. The teachers can contribute
in many cases, government In order to fully fund more money to the pension.
employees. These differences are the [defined benefit]
not trivial and can change who programme in 30 I’ll discuss these ideas in turn.
bears the cost of improving years, investment
worker benefits from the “Us
versus Them” argument of the
returns for the next 1) Increased asset returns
1930s. Let’s use teachers as an five years would have
example. to exceed 20% per Asset appreciation is the
The conflict between year, a rate of return least painful way to make up
politicians (school boards, the pension shortfall as no one
that is 2½ times the has to pay any more than they
mayors, governors - the owners assumed investment
of the schools) and teachers is already are; the problem is it is very
coming to the fore for one very simple
return unlikely to happen.
reason: teacher pension plans are massively The head of the California State
underfunded. Teachers’ Retirement System has said: “In order
According to an April 2010 report by the Manhattan to fully fund the [defined benefit] programme in
Institute for Policy Research, the 59 pension funds 30 years, investment returns for the next five years
that account for most teachers’ pensions in the United would have to exceed 20% per year, a rate of return
States are underfunded by between $332bn and that is 2½ times the assumed investment return.” (The
$933bn, depending upon the assumptions you make California pension system is about $100bn short and
about the appreciation of existing assets. Only five of is in the worst shape in the country).
the 59 are better than 75% funded. Returns on investments are limited to what is
These pension plans receive funds from two available in the marketplace: 30-year government
sources: teacher contributions and school district bonds are yielding about 4%; equity returns for the
contributions, and the contributions are primarily last 10 years have been approximately flat—and it is
invested in US debt and equity instruments. As a an open question what they will do the next ten years.
result, the teachers own portions of US companies, While the Federal Reserve’s efforts to keep interest
and lend money to US companies and US rates low have benefitted borrowers, those same low
governmental entities. rates have hurt lenders like the pension plans.
Thus, there are only three ways to make up the Efforts to raise taxes on corporations to increase
shortfall in the pension funding so that the teachers Government revenue hurt the profitability of these
companies and, by extension, their owners - the

14 | Fundamentals4HNHaPUL |:WYPUN2011
 US Pensions provision

pension plans - and reduce the possibility of asset pensions, driving more residents away in a spiral of
appreciation. It seems clear that federal government community decline and decay.
action going forward will impact the returns available
to the pension plans and their beneficiaries, the
teachers. 3) Increased teacher contribution

If the teachers contribute more of their salary to their

2) Increased school district contribution own pension, who benefits and who pays? This is
pretty straightforward - the teacher benefits and the
What happens if the school districts increase their teacher pays.
pension contributions? Over the last 20 or 30 years A couple of examples of current payment levels may
school district revenues have generally increased be useful: Chicago teachers pay 2% of their salary to
without an increase in tax rates as property values their pension while the district contributes 7 percent.
grew - but the last few years have seen a decline in In Cleveland, teachers pay 10% of their salary to
property values, not an increase, and a their pension and the district contributes 14
turn in the housing market does not percent. A big spread, but it gives you an
seem imminent. The easy historical idea of the numbers.
option of allowing rising property For the teacher to
values to increase school district
benefit in their role In conclusion
revenues is not currently
available to decision makers. as worker they will
Now, in order for the school pay in their roles as Debates are now occurring
districts to contribute more owner, taxpayer, and across the country as every
to the pension plans, they state and community tries to
consumer. Hence,
will have to get the money by figure out how to resolve the
the statement that it is difference between what has
either reducing costs or raising
no longer “Us versus been promised and the assets
revenues.
(Remember, school district Them,” but now “Us available to keep the promises.
revenues are residents’ property versus Us.” I suspect there will be a broad
taxes, so raising revenues means spread of solutions in the end.
raising taxes; without property value The key point I’d like to make is
increases, it means raising tax rates). that the teacher - the worker - is now also the
Who would benefit and who would pay? The retired owner through his/her pension plan.
or retiring teacher would benefit as the promises For the teacher to benefit in their role as worker
made to them about their retirement plan would be they will pay in their roles as owner, taxpayer, and
kept. consumer. Hence, the statement that it is no longer
Any teacher laid off or not hired as districts reduce “Us versus Them,” but now “Us versus Us.”
costs, any teacher with a greater work load and fewer This reality does not appear to have sunk in yet, and
resources because of budget cuts, and any teacher it is noticeably absent from the rhetoric of the parties
with her own children in the school would pay the involved in the discussion.
price - as would all the residents of the district as their When this reality sinks in to the participants in the
taxes went up. debate, I think it will lead to more fruitful discussions
In the long run, communities may decline as and, hopefully, more acceptable solutions.
residents move elsewhere looking for lower taxes and
higher quality education. A full version of this article appears at Muehlenkamp &
At the extreme, this becomes a self-reinforcing Co (http://www.muhlenkamp.com/)
process as higher taxes and lower quality education
fails to attract new residents or even chases existing
residents away, requiring increased taxes to fund the

:WYPUN 2011|Fundamentals4HNHaPUL| 15
 OTC derivatives: over the top?

Brian Bollen examines the knock

Over the top? on effects that could entail from

forcing pension funds to clear OTC
derivatives centrally
FundFront

Could the proposals to force pension funds to counterparty,” says Ben Clissold, deputy chief
clear OTC derivatives centrally represent a classic investment officer at P-Solve, which is part of
case of the law of unintended consequences in the Punter Southall Group and was founded in
action? If the low, growling rumblings emitting March 2001 to provide advice to liability-driven
from the industry are as well informed as they organisations such as trustee groups, corporations,
seem to be, this might well turn out to be the case. charities and insurance companies. “If they
The central clearing measures dictated from on are required to switch from collateralised OTC
high with the intention of making financial services derivatives to central clearing it will reduce capital
safer might well in reality very quickly increase efficiencies by requiring them to post initial margin
risk levels. which are not needed in bilateral transactions.”
This emerges as one of the key issues to present This could cause a drag on overall performance by
itself in even the most cursory examination of the requiring the amount of assets that would need to be
Dodd-Frank and EMIR proposals to ‘improve’ the available as collateral by a further 6%, he calculates,
safety of OTC derivatives, and ultimately the as cash will return only Libor. “The other 74%
value of pension funds. of assets will have to work even harder
Apologists for pension funds argue to compensate, so paradoxically the
that the funds should be exempted requirement to post margin to a
from the central clearing
If they are required central counterparty to reduce
requirement on what are in to switch from risk could actually increase risk,
effect the same grounds used collateralised OTC reduce income, or both,” he
to argue for the exemption derivatives to central says.
of corporates which use clearing it will reduce Tony Kirby, director,
hedging as an intrinsic capital efficiencies by regulatory and risk
component of their business management at Ernst & Young
model. It is exceedingly well
requiring them to post and chair of the MiFID Forum
documented that pension initial margin which are Best execution and Trading
funds which pursue liability- not needed in bilateral Group, predicts that there will
driven investment strategies need transactions be what he calls a rolling wave of
to use hedges of one kind or another higher costs all the way back to the
to enable them to meet their liabilities, buy side. “In a worst case scenario,
especially over the longer term. There is no a whole range of costs will increase, and the
single standard in this process, and the extent of each increases will be worse if there is initial and variation
individual pension fund’s customised needs would margin segregation on top,” he says. “These will all
create the mother of all challenges. Central clearing be passed on to the buy-side as fees.” Little good,
would become, if not an absolute nightmare, at least moreover, will come of it, he argues. “Will it make
a very, very bad dream. things safer? Are the measures proportionate?
The impact would be felt not only on the technical Do they tackle the problem of speculation? No.
side of the business. It would also affect the financial Speculation is the flip side to hedging, yet some
arithmetic. Central clearing will mean additional regulators think hedging is good, while speculation
costs (widely estimated at the equivalent of 100- is bad. They have to be careful not to stifle growth or
200 basis points lower performance), making it a pension funds won’t be able to plug their deficits.”
certain drag on income. This could in turn nudge a Neill Pattinson, chief strategy officer, global rates,
fund into taking a riskier approach to investment, at HSBC Investment Bank, could scarcely agree
or demanding more support from its sponsoring more. “What will be the impact of using a central
company. counterparty? It will clearly be a drag on investment
“If a pension fund is using OTC derivatives we return if they continue to use derivatives in the way
recommend that they hold 20% of their assets in that they have done until now,” he says. Not only
cash or gilts to post as collateral with the bilateral will pension funds have to post initial margin that is

16 | Fundamentals4HNHaPUL |:WYPUN2011
 OTC derivatives: over the top?

not currently required in bilateral OTC transactions, memory serves me, I recall the numbers quoted were
but they will have less flexibility in the assets they some $30bn of current revenue which was predicted
must post. “They will have financing needs for the to reduce to $6bn. I don’t know how or where they
clearing house eligible collateral, which will represent get the numbers, and of course what rigour was
an ongoing cost.” applied to discover them, but what is certain is that
He concedes readily that clearing will provide the lost revenue to brokers has to end up somewhere;
certain benefits, but adds that there are other ways yes, mostly back in the pockets of the buy-side clients
of mitigating risk. “No-one in the fund manager who will now be able to see prices centrally, have
community is looking at clearing as an immediate better visibility of what the market is doing, and will
imperative; they feel that their existing bilateral therefore achieve a tighter spread.
facilities give adequate credit protection." “Now, I know it is not a completely zero-sum-game,
Whatever the philosophical and theoretical since new technology has to be put in place and
debates, a sense of acceptance and readiness to higher capital requirements are needed, but I imagine
adapt abounds. Says Stefan Gavell, executive vice the visibility gained by a centrally cleared OTC will
president of State Street Corporation, for example: greatly mitigate the cost of providing it. I remember
“Clearing of derivatives is going to be a reality -as in 1986 (pre big bang at the LSE), where naysayers
well as enhanced requirements for OTC contracts. were claiming that going visible on electronic markets
While there are overall benefits from clearing in would kill prices, cost too much and that liquidity
the reduction of systemic risk, it will also would plummet. Well, have we learnt a lesson
require major changes to how market yet?
participants, including buy-side “There is that other wee side effect –
firms, execute, settle, collateralise the one that regulators are pressing
and report on trades. A word of What will be the for – and that is insurance. I
caution comes, though, from impact of using a believe CCPs will provide a
Philippe Rozental, head of asset central counterparty? degree of insurance that will
servicing at Societe Generale It will clearly be a drag protect us from a repeat of
Securities Services. “It’s the on investment return the crash recently suffered.
pre-trade area that pension We all know to our detriment
funds must still concentrate
if they continue to use that insurance costs money,
on when making a decision derivatives in the way but the upside is that almost
whether to invest in OTC that they have done every single country west of
derivatives, not the post-trade until now China would have avoided the
processes, however sophisticated depths of depression that we have
they might be.” stooped to. We would not have
We return to Mr Clissold of P-Solve. to nationalise our banks, have no
He believes that the worst of all possible ballooning unemployment and poor GDP
worlds would be to require pension funds to clear etc. And the buy-side simply cannot complain that
derivatives before central clearing counterparties can 1-2% of performance will be lost due to these costs. I
deal with all the types of derivatives pension schemes think the ensuing crash, the failure to understand the
use. Making it possible to clear some transactions risks, resulting in a worldwide crash has had a rather
centrally but not others would defeat the objective more significant cost than an annualised 2%.
of the exercise, he argues. “It would reduce the “Finally, taking the last word from Mr Clissold, I
efficiency of the system while raising costs for its simply do not agree that unless every instrument is
participants.” able to be cleared centrally then we shouldn’t start
Kevin Neville, head of prime services and securities clearing any of them. We know that $450 trillion
finance at Rule Financial, challenges the assertion of OTC Swaps are traded, and $6 trillion of OTC
that ‘new’ costs related to central clearing will equities, and the same in OTC repos, and maybe a
cause unintended consequences, such as reduction few others – so why don’t we start with swaps and
in performance and riskier investing. “I remember get 90% of the game covered? Simple.”
reading recently that broker dealers were concerned
that with central clearing they would lose a huge
profit stream in the spread they charge the buy-side
over these bilateral agreements,” he says. “If my

:WYPUN 2011|Fundamentals4HNHaPUL| 17
 Fund manager profile
The Brandes Brand
FundFront
Debra McGinty-Poteet, Director of Mutual Fund and Subadvisory Client Services at
Brandes Investment Partners, explains the firm's history and investment principles
In 1972 Charles Brandes worked for a small, now-
subsumed brokerage firm in La Jolla, California. He
was a young guy and had been in university when
they were still teaching Securities Analysis as a
textbook in the finance classes, which was written
by Benjamin Graham and David Dodd, and The
Intelligent Investor which came out a few years later,
which was also written by the two of them.
Who walks into the office on that day – that brokerage
firm on Wall Street, which was about six houses long in
downtown La Jolla, but Ben Graham, retired after 30 or
so years at Columbia University. He spent six months
a year in La Jolla and was writing the fourth edition of
The Intelligent Investor.
Interestingly, after Charles had finished college they
began teaching modern portfolio theory and they quit
teaching the various books written by Ben Graham and
David Dodd, so the fact that he had even read this stuff
was interesting.
Having recognised that this who was in front of him,
he said: “I really liked what I read in your books and it
really seems like the way I think you ought to approach
investing.” So for the next couple of years Charles
would pursue Ben Graham for donuts, lunch or coffee;
any pretext to sit down and talk about investing.
They developed a mentor/student relationship over
the next couple of years and Charles became imbued
with the rightness of this theory of managing money
and not with the types of things that were being
advocated by the brokerage firm he worked for.
He quit his job and took all the money he had in
the world – which wasn’t much – and set up Brandes
Investment Partners in the next beach community north
of La Jolla called Del Mar, above the Double Chinese
Happiness restaurant (editor’s note - for anyone in
the area the restaurant is still there, although Brandes
has - not surprisingly - moved) and laboured there by
himself for the next 10 years.
Graham’s work is known for his applying value
principles to domestic US securities. But the first client
at Brandes was a Canadian multi-national, who said: “I
really like this whole value idea, but why can’t you do
it with both US and non-US stocks as well?” So Charles
started applying the principles to a global portfolio for
the very first client.
So it could all have gone differently if someone else
had walked in that first day.
18 | Fundamentals4HNHaPUL |:WYPUN2011
In terms of applying these principles to non-US stocks,
there has been an evolution. Even in the 1980s it was
hard to get US GAAP comparable data out of a lot of
companies and so there was more of a bias towards
large cap, but over the years non-US firms wanted
access to US capital and the only way to get that was
to open up the books, or come up with US GAAP
comparable financials.
You also have the evolution of custody. It used to be
that you’d find a lot out about a firm but trading it was
a nightmare, as were the expenses on top of that, but
now you can trade non-US securities extremely cheaply
from an institutional standpoint.
As we talk to our elder statesmen here about how
it was in those days, they wouldn’t get a lot of
information but they would get a sufficient amount to
start developing the models compared to what we can
get today on companies.
The interesting thing is non-US companies aren’t
restricted in terms of what they can talk to you about,
versus what happens in the US now. In the US a
company can’t tell you anything more than they tell
the public so it gets pretty difficult to get additional
information.
You can find out more from the competition on
another company than you can from them if they
haven’t released it, because they can talk about other
firms; they just can’t give you information about
themselves that’s not published. You don’t have that
restriction on the non-US side.
In the present day, the firm itself is a partnership
and we have a 100-year vision of remaining employee
owned. Charles still has a substantial ownership
interest or partnership interest but there are 21
partners currently and the 100-year vision is to remain
employee-owned because if you look at the way we
invest, it does not sit well with a corporate parent.
The reason for that is Graham talked about value
investing as thinking differently from the herd. The
market itself is a manic depressive and can’t be
anticipated in terms of how it’s going to behave, and
it’s really the sum total of a lot of irrational behaviour.
First and foremost we’re a research boutique. We don’t
have a top down view or an economist on staff, we
research businesses as an investor or an entrepreneur
might look at a company.
When we develop a valuation of a security we look at

its history. It might take 10 or 15 years’ worth of data to
come up with the cash generative properties of a firm
as it goes through the various market cycles. We’re not
saying it’s a good firm or a bad firm, we’re looking at
fundamentals and how it performs over time.
Next, we only get interested in purchasing a name if
you can purchase it at a discount. Graham pointed to
a 20-35% discount – if you can purchase names in that
range you’re going to do better than the market and
sometimes the reason for that discount can be very
uncomfortable – it can be headline risk of factories
being destroyed, it can be problems with regulators,
and so on.
We are looking for that sweet spot at 20-25% discount
of what we think it is worth. Graham called that the
margin of safety and the valuation the intrinsic value.
The next tenet of value investing is to take a long-
term view. Our typical portfolio is three to five years,
although we’ll have outliers that will be in the portfolio
for seven to nine years before they reach their valuation
target.
That’s the philosophy, but where we are unique is in
the way we render our valuation philosophy. We don’t
have a star system, legitimately. All of our buy, sell and
allocation decisions in our portfolio are actually made
by an investment committee.
We have four investment committees –large cap, mid-
cap, small-cap and emerging markets products.
We have 35 researching analysts who are responsible
for putting together these valuations. They might spend
anywhere from four to six weeks or more coming
up with the valuation of a company. They bring this
research report to investment committee and everybody
who sits on a committee is either currently a research
analyst or has been one in the past.
Once a research report is ready it is brought to the
Watch a video
interview with Debra
at the IMN Beneficial
Owners' Securities
Lending Summit at
Fundamentalsmagazine.
com/videos
Fund manager profile
investment committee who will opine on any issues
on the report. They can request anything they want
and send the analyst back many times until they are
comfortable.
Then the committee will discuss what the value
should be. Part of what we do to ensure it is truly
a committee decision is that when comments are
requested of the committee members the most junior
people have to speak first so you don’t have the most
senior people intimidating the newer members. We
want the intellect of everybody to be rendered equally.
We like to call our valuations a neighbourhood rather
than an address; we don’t say a firm is worth say $30 a
share. We might say as a committee that it is worth $30
to $32 a share.
Then let’s say it’s trading at $15, the committee will
decide whether that current market price is cheap
enough. If it is, the committee will say the current
margin of safety is acceptable and we would like to put
2% of the stock into our cash flows and then we put
that into our computer systems to look around all of
our portfolios and look for cash opportunities.
So in our portfolios we’re looking to have an average
margin of safety of 20-35% across the board and to the
extent there are no cash flows we’ll look for situations
where names are approaching their intrinsic value.
Let’s say they were purchased three years ago, it is
40% margin of safety and now they’re only 10% away,
so we might pick up cash from those names that are
approaching their intrinsic value.
Our portfolio managers don’t have discretion because
the investment committee itself does all buy, sell and
allocation decisions.
:WYPUN 2011 | Fundamentals4HNHaPUL| 19
 EFSF bonds

Common stability
FundFront

Ugo Bonaugurio investigates the European Financial Stability Facility:

A temporary initiative for the issuance of the first common bond in the Eurozone
The European Financial Stability Facility (EFSF) is particularly from Asian investors. The five-year maturity
one of the many acronyms we have come across in the bond was priced at a yield of 2.89%, giving subscribers a
last few years identifying programmes to safeguard the 48 bps yield pickup over the German Bund of the same
stability of the financial system, provide liquidity and maturity while holding a AAA-rated top notch bond.
restore markets under stress. The success of the pre-placed issuance rewarded the
Like other initiatives implemented on both sides of marketing efforts of Klaus Regling, EFSF’s CEO, and
the Atlantic it is temporary in nature but unlike them signaled a commitment of Asian countries to support the
it can have permanent consequences on the European resolution of the sovereign debt crisis in the eurozone.
government bond market. To raise funds to provide aid The benefit of an higher yield over the bund, however,
to countries in financial difficulties, the EFSF issues bonds came at the cost of a lower liquidity of the EFSF bond,
backed by the guarantees of the Euro-area member states. for which a secondary market is currently non-existent
People familiar with the political debate in Brussels can and trading activity is limited to satisfy dealers’ market-
easily recognise that the structure of this new making requirements.
financial instrument resembles that of the Nevertheless, the issuance of the first EFSF
common European government bond, bond is a key milestone for the European
brought up initially by think tanks Monetary Union that could initiate
and consultants, and more recently A possible solution a substantial move toward a fiscal
by policymakers as a panacea for to the debt crisis co-operation among eurozone
the sovereign debt crisis in the would be to learn from countries, including the issuance
eurozone. the crisis resolution of a common sovereign bond.
The EFSF was created on the Germany has strongly opposed
basis of Article 122.2 of the
mechanisms adopted the project but as Simon Penn,
Treaty on the Functioning of the by Latin American executive director and global
European Union, which allows for countries at the end head of strategic content at UBS
mutual support when a eurozone of the 1980s and AG said: “Providing funding to
member country is “in difficulties countries that have lost access to the
or is seriously threatened with severe
take the Brady bonds
capital markets is only a temporary
difficulties caused by exceptional scheme as a template measure that will not eliminate the
occurrences beyond its control”. structural imbalances among EMU
This special purpose vehicle is backed by countries exposing the eurozone to the
a guarantee of the eurozone countries of EUR 440 recurrence of the sovereign debt crisis in the future.
billion and was formed as a part of the EUR 750 billion A possible solution to the debt crisis would be to learn
Financial Stabilization Mechanism (ESM) approved by from the crisis resolution mechanisms adopted by Latin
European Finance Ministers on 10th May 2010. In addition American countries at the end of the 1980s and take the
to the EFSF, the plan includes EUR 60 billion provided Brady bonds scheme as a template.”
by the European Financial Stabilization Mechanism Brady Bonds provided bond holders the option to
(EFSM) and up to EUR 250 billion from the International receive a recovery rate on their investment or newly
Monetary Fund (IMF) that commits to contribute up to issued bonds in exchange of the defaulting ones with a
50% of the loans made by the EFSF and EFSM. haircut that depended on seniority and maturity of the
The main objective of the ESM was to provide a backstop original claim. If such an initiative were undertaken in
against speculation on the sovereign debt of European Europe, continues Penn: “The EFSF would buy bonds
peripheral countries, and many market participants of troubled countries at a discount and issue AAA-rated
expected that the facility would have never been tapped. bonds allowing countries such as Greece and Ireland to
However, in November 2010, under increasing market restructure their debt without causing any credit event.
pressure, the Irish government agreed with the European As suggested by Austria and Greece, the money raised
Union and IMF an official bail-out package. through the issuance of the EFSF bonds could be used to
As a consequence, the first EFSF bond was issued on 24th finance infrastructure projects of common interest for the
January 2011 for a notional amount of EUR 5 billion, and it
attracted an extraordinary demand with a strong interest continued overleaf

20 | Fundamentals4HNHaPUL |:WYPUN2011
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 Private Equity Endless-Liberata
European community.” A first step in this direction has
been taken with the deal agreed by government leaders of
the eurozone countries on 12th March 2011 that increases
the lending capacity of the EFSF and gives the EFSF the
ability to purchase bonds in the primary market.
FundFront
The theoretical idea of a single eurozone debt
instrument first considered in a report published by the
Giovannini Group in 2000 as one possibility to further
Private equity deal focus:
Endless - Liberata
Brian Bollen takes a look at two major private equity deals - first, the purchase of
business process outsourcing services firm Liberata by Endless and overleaf, the Pearson
Group's acquisition of the learning division of one of Brazil’s leading education companies
Here's the deal:
Private equity turnaround specialist
Endless has committed more than £20m
in the acquisition of Liberata, a provider of
outsourced services to local and central
government bodies in the UK.
The Endless team was led by Garry Wilson
and Chris Clegg. James Woolley and
Kerry Swain completed the in house due
diligence and Simon Mason supervised
the legal documentation whilst Ian Plumb
dealt with the Pension Scheme restructure.
Endless was advised by the London office of
Eversheds.
An IT due diligence team and Pensions team
from PwC also advised Endless. A team
from the London office of Ernst & Young
Transaction Advisory Services advised
Liberata on the accelerated M&A process
and introduced the deal to Endless.
victory in 1997 until its defeat in 2010
22 | Fundamentals4HNHaPUL |:WYPUN2011
enhance the integration in the government bond market
is progressively becoming more concrete, and European
policymakers now have the unique opportunity to make
it happen.
It might be the mother of all clichés, but one person’s
challenge is another’s opportunity. Some might
feel that that cliché could be about to be tested to
destruction as private equity turnaround specialist
Endless steps into the age of austerity being ushered
in by the UK’s Conservative-dominated coalition
government. “We are all in this together,” the
chancellor of the exchequer likes to remind the UK’s
people on a regular basis as he refers to his beloved
spending cuts, sneering and baring his teeth as he does
so. Some of us, though, see the opportunity to make a
profit out of it.
Garry Wilson, managing partner at Endless, is a
founder member of that latter group. This helps explain
his almost tangible enthusiasm for the firm’s most
recent purchase, of Liberata Limited, a leading supplier
of business process outsourcing services to the public
sector. He argues strongly, and convincingly, that the
key to understanding the merits of the transaction is
to look through the right end of the telescope. Doing
so shows that Liberata will in fact benefit from public
spending cuts, not suffer. “I can see that local authorities
and central government will be under huge pressure to
make cuts, and that that pressure should create huge
opportunities for Liberata,” says Wilson. “Its business
model is to provide public sector bodies with outsourced
services; we can save them a lot of money.”
Endless is backing the incumbent management team
of Dermot Joyce and Martin Trainer, who act as CEO and
CFO respectively of the group. First contact between
them and Liberata dates back to early October last
year. “Ernst & Young were assisting the company in
an accelerated M&A process,” recalls Wilson. “We met
 Private Equity Endless-Liberata

the management team on 4th October and we knew at years the business has a positive balance sheet which it
once that it was a transaction well suited to the Endless can be proud of and unlike many competitors has zero
business model. I was very impressed with Dermot and bank debt. Furthermore the cash injection from Endless
Martin, who had already taken the company a long way of over £20m has given the business substantial cash
through the turnaround process.” headroom. Many employees have asked why Liberata
Two big obstacles remained, however, to make was acquired by a Turnaround Fund and the reasons lie
Liberata truly attractive. One, the company was running in the historic debts and weak balance sheet which were
out of cash, as its modest profits were too low to service unsustainable.
the debt taken on by General Atlantic to fund its The acquisition marks the first deal from the firm’s
previous private equity purchase, and General Atlantic new London base in Curzon Street, Mayfair, and the 11th
had reached the limits of its appetite to provide further in Endless Fund II. Liberata employs over 2,000 people
funding. Two, Liberata’s defined benefit pension fund in 20 business centres across the UK and its core focus is
had a deficit in excess of £100m that had to be addressed. on improving and streamlining operational processes to
“On the cash front, we knew we had until Christmas,” drive costs savings and improve administration at Local
Wilson continues. “That made it a tight timetable, but Authorities and Central Government Departments.
one that is within our usual norms.” On the pension Liberata describes itself as one of the UK’s leading
front, the management team had already been in providers of business process services having supported
discussions with the fund trustees and the UK’s clients for over 35 years in improving their operational
pensions regulator. Those discussions had very handily cost management and service performance to deliver
pinpointed a groundbreaking way forward, which was business and social benefits and improve their
to place the fund in the care of the country’s customers’ experience. Its origins lie in a business
Pension Protection Fund. At a stroke, founded in 1975, by the Chartered Institute
using a Regulated Apportionment of Public Finance and Accountancy
Agreement, and handing over a cash (CIPFA), called CIPFA Services
sum in excess of £10m, the pension A possible solution Ltd. CIPFA was acquired by its
liability vanished. The exchange to the debt crisis management in 1989 and renamed
of contracts took place on 26th CSL. CSL provided management
November, and although the
would be to learn from consultancy services, Business
formal public announcement did the crisis resolution Process outsourcing (BPO)
not take place till early January, mechanisms adopted and corporate finance advice,
completion followed on 24th by Latin American predominantly to local
December, delivering yet another government until 1993, when
cliché opportunity. “Yes, it was a countries at the end it was acquired by Deloitte &
nice early Christmas present for of the 1980s and Touche and renamed Liberata.
us,” agrees Garry Wilson. take the Brady bonds BPO services became the focus of
The total of more than £20m its activities resulting in a number
committed by Endless includes the
scheme as a template of partnerships with local authorities
premium paid to the PPF. The firm and governmental agencies for the
paid a nominal sum for the business itself, provision of services including Revenues &
which is now debt-free, leaving around £10m for Benefits, Finance & Accounting Management, ICT,
working capital as Endless gets on with doing what it Human Resources & Payroll and other transactional
does best. “What struck me most on meeting Dermot services. Recent successes include contracts for the
and Martin was that despite having been through a provision and management of business support services
tough time their primary concern was about providing for the London Borough of Bromley and North Somerset
a secure base for employees and customers alike,” says Council and the Local Government Association.
Wilson. “Those principles are very closely aligned to “Endless understood the financial restructuring that
our own. Harnessing the motivation and support of was required and that is one of the final pieces in a
Liberata’s employees and customers will mean a bright turnaround strategy already well advanced by the team
future ahead. The company is already making modest at Liberata,” says Garry Wilson, bringing the current
profits, and we hope to improve the level of those chapter of the story to a neat conclusion. “Now that the
profits.” At the time of acquisition, Liberata’s annual deal is done all stakeholders can look to the future with
revenues of around £110m were generating around £5m Liberata as a financially strong, independent company. I
of ebitda [earnings before interest, taxes, depreciation, am very much looking forward to seeing the team take
and amortisation], he adds. Turnover is underpinned by the business forward for years to come.”
contracts with the UK’s Ministry of Justice and several of
the country’s largest local authorities.
The transaction has seen the financial position at
Liberata strengthened considerably. For the first time in

:WYPUN 2011|Fundamentals4HNHaPUL| 23
 Private Equity Pearson-SEB
Private equity deal focus: Pearson -
FundFront
Sistema Educacional Brasileiro
Here's the deal:
Pearson agreed to pay around £326m for SEB’s school learning systems business and to provide technology
and materials to SEB’s educational institutions, using part of the proceeds from its earlier sale of Interactive
Data Corporation.
Barclays Capital advised Pearson while Morgan Stanley advised SEB. Pricewaterhouse Cooper handled due
diligence for Pearson. Lobo de Rizzo was Pearson’s legal adviser, while Pinheiro Neto looked after SEB.
Education. Education. Education. The one-time
favourite election campaigning mantra of Anthony
Charles Lynton Blair could also double as a modern
mission statement for the Pearson Group. In the early to
mid-1980s the company was little more than a de facto
investment trust with a ragbag assortment of holdings
ranging from the Financial Times to Lazards to Madame
Tussauds to Penguin books. Today Pearson describes
itself with no false modesty as the world’s leading
education company, providing learning materials,
technologies, assessments and services to teachers and
students of all ages and in more than 60 countries.
The most recent addition to the stable is the learning
division of Sistema Educacional Brasileiro (SEB), one of
Brazil’s leading education companies. Strictly speaking, the
formal announcement of the link-up spoke of a strategic
partnership to develop educational products and services
for the fast-growing Brazilian education market. Brazil is
described as one of the world’s largest education markets
with 56m students and an educational materials market
valued at approximately $2bn.
Under the terms of the agreement, Pearson will acquire
SEB’s school learning systems business and will provide
technology and materials to SEB’s educational institutions.
Pearson agreed to pay a cash consideration of R$888m
(US$497m; £326m) or R$22 per unit. This compares with
a reported price tag of around £250m when murmurings
about the deal first surfaced several weeks ahead of its
confirmation. Citi analyst Tom Singlehurst, who covers
Pearson, is, however, reasonably relaxed.
“The multiple looks high but for good reason we
believe,” he observes in his examination of the deal. “SEB’s
learning systems business is expected by the company
to generate c. R$160m of revenue this year (c. £60m) This
implies Pearson is paying around 5.5x sales and around
15x EBIT. While this is higher than the recent acquisition
multiples we have seen (around 2x sales) we note that:
one, the business is much higher margin (35% operating
margin compared with Pearson’s existing education
24 | Fundamentals4HNHaPUL |:WYPUN2011
business on 16% 2010E); two, the business has achieved
20% organic growth (and drivers for growth remain –
young demographic profile, increasing public and private
education spend); and three, there are meaningful tax
benefits (no tax to be paid in Brazil for five years).”
He points out that Pearson has an existing small position
in Brazil and that the combination of the two entities
should allow cost synergies. He adds that with integration
costs taken above the line, Pearson expects the deal to be
mildly EPS accretive in 2011E and value accretive. Clear
operational synergies also exist. Pearson can point to a
very large sunk investment in creating educational content
for the US and European markets. The translation of these
into other languages for sale and use in other markets
is a relatively simple and high-margin process, rather
resembling the traditional syndication of newspaper and
magazine content. The process works particularly well for
subjects such as mathematics and science, although some
products need to be carefully adapted for local language
and cultural reasons.
Older observers whose memories are still sound will
surely find their eyes twitching wildly at the mention of
any tax concessions, like Commissioner Dreyfus in the
Pink Panther films upon any mention of the name of
Inspector Clouseau. Brazil was known long ago for its
tendency to issue withholding tax certificates for large
amounts of tax ‘paid’ locally. The clinching argument
of many a proposition for many international investors
was not the soundness of the underlying investment, but
the implications for domestic tax savings using WHT
certificates that were, to put it bluntly, pretty much fake, but
genuine fakes. There is not the remotest suggestion that this
is a factor in this deal, but it seems appropriate to provide
younger readers with a degree of longer-term context that
they might not otherwise possess.
Returning to the present, Singlehurst’s counterpart at
UBS, Alastair Reid, echoes many of his thoughts. “Revenue
growth for the SEB unit Pearson is buying has been 20%
pa with EBITA margins of 35%,” he comments. “Assuming
 Private Equity Pearson-SEB

this growth rate continues, a higher than 50% incremental curriculum design, teacher support and training, print
margin and given the relatively low cost of financing and digital content, technology platforms, assessment
using the proceeds of the Interactive Data Corporation and other services. SEB’s four sistemas – COC, Dom
disposal (£900m of net cash), we estimate the deal would be Bosco, Pueri Domus and NAME - serve more than 450,000
more than 3% enhancing to 2011E EPS and more than 4% students across both private and public schools. It offers
enhancing by 2012E, all else remaining equal.” undergraduate and graduate programmes to approximately
The strategy makes sense, adds Singlehurst, even though 9,000 college students and distance learning courses for
this is not the exact deal hypothesised in Citi’s own recent undergraduate, graduate, test preparation and further
report “Pearson: Building BRICs”. It reflects the execution education programmes. It directly operates 31 schools
of the same strategy, he explains, reallocating resources providing full-time pre-school, primary, secondary and test
towards faster growing markets. Although small, it will preparation courses.
shift Pearson’s emerging market exposure in Education Based on current market conditions, Pearson expects
from 13% to 14% on our estimates. “We believe Pearson will SEB’s learning systems division to generate revenues of
have the opportunity to grow the business (no.3 player in around R$160m in 2010 and to continue to grow rapidly.
a fragmented market) by bringing in existing expertise in The division has achieved average organic revenue growth
English Language Training and technology from previous of more than 20%, supplemented by acquisitions, and
acquisitions like Fronter.” Alastair Reid adds: “We see the operating margins of around 35%. Pearson will invest
move as a strategic positive as it allows Pearson to bulk to grow the business, integrating its content, assessment
up its faster growing international education unit (around and digital services into SEB’s sistemas and enabling SEB
20% of estimated 2011 EBITA) and expand into a high to provide a more complete offering to a wider range
growth market.” This will be building on the company’s of schools and students. The integration of SEB’s
recent progress. Over the five-year period from significant infrastructure with Pearson’s
2005-09, the international education market existing business in Brazil will enable
outside North America was Pearson’s Pearson to reduce costs for the combined
fastest-growing market. The headline organisation.
In Sistema
compound annual growth rate of Pearson expects the acquisition to
sales was 17%, rising to £1.035bn in Educacional Brasileiro, enhance adjusted EPS from 2011,
2009 from £559m in 2005. Operating we are delighted to its first full year, and to generate a
profit from that sector almost have found a dynamic return on invested capital above
tripled over the period, rising to Pearson’s weighted average cost of
£141m from £51m.
partner who shares capital from 2012.
Charles Goldsmith, head of our vision and Pearson says that this acquisition
corporate communications at commitment for supports its stated goals of building
Pearson, points out that Pearson innovative and significant education companies in
flagged up its intention to make selected fast-growing markets and
acquisitions of just this kind on effective learning applying its learning services and
the occasion of the Interactive Data technologies to support governments
Corporation sale. “Most recently, back in and institutions in making educational
May, we said that we would use the proceeds opportunities more accessible and more
of the sale to accelerate the expansion of our effective. It extends Pearson’s position as the
businesses, including through bolt-on acquisitions, with a world’s leading education company and follows recent
particular focus on adding complementary technology and investments in both acquisitions and organic growth
services to our international, consumer and professional opportunities in China, India, Southern Africa and Nigeria.
education businesses.” Juan Romero, president of Pearson Latin America, will
Although it is a small deal, Singlehurst says he believes it relocate to São Paulo to manage the business and lead
is transformative to the profile of the group and additive to Pearson’s growth strategy for the region from Brazil. John
earnings. Importantly, he calculates that it only represents Fallon, chief executive of Pearson’s international education
around one-third of the proceeds of the IDC sale. He company, said: “Given the size and growth prospects of
therefore expects to see more bolt-on acquisitions over its education sector, Brazil has been a focus for Pearson
the course of the next six to 12 months. He views the for some time. In SEB, we are delighted to have found a
SEB purchase as a mild positive in as far as it refocuses dynamic partner who shares our vision and commitment
market attention on the opportunities for growth through for innovative and effective learning. For Pearson, this
acquisitions and from emerging markets. also provides a platform to build a more significant Latin
SEB was founded more than 40 years ago and listed American business and takes us further into the provision
on Bovespa in October 2007. It has strong positions of broad-based integrated education services.”
in several key segments of the Brazilian education
market. It is a leading provider of sistemas (or ‘learning
systems’) to pre-school, primary and secondary schools.
A sistema is an integrated learning system incorporating

:WYPUN 2011|Fundamentals4HNHaPUL| 25
 InvestorServices
P.28 P.33 P.38 P.42 P.50
Executive Profile: Russia gets ready Third-party Domiciles: Sustainable
Steve Smit clearing: Hong On and off again investment
P.34 Kong Guernsey focus
P.30 CEE outline P.54
Future trading P.40 P.48 Outsourcing
P.36 Dodd Frank Stock exchange
P.31 Corporate actions consolidation P.56
OTC Clearing automation Wine custody

Register free for the Weeklywire - eFunds.tv/membership

InvestorServices

Road to Ratification

With European Member

:cV]R_U
States having until 1st
F< July 2011 to adopt
UCITS IV into their
8Vc^R_j
national legislation,
3V]XZf^
the diagram opposite
=fiV^S`fcX shows how far some
of the leading markets
7cR_TV have yet to come in
DhZekVc]R_U terms of implementation
:eR]j
Key:
Red - no action
DaRZ_ Amber - at
parliamentary stage
Green - implemented

Diagram courtesy of RBC Dexia Investor Services

26 | Fundamentals4HNHaPUL |:WYPUN2011
Gateway to the Russian Financial Market

The largest settlement depository in Russia

servicing on-exchange and OTC transactions with all types of debt
and equity securities of Russian issuers and providing settlement services
to participants in the Russian financial market

www.nsd.ru ■ www.isin.ru
 Executive Profile: Steve Smit
Executive Profile:
Stephen Smit
Stephen Smit has been at State Street for what he
describes in his own words as an “awfully long time”,
taking in a variety of roles and locations (see pull out
for details), but the current period is perhaps the most
exciting in his long and varied career to date.
His journey is perhaps rare within the investor services
space. To cut a long story short, he moved from being
a foreign exchange trader to heading foreign exchange
sales, and then “ultimately was asked to set up and
InvestorServices
manage the global markets operation for State Street in
Canada”.
What expertise has this experience given him? “I
have great, broad exposure to our markets business in
terms of foreign exchange, both building and running
trading rooms. I’ve had stints with responsibility for our
investment research, with responsibility for building our
electronic trading platforms in Europe and so on, so I’ve
had good broad exposure rather than the very narrow
asset class exposure that many people tend to follow in
terms of a career in the markets.”
However, it was his move to Canada – for the second
time – that saw him tasked with taking both a global
markets and investor services role.
What was State Street’s thinking behind this? “There
was a very conscious decision on the part of the
organisation to start breaking down the silos within the
bank, but also recognition that 70% to 75% of our growth
in revenues actually comes from our existing client base.
“The idea that a big component of our revenue growth
was actually our ability to cross-sell products and
services between the businesses was a key element.”
So was Smit’s experience on the other side of the
business a major part of this decision? He thinks so.
“When you spend 20 years around an institution like
State Street you are going to pick up a fair amount of
knowledge about the servicing business, but I think it
also enabled me to bring a slightly different mindset
to that business to the extent that I don’t necessarily
see what we are selling in the marketplace as being
custody and accounting; the service I see us selling is the
assumption of operational risk.
“I think that background in managing risk in a trading
environment really allows me to bring a slightly different
perspective to our core business on the asset servicing
side.”
The renaming of the custody business is becoming a
theme of the Fundamentals executive profiles and Smit
is no exception. With ‘risk awareness’ being one of the
most oft-used phrases in the financial services business
since the onset of the crisis, ‘operational risk’ may well
28 | Fundamentals4HNHaPUL |:WYPUN2011
Craig McGlashan talks to the
Executive Vice President, Head of
Global Markets Europe and Investor
Services UKMEA at State Street
be a name that chimes with regulators and clients alike.
However, Smit points again to the cross-silo nature of
his work; for him, the most important factor.
“We are seeing tremendous demand in middle office
investment operations outsourcing. You have many
asset managers who are looking to address their
current expense challenges and you have an outsourced
provider where generally the initial expense is quite high
in terms of migrating or integrating systems. The ability
to provide a whole range of services which are priced
transparently allows that transaction to become viable in
many cases.”
As said at the outset, the current environment is an
exciting one for Smit, not least within the potential
opportunities that the current raft of regulation being
seen in Europe and North America could provide.
“The evolving regulatory environment is in many
ways a new product laboratory for us to the extent that,
while it can certainly create challenges, it can also create
opportunities, for instance if our clients have enhanced
disclosure reporting requirements that we can assist
them in meeting.
“Looking at Dodd Frank and the Volker Rule in the
USA and what is in the process of playing out here
in Europe, there will be new regulation around OTC
derivatives clearing and there is a potential opportunity
there because clearing is really an adjacency to much of
what we do already in terms of securities settlement and
safekeeping.
“Like everyone else, we need to continue to evolve
and refine our operating model as there continues to be
a certain amount of downward pressure on fees and we
need to get more efficient in terms of how we go about
our activities, our processing.
“Automation is obviously a key element of that; we
allocate a pretty significant 20-25% of our operating
expense budget to IT. I think it’s probably difficult
for many of our competitors to maintain that kind of
expenditure in that area.”
Despite these potential opportunities, Smit is cautious
about some of the problems that could arise as global
regulators look to reform the financial world following
the crisis.
“I don’t think all of the implications have necessarily
been thought through and I’m not sure there is someone
looking across the whole agenda and ensuring that
there’s consistency across markets; certainly not globally.
“A lot of the new regulation and legislation will be
enforced in the USA probably 12 months before Europe,
so a lot of the rules will come in as we are drafting

Bio:
Smit has regional responsibility
for investor services, securities
finance, foreign exchange,
equities, and fixed income trading
activities, and operations and
is a member of State Street's
European Executive Board. Prior
to relocating to the UK, Smit
was President and CEO of State
Street Trust Company, Canada, and Principal Officer of
State Street Bank and Trust Company – Canada Branch,
responsible for State Street’s Investor Services, Global
Markets and Securities Finance businesses in Canada.
Smit joined State Street Bank and Trust Company in
1987 and has served in a variety of trading and risk
advisory roles. Prior to relocating back to Boston in 2005,
the rules here. There will be some ability to ensure
consistency between North America and Europe but we
have yet to see whether that consistency will exist.”
During the interview, Smit talked at great length
about the client focus he and State Street attempt to
achieve when running their business. But, while Smit
talks expertly about the regulations his bank must
deal with, does he feel his customers are in the same
knowledgeable position?
“It varies. There are certain elements of the changing
regulatory environment that our clients are very well
aware of, like UCITS and AIFMD, but I think there are
other elements that perhaps they are not so aware of.
“The implications of Solvency II on the insurance
industry are probably well recognised in the UK,
perhaps less so on the continent. We’re trying to work
collaboratively with our clients, where necessary to
help educate them and we have a variety of mediums
for doing that; our vision paper series, our client
roundtables and so on.
“It really is a two-way street; our ability to provide
information and education to our clients and receiving
their feedback in terms of what’s important to them,
at the front end trying to consolidate that information
and influence the regulatory agenda, but at the back
developing products and services to help our clients
meet those requirements.”
However, there is one area where Smit expresses
explicit concern, a concern that filters down to the level
of the participant within some of the pension funds that
State Street counts as its customers.
“One area where I don’t think there is necessarily a
good appreciation - maybe it’s beginning to manifest
itself now - is that the result of many elements of this up-
and-coming regulation is going to be increased costs.
“Whether that’s cost to meet the increased risks that
asset servicers are assuming or it’s increased costs to
Executive Profile: Steve Smit
Smit was based in Tokyo as Managing Director and
General Manager of the Tokyo Branch of State Street Bank
and Trust Company. With overall responsibility for Global
Markets’ activities in Japan (including foreign exchange,
money markets, equities and Global Link), he was a
member of Executive Committee providing oversight for
State Street Group companies in Japan.
From 2000 to 2004 Smit was based in London as
Managing Director with responsibility for the company’s
e-finance strategy in EMEA. From 1995 to 2000 he was
Managing Director of Global Trading & Research of State
Street Trust Company Canada where he was part of the
senior management team overseeing the company’s daily
operations, and responsible for the company’s treasury
and capital markets activities including the balance sheet
management, deposit-taking, trading and investment
activities.
meet increased disclosure requirements, it’s very likely
that these costs will be passed on and detract from the
investment performance of the asset managers and in
that way ultimately impact the end investor, whether it’s
a pensioner or someone putting money in their ISA.
“I don’t think that aspect has really been recognised by
the end investor, but certainly not by the politicians that
are proposing this increased regulation.”
Despite these concerns, Smit is optimistic about the
future, citing the potential for State Street to take on
operations that fund managers are currently finding a
drain on resources.
“Demand on the asset servicing side is very robust
and the pipeline is very robust, for a number of reasons.
Asset managers are endeavouring to address their cost
challenges because right now levels of assets under
management generally have returned to pre-crisis levels,
as has asset managers’ expense base, but revenues have
probably only returned to about 80%, as the money that
has flowed in has flowed into lower margin strategies.
“We are seeing tremendous demand for an end-to-
end solution, middle and back office, and regulation
is enhancing that demand, not necessarily in the
asset manager space but also the insurance space
with Solvency II. Insurers are looking at what their
requirements and needs are going forward and who can
help support them.
“On the pension side, we still continue to visit the
shift from defined benefit to defined contribution and
that’s a trend that will continue to play out over years.
There are lots of trends out there creating challenges
and opportunities, but certainly from where I sit the
opportunities are outweighing the challenges - making it
a very exciting time.”
As stated earlier, Steve Smit has been in the business for
an “awfully long time”, but – if he is right – this might
well be his most exciting time yet.
:WYPUN 2011|Fundamentals4HNHaPUL| 29
 Future trading
Future Mark Akass, BT GB & FM’s Chief
Technology Officer, answers questions
on the challenges of co-location and
trading proximity hosting
Does automated trading mean the death of the traditional
trading floor?
There has been a lot of discussion about the long-term
death of the trader but we haven’t seen that yet – there are
approximately 180,000 traders globally. BT serves about
a third market share for the trading floor population and
we haven’t seen that go down. What is happening is that
InvestorServices
people are modernising.
There are still investments going on at the trading floor
level and that means they are more going into collaboration
services, such as instant messaging and voice collaboration.
With fairly simple trades, machines can do it better, faster
and cheaper. With complex trades, you need humans and
these new services can help them with that.
Did the “flash crash” impact on your business?
No, we continued to operate successfully. Our challenge
is to make sure that our infrastructure is robust enough for
those sudden surges. When you create your capacity model,
the rule of thumb is to have your load factors at below 40%
load, so if you have a failure on one half of your service
route you have sufficient capacity to cope with it.
The issue there is 40% of what –the next part is to set the
metrics to say the busiest second of the busiest minute of
the busiest day of the month and you use that as your point
for setting the 40% threshold.
As an analogy it would be like capital reserves at banks?
That’s exactly right. I wouldn’t call them unexpected
surges because we expect these surges to happen and they
will; that’s the way the market works. When it peaks the
whole market moves together so you get aggregated peaks.
Which regions dominate in terms of electronic trading? Are
there any upcoming areas?
London and New York, in terms of volume of trade,
dominate. Chicago is another major market and they are
fairly well linked together for low latency trading. Another
factor is the merging of big exchanges and how this will
impact trading as they start forming their new power bases.
In Asia, Australia and Japan are very active. China’s
market will become more active I’m sure but at the moment
the regulatory regime and the capital restrictions will
impact trade volumes and external investment.
What advantages are there for traders to use providers like
BT instead of hosting their servers at the exchange?
While the market is so fragmented, as it is currently, there
is a cost of placing infrastructure at the exchange. If you are
doing arbitrage between exchanges, you still have to gather
30 | Fundamentals4HNHaPUL |:WYPUN2011
market data somewhere and make those trading decisions
somewhere and you then have to make the order flow.
They tend to optimise these servers, but then they are
optimised at one venue but not for the rest. So where BT fits
in is that we take that infrastructure and sit in the middle
and connect to everybody, so if you’re order routing engine
and your decision-making point is in our infrastructure, you
can broadly get to everywhere equally.
Are all clients' traffic flows treated equally, like the internet?
Yes, You have to treat every client equally. We have a
number of mechanisms in place for that.. Some clients will
take on more capacity than others, but what you can’t have
is one investment bank saying, ‘I want to be higher priority
than another investment bank.’ We have to treat all the
traffic coming in on an equal basis.
Secondly, on a single physical link going to a client you
may have 10, 20 or 30 different services all running in
parallel. Each of those services can have its own service
agreement or performance plan, but each has a certain
amount of bandwidth absolutely guaranteed and the ability
to burst above that during peaks. A lot of that is extremely
deterministic. We dimension the access line and the network
infrastructure to cope with all the demands from clients.
So we don’t work like the internet. One of the problems
with the internet is that it’s a good average, but if you get
peaks at a certain point of a day it struggles; our network
can’t work like that. The assumption has to be that all of
our clients use the level that they’ve paid for, all at the same
time at the worst time of the day.
Part of our job is analysing trends and advising clients that
they need more bandwidth, before they have problems.
Which areas of electronic trading will see the biggest
changes over the coming years?
The advent of cloud-based services will dynamically
change how things are operated as people access the
markets more flexibly. There’s a background demand for
more bandwidth but that’s there every year, I don’t see that
fundamentally changing.
On the people side, unified communications mean the
trading floor is going to be a much more interactive,
collaborative place, with people trading and experts
brought to bear using all sorts of different media types.
Additionally, there is the regulatory obligation for storage
recording and interrogation of that data; you have to make
sure you’re compliant with regulations. So compliance and
risk management are places where people are spending
money, and they’re looking to providers like us to help
implement these things.
 OTC Clearing focus

OTC Clearing focus

Brian Bollen finds out what those in the OTC
clearing business think of the inclusion of
independent directors on their boards

No representation without loss mutualisation! As a pragmatism.

student demonstration chant this mantra probably would “We are generally very supportive of legislation and the
not quite slip off the tongue. But as a pithy means of move to push more OTC derivatives through clearing
summing up some industry views about the imposition houses but we have concerns about the independent
of a minimum number of independent directors upon the director proposals,” says Roger Liddell, CEO of LCH.
boards of clearing houses and swap execution facilities it Clearnet. “We can just about live with a requirement that
certainly has its supporters. The essence of the argument more than 35% of board members be independent, but
is that only institutions which ‘have skin in the game’ anything significantly above that is simply too high.” In any
in terms of exposure to risk in the clearing of OTC event, some ask, becoming super-pragmatic, where are the
derivatives should be allowed to vote on any planned risk numbers of independent directors envisaged by regulators
committee decisions. and legislators going to come from? The pool of qualified
Andy Ross, executive director, OTC Clearing at Morgan and available talent is not particularly wide or deep. In an
Stanley, elaborates. "When you clear a client trade with a ideal world, it would surely comprise recently retired or
clearing house, there are two main points to bear in soon-to-retire market participants, who understand
mind," he explains. "One, the client puts up market customs and market nuances.
an initial margin as collateral for the trade. One drawback, though, is inherent to
Two, we put up capital to support the We therefore need to implementation: almost as soon as such
risk of the clients to the CCP. And it is
not just our own client which benefits
ensure that the risk
from our guarantee; if another party committee and the
gets into trouble we can lose capital. CCP board both have
Our cash is at significant risk." sufficient expertise to
He goes on to say: "To the
extent that it is determined that ensure proper risk
independent experts be included management and
on the risk committees of CCPs, to avoid the drive
it is critical that these people have
for profits pushing
the appropriate specialist market
experience and technical expertise. the CCP into candidates step off the daily treadmill,
Due to their vital systemic importance, dangerous territory their market knowledge begins to decay.
prudent risk management policy and “The passage of time is certainly one
practice at clearing houses is paramount and problem,” comments Dave Olsen, global
cannot be compromised in any way.” head of OTC Clearing at J.P. Morgan. “You could
Conversations with a broad range of industry players assemble a group of independent directors today to fill the
at different points on the supplier-user spectrum suggest seats, but move on three or five years, and what happens
that this view is not unusual. The question of sharing risk then? How do you keep that group refreshed enough to see
and possibly sharing the burden of any loss incurred by the next problem coming?”
a clearing house is not the only objection being raised in He agrees, then, on the importance of the need for
discussion of the impact of the Dodd-Frank act and its appropriate regulation and for closer scrutiny, but questions
equivalent in Europe, the European Market Infrastructure preventing the clearing houses from having access to the
Regulation (EMIR, also confusingly referred to as EMIL for widest talent pool possible. “They need deep expertise in
European Market Infrastructure Legislation). the field - acting exclusively as fiduciaries for the clearing
There are occasional mutterings to be heard about the house - rather than narrowing the group to independent
precise way in which the proposals might be implemented, directors, each with, possibly, their own prejudices,” he
but there seems to be no strong wave of protest against the says. What is his conclusion? “The clearing house system is
suggestion that increasing the numbers of independent tried, and has been tested,” he continues. “I believe, having
directors might improve governance. And while the ‘no seen at first-hand how LCH.Clearnet managed the process
skin’ argument can be interpreted as ideological, the other through the Lehman bankruptcy, quickly collapsing an
principal argument against the proposal is based on pure enormous portfolio and handing cash over to the Lehman

:WYPUN 2011|Fundamentals4HNHaPUL| 31
 Central on CEE

Central on CEE
estate, that this is in many important respects a solution in
search of a problem.”
For Florence Fontan, head of public affairs, BNP Paribas
Securities Services, the key for clearing house governance
is expertise before independence, and this is particularly
true for OTC derivative products. “Neither the financial
industry nor the public authorities can afford the collapse
of a CCP,” she comments. “We therefore need to ensure that
the risk committee and the CCP board both have sufficient
expertise to ensure proper risk management and to avoid
InvestorServices

the drive for profits pushing the CCP into dangerous

territory."
Lee Olesky, CEO at Tradeweb, which he says has been
performing many of the functions of the newly envisaged
Swap Execution Facility since its inception in 1998, offers
a different perspective. For him, one area of concern
for potential SEF’s and clearing houses is the proposed
restriction on ownership (no single person or entity can hold
more than 40% of an SEF). “Restrictions on ownership will
reduce the constituency of potential investors and raise the /ŶƚŚĞůĂƐƚŝƐƐƵĞŽĨ&ƵŶĚĂŵĞŶƚĂůƐǁĞĨĞĂƚƵƌĞĚ
cost of capital for SEF’s and clearing houses.”
As happens so often in any discussion of any aspect of the ĂŚĞĂǀLJĨŽĐƵƐŽŶƚŚĞĞŶƚƌĂůĂŶĚĂƐƚĞƌŶ
modern financial services system, capital and its cost sooner ƵƌŽƉĞĂŶƌĞŐŝŽŶ͕ŽƵƚůŝŶŝŶŐƚŚĞŵĂĐƌŽ
or later muscle their way onto the agenda. “Providers
ĞĐŽŶŽŵŝĐĨĂĐƚŽƌƐƚŚĂƚĂŶLJŝŶǀĞƐƚŽƌƐŚŽƵůĚďĞ
[of OTC derivatives clearing services] want ownership
structures to access the maximum capital,” adds Tim ĂǁĂƌĞŽĨ͘
Murphy, head of BNY Mellon Clearing Europe.
“This conflicts with what regulators and legislators want.”
A workable solution, he posits, lies somewhere in between
dŚŝƐŝƐƐƵĞ͕ǁĞůŽŽŬĂƚƚŚĞŝŶĨƌĂƐƚƌƵĐƚƵƌĞŝƐƐƵĞƐ
the two. ƚŚĂƚĐĂŶĂīĞĐƚŝŶǀĞƐƚŽƌƐ͘ĞƐƉŝƚĞƐŽŵĞŽĨ
ƚŚĞĐŽŶĐĞƌŶƐƚŚĂƚƉĞŽƉůĞŵĂLJŚĂǀĞĂďŽƵƚ
ĞŶƚĞƌŝŶŐƚŚĞƌĞŐŝŽŶ͕ŝƚŝƐŝŶƚĞƌĞƐƟŶŐƚŽŶŽƚĞ
ƚŚĂƚĂƚŽƵƌϮϬϭϭ'^>EŽƌĚŝĐ^ĞĐƵƌŝƟĞƐ>ĞŶĚŝŶŐ
^Ƶŵŵŝƚ͕ŚĞůĚŝŶ^ƚŽĐŬŚŽůŵŝŶDĂƌĐŚ͕ƐŽŵĞ
Restrictions on ƐƉĞĂŬĞƌƐƐĂŝĚƚŚĂƚ͕ĚĞƐƉŝƚĞƚŚĞĞdžĐŝƚĞŵĞŶƚ
ownership will reduce ĐƵƌƌĞŶƚůLJďĞŝŶŐĨĞůƚĂďŽƵƚƐŝĂ͕ƐŽŵĞƵƌŽƉĞĂŶ
the constituency of ŝŶƐƟƚƵƟŽŶƐĨĞĞůŵŽƌĞĐŽŵĨŽƌƚĂďůĞůŽŽŬŝŶŐĨŽƌ
potential investors ŽƉƉŽƌƚƵŶŝƟĞƐŝŶƚŚĞƌĞŐŝŽŶ͕ŐŝǀĞŶƚŚĂƚŝƚ
and raise the cost of ŝƐ͞ĐůŽƐĞƌƚŽŚŽŵĞ͟ďŽƚŚŐĞŽŐƌĂƉŚŝĐĂůůLJĂŶĚ
capital for SEF’s ĐƵůƚƵƌĂůůLJƚŚĂŶŵĂƌŬĞƚƐŝŶƚŚĞ&ĂƌĂƐƚ͘
and clearing
houses.
KǀĞƌƚŚĞŶĞdžƚƚǁŽƉĂŐĞƐ͕ƚǁŽŝŶĚƵƐƚƌLJĞdžƉĞƌƚƐ
ƉƌŽǀŝĚĞĂĨŽĐƵƐŽŶƚŚĞŝŶǀĞƐƚŽƌƐĞƌǀŝĐĞŝƐƐƵĞƐ
ƚŚĂƚŵĂƌŬĞƚƉůĂLJĞƌƐƐŚŽƵůĚŬŶŽǁĂďŽƵƚďĞĨŽƌĞ
ŵŽǀŝŶŐŝŶƚŽǁŚĂƚ͕ďLJĂŶLJŵĞĂƐƵƌĞ͕ŝƐĂŶ
ĞdžĐŝƟŶŐĞŵĞƌŐŝŶŐƌĞŐŝŽŶ͘

32 | Fundamentals4HNHaPUL |:WYPUN2011

Russia gets ready
Following the merger of Russian stock exchanges MICEX and
RTS - and the subsequent merger of depositories NSD and DCC
- Eddie Astanin, NSD executive board chairman, talks about
Russia’s journey to becoming an international financial centre
What products and services has NSD introduced to the
market in the last few years?
During and after the 2008 crisis, MICEX Stock
Exchange and NDC [the former name of NSD] made an
effort to help regulators improve liquidity.
The Bank of Russia dramatically increased the eligible
list of securities which could be used in repo with the
central bank, including Eurobonds.
NDC and MICEX Settlement House introduced OTC
repo products and services which helped participants
enter repo transactions with the Central bank on the
OTC market, with settlement by NDC and MICEX
Settlement House.
We introduced gross settlement of trades with
securities on a real-time basis and DVP settlement with
Eurobonds on a multi-currency basis.
We also launched a better version of our centre of
corporate information. At the same time, we changed
our IT platform on the depository side, making our
system more reliable and productive.
Now we have the same product on the cash side and
by the end of the year we are going to change this
platform too. We will build a link between these two
platforms and this will be helpful as our participants
will be able to operate with securities and cash on the
same entity.
At the end of last year NSD set up a link with an
exchange in St Petersburg which has allowed St
Petersburg municipal bonds to be placed on the MICEX
trading floor. There is now an opportunity to enrol the
munis on the eligible list for repo transactions with the
Bank of Russia.
Our strategic vision is positioning NSD as the regional
(CIS) central securities depository and as the gateway
for international investors to get access to securities
from countries in the CIS zone, including Russia. On this
way, NSD has established interoperability with the CSD
of Republic of Kazakhstan, Republic of Azerbaijan and
Republic of Belarus. We can now provide settlement and
corporate actions with Belarusian government bonds,
denominated in Rubles and kept in NSD, and that’s the
first step of our strategy in this direction.
Also, we are going to establish our interoperability
with CSDs from other countries in the CIS zone.
Are Russian regulators following trends seen in other major
markets?
Our regulators have strongly supported the MICEX
Russia gets ready
and RTS merger - it is
expected that the deal
will help to establish a
competitive and effective
exchange group which
can compete with the global players and provide
international standards for investors in Russia.
Our regulators tried to extract the best practices from
Europe, the USA and Asia on how to regulate and
run markets. Russia has become a global player in the
financial markets so we have to establish international
standards in this field.
Are there any regulations or market practices in Russia that
investors may not be used to?
With the merger of MICEX and RTS, and the
subsequent automatic merger of NSD and DCC, this
wipes out the last obstacle on the path of setting up a de
facto single CSD model.
Now, for international investors, there are still tasks,
such as familiarising themselves with settlements by
CSD because there are many places to keep securities,
several settlement depositories, registers etc. This creates
uncertainty for investors as to where their assets are
allocated.
What challenges did you face during the merger?
It was a successful project because our clients didn’t
get any trouble from the merger and it brings a potential
synergy for them.
We did face challenges, for example we now have two
IT platforms. One of our next steps is to decide how
to run this platform. Establish a link between them or
integrate them on the one platform? I don’t know what
the answer is yet.
Additionally, we face a new challenge in relation
to DCC. DCC has its own IT platform, products and
staff, and its IT products are widely used by brokerage
companies so we can’t throw this out as it would disturb
our clients.
How are you dealing with this?
We set up a special working group which includes
representatives from NSD, DCC, exchanges and market
participants.
:WYPUN 2011|Fundamentals4HNHaPUL| 33
 CEE ING

ING navigates you through

Central and Eastern Europe
with Lilla Juranyi, global head investor services, ING Commercial Bank
During this post-crisis period the trend for the announced that the Ukrainian CSD will be created as
Central & Eastern European economic outlook is a result of the merger of NDU (National Depository
positive. However, the attractiveness is lagging of Ukraine) and the central bank. To accelerate the
behind some other emerging markets. Some process a working group supported by the prime
uncertainty remains in the region and the outlook minister has been created.
for the coming few years is generally weaker than The depository functions of the Ukrainian Central
InvestorServices

the recent economic activity would predict. Due to Bank in connection with the global certificates will
the weakening outlook of the eurozone the external be passed on to the NDU. Parallel to the creation of
environment is not supportive and remains volatile. the CSD the All Ukrainian Securities Depository is
Analysts expect that on a three-to-five year horizon supposed to function as a clearinghouse.
the regional growth in CEE will become The Czech market already took the lead
more attractive. No one will doubt last year in creating the CSD by a
however that it will require further similar merger, now Ukraine
stability and market developments Analysts expect that might succeed as well.
in the region. on a three-to-five A few other countries where
Can we expect that the similar structures operate
sentiment for Russia would
year horizon the today might decide to do
change? Most of the comments regional growth in the same. The Bulgarian
about Russia’s ambition CEE will become Central Depository launched
to become an International more attractive a project to implement SWIFT
Financial Centre (IFC) refer to communication with its members,
the slow market developments. The which will allow better STP rates.
decision has been announced a few years Poland performed extremely well
ago that Moscow desires to become an IFC but during the crisis so it is not surprising that the
the progress is slow. Lately, there have been positive country attracts a lot of interest. Poland continues
signs but any actions needed toward of achievement further with the implementation of the omnibus
of Moscow’s goal should be speeded up. account concept and by year end hopefully all
The requirements and comments of international outstanding questions will be clarified. Implementing
participants should be taken seriously otherwise how the new account structure from the beginning of 2012
would it be possible to become “international”? In seems to be realistic. Surprisingly there is a parallel
addition to the plans to create a CSD in Russia it has move in Poland and Hungary in connection with
been announced recently that a megaregulator will pension funds: hand-in-hand they decided to reverse
be established for the creation and execution of the the first pillar of the private pension scheme, which
state policy related to the financial markets. Parallel to created a lot of negative comments.
this, the FSFM will become a megasupervisor. By this No doubt that the Central and Eastern European
the regulatory and controlling functions will be split region offers good opportunities, however, these
which should lead to more efficient and simplified opportunities can be turned into benefits if the
decision-making. investors are supported by a strong, committed
Due to its size and importance in the region Russia is sub-custodian bank with good market knowledge,
always in the centre of interest but important changes proactive client service and with a focus on risk
can be seen in other countries as well. Investors mitigation and clients’ asset protection.
and the agent banks in Ukraine are faced with
challenges but it has been good to see recent efforts
for the development of the market infrastructure.
After several years of discussion it has been recently

34 | Fundamentals4HNHaPUL |:WYPUN2011
 Nordea Bank
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 Corporate actions
Actions station
Stephanie Baxter talks to Laura Pollard, executive vice-
president of Fidelity ActionsXchange, about the need for more
timely sources of information in the corporate actions world
Corporate actions are an on-going challenge for the
asset management world, and continued market volatility
in recent years has only increased the complexity of
managing that information.
Automation in the collection process still remains at a low
level of 60-70%, but more firms are starting to open their
eyes to the consequences of failing to install a system that
InvestorServices
can computerise the process. For example, a recent Tower
Group survey revealed that 66% of firms are making plans
to implement technology to improve their corporate actions
data within the next 12-24 months.
Fidelity ActionsXchange claims to tackle these problems
head-on with an enhanced version of its ActionService
platform, launched in November 2010 in a bid to improve
the ‘timeliness’ of corporate actions data. Laura Pollard,
executive vice-president of Fidelity ActionsXchange, talks
about the need for more timely sources of information,
which ActionService attempts to produce by getting closer
to the issuer who generated the event.
“We’ve always believed that the more timely sources of
information come directly from the issuers, the exchanges
and issuer agents, so the closer we can get to the source
the more timely, standardized and comprehensive the
information will be.”
Pollard claims that since the improvements, the platform
has seen an increase in terms of timely data, where more
than 25% of the time the data is timely by more than 24
hours compared to the firm’s traditional sources. She also
says that the firm has seen an increase in new business
and expanded usage among its clients. “We support
about a third of the top 20 asset managers and we’re
seeing increased interest in broadening the usage of this
information within their enterprises.” The firm is now
looking to globalise through expanding its reach beyond
North America into Europe and Asia Pacific.
Fidelity has seen some significant changes to the product
in recent months with last November’s enhancements and
the recent linking to Asset Control’s data management
platform, AC Plus. Phil Lynch, Asset Control’s president
and CEO, claims the move will help firms improve the
quality of corporate actions data and reduce time-to-market
delays to ensure business continuity.
“We’re seeing increased focus on corporate actions data
across departments at a variety of financial organisations,
such as improving data quality before corporate actions
processing takes place, or integrating issuer data, security
master data or (historical) pricing data as a result of
corporate actions,” said Lynch.
In the past, errors taking place in corporate actions were
seen as a cost of doing business, and many organisations
budgeted for those potential financial losses. According
36 | Fundamentals4HNHaPUL |:WYPUN2011
to Pollard, both the front
and back offices need and
expect more timely, accurate
sources of information,
whereas historically the
front office was willing to
work on rumour but expected that information to be correct.
Regulation will play a huge part in driving the changes in
how corporate action and related events are managed, says
Pollard. “It’s a critical imperative that we have standards”,
she continues. “Regulatory reform will help the public
sector with transparency in terms of supervising and
managing risk by implementing standards starting at the
legal entity identifier level, but it will also help promote the
standardisation and efficiencies that we’ve been pursuing
for some time.”
Fidelity ActionsXchange claims it has seen an
‘overwhelming’ response from institutions and trade groups
participating in an industry dialogue and response to the
Dodd –Frank Act and the Office of Finance Research as to
the impact that the new requirements will have on the legal
entity identifier and subsequently to financial instruments
and corporate actions.
Pollard adds that there is room for additional providers in
the marketplace who can create new end-to-end solutions
for corporate actions and related event processing In a
bid to stay ahead of the game, Fidelity ActionsXchange is
extending its product offering this year beyond sourcing
and validation of announcements to offer a new service,
Notification and Response. A natural extension of our
offering is to automate notifications out to their clients
and to be able to collect those responses to pass onto their
recordkeeping systems and custodians, says Pollard. The
new product will aim to automate that process for its
customers.
The firm is also looking to bring in subscription-based
servicing to meet customer demand for flexibility well
as more timely sources of corporate action and related
event information. “We want to be able to provide our
customers with flexibility and choice around the sources of
information they want to use. They may have relationships
that they wish to preserve and e different asset classes
they want to support and providing flexibility and choice
provided value,” she adds.
The corporate actions space is an important one to watch
this year and it will be interesting to see if institutions and
regulators take the next step to standardise the process, or
whether other pressing issues on their agendas will take
priority.
How can you reduce risk and cost
across your organization?
With Fidelity ActionsXchange, our innovative solutions
harness the combined power of highly skilled analysts,
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technology to deliver timely information and guidance
necessary to mitigate risk, reduce cost and increase
efficiencies across your organization.

For over 10 years, Fidelity ActionsXchange has been a

pioneer in custom solutions for validation, interpretation
and guidance surrounding global corporate actions
and related events.

We have worked with leading financial institutions

across the globe to provide timely and
validated customized announcement information.

To learn more about our custom solutions,

contact us today.

Call 877.777.5838
Visit www.actionsxchange.com
 Third-party clearing: Hong Kong
Third-party clearing:
Hong Kong style
BNP Paribas Securities Services has become the largest third-party clearing participant on
the Hong Kong Stock Exchange. Barnaby Joel Nelson, head of business development,
talks to Stephanie Baxter about the growing trend towards outsourcing in Hong Kong
and why it’s taken so long for the market to accept the concept of third-party clearing
BNP Paribas Securities Services first entered the Hong
Kong market three years ago. How does the market back
InvestorServices
then compare to what it is now?
Asia is very crowded in terms of custody, but there
was a need for someone to manage more of the
value-added tasks around clearing and back-office
processing.
In Asia we’ve been leveraging what we do in
London and Paris, transferring our knowledge over
here. The news that we are the largest third-party
clearing participant on the HKSE is the first major
milestone for us.
However, what is more important is the value to
the Hong Kong market. Before the Lehman Brothers’
scandal you couldn’t outsource clearing in Asia like
you could in Europe. The Hong Kong Securities and
Futures Commission (SFC) started to create a clearing
model in 2007 but stopped after Lehman Brothers
because they didn’t want to make any more changes
to the market until they had a better understanding
of the clearing model. Since then, the regulators have
been trying to understand it but there’s been a long
delay between its development and final sign-off.
Why has it been difficult to outsource clearing in Asia?
The problem was how the Asian markets viewed
the clearinghouse and clearing agent. They viewed
clearing agents as riskier than clearing houses, and
therefore you had to put down more capital with the
clearing agent. For a big broker that’s a lot of money
and it’s very prohibitive. That one limitation stopped
anyone from doing anything large scale with clearing
in Hong Kong.
The other reason is that there is very emotional
connection to clearing in Asia. Clearing is perceived
to be a very visual activity in front of clients, which I
personally don’t see any explanation for. In the past,
brokers thought they had to offer a one-stop shop
to gain the client’s trust. This included keeping the
38 | Fundamentals4HNHaPUL |:WYPUN2011
broker’s name on the clearing ticket, even though
the client would never see it. This situation is still
occurring where Asian brokers don’t want to give
up clearing membership. It’s very strange, but it all
comes back to the lack of precedent because they’ve
never seen third-party clearing work. The Asian
markets are also led by the majority – if no one else
is doing it then you don’t do it. However, five years
from now I expect outsourced clearing to have taken
off in the region.
How have BNP Paribas and other institutions tried to
change Asia’s attitude toward clearing and is it working?
During the last few months we’ve been working
with the SFC to validate and finish the clearing
model. We’ve been trying to get the message across
that using a clearing agent is no riskier than using
a clearinghouse. There have been massive amounts
of education which led to the SFC signing off the
model in January. In advance of legislative changes
- which will take a long time to bring into force – the
regulator has given us special dispensation per client
to use us as a clearing agent. It now means Hong
Kong’s regulators are happy to see any major broker
outsource their clearing. From a market perspective
it means this includes both small and large brokers in
Hong Kong.
How has the role of the custodian evolved in the Asian
market over the past year?
The role of the custodian is growing all the time
and the amount of services you can outsource will
continue to expand. The temperature in Asia is rising.
The pace of transfer into Asia has accelerated, leading
to more fund managers, brokers and practitioners all
competing for some share of the pie. At the end of
2010 people were saying that their costs had tumbled,
so they had to build their margins back out. Moving
out to Asia has to be a profitable set-up. You need to

lift out whole sections and outsourcing is the only
way to do that. I expect outsourcing to be bigger this
year, perhaps even doubling last year’s figure.
What do you see at the key drivers behind outsourcing in
Asia?
It’s all about reducing cost, which is the biggest
factor for clients. Margins are being eroded because
of increased competition in Asia. You can’t spend
money on everything so you’ve got to spend
money on the things that differentiate you when
you’re under pressure from competitors. This is
an important issue in Asia at the moment. There
are more than 700 brokers in Hong Kong who are
all targeting investors. The important question for
them is: "How do I differentiate myself?" which is
becoming more acute as more people move into Asia.
The Lehman Brothers’ scandal did a lot of damage to
outsourcing and made people extremely risk-averse.
The reaction in Asia was: "Let’s not do anything yet,"
which was very similar to the regulators’ approach.
There is also less precedent for outsourcing in Asia
compared to other global markets. Outsourcing is
still a foreign concept as opposed to something that’s
been tried and tested. But there will be precedent for
outsourcing this year, which will give credibility to
everyone in the market.
Are Asian custodians looking to provide clearing services
too?
The problem that Asian custodians have is that
they haven’t offered outsourced clearing services
before. Without that precedent, you can’t build these
clearing operations quickly because it takes years
of investment and implementing new technology.
There’s only two or three of us in Asia that have
done this before, but that will be enough to expand
clearing operations in the region. We’re not in Asia
just as a custodian; we’re there to be offering a range
of services.
How are the Hong Kong market and other Asian markets
developing?
Hong Kong has two purposes: firstly to be a market
Third-party clearing: Hong Kong
Bio:
Barnaby Nelson is head of
client development in Asia for
broker-dealers and investment
banks at BNP Paribas
Securities Services. Having
grown up in Hong Kong,
Barnaby has worked in the
Asian financial services sector
for over ten years, servicing
major banks across both custody and technology.
He holds a BA (Hons) in modern languages from the
University of Bristol.
in its own right, and secondly to be an international
market. Singapore is thinking along the same lines. At
the moment there’s a big race in Asia to snap up the
last places left to capitalise on. Everyone is running
around the region trying to find a bit of margin
wherever they can. Australia and India have had
a lot of interest while Thailand and Sri Lanka have
experienced strong growth. Most of it is happening
from Hong Kong and Singapore but there are still
those niche areas. Singapore is positioning itself as a
new trading venue. The lines are blurring between
Hong Kong and Singapore and there’s a huge
‘ebb and flow’ of movement between the two. For
example, many Hong Kong brokers now have offices
in Singapore too.
As outsourcing becomes a growing trend in Asia,
there will undoubtedly be other institutions who want
to capitalise on that. How competitive do you think that
market will become?
Citi, Deutsche Bank and BNP Paribas Securities
Services are currently the main providers of clearing
services in Hong Kong. There will undoubtedly be
those who want to tap into that market, but some
institutions have taken a very passive approach
to clearing in Hong Kong. They have been caught
napping and will find it hard to catch up. The
message we’ve been getting from our broker clients is
that those institutions have never actually sat down
and thought it through. For the time being there is a
wide gap but that will narrow over time. Clearing is
new because it’s only been topical in the last couple
of years. Japan, Australia and Singapore are set to be
the next markets to introduce outsourced clearing,
and I expect Singapore to be the first to follow Hong
Kong. Those markets haven’t really kicked off yet so
it’s an important space to watch.
:WYPUN 2011|Fundamentals4HNHaPUL| 39
 Regulation: Dodd Frank
ISDA on Dodd-Frank
Brian Bollen in conversation with Conrad Voldstad, CEO of the International Swaps
and Derivatives Association (ISDA) and Robert Pickel, ISDA executive vice chairman
Does ISDA have a clear idea of what it would like to see
happen in the industry by 15th July 2011, the deadline
for rule-setting following the Dodd-Frank Act?
Our primary goal is to ensure that we continue
to have a safe, efficient and liquid OTC derivatives
market that enables firms to better manage their
risk. We think this is a goal that policymakers share
InvestorServices
and we’re working with them on a number of issues.
There is no simple yes or no answer here. There
will be gradations as regulators weigh the costs and
benefits of different approaches to rulemaking.
And those would include?
End user margin exemptions. The Act exempts
end users from its clearing requirements but also
gives regulators the power to require them to post
margin. That is tantamount to forcing them to
clear, as clearing obviously involves posting initial
margin to the clearing house and variation margin
depending upon market movements. We think that
companies which are using derivatives to reduce risk
in the normal course of their business should not be
penalised.
What would be the consequences if they are compelled
to?
We crunched some numbers at the time Dodd
Frank was finalised, which showed that it could cost
corporate America $1 trillion in capital and liquidity
requirements. This could impede their ability to do
business.
How have you arrived at this figure?
We analyzed 2009 year-end market statistics
and determined the total outstanding of end-user
swaps with US banks (about $21 trillion). We then
estimated, using current industry practices, what the
initial margin requirement would be (about 1% of
the total, or $213 billion). We also determined what
the variation margin would be on the portion of
end-user swaps that are not currently collateralised
(about $112 billion). We performed the same exercise
40 | Fundamentals4HNHaPUL |:WYPUN2011
for US companies who had swaps with non-US
banks (which added another $80 billion in collateral
requirements). This brings the total to about $405
billion.
But you also need to factor in collateral
requirements relating to future movements in market
prices that influence the value of swaps. We utilised
a calculation called Potential Future Exposure
and found this would add another $370 billion of
collateral needs. Finally, if market conditions reverted
to the severe turmoil of 2008, we estimated variation
margin might increase by over $200 billion for end-
users. This brings the total to about $1 trillion.
ISDA has something of a robust view on transparency
and its limitations, doesn’t it?
We identify two kinds of transparency: regulatory
transparency and market transparency, which
includes pre- and post-trade transparency. Everybody
believes in regulatory transparency, because
regulators need to see what is happening in the
industry, and where the concentrations of risk are
taking place. The industry has already set up three
data repositories, for equities, interest rate swaps and
credit, supplying the necessary information. Work is
progressing on doing the same for commodities and
foreign exchange (FX). It’s working very well.
With regards to market transparency, we believe
that users of most derivatives have tremendous
pricing transparency and extremely competitive
pricing, and we have research to support this. We
are working to further improve transparency, but we
need to keep in mind that there is a clear trade-off
between transparency and liquidity.
Can you elaborate?
Detailed real-time reporting of a very
large transaction could affect the market
disproportionately, adversely affecting the ability
of market-makers to provide liquidity. This would
mean more risk for those who want to undertake
large transactions, forcing them to drip-feed smaller
transactions into the market, thus reducing liquidity.

What do you conclude from that?
Block trades have to be exempt, and the exemption
must be meaningful in order to preserve liquidity.
There is a clear continuum. How much transparency
do you want? How much electronic trading and
liquidity do you want?
The market is nervous about the timing of the
implementation of Dodd-Frank requirements. Does ISDA
see a clear picture emerging?
We need to think about the phasing in of rules. The
process requires that the rules be in place by 15th July
2011, 360 days after President Obama signed the Act.
But the rules don’t take effect for a further 60 days. It’s use of OTC derivatives. Is this faith justified? Or does it
just not possible to flick a switch one day. We need a
series of deliberate steps rather than one Big Bang.
There is a lot of faith being placed in clearing houses as use of central clearing facilities as a means of reducing
the answer to all kinds of imagined deficiencies in the
Bio:
Conrad Voldstad is a senior
industry executive whose
career in the financial
markets spans three
decades.
Before ISDA, he served as Director of RAM Holdings
Ltd. a credit reinsurance company. Earlier this decade,
he was founding Principal of New Jersey-based
Arlington Hill Investment Management, a global debt
investment management firm.
From 1988 to 1999, Voldstad was employed at Merrill
Lynch, where he held several senior positions, including risk of their clearing members, policymakers and
membership on the Oversight Committee responsible
for liquidating Long-Term Capital Management; Co-
Head of Global Debt Markets in New York; and Head of
European Debt Markets in London.
Regulation: Dodd Frank
We are working
to further improve
transparency, but we
need to keep in mind
that there is a clear
trade-off between
transparency and
liquidity
present inherent dangers?
The OTC derivatives industry is committed to the
counterparty credit risk. However, we have said
all along that clearing houses are the next ‘too big
to fail’ institutions. It is critical to monitor how they
are structured and managed and capitalised. It’s
important to keep in mind that clearing houses can
and do fail – and since 1974, three clearinghouses in
France, Hong Kong and Malaysia have in fact failed.
To perform their important function, clearing
houses must be designed to absorb the credit risk of
each of its clearing members in the event that one of
them defaults. If a default were to occur, the other
clearing members must manage the resulting risk
of the clearinghouse and, very likely, bid to take on
the defaulting clearing member’s positions. Clearing
members must have the requisite financial strength
and product expertise to assume this responsibility.
Because clearing houses concentrate the credit
legislators recognise that clearing houses might
create systemic risk themselves and that the
failure of a clearing house could have devastating
consequences. Clearing houses must be able to
survive a worst case scenario.
:WYPUN 2011|Fundamentals4HNHaPUL| 41
 Domiciles: On and off again

On and off again

Stephanie Baxter considers the challenging road ahead for fund centres with the
upcoming AIFM Directive and government attack on tax havens

Offshore investments are increasingly popular EU. He adds that Malta is making a “concerted” push
and many investors and managers have sought to in the hedge fund sector. “Movement is slow, with
capitalise on emerging low-cost domiciles such as funds and investors wary of a relatively untested
Malta and Cyprus. But fund domiciles have been jurisdiction, but it is quite possible that Malta will
put under a glaring media spotlight following the soon reach a ‘critical mass’ in fund terms, giving
fast-approaching Alternative Investor Fund Mangers comfort as to the jurisdiction.”
Directive (AIFMD), government crackdowns on tax But several factors need to be considered when
havens and fiscal uncertainty. With many different re-domiciling funds to another jurisdiction, such as
InvestorServices

factors affecting these jurisdictions, it begs the geographical location, economic and political stability,
question: “Is the offshore model still valid?” as well as the availability of a skilled workforce. “I do
The directive came under scrutiny in 2010 for its not think that any one factor can be taken in isolation
potential connotations for the alternative when deciding whether to re-domicile,” says
funds industry and many industry Farrugia.
professionals predicted that it Another important factor on
would create a ‘lock-in lock-out’ Under the directive, investors’ minds is a jurisdiction’s
scenario in the EU. This could reputation, which can easily be
hedge funds will be
create problems for some non- damaged. Dublin’s reputation has
EU domiciles that might have looking for jurisdictions suffered as result of its financial
to reconsider their regulatory that are more turmoil and subsequent $115bn
structures if they want to regulated. People EU bailout last November. But
keep their European fund are uneasy about the offshore centre appears to
managers at home. going to offshore have survived unscathed by
Paul Wilkes, group partner reaching a record 964bn in the
centres that
at Guernsey law firm Collas value of Irish-domiciled funds at
Crill, says: “Under the directive, have lightweight the end of 2010, an increase of 29%
hedge funds will be looking regulation from the year before. A press summit
for jurisdictions that are more hosted by the Irish Funds Industry
regulated. People are uneasy about Association (IFIA) in March certainly
going to offshore centres that have lightweight displayed this positive atmosphere, where the
regulation.” former Irish prime minister John Bruton said: “We
This may put some centres in a better position than faced more trouble in the 1980s and survived it, which
others, but each jurisdiction has its own niche and shows we can service this debt.”
offers product expertise that another centre does not. Dublin is arguably in a better position than the
Malta, which is an EU onshore fund domicile, Cayman Islands, which has been in its own debt crisis
has seen a number of funds migrating from non- over the past two years and was forced to ask the
EU jurisdictions to use Malta as a gateway to the British Foreign and Commonwealth Office to borrow
EU. Kenneth Farrugia, chairman of FinanceMalta, £278m in 2009, but was refused. The jurisdiction’s
says this could be a result of the AIFMD, a strong debt situation has grown from $142m in 2005 to about
move to regulated jurisdictions, or the new UCITS $560m at the end of January 2011, and is expected to
‘passporting’ mechanism which makes it necessary to increase to $626m by June. “Offshore jurisdictions
have an EU domicile. are masters of their own destiny, but they have less
According to David Williams, head of investments support”, says Wilkes.
funds practice at DLA Piper, the AIFMD will throw This, in addition to the UK government’s decision
challenges in the way of traditional hedge fund to stop Cayman from borrowing more money in the
jurisdictions such as the Cayman Islands, which he next financial year, has sparked fears of rising tax
claims will be beneficial to Malta as a member of the rates. This has been a similar concern in Ireland, but

42 | Fundamentals4HNHaPUL |:WYPUN2011
 structured
for success
Exceptional Growth for Malta’s Fund Industry
The number of collective investment schemes more than doubled from 200 in 2006 to 434 in 2010.

This success was made possible by Malta’s highly favourable business environment. This includes the role
played by the island’s Single Regulator, renowned throughout the industry for its flexibility coupled with
meticulous attention to detail.

The island’s highly competitive, cost-effective business environment and the presence of all the Big Four
accounting firms adds even further advantage.

An onshore EU jurisdiction allowing passporting and redomiciliation of funds, with an efficient fiscal regime,
a balmy Mediterranean climate and a multilingual, ethical and professional workforce, Malta offers a winning
combination of advantages specifically designed to foster further growth and maximise success.

more information on:

ZZZÀQDQFHPDOWDRUJ

(IIHFWLYH_6HFXUH_6NLOOHG

)LQDQFH0DOWDGarrison Chapel, Castille Place, Valletta VLT1063 - Malta | info@financemalta.org | tel. +356 2122 4525 | fax. +356 2144 9212

)LQDQFH0DOWDLVWKHSXEOLFSULYDWHLQLWLDWLYHVHWXSWRSURPRWH0DOWDҋV,QWHUQDWLRQDO)LQDQFLDO&HQWUH
 Domiciles: On and off again
speakers at the IFIA press summit were adamant that
corporate tax rates are “non-negotiable” and that
the non-tax status of Irish funds would remain the
same. Ireland’s fund industry has also been quick to
differentiate itself from the failure of the country’s
domestic banks.
Offshore centres are also under pressure from global
governments and the Organisation for Economic Co-
operation and Development to improve transparency
and information exchange for tax purposes. The UK
government for example has been trying to claw back
£10bn in undeclared funds from British citizens after
establishing an agreement with Switzerland last year
and hopes to set up further deals. “Politicians were
trying to find scapegoats for the crisis, deflecting that
InvestorServices
blame onto small fund centres,” says Peter Niven,
chairman of Guernsey Finance. Under the glaring
spotlight, fund domiciles such as Guernsey and Malta
are trying to promote themselves as international
finance centres to lose the ‘tax haven’ label, which
now has negative connotations due to media coverage
and comments from G20 government leaders.
It is clear that small fund jurisdictions will encounter
some tall hurdles over the next few years but their
positive attitudes – despite coming across a little
unrealistic - shows they are prepared to fight for
survival.
I do not think that any
one factor can be
taken in isolation when
deciding whether to
re-domicile
Kenneth Farrugia,
FinanceMalta
44 | Fundamentals4HNHaPUL |:WYPUN2011
Brian Bollen in conversation with Jane Pearce,
Partner, Ogier Fund Services, Jersey
BB: How will the AIFM Directive impact fund
administration?
JP: There has been a lot of debate about the practical
aspects of the Directive’s implementation but it
won’t be until the directive becomes effective that
the wrinkles will appear. Even in its very simplest
form the Directive will raise the cost of compliance.
BB: How is the business changing?
JP: We haven’t yet come out of recession, and
restructuring and divestment continues to take place
within the industry. In the current climate there is
much more to our function than business as usual.
There is no finance without information. Lenders
and investors won’t take risks they are unable to
measure and this is where administrators can react
quickly to reporting demands. Transparency and
disclosure, words not historically associated with
private equity, are becoming more prominent in our
industry.
BB: Will fund administration expand as an industry?
JP: Outsourcing is a perennial discussion topic, and
we are likely to see more managers outsourcing
aspects of their middle and back office functions
to allow them to concentrate on core investment
activity. Increased regulation and IT investment are
two of the main drivers for this.
BB: Boom times ahead for Ogier and its peers?
JP: While there is increased scope for fund
administrators to win more business, we have to
be careful that it does not necessarily translate
into higher revenues, let alone profits. Fund
administrators need to align themselves with their
clients at a time when all services providers are being
squeezed. Every penny needs to be made to count.
BB: Looking forward
JP: I would like to see greater clarity in respect of the
impact of regulatory activity and compliance, and
greater appetite on the part of Governments and
regulators to encourage entrepreneurial behaviour. I
think the onshore/offshore debate will continue and
I think we will see the emergence of other potential
domiciles for the provision of alternative investment
fund administration.
 Domiciles: Guernsey focus

Guernsey focus
Stephanie Baxter took a trip to Guernsey to find out what makes the island's
financial services industry tick
For a small island with only 62,000 inhabitants,
Guernsey might appear to be a small fry in the ocean,
but it might surprise many to discover that - unlike
its larger counterparts - Guernsey has not only had a
pretty smooth ride through the financial crisis but has
also managed to break a few records in the process.
Its greatest achievements this year include receiving
recognition from the International Monetary Fund
InvestorServices
which was established in 2007, services clients with
private equity, real estate and fund of hedge funds, but
is getting demand in new areas. “We have clients who
are looking to launch in many new areas: start-up hedge
funds, real estate derivatives and more IFA-focused fund
offerings,” Everitt adds.
This need to diversify is more important now than ever
as emerging fund domiciles such as Malta and Cyprus

(IMF) for its “high standard” regulatory infrastructure. creep into the picture, citing concern that Guernsey and
Guernsey has long been viewed as a holiday destination other well-established centres could lose out to the rising
with its close proximity to France and the UK, but the competition. Yet according to Mark Douglas, managing
island’s main income is generated from its financial director at Mercator Fund Services Limited Guernsey:
services sector rather than tourism. “Malta and Cyprus have tried to be new entrants, but
The island’s finance industry contributes around 40% we’ve got the history, the positive IMF reports and
to the Crown dependency’s total GDP, which could regulation that’s developed over time.”
easily have led to its downfall during the economic Another potential threat to fund domiciles is the
crisis. But despite a 4.5% decline in the EU’s Alternative Investment Fund Managers
economy during 2008 the island is (AIFM) Directive which came under
currently in a stronger position than Despite the IMF considerable scrutiny in 2010 for its
other jurisdictions, with no public and OECD reports, potential threat to the alternative
deficit and a well-supported state Niven claims that funds industry.
pension scheme. Despite the global uncertainty
Yet it is Guernsey’s investment
Guernsey still has over the Directive, Guernsey’s
funds industry that has really some way to go to fund sector seems to have a
taken off recently by moving overcome ingrained pretty relaxed attitude to the
past the £250bn mark at the misconceptions new regulations. “Business as
end of December 2010 with a usual” is the phrase on everyone’s
and convince its
phenomenal growth rate of 40% lips. According to Neale Jehan,
over just one year. detractors that it chairman of the technical committee
Guernsey’s focus on niche is a well-regulated of the Guernsey Investment Funds
products has helped it to ride international Association (GIFA), Guernsey will be
out the storm, says Jarrod Cowley- finance centre in a better position than its European
Grimmond, director of finance sector counterparts because the island is not
development for the States of Guernsey. part of the EU, unlike Malta for example.
Like most offshore jurisdictions, Guernsey has “If you’re not sitting in the EU then you’re still open
specialised in certain products to differentiate itself to non-EU investors without having the additional cost
from the rest of the market. Over the past two decades of the Directive, which means that your products will be
the island has experienced a gradual shift from retail or more flexible,” he says.
equity-traded schemes to predominantly institutional Although Guernsey does not have EU membership,
niche funds. the doubt over the directive has given the island an
While the Cayman Islands have concentrated on hedge opportunity to go into Brussels to have some input in the
funds, Guernsey has become well-known for its private formation of the new fund passport rules.
equity funds, fund of hedge funds and closed-end Guernsey is very proud of its strong regulatory
listed funds. Investors are looking for those alternative network, but it has somewhat struggled to bring that
funds now more than ever as well-regulated and secure message across in previous years. “The IMF visit and its
products are set to become the future. subsequent positive report were catalysts for promoting
Paul Everitt, who is managing director at Fund Guernsey as a well-regulated jurisdiction,” says Lyndon
Corporation of the Channel Islands, says that Guernsey Trott, Guernsey’s chief minister. The island’s finance
will benefit from diversifying itself. Fund Corporation, industry now hopes that this will encourage other

46 | Fundamentals4HNHaPUL |:WYPUN2011
 Domiciles: Guernsey focus

funds to migrate or outsource their

administration office to Guernsey.
The island’s fund managers, law
firms and ministers talk about selling
Guernsey as an ‘entire package’ when
bringing in investors and funds.
Not content with simply promoting
the offshore centre as a ‘tax neutral’
destination, Guernsey’s lawyers and
fund managers bring in other factors
such as its close relationship with
London, relaxed lifestyle, beautiful
landscape and zero public debt. But
while a jurisdiction’s fiscal stability
and picturesque views might be
important to some investors, there
will be other more pressing factors
such as low tax rates, expertise,
and a well-balanced regulatory
infrastructure.
There is also the question as to
governments’ future approach
Peter Niven, chief executive of Guernsey Finance
to so-called offshore tax havens,
which have come under fire from
governments’ desperate attempts to draw in extra office is highly surprising considering the historically
money in the face of huge public deficit. Guernsey has competitive tensions between the two islands. Jersey
been caught up in this and is obviously keen to lose the and Guernsey have not always seen eye-to-eye when
title. Despite public furore in the UK over businesses it comes to regulation and tax rules, but the Directive
relocating to offshore destinations to avoid paying tax, appears to have brought the two closer together.
it is interesting to note that Guernsey’s fund industry “The regulators don’t always work together as much
actually provides a net benefit to the UK. What’s more, as they perhaps should,” say Paul Wilkes and Jason
around 50% of investment from Guernsey-domiciled Romer who are both partners at Guernsey law firm
funds goes back into the EU, which is surely something Collas Crill. However, Romer claims that while it is
that everyone would welcome, says Cowley-Grimmond. important for the two islands to co-operate where they
A recent report by the OECD has helped to put can, the competition between them is also a vital element
Guernsey in a more favourable light by confirming to driving new business. “Jersey and Guernsey are like
that it has abided by OECD rules on transparency and twin brothers, pushing each other to innovate and do the
information exchange for tax purposes. The island has best they can.”
taken this further in the first quarter of 2011 by signing Guernsey has generally been regarded as the ‘little
these bilateral tax agreements with Canada, Romania brother’ of the two in terms of its financial industry,
and South Africa. but the Bailiwick has surpassed Jersey this year both in
It is misleading to use the expression tax haven to terms of the number of companies listed on the London
describe Guernsey, says Andrew Walters, partner at Stock Exchange and its domiciled funds.
Mourant Ozannes. He goes on to say that the island is “Guernsey will continue to promote itself as a
now recognised internationally as a transparent and well-regulated international financial centre that
cooperative offshore financial centre and that the island complements onshore jurisdictions by providing a niche
has gone to great efforts to educate the outside world of set of products and services to a global client base,” says
this and to distinguish itself from other less cooperative Peter Niven, chief executive of Guernsey Finance, which
jurisdictions. He says that these efforts have received promotes the island’s financial industry. Despite the IMF
a boost with the launch of a Channel Islands office in and OECD reports, Niven claims that Guernsey still has
Brussels to give Guernsey and Jersey greater presence some way to go to overcome ingrained misconceptions
at the heart of Europe, headed by the current British and convince its detractors that it is a well-regulated
ambassador to Bulgaria, Steve Williams, who starts his international finance centre.
new job in April.
This major development was undoubtedly aided
by Guernsey’s presence in Brussels during the
development of the Directive. The move to create a joint

:WYPUN 2011|Fundamentals4HNHaPUL| 47
 Stock exchange consolidation
Exchange interchange
Fundamentals gives a summary of the
new spurt of plumbing consolidation; or in
formal terms the new exchange mergers
that were announced in Q1 2011
The on-off-on-off marriage between New York
Stock Exchange and Deutsche Boerse is all
InvestorServices
of a sudden back on. Subject, of course, to
approval by regulators, witless interference
by uncomprehending politicians and their
lackies, and passing anti-trust objections.
Oh, and subject to the non-appearance of
rival bids. Whoever would have thought that
the industry’s basic plumbing could generate such
excitement?
The news of the ‘advanced talks’ between the
beaming couple continued an exciting week,
following hard on the heels of the news that the
London Stock Exchange is at a similar stage in
talks with TMX Group, Canada’s largest exchange
company. Somehow, though, the thought of a New
York-Frankfurt axis chills the blood more than a
London-Toronto version.
The latter pair, of course, are approaching the
second anniversary of the strategic partnership
agreed in March 2009.
This engagement has, presumably, enabled them
to grow to know and perhaps even love one another
move to give a full union as much of a guarantee of
success as one might hope for. Only insiders, though,
will be able to advise whether they are still sipping
tea gently together from dainty bone china cups with
little fingers upturned, or whether they are madly
gulping down mugs of builder’s tea while passing
wind uproariously in front of one another.
If the NYSE/Deutsche Boerse marriage proceeds
(and few in the industry will need reminding that
talks on a merger failed in March 2008) it will, as
the Financial Times pointed out, ‘create the world’s
largest exchanges operator by revenues and profits’.
On a slight tangent, for anoraks specialising in the
compilation of mergers and acquisitions league tables
it will also mark another bout of debate over how
to value a deal for league table purposes; although
NYSE Euronext has a market value of $8.7bn and
48 | Fundamentals4HNHaPUL |:WYPUN2011
Deutsche
Boerse has a
value of $15.3bn, the
league table will be $12bn,
half the combined total value.
This pronouncement comes
from someone steeped in league
table folklore, with battle scars
obtained from their year-end
compilation amidst the ruins
of many a family Christmas.
Any other calculation is inherently
flawed and should be treated with the
utmost suspicion. Please remember this,
Morgan Stanley and Barclays Capital
- joint lead financial advisers and
brokers to LSE – RBC Capital Markets
– financial adviser to LSE - and Bank
of America Merrill Lynch and BMO
Capital Markets (who they?) – joint
lead financial advisers to TMX.
If NYSE/DB does proceed to
conclusion it, the blushing bride and groom say it
will create a world leader in derivatives and risk
management and the premier global venue for capital
raising, and generate around 300m in synergies (also
known as cost savings). The LSE/TMC combo would,
meanwhile, be the world’s largest platform for mining
company listings at a time of surging commodities
prices. Which is, presumably, encouraging news
for the hordes of Russian oil companies that are
reportedly poised to float in London. The deal has the
approval of a number of major shareholders, most
notably Borse Dubai, the LSE’s largest shareholder
with a 20% stake, and Qatar Investment Authority,
which holds a 15% stake in the LSE.
For the record, the Boards of LSEG and TMX
say they believe that the merger is strategically
 Stock exchange consolidation

If NYSE/DB does proceed to

conclusion it, the blushing bride and
groom say it will create a world leader
in derivatives and risk management
and the premier global venue for
operator by revenues and
capital raising, and generate profit and would continue to
around 300m in synergies operate all exchanges under
local regulatory frameworks
and supervision, and would
work closely with regulators
to facilitate transparency and
standardization of global markets.
compelling and will create It is expected that Deutsche Börse
a more diversified business and NYSE Euronext would combine their
with greater scale, scope, reach businesses in all-stock transaction under a new
and efficiencies, generating substantial legal entity incorporated in the Netherlands. If fully
benefits for all stakeholders. consummated, Deutsche Börse shareholders would
hold approximately 59 to 60%, and NYSE Euronext
Formal acknowledgement of shareholders would hold approximately 40 to 41%, of
the other set of talks came in the the combined company’s equity.
following bulletin from NYSE The combined group would have dual headquarters
Euronext: in New York and Frankfurt. The Chairman would
“In light of recent market be Reto Francioni, based in Frankfurt, and the
rumors, Deutsche Börse CEO would be Duncan Niederauer, based in New
AG and NYSE Euronext York. The new company would have an Executive
(NYX) today confirmed Committee drawn equally from the current leadership
that they are engaged in of both companies.
advanced discussions NYSE Euronext and Deutsche Börse AG expect to
regarding a potential be able to realize approximately EUR 300m in cost
business combination. They synergies, principally from economies of scale in
cautioned that no agreement information technology, clearing operations, market
has been reached. They also operations and corporate center functions. In addition
noted that there cannot be any Deutsche Börse AG and NYSE Euronext expect to
assurance that an agreement will be reached or, if generate substantial incremental revenues from
an agreement is reached, that a transaction will be clearing services, product innovation and cross-selling
completed. Any transaction would be subject to the opportunities between the global cash and derivatives
approval of the two companies’ boards, regulatory businesses.
and shareholder approvals, as well as other
customary conditions. In the meantime, of course, industry participants
This transaction creates a group that is both a world and observers will be making their own judgment,
leader in derivatives and risk management and the and informed or ill-informed comments. For better
premier global venue for capital raising. As a true or worse, for richer or poorer, in sickness and in
pacesetter across the spectrum of capital markets health…
services, the combined group will offer clients global
scale, product innovation, operational and capital
efficiencies, and an enhanced range of technology
and market information solutions. The combined
group, which would be the world’s largest exchange

:WYPUN 2011|Fundamentals4HNHaPUL| 49
 Sustainable investment
Sustainable investment
Brian Bollen provides a roundup of the latest trends
and opportunities in environmentally-friendly investing
The future’s bright, the future’s clean, the future’s
mandatory
Solar panels, ground source or air source heat
pumps or some other source of renewable energy
will be mandatory on new-build houses by 2020 in
many parts of Europe. That is one of the confident
predictions made by Evelyne White, a former
InvestorServices
Wall Street analyst who now specialises in clean
technology and energy efficiency investing for
Riverside, a small/mid-market private equity firm
that has worked on a number of clean technology
& energy efficiency deals, particularly in the area
of energy efficiency for the built environment.
She believes there is huge potential in this area,
particularly since it is less vulnerable to drastic
swings in government guaranteed feed-in-tariffs
(FITs).
At current levels, explains White, these FITs
provide an incredibly profitable investment
opportunity for the participating green householder,
but utility companies – and ultimately all ratepayers
- are paying an enormous premium for their
electricity. In response to this concern, a few months
ago the French government put a moratorium on all
installations over 3kw since the major French utility
EDF was paying roughly eight to 10 times the spot
price of electricity to cover its obligations to buy
solar energy at a hefty premium. The moratorium
in France and ensuing cap on solar construction
combined with what took place in Spain in 2010
has led to a lack of trust in government-sponsored
incentives – particularly for solar photovoltaic.
This lack of trust - especially in challenging
financial times - could undermine the niche as an area
of potential investment for us, so we’re especially
looking for areas that are less reliant on government
subsidies. As older readers will be well aware, today’s
government incentive is tomorrow’s tax loophole
that the government in question can suddenly feel
compelled to close by moving its goalposts onto a
new moral high ground.
Clean a broad umbrella
White describes her interpretation of clean
technology as a broad umbrella term covering
renewable energy generation, and cites wind, solar,
biofuels and geothermal at the top of her list of
sources. Energy efficiency – including smart grid
50 | Fundamentals4HNHaPUL |:WYPUN2011
technologies and energy efficient building materials
- recycling and waste treatment, water treatment,
energy storage, electric car infrastructure and
efficiency in transportation also fall under the Clean
Technology umbrella.
“Anything that enables us to do more with less
resources or less environmental damage – that
qualifies for inclusion in our book,” she says. “The
technology involved does not have to be new or
ground-breaking, just improved and with a clear
value proposition to its end customers.”
Riverside looks to invest in niche leaders in
markets with huge growth potential, and at the
time of writing (early March 2011) has made nine
investments in Clean Technology & Energy Efficiency
companies. It made its first in August 2005, in
UK-based Sentinel Performance Solutions Ltd, a
leading manufacturer of products designed to clean,
protect and improve the efficiency of residential
central systems, and solutions for the cleaning and
maintenance of solar and heat pump systems.
On March 1 this year it announced the £43m sale of
Sentinel, its first clean technology exit, notching up
a 22% gross internal rate of return and a three times
gross cash-on-cash return.
Riverside describes Sentinel – sold to Electra
Partners - as Europe’s number one supplier of
residential heating and hot water system treatment
products.
Sentinel, based in Runcorn, England, has market-
leading positions in the UK, France, Italy and
Germany. Sentinel’s biodegradable and OEM-
recommended products clean and prevent corrosion
in heating systems, improving energy efficiency and
increasing system lifespan.
Success of the corporate carve-out
Riverside invested in Sentinel in August 2005, as a
corporate carve-out from General Electric. Riverside
transformed Sentinel from a small corporate division
to a standalone company with operations and
personnel spread across six countries. Riverside
helped strengthen the management team and worked
with them to build the systems and processes to
position the company for future growth.
During Riverside’s ownership, Sentinel added a
range of products and customers with the 2007 add-
on acquisition of Salamander Engineering Ltd., a
smaller UK-based competitor.
 Sustainable invstment

The firm also helped Sentinel launch 24 new professionals in 19 offices, and longstanding
products, including its flagship X800 line. relationships with partner lenders.
“We’re proud of the work we did with Sentinel,”
said Riverside managing partner Suzy Kriscunas. Greening the economy: Abellon to create 25,000 new
“We harnessed Sentinel’s potential, working with jobs
management to expand the company’s strong UK
position, build sales channels in Benelux, France, Italy Just days before the sale, demonstrating the
and Germany and initiate sales in the U.S. Sentinel connection between the concept, the economy
is well positioned to build on this strong growth worldwide and society, the news broke that Abellon
foundation going forward.” CleanEnergy a sustainable energy company based in
The investment was truly international for the India, was pledging to create 25,000 jobs over the next
global firm, as it involved two Riverside funds – the five years, and to produce clean, affordable energy
North America-based Riverside Capital Appreciation that could power 100,000 homes in Ghana. The
Fund and the Riverside Europe Fund. Having deal commitment to the Business Call to Action (BCtA) – a
team members on both sides of the Atlantic global initiative that aims to support the private
delivered a broad range of insight and sector’s efforts to fight poverty through its
experience to the company.
In addition to building and
Anything that enables core business - is also expected to reduce
carbon dioxide emissions by over one
strengthening Sentinel’s core us to do more with million tons by 2015.
hot water system sales, less resources or less “Abellon’s commitment is a
Riverside helped Sentinel environmental damage concrete and effective example
capitalise on the growing of how the private sector can
renewable energy market – that qualifies for
adopt sustainable, pro-poor
and build on Sentinel’s inclusion in our book. business strategies to tackle
environmentally friendly The technology the twin global challenges of
reputation. involved does not poverty and climate change,”
“We saw some said BCtA programme
compelling opportunities to have to be new or manager, the magnificently
expand Sentinel’s offerings,” ground-breaking, named Natalie Africa.
said Riverside partner Volker just improved and Through this initiative, we
Schmidt. “The company now learn, Abellon will convert 10,000
has a comprehensive product
with a clear value
hectares of degraded earth into
line for renewable heating systems, proposition to its agricultural land with crops such as
which can be used in solar thermal, end customers bamboo, palmarosa and sweet sorghum
air source and ground source heat pump that require little to no irrigation, and are not
heating systems.” used primarily for food. Some 21,000 farmers will
Principal Trey Vincent and vice president Scott be employed through this scheme, and will receive
Bogard worked with Schmidt and Kriscunas on assistance and training to grow these crops. Abellon
the transaction for Riverside. Riverside’s associate will then purchase their harvest and convert it into
director of origination, Amy Margolis, worked with fuel at a planned biofuel manufacturing plant. The
the deal team and the sell side advisor to facilitate the company will then convert the bio-fuel into clean
exit. Lincoln International advised Riverside on the energy at a mid-size bio-power plant that it will also
sale of Sentinel to Electra Partners. Jones Day, KPMG build.
and LEK provided legal, financial and commercial By 2015, this power plant is expected to produce
support. enough clean energy that, upon sale, could meet the
The Riverside Company describes itself as a global needs of up to 100,000 homes. An additional 4,000
private equity firm with a focus on acquiring growing skilled and unskilled workers will be employed as
enterprises valued at up to $200m ( 200m in Europe). technicians, fabricators, engineers and agronomists
The firm partners with strong management teams and along the entire energy production process.
enhances its investments through acquisitions and “We are dedicated to partnering with Ghana in the
organic growth. Since its founding in 1988, Riverside domain of clean energy and low carbon economic
has invested in 250 transactions with a total enterprise processes,” said Aditya Handa, managing director of
value of more than $5.4bn/ 4.4bn. Abellon CleanEnergy. “Our aim is to create a holistic
The firm’s portfolio in North America, Europe and sustainable approach of energy production
and the Asia Pacific region includes 74 companies that helps meet national economic and energy
with roughly 14,000 employees. Riverside completes goals, and creates real development impact for local
acquisitions smoothly thanks to $3.4bn/ 2.7bn communities.”
in assets under management, more than 195 Abellon says its commitment to renewable energy is

:WYPUN 2011|Fundamentals4HNHaPUL| 51
 Sustainable investment
based on a philosophy of non-conflict of food, fodder
and fuel. This focuses on the conversion of biomass
waste from crops into fuel, and then into energy using
innovative, low-carbon conversion techniques.
This contributes to Ghana’s strategic national
energy plan to increase and diversify the country’s
energy source so that 10 % of total energy is based on
renewable energy sources. Abellon CleanEnergy Ltd.
is an integrated sustainable energy solutions provider
with a vision to contribute to clean energy generation
through focus on bio energy, including bio pellets,
bio fuels, bio power, and other forms of clean energy
generation. The company is part of a global business
group with interests in diverse areas including clean
energy, agrisciences and genomics research. At social
front, the group has undertaken several educational
InvestorServices
initiatives like RedBricks Education and Xcellon
Institute.
State Street in ESG link with F&C
Adding to the general visibility and viability of
the notion of clean and/or ethical investment, State
Street reported the launch of its new environmental,
social and governance reporting service. State
Street has partnered with F&C Investments to
provide an environmental, social and governance
(ESG) reporting service to enable investors to meet
stewardship goals.
It says that F&C’s ESG service provides investors
with comprehensive, global engagement reporting,
enabling them to fulfil their UN Principles for
Responsible Investment (PRI) reporting needs.
Investors that can benefit from this service include
pension fund managers and pension fund trustees,
institutional clients including endowments,
foundations and sovereign wealth funds and
financial institutions seeking to implement best
practice responsible investment and enhance the long
term value of their investments. The new service
will enable State Street to provide its clients with
Our aim is to create
a holistic and
sustainable approach
of energy production
that helps meet
national economic
and energy goals,
and creates real
development
impact for local
communities
52 | Fundamentals4HNHaPUL |:WYPUN2011
comprehensive ESG engagement reports available on
mystatestreet.com.
Wade McDonald, head of client management and
sales for State Street’s Global Services business in
the UK Middle East and Africa commented: “We are
the first investment service provider to bring this
service from F&C directly to institutional investors.
As part of State Street’s broader investment analytics
suite of services, the ESG reporting service has the
information needed to support our clients’ fiduciary
and regulatory duties, ensuring their investments in
companies that demonstrate a global commitment to
environmental and social responsibility and corporate
governance. We provide institutional investors with
the ability to implement and manage a responsible
investment strategy so they can communicate positive
engagement outcomes to their stakeholders.”
Karina Litvack, head of governance and sustainable
investment at F&C added: “Partnering with State
Street for this new service will enable their clients to
be better informed on ESG issues and better placed to
assess any potential ESG risks and opportunities, key
factors in investment decisions today. F&C’s approach
to ESG recognises that investment returns over the
long-term are driven primarily by the performance
of innovative, well-managed corporations that, in
themselves, are dependent on the health of the human
societies and ecological systems that sustain economic
enterprise.”
“State Street is committed to being a leader in
environmental sustainability and providing our
clients with a range of ESG products as they continue
to value the importance and manage the impact on
their business,” said Pat Centanni, executive vice
president, head of global product management and
chair of State Street’s ESG Committee.
Each year, says F&C, it engages approximately
6,000 companies through active dialogue on material
ESG issues such as biodiversity and climate change,
human rights and labour standards, corporate
governance, bribery and corruption, business ethics
and sustainability management and reporting.
It identifies companies for engagement based on
client input, financial exposure, material ESG risks,
governance practices and ability to influence.
Flexibility for
a world in motion
ade services,
eed them

A reliable service provider like Euroclear

can help you meet your short-term needs,
especially during these challenging times
of changing market conditions, tighter
regulation and scarce liquidity.
 Outsourcing administration focus
Outsourcing focus
There is scarcely a corner of the financial services
world that is not affected in some way by the waves of
regulation sweeping and threatening to sweep over the
industry. From the front to the middle to the back office,
from bottom to top of the hierarchy, pre-trade and post-
trade, MiFid, Dodd-Frank, Basel III and Solvency II are
InvestorServices
the source of growing levels of discomfort and concern.
It is an ill wind, though, that doesn’t blow someone
some good, and the providers of all kinds of outsourced
administration services, of all shapes and sizes, are
looking confidently ahead to rolling out their products
and growing their business and profitability.
GBST niche
One such niche provider is GBST, which provides global
technology services to the financial services industry at the
point where institutional meets retail in the pensions arena.
It was established in 1983 in Australia and since then it has
grown to a staff of 350 people in Australia, Hong Kong,
London and New York. GBST was listed on the Australian
Securities Exchange in June 2005.
Daniel Carpenter, head of business development, EMEA,
since arriving at the company in September 2010, says
the company is looking to grow in terms of territory,
architecture and product range. He argues that the rules-
based real-time processing and integration capabilities
that it provides in the recording of settlement activity
and interfacing with custodians will be invaluable to
institutional clients in today’s and tomorrow’s more heavily
regulated world.
He identifies the growing flexibility and interactivity of
web tools as a key area of interest. “We are launching and
redeveloping products using new Google web tools which
will make the front end more proactive and functional,” he
says. “Older products that used a web browser for access
were only able to provide a dumbed-down experience. Now
it feels more like using a full, rich application but with the
simplicity of accessing a website. We’ve shown the fruits
of our efforts to existing and potential new clients and they
love what they see. This paves the way for us to be more
aggressive in the EMEA region, and our current growth of
10-15% a year could jump exponentially if our predictions
and projections are right.”
Official history
The official company history shows that as part of its
growth strategy GBST has acquired a number of companies
54 | Fundamentals4HNHaPUL |:WYPUN2011
Fundamentals investigates how
the raft of new regulations being
introduced worldwide is creating
opportunities for outsourced
adminstration service providers
including:
Coexis in December 2008 which provides next generation
solutions for global capital markets and institutional
broking through the Syn platform, which processes equities,
derivatives, fixed income and managed funds transactions.
InfoComp, now GBST’s Wealth Management division,
in August 2007 and is the leading specialist provider of
software for wealth management and client registry in
Australia, and increasingly, the United Kingdom.
Palion, Australia’s foremost derivatives trading and client
accounting technology, was acquired in December 2005.
GBST currently clears 47% of equities transactions on the
Australian stock exchange by volume, and GBST’s DCA
platform processes over 70% of derivatives volumes. In the
UK and Australia, its wealth management platform, GBST
Composer, administers more than $250 billion in assets.
GBST has four divisions, the first of which is GBST
Global Broker Services, a provider of client accounting and
securities transaction technology to capital markets in Asia
and Europe. Through the Syn~ platform GBST provides
next generation technology to process equities, derivatives,
fixed income and managed funds transactions.
GBST Broker Services is currently focused on the Australia
market place selling financial solutions, including front
office tools, to this region. This division is also engineering
the Syn~ solution as its strategic solution for this territory.
GBST Wealth Management is the leading provider of
funds administration and registry software to the Australian
Wealth Management industry. GBST’s wealth management
software, Composer, administers funds in Australia and the
United Kingdom.
GBST Financial Services is a wholesale provider of
independent, market-leading financial product data and
related services to financial advisers and institutions. It also
provides web design, development and usability services.
Other end of the scale
Will all due respect to the ambitions at GBST, already
sitting at the other end of the scale sits Misys plc, a global
application software and services company. It followed
traditional British folklore by storming into the month
of March like a lion, confirming the completion of its
acquisition of Sophis to create what it describes as the
number one capital markets solution provider
The acquisition, which was approved by Misys
shareholders on 11 February 2011, has brought together
two high profile software and services providers in capital
 Outsourcing administration focus

Older products that used a web browser for access were only able to provide a
dumbed-down experience. Now it feels more like using a full, rich application but
with the simplicity of accessing a website. We’ve shown the fruits of our efforts to
existing and potential new clients and they love what they see

Daniel Carpenter, head of business development, EMEA, GBST

Misys customers will be able to take advantage of the more advanced functionality
around equities, equity derivatives, portfolio management and portfolio analytics
from Sophis. Whereas, Sophis clients will have access to greater interest rate and
credit derivatives, bonds and foreign exchange capabilities from Misys solutions

Mike Lawrie, CEO of Misys

markets. The newly enlarged combo modestly claim
that the merger has created a business ‘that has the most
comprehensive cross-asset and front to back-office coverage
available in the market today’.
Sophis solutions are used by financial institutions on
both the sell-side and the buy-side. Its buy-side solutions
will help accelerate Misys’ penetration into this lucrative
market. Its sell-side solutions, particularly around the
equities, equity derivatives and commodities areas, are
complementary to Misys’ existing strong solutions in
interest rate derivatives, foreign exchange and fixed income,
as well as its commercial lending capabilities.
The two businesses now have more than 1,800 domain
specialists with an ‘unrivalled knowledge and expertise
covering all asset classes across all functional areas,
including trading, investment decision support, portfolio
management, risk management, compliance, pricing and
collateral management’.
Combo delights
Mike Lawrie, CEO of Misys, is clearly delighted with the
additional strengths the acquisition brings to the company:
“This really catapults us into the No.1 position in the
market. Misys and Sophis clients will both benefit from this
acquisition: Misys customers will be able to take advantage
of the more advanced functionality around equities, equity
derivatives, portfolio management and portfolio analytics
from Sophis. Whereas, Sophis clients will have access to
greater interest rate and credit derivatives, bonds and
foreign exchange capabilities from Misys solutions.”
“Systems that enable traders, investment managers
and risk managers to price and manage any instrument,
regardless of complexity or asset class, encourage
innovation in the capital markets, as well as increase
transparency,” states Stephen Bruel, Research Director,
TowerGroup, a Corporate Executive Board company. “The
ability to manage cross-asset portfolio strategies, combined
with comprehensive risk management from the front to the
back office on one integrated platform will keep institutions
ahead of their competitors. Having a single vendor offering
this broad coverage potentially reduces risk for financial
institutions.”
Sophis solutions now have greater exposure to non-
European markets, in particular the fast-growing Asian
and Latin American markets, through Misys’ international
footprint and its existing sales and services infrastructure in
these regions. Additionally, the combined solution portfolio
and broader capital markets expertise will provide new
customers with a wider choice of cross-asset coverage.
Sophis, which becomes Misys Sophis, a business unit
of Misys, has approximately 130 financial institutions in
its customer base. Among its 80 buy-side customers are
organisations such as UBS Global Asset Management,
Groupama Asset Management, Fidelity International and
Dexia Asset Management. Its 50 sell-side customers include
Barclays, HSBC, Natixis and Royal Bank of Canada.
In conclusion
Misys concludes by saying that it now has over 500
customers benefiting from its broad range of capital markets
solutions. It adds that it generates more than 60% of its
revenue from the combined capital markets businesses.
“Misys is a new force in buy-side systems with 13 of the
top 20 asset managers and has added 22 new customers in
2010,” it claims.

:WYPUN 2011|Fundamentals4HNHaPUL| 55
 Wine custody
Liquidate your assets
Brian Bollen takes a tour of the refreshing world of wine investments
There are alternative investments, and there are
alternative investments, such as art, which became
hugely popular with the pension funds of certain
nationalised British industries in the 1970s and 1980s.
And then there is wine.
“Wine is a perfectly valid alternative investment
asset,” says Richard Brierley, head of the ‘fine wine’
department at Mayfair, London, UK-based Vanquish
Wine. “It is trackable, capable of being subject to analysis
InvestorServices
and it is a commodity. You can see the price go up, you
can see the volumes being traded and the prices being
paid on Livex. It also boasts a number of underlying
fundamentals such as the year of vintage and the
quality of the chateau from which the wine originally
emanated.”
Investors can either invest directly, tapping into the
experience and expertise of a firm like Vanquish, which
in its own words will act as prime broker, custodian,
and investment advisor. Or they can invest indirectly via
an entity such as the Fine Wine Fund, the vinicultural
equivalent of a unit trust. One benefit of taking physical
ownership is that because Her Majesty’s Revenue &
Customs views wine as a wasting asset (despite all
evidence to the contrary) any profits are not currently
subject to UK capital gains tax.
For the record, this writer is a fine wine sceptic who
is working his way through a case from Berry Brothers
& Rudd, vintners to more than one member of Britain’s
Royal Family. With only one or two bottles left I am
distinctly underwhelmed. The Lindemans Cawarra
Shiraz Cabernet on offer for £4.99 at my local Netto store
is greatly superior in both absolute and relative pound-
for-pound terms than anything in the BB&R case.
For what it is worth, the best red wine I have ever
tasted is the Lanz Thomson 2006 Shiraz from the Barossa
Valley, a marvellous SwFr48 companion to the weekly
cheese fondue at the Hotel Baeren in the Swiss Alpine
upmarket ski and summer hiking resort of Wengen.
Snobs might literally turn up their noses at it, but if there
is a fuller bodied more enjoyable way on the planet to
pleasure the taste buds, I’d love to sample it.
Back in the Old World, the following communication
landed in the Fundamentals in-tray in late February: “I
was wondering if you might be interested in speaking
to the Fine Wine Department at Vanquish Wine (www.
vanquishwine.com). Vanquish Wine started out as
London's leading drinks distributors to top clubs and
bars and in 2009, the company used their experience
to adapt their business so as to make the most of the
recession. The business expanded and they launched
56 | Fundamentals4HNHaPUL |:WYPUN2011
a fine wine division for private clients and investors
and work with those just starting to build their wine
portfolio to the more experienced.”
With two Scotsmen on the editorial team, and the
whiff of a complimentary drink or two in the air from
Mayfair-based Vanquish, there was an immediate debate
on how to respond. We reached the conclusion that the
principles of custody, safekeeping, regular portfolio
valuations and changes are more or less identical
whether the asset involved is a collateralised mortgage
obligation or a bottle of wine. That swung the argument
in favour of tackling the challenge.
Richard Brierley joined Vanquish as head of fine wine
from New York, where he was vice president and head
of Christie’s North America wine department and was
responsible for $27m in sales in 2007. He now sources
and sells the rarest wines to elite clients on a global
scale. In 2010, he and the team launched Magenta Wine
Investors Ltd, a dedicated investment vehicle for the
purchase and sale of fine wine. He spends a good deal
of time, he says, persuading owners with rare wines
languishing unappreciated in their cellars to part with
them. “It’s like trying to convince people to give away
their children,” he says.
Vanquish, he says, manages bespoke portfolios of
blue-chip wines for both the investor and investor/
drinker. Their team of specialists will craft a balanced
basket of investment worthy cases to meet personal
requirements. They arrange for the cases to be stored
in an underground, temperature and humidity
controlled, fine wine storage facility in the individual's
name. Each quarter or on request, Vanquish provides
regular updates on the market value of the collection,
opportunities to add to the basket or liquidate certain
portions. One client wished to create a vertical collection
of Sassicaia (Italy) in six-litre large formats. Vanquish, we
learn, was able to put together the collection in perfect
condition in their original wooden cases from each
vintage from 1995 – 2007.
Brierley defines a fine wine as one that represents a
combination of price (£25-plus a bottle), the way it is
marketed, the producer’s production values and its
pursuit of quality. It will also drink for several years. His
own favourite? “Red burgundy pulls at my heart strings,
but it also pulls at the purse strings. A very good red will
sell for thousands of pounds per bottle, but is delicious
and otherwise very accessible.” At home, he will drink
wines from the Rhone Valley (such as Chateauneuf du
Pape). A particular favourite is Vacqueyras, normally
based on the Grenache or syrah grapes. “It’s a big rich
 Wine custody

wine that almost smells of where it comes from,” he Interestingly, wine has taken on a secondary function
says. “You can pick it up for around £15 [the Berry in today’s China, helping to lubricate trade and business
Bros price is £15.65 a bottle at the time of writing, end- with government at all levels. Chateau Lafite 1982, it
February 2011].” seems, is the gift of choice at the top of the hierarchy
in Beijing. In such an environment, one cannot help
The Market In Asia wondering what influence or favours might be bought
Reflecting the broader macroeconomic environment, by deploying bottles of Mateus Rose, Asti Spumanti
China is identified as a key source of future growth. and Chianti, staples of the mass British wine scene in
Indeed, sales to Asia already represent more than 50% decades past. The thrusting go-getters of China are
of Vanquish's fine wine sales. The team, we are told, has highly unlikely, we suspect, to be driving around with
worked hard at developing long term relationships with cases of those in their car boot on the off chance that a
both private and trade clients in the region and makes spot of lubrication might be needed to clinch a deal of
regular trips to Greater China throughout the year. some kind. The Chinese might be consuming fine wines
Face to face meetings in Asia count for a great deal and five years younger than connoisseurs in the west might,
Vanquish have been eager to be sensitive to business but they are no mugs.
practices and culture in the region. Chateau Lafite, incidentally, pulled off something
Brierley comments: "We are not just looking to of a coup by announcing that it plans to carry the
sell to these people but deeply understand Chinese symbol of the number ‘eight’ on its
how individuals are learning about new 2008 bottles. That number is synonymous
products. For example – In Beijing with wealth and good fortune in China,
we held a dinner/seminar with 10 Fine wine is being and the price jumped 25% in 24-48
young wine collectors who agreed hours, recalls Brierley.
to join us to discuss their approach
consumed quicker Their enthusiasm for drinking
to fine wine, what they wanted than it is being young vintages that Europeans
to learn and which wines they produced for the first would leave in the cellar
were excited to try. It was a time in a long time, somewhat longer is, though,
frank, open discussion about inevitably affecting the pricing
and supply can’t rise
their preferences and their ‘wine dynamics of the industry. “Fine
journey’. Bordeaux and Burgundy wine is being consumed quicker
continue to dominate Vanquish's than it is being produced for the
portfolio of wines sold, as well as first time in a long time, and supply
vintage Champagne. can’t rise,” explains Brierley. “The land
This new-found interest in foreign wines devoted to vineyards is pretty much fixed, and
reflects not only China’s economic growth but also the you can’t increase quantity at the top level without
glacially paced opening up of the country over the past compromising quality. This is putting upward pressure
15 to 20 years. “As European restaurants have opened, on young vintages; the wines from 2000 to 2008 coming
serving European wine to go with the food, so interest in to the market are more expensive.” What we will see, he
the wine has grown,” he observes. Another contributing believes, is that the grand chateaux will stay top quality
factor was the decision to cut to zero Hong Kong’s duty but will produce more, younger, second wines.
on wine in February 2008. “That made Hong Kong in In the meantime, 2009 prices were the highest on
essence China’s freeport for wine,” he adds. “Wine is record, and existing vintages responded to that. When
everywhere, in bars and in restaurants. It reminds me the 2010 prices are set in April/May this year, Brierley
a lot of mid-America 10 to 12 years ago. The US wine expects the same to happen again for a wine as buyers
culture was to be found mostly on the east and west position themselves to secure an allocation of wine
coasts, and in Chicago and Houston, but today there are that won’t actually be released to the market until
great wine bars and restaurants all over the country.” 2013. “You’re buying a future,” he says, concluding by
The rich are different in India, too. According to a beginning to use language that is meat and drink to
recent story in London newspaper The Times, Moet & Fundamentals readers. “Whoever can work out a way to
Chandon, one of the world’s best known Champagne replicate wine-style investment returns using derivatives
houses, is reportedly planning to produce a new could make themselves a lot of money.”
sparkling wine in the state of Maharashtra to satisfy
demand from the sub-continent’s growing middle As mentioned in the article, our editorial staff includes
class. Indians drink an estimated 1.5m cases of wine two Scotsmen – we invite any similar firms dealing in whisky
each year, compared to 150m cases in the UK, the story to come forward with contributions - editorial, or alcoholic
relates, but growth has plateaued in the UK while India’s (ideally both) - for the next issue of Fundamentals
consumption is growing at 25% a year.

:WYPUN 2011|Fundamentals4HNHaPUL| 57
 SecuritiesLending
P.60 P.70 P.76 P.82
US Senate hearing CCP: Diana Chan Repo: Asia IMN Beneficial Owners
Conference
P.66 P.72 P.78
Fixed income: Market focus: Japan ISLA: Kevin McNulty
Short selling
P.73 P.80
P.68 Islamic banking GSL Summit:
CCP: Eurex Nordic 2011

Register free for the GSL Weeklywire - eFunds.tv/membership

Fundamentals
Congratulations to David Allen, Vice President,
Long&Short
THE

OF IT

ClearLend Securities, who received an Amazon Kindle

MarketSummary
PowerBalance after winning the crossword competition in The Long &
ExpertPanel
SummitReport
TaxOverview
Short Of It, a securities lending market review published
alongside the last issue of Fundamentals.
Thanks to everyone who entered and you can find the
answers below. Copies of The Long & Short Of It are still
available on request.
1 2
D E R I V A T I V E
Down
SecuritiesLending

3
S A
4 5 6
2 A motorised caravan reversed around an article is a risky proposition.
P R O P R I E T A R Y B U N D
(3)
E N A
7 8
3 LA spice turned around to give the hottest deal. (7)
C C D S S M 5 Bad spin with Europe in other words creates a similar type of asset. (2,6)
9 10
Q E I I O P E S I V 6 It sounds like Mr Fawlty is involved as well, this time in Switzerland.
11
A N E U L A (5,2)
12 13
L V C R T I M E 7 Rag top automobile that doubles as an equity stake, eventually. (11)
14 15 16
C E I N D E M N I F I C A T I O N 8 Where Don Johnson meets the financing crowd this year. (5)
U R E C L C H 11 How much is employed may be a useful metric. (11)
S T O I P A 12 An important firm announcement made by an LP in the diary? (6,4)
17
T A L L I N R S N 13 The yield gets bigger and better! (11)
18 19 20
O B D O D D F R A N K B R I C 14 Have your assets broken the law? They are kept here until they need to
21
D E F A U L T T D T E be sent elsewhere. (7)
22
Y E C A R B I T R A G E M 16 Cyrillic Russia without a hundred leads to a medium through which to
23 24
M T O F E E trade. (3)
25 26 27
S I N G A P O R E N A K E D N 19 This method of trading is certainly above board! (3)
28 29 30
E S R X R T 23 I heard a maiden strike a light to get a different maturity. (8)
31
T M C O L L A T E R A L E 26 Not one for democracy, I am telling you how to vote! (5)
32
F I N A L X B 28 Echo, tango, foxtrot? (3)
33
T H Y P O T H E C A T I O N A 30 Beater redefined to give you your money back. (6)
C T
34 35
T H E B I G S H O R T D I V I D E N D
Across 22 A bear grit wrongly will get a good deal! (9)
1 Deviate strangely with a bad Roman man to get an off-shoot. (10) 24 Part of the coffee culture creates the return. (3)
4 One’s own business supports an irate short year gone bad. (10) 25 A good part of cleansing a pore leads to a PASLA event. (9)
6 Tied up with no love for an obligation. (4) 27 A vulnerable position frowned upon by the authorities! (5)
7 Common dictated statement initially used for asset type. (3) 29 Does it sound like the top of the range sporty version of arachnoids? No,
9 Big boat that helped get us over a rough patch twice over. (4) rather ten and real treats initially to be invested. (3)
10 Four-wheel-drive vehicle with its heart changed from thee to me. (3) 31 A local mismatch to a later redesign provides a safeguard. (10)
15 It’s a protection sort of thing! (14) 32 and 35 Your ultimate return on your investment. (5,8)
17 Totally exhausted but it gives you the return you want. (3,2) 33 Toy cenotaph when mixed with the periodic table’s main element and me
18 Two American lawmakers one of whom doubles as a sausage? (4-5) provides a way to get more out of it. (13)
20 The next big 4 building material that lacks the silent part of knowledge. (4) 34 A large but vertically challenged novel approach to selling securities? (3,3,5)
21 Of French mistake that puts contractors in the wrong. (7) 35 See 32

58 | Fundamentals4HNHaPUL |:WYPUN2011
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correct level of debit/margin balance all the time – I
am unable to benefit from hot stocks tied up in my
margin/debit balances – Many of my operational
activities are highly labor intensive - I only have
time to sort out the large billing discrepancies
Managing multiple technology
vendors takes too much of my time
– I am missing corporate actions that
impact the profitability of a trade – I
have to work very long hours to sort
our billing discrepancies – I can’t
take risks when choosing the
supplier for my mission critical
solutions - I don’t have
truly real time global
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trade names are trademarks or registered trademarks of their respective holders.
 US Senate hearing

Securities Lending takes the stand

Craig McGlashan gets behind the headlines and finds out from those who were there
about the US Senate hearing on securities lending disclosure
Once again securities lending found itself in
the spotlight as the US Senate Special Committee
on Aging reported back on the findings from
its investigation into the industry launched
in December, assisted by the Government
Accountability Office (GAO).
At a hearing on the findings, held in mid-March,
committee chairman Senator Herb Kohl released
a report that made a series of recommendations
surrounding disclosure within securities lending
programmes, while the GAO released its own
findings. Kohl stressed that, at a time when US
pension funds were dangerously underfunded (read
more on page 14) any potential losses that funds
could suffer should come under scrutiny.
In particular, Kohl pointed to research by the
committee which found that, of 30 employers
surveyed, a third had had plan-level withdrawal
restrictions in at least one fund over the period of
2006 to 2010, a situation described as “troubling” by
SecuritiesLending
in the box on the next page.
Charles Jeszeck, acting director of the GAO’s
Education, Workforce and Income Security
programme, spoke at the hearing. Fundamentals
asked both him and his colleague Tamara Cross,
assistant director at the GAO, whether or not plan
sponsors who saw cash collateral reinvestment losses
during the crisis should have been more aware that
their investments were being lent in the first place.
“There could be a level of disconnect in terms of
where that information is actually provided,” says
Cross. “Depending on the savvy of the plan sponsor
and whether they have consultants that can actually
tell them that this is what can go on.”
However, plan sponsors still have a fiduciary
responsibility to their participants. Should they have
signed a contract if they were not fully aware of its
details?
“We have a large number of plan sponsors in the
USA, some that are big companies that can afford

Kohl, as “employers are required by law to be able to
change the investment options offered in their 401(k)
plans”.
The report also surveyed the seven largest banks in
the securities lending market, three of which said they
had restricted retirement plans from exiting securities
lending funds.
“Securities lending is a complex financial transaction
that goes on every day, often without employers
even knowing it is going on within their plans,” Kohl
said. “And if they are aware, many employers do not
understand the added risk.”
In general, the thrust of both the committee and
GAO reports, along with the discussions at the
hearing, were around improved disclosure in
securities lending.
The committee itself laid out the recommendations
consultants and are more likely to have investment
committees that thoroughly vet investments.
“Others are small and medium-sized plan sponsors.
We’ve seen instances where they thought they’ve
given their fiduciary responsibility to their investment
adviser and not understood what their role is under
ERISA. So there is a large education that needs to go
on in terms of what the fiduciary’s responsibility is
and what they should know.
“GAO has taken some steps in that direction but the
important thing to understand is that the assumption
that all plan sponsors can read a contract and
understand what they’re investing in is not the best
assumption right now.”
Jeszeck adds: “A lot of small plan sponsors’ main
focus is growing their company; they may not
be financially savvy in regards to investments,

At the very minimum there should be easily understood language that

explains securities lending and the potential risk and returns. That’s
challenging but it is done in a lot of other areas of life where there are
complicated transactions

Charles Jeszeck, acting director of the GAO’s Education, Workforce and Income
Security programme

60 | Fundamentals4HNHaPUL |:WYPUN2011

particularly if they’re in a commingled fund. They
may be dimly aware that their investment option
can do this but they won’t know to what degree that
investment option is engaged in this, or the other
parameters of how risky that particular transaction
might be.”
In particular, it is the area of commingled funds that
appeared to give the GAO most concern. Cross points
to the fact that in such a vehicle it is the account
manager that makes the decision on whether or not to
lend, as it is in a mutual fund.
He continues: “What we tried to do in this report
was to try to get the Department of Labor more
involved so they can educate all types of plan
sponsors as to what exactly this is, what it means,
what questions they should be asking.”
Anthony Nazzaro, principal at A.A. Nazzaro
Associates, agrees with this sentiment.
“Generally speaking, anytime your're responsible for
making an investment decision on behalf of someone
else, you have a fiduciary duty. So whether your're a
plan sponsor trying to devise investment options for
the retirees, or if you are the ultimate loan servicer
making loans and investments, you have a duty to the
constituents of the plan,” he says.
“I think there are two levels of care there; the loan
servicer has an obligation to disclose as much as
possible to the plan sponsor and let them know
what’s embedded in that programme, and then once
the plan sponsor understands that, they can make an
educated and informed decision as to whether or not
this is prudent for their constituents.”
One of the largest talking points of the hearing
was the suggestion, included in the committee’s
recommendations, that individual participants in
plans should be made aware that their pension could
be indulging in securities lending.
Some suggested this was not information that a
participant should need to know about and indeed,
could cause more confusion than understanding.
But GAO’s Jeseck, for one, believes this could be
possible. “At the very minimum there should be
easily understood language that explains securities
lending and the potential risk and returns. That’s
challenging but it is done in a lot of other areas of life
where there are complicated transactions.
“I don’t think we’re talking about a mini prospectus
US Senate hearing
Committee chairman Senator Herb Kohl
1) Employers should increase their knowledge of
securities lending within their defined contribution
retirement plans by asking simple questions to
uncover their potential exposure and risk.
2) Participants should be given easy to understand
information and tools about securities lending and
cash collateral reinvestment and the benefits and
risks associated with the practice.
3) The Department of Labor should issue guidance
to employers on securities lending practices within
qualified retirement plans.
4) Companies in the business of securities lending
should report information about their businesses
practices to the Securities and Exchange Commission
and bank regulators. Sponsors of qualified retirement
plans that engage in securities lending also should
be required to report basic information on securities
lending within their plans to the Department of
Labor.
but something that provides a least a clear definition
and any implications of securities lending.”
Nazzaro disagrees, pointing to the example that
“any time you open up a brokerage account there are
two or three pages of fine print and you have no idea
what is in there so to have any kind of discussion
about securities lending does not make sense”.
However, he does offer one potential extra level of
disclosure for the individual retiree, one that does not
require an explanation of the workings of securities
lending.
“If there’s a way of measuring the differential
between a lending and non-lending fund as it affects
the individual retiree, that would be nice to know. If
they could do some sort of calculation to say, ‘here’s
what the net result might be to you as an estimate
then someone can make an informed decision’.
“But by the time it gets down to the actual
individual retiree, the differential is going to be very
small. It’s not enough to move the needle in terms of
:WYPUN 2011|Fundamentals4HNHaPUL| 61
 US Senate hearing
What I’m suggesting is that there should be a cash collateral reinvestment
report that itemises all the investments and the total of these investments
should be equal to the cash that they’ve received from counterparty
borrowers
Anthony Nazzaro, principal at A.A. Nazzaro Associates
yield significantly.
“But if that explanation could be given from the plan
sponsor to the individual who’s trying to make an
informed choice, he doesn’t have to know everything
about securities lending but he might want to know
how much in terms of yield he would get from the
lending option. That would be a very interesting
measurement if that can be done.”
This question of informed choice raised its head
when GAO’s Jeszeck found himself questioned by
Senator Bob Corker. Jeszeck’s testimony warned
that, in a cash collateral reinvestment deal, providers
would share in the profits but take none of the losses.
Corker questioned whether this was not usually the
case among investment managers. Cross counters:
“We found that plan sponsors may not be aware
SecuritiesLending
that their investments are being utilised in securities
lending so to make the blanket statement as the
senator did, that this is the way the industry works, I
think is not a correct comparison.
“In this particular instance it does seem that the cash
collateral pool manager is able to lay off all the market
risk on to people that may not be completely aware
that they’re involved in this transaction.”
Jeszeck adds: “Being respectful to the senator, the
difference is that very often the participants are
completely unaware. In the federal government of
the USA one of the main funds that is analogous to a
401(k) fund engages in securities lending.
“I have not met one federal employee yet who I’ve
asked that, they knew what securities lending was,
whether they were aware that their fund did it. People
just don’t know about it and the more shocking thing
is that when we were doing our work we would
meet plan sponsors, some of whom were incredibly
knowledgeable people who were also unaware that
some of the investment options that they had were
engaging in these transactions.”
On top of the recommendations from the committee
and GAO, Nazzaro himself offered some areas
where securities lending could be demystified for
plan sponsors, particularly around cash collateral
reinvestment.
Citing the example of AIG and others, which
62 | Fundamentals4HNHaPUL |:WYPUN2011
invested its cash collateral in long-dated instruments
and were then stung when counterparties began
returning borrowed securities and demanding their
cash back, he believes plan sponsors should receive
better reporting about the value of the instruments
their cash is reinvested in.
“What I’m suggesting is that there should be a
cash collateral reinvestment report that itemises all
the investments and the total of these investments
should be equal to the cash that they’ve received from
counterparty borrowers,” he explains.
“What you had a couple of years ago was the
investment portfolio fell short of the cash collateral
due to the counterparty borrowers. You maintained
102% from the cash collateral from the borrowers.
But when the investments depreciated you now no
longer maintained the 102% that you owed back to
the borrower.”
“I think it is reported on some level, maybe monthly,
maybe quarterly but my suggestion was that someone
should be aware of that on a daily level, because those
reports are available. The banks and large providers,
they do know what that is, it’s just I don’t think that
information is always getting across to the beneficial
owner or whoever represents the beneficial owner.”
The GAO agreed that these proposals could be
beneficial, as its own report suggested that there
should be tighter rules around lending agreements, to
ensure that cash collateral managers cannot invest in
securities that do not match those out on loan.
Despite the concerns raised during the hearing,
securities lending came out well, despite some of
the mainstream media reporting at the time. All of
the senators who spoke believed that the practice
was beneficial as pension funds struggled to find
revenues, although it was clear that the concerns
about disclosure were genuine.
It does seem that this may not be the end of the
story however; a number of noises from the senators
suggested that securities lending may come under
yet more scrutiny, although the GAO confirmed that
they have not been asked to conduct any further
investigations so far.
For now, this is a watch this space.

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 Fixed income

As Portugual becomes the latest eurozone

A king's ransom
Some had hoped that, after the Greek and Irish
bailouts, the European sovereign debt crisis had
abated. Many had not though and in early April
they were vindicated as Portugal became the third
country in the eurozone to seek help from its
neighbours.
A number of voices in the European Union (EU)
labyrinths of power blamed much of the crisis
on naked short selling of government bonds and
uncovered credit default swap trading. Indeed, in
early March these voices appeared to be winning the
argument as the Economic Affairs Committee voted
in favour of a draft EU regulation to ban the practices.
Specifically on “naked” short selling, the proposal is
not to ban it per se, but the draft regulation says that
any naked short sale must have been covered by the
end of the trading day.
country to seek a bailout, Craig McGlashan
looks at the debate on short selling sovereign
bonds in the EU and the potential effects on
the lending industry
(Note: Baker was interviewed before the
announcement on Portugal’s bailout)
“There isn’t, which is why I think the Council
has a desire to come up with a much more rational
definition because the closer they get to the subject the
more they realise that a hard definition could actually
make life harder than clarifying the picture,” he says.
“Where people are in universal agreement is when
naked short selling is abusive because there is no
intention whatsoever to settle or where someone is
trying to introduce a short position of more than the
number of shares outstanding and there have been
celebrated examples of both of those at various points
in history.
“That is abusive behaviour and everyone wants that
eliminated because it’s egregious, it’s trying to push
markets in a particular direction.”

We deliberately avoided coming out with a definition of naked short selling

because you’d actually have to subdivide it into good naked and bad
SecuritiesLending

naked and that wouldn’t help with the vote

Andrew Baker, CEO, Alternative Investment Management Association

Some may wonder why this could affect the
securities lending industry; after all, one of the drivers
of demand behind lending is the covering of short
sales, so anything that discourages a short position
should in fact be welcome.
The picture is more complicated than that, however.
At the Clearstream Global Securities Finance Summit
in January 2011, audience members were asked to
vote on four different definitions of naked short
selling - the vote was fairly evenly spread across the
four options.
Indeed, even a look through the literature provided
by the EU fails to turn up a concrete definition on
exactly what naked short selling is.
The Alternative Investment Management
Association (AIMA) has lobbied politicians across
Europe to try to ensure that, of the raft of new
regulations being drafted for the financial markets,
unintended consequences do not come to the fore.
AIMA CEO Andrew Baker agrees that there has so
far failed to be consensus on the issue.
Few people have as much experience of talking to
those that make and implement the laws that affect
hedge funds and, by extraction, the securities lending
industry. Does he feel they are getting the message?
“I suspect the regulators have always known what
abusive short selling is. But you have the guys
making the laws and they are by and large in the
European parliament, and their counterparts in the
ministries of finance who are on the working groups.
“So the difficulty is usually at the lawmaking stage,
because the lawmakers have to come up with key
definitions and in a world which is polarised on a
topic as politically sensitive as short selling, there are
those who easily confuse short selling with naked
short selling and naked short selling with abusive
short selling.”
Confusion reigns supreme then, it seems. Has AIMA
attempted to clarify the debate by introducing its own
definition? The answer is no.
“We deliberately avoided coming out with a
definition of naked short selling because you’d

66 | Fundamentals4HNHaPUL |:WYPUN2011

actually have to subdivide it into good naked and
bad naked and that wouldn’t help with the vote,” he
explains.
It is this second confusion of terms - between
covered short selling and naked short selling - that
may be more worrying to the industry. Despite
numerous academic reviews highlighting the positive
aspects of short selling to market liquidity and price
discovery, there continues to be voices against the
practice, as there have been for hundreds of years.
This outcome is not helped by the fact that the
mainstream press consistently fails to make a
distinction, as seen in September 2008 when headlines
were full of the “evil” practice of short selling,
resulting in various temporary bans and restrictions
across the world.
Indeed, even the Church of England jumped on
the bandwagon during that same month, with the
Archbishop of York, Dr John Sentamu, referring to
short sellers as “bank robbers and asset strippers”,
before it emerged that the church’s investment
programme was itself engaged in a securities lending
programme.
Of course, while these were all great headlines, once
the dust had settled and the work of examining the
wreckage had begun, any findings that vindicated
short selling were by and large ignored by the
mainstream press.
For instance, it was found that the short selling of
banks’ shares had all occurred earlier in 2008 and
those who had sold short had become net buyers
during September 2008.
“So much time and effort was wasted on the subject
of short selling that you could argue that the real
source of the fire wasn’t being tackled because there
was too much diversion of attention on a non-issue,”
adds Baker.
Another proposed European regulation on short
selling involves the disclosure of short positions,
Fixed income
PIIGS in a poke
Borrowing costs of sovereign debt for
European fringe economies
Data courtesy of SunGard Astec Analytics
something supported by AIMA - to an extent.
Baker believes the proposed public disclosure
regime is “the number one topic” for the organisation.
While AIMA supports the public disclosure of
anonymous, anonymised short selling data, it is
against the proposal to require individual managers
to be named when they make short sales.
“The bad thing about it is we think that there is
no need to publically disclose individual names of
managers. What should go into the public domain
is the aggregate, i.e. add up all of the short positions
that are there, because that does give information to
the market,” he explains.
Baker does highlight an advantage of the proposal,
namely that it would introduce a consistent regime
across Europe which is “nothing but a good thing” as
traders could put the figure into their computer “and
that would be how it worked in every single market
in which you want to operate”.
Another advantage would be that if aggregated
short selling data had been available in September
2008, it could have shown that short selling was not
behind the collapse, Baker adds. The same could be
true of the sovereign debt crisis.
While it is too early to see whether short selling
will again be the fall guy for the mismanagement
by politicians of a country’s funds - in this case
Portugal - it seems that of the new regulations at least
the disclosure proposals could mean that all those
involved in the practice - from agent lenders to hedge
funds - will be able to point to the data and absolve
themselves of blame.
However, it remains to be seen whether AIMA and
the industry will get the type of disclosure it wants;
and if the fallout from Portugal creates more of the
headlines that have been seen during the previous
two bailouts, it could be third strike and out for their
hopes.
:WYPUN 2011|Fundamentals4HNHaPUL| 67
 CCP: Eurex

Roy Zimmerhansl grills Matthias Graulich,

executive director, head of clearing
Eurex: CCP plans initiative and Thomas Wißbach, senior vice
president, on Eurex Clearing's securities
lending CCP plans

One of the most highly debated topics arising the analysis put forward in some recent studies
from the crisis since the summer of 2007 has been that a large part of the OTC market is standardised,
the increased use of a central counterparty (“CCP”). despite not being exchange traded. Nevertheless, just
CCPs are a feature of many of the world’s largest because it works for some products, doesn’t mean it
exchange traded products, both securities and can or should be applied to all products. So what is
derivatives. the driver for the market to adopt CCP for securities
Their importance and necessity are acknowledged lending?
by regulators and market participants alike as adding “While the securities lending marketplace is correct
value through counterparty risk reduction and to be satisfied with its experience through Lehman,
improved resource utilisation. there are larger issues it is being forced to consider,”
Regulators have recently proposed that over- comments Wißbach. He adds: “First, successfully
the-counter (“OTC”) products should be dealing with one unforeseen crisis does not
CCP cleared on a mandatory basis. guarantee that the next time will yield
By definition, OTC products lack Many consider the same result. Second, pressures
standardisation and centralised that CCPs are only on firm resources: human, capital
reporting, making them an for on-exchange and balance sheet means that
obvious area of concern for there is an inevitable push to get
SecuritiesLending

transactions. As
those charged with market better results. Third, we expect
oversight. Whether undue
a matter of fact that the market will only be
risks exist, and if they can that is not true. convinced to pro-actively adopt
be brought into a CCP Approximately the CCP if it can be shown to
environment in a commercially 40% of our cleared add value.”
sensible manner is somewhat contract volume The final point hits the key
less obvious. Securities lending at Eurex Clearing issue. Absent a regulatory
is one product that has seen imposition of CCP, it requires a
heated debate. Fundamentals
is OTC-traded meaningful participation from the
recently had an opportunity to speak business securities lending community. How
with Matthias Graulich, executive to convince an obviously successful,
director, head of clearing initiative and Thomas profitable industry to implement change?
Wißbach, senior vice president of Eurex Clearing Wißbach describes the lengthy research phase: “We
about CCPs generally, and specifically with respect to have taken our time to listen to market participants
securities lending. to get their views and needs through a series of
individual meetings and group workshops. We have
Given that OTC instruments are unique, individual proposed ideas and developed them in the context of
contracts, many question whether they are suited for the feedback from potential users.”
central clearing through a CCP. Graulich tackles this Lengthy indeed. While the first securities lending
question head-on: “Many consider that CCPs are only CCP in Europe was launched in June 2009, the first
for on-exchange transactions. As a matter of fact that release of Eurex Clearing’s CCP offering for securities
is not true. Approximately 40% of our cleared contract lending is currently targeted for Q4 2011 live date.
volume at Eurex Clearing is OTC-traded business.” When pressed on the development time, Wißbach
This is a surprisingly large figure and given that explained: “We didn’t think that simply taking our
Eurex Clearing is one of the world’s leading clearing existing service model and trying to re-use it for
houses, puts to bed the question of the potential for securities lending would be successful. So our newly
CCP application to OTC markets. It also supports developed dedicated lending offering takes some

68 | Fundamentals4HNHaPUL |:WYPUN2011
 CCP: Eurex

core values that lenders and borrowers made clear they use should also apply for CCP and collateral
were important to them. Even though the CCP will management processing should follow existing
novate trades and become the legal counterparty to models.” Does that mean tri-party will be part of the
borrower and lender, our product will ensure that the Eurex Clearing’s CCP? “We fully expect that tri-party
bilateral nature of securities lending relationships is will be part of our service,” Wißbach confirms.
maintained. We are here to help reduce counterparty Yet, is now the right time? Profitability has never
risk and enhance efficiency.” been under more pressure and the introduction of
Graulich adds a valuable point on risk management. CCP brings more mouths to feed. Wißbach outlines
“By having a portfolio approach to risk across their approach: “Of course our service will not be
derivatives and cash markets as well as other asset for free. However, our approach differs from others.
classes like securities lending, we can take a portfolio First, our model enables trading to continue as at
view of risk using off-setting transactions to reduce present. Second, our unique Specific Lender Licence
risk within individual participants and the market as for beneficial owners does away with the need for
a whole.” CCPs that have multiple products covering a General Clearing Member for the lender side of
exposures in opposite directions “will be able to the business. This eliminates the concern over risk
add value in reducing collateral requirements while concentration and the additional processing cost.
improving market integrity.” Third, leveraging off users’ existing operational
Efficiency is another challenge. CCPs potentially add infrastructure will reduce, if not eliminate the
complexity by requiring users to process securities practical cost of change. The resource efficiency that
lending trades differently for CCP eligible trades. we expect to bring will provide a net benefit to our
Wißbach explains: “Our objective is for users to users.”
operationally deal with us almost as if we were just There are challenges ahead for Eurex Clearing. Most
another counterparty. The challenge is to ensure that importantly they will have to deliver the product they
participants can employ their existing infrastructure have described. Second, and perhaps an even bigger
to interface with us.” But what does that really mean? task, they must convince a sceptical community that
He goes on: “That means that the existing post-trade change is not only needed, but should be embraced.
processing should be the same whether or not trades There are indeed many compelling arguments for a
go through CCP. Therefore any reconciliation services better marketplace if they can pull it off. And a market
that mutualises risk will, almost
by default enforce best practice on
By having a portfolio approach
participants. Graulich concludes: “If
to risk across derivatives and
you have skin in the game, you have
cash markets as well as other
an incentive to make sure the system
asset classes like securities
continues to run.” Regulators, and
lending, we can take a portfolio
others, will watch with interest.
view of risk using off-setting
transactions to reduce risk within
individual participants and the
market as a whole

Matthias Graulich, executive

director, head of clearing initiative,
Eurex Clearing

:WYPUN 2011|Fundamentals4HNHaPUL| 69
 CCP: Diana Chan
Diana Chan on CCP
The panel on central counter parties (CCP) at the IMN Beneficial
Owners’ Securities Lending Conference in Arizona in February
threw up a number of interesting questions for debate. Here,
in London, Diana Chan, CEO of EuroCCP, which offers CCP
services for equities in Europe, tackles some of these issues
It’s been said that universal adoption of CCPs will be easier
in the US market than the European market for a variety of
reasons. What is the current situation with CCPs generally?
In the US, the securities market infrastructure has
been unified after decades of competition. Regulations
governing clearing agencies were introduced in the 1970s.
At the time there were seven CCPs and they interoperated.
Over the next two decades, the securities clearing market
consolidated under NSCC [National Securities Clearing
Corporation] which is the clearing structure for US equities,
corporate and municipal bonds and FICC [Fixed Income
Clearing Corporation] which is the clearing structure for
US government debt, US agency and mortgage- backed
securities.
The unified market structure works very well. Every
market participant is a direct or indirect member of NSCC
and FICC. Because of the commonality of market structure,
whoever you do business with, they will be using the same
SecuritiesLending
CCP.
In Europe, it is a bit different because people use different
CCPs in the markets where we operate. There are nine
CCPs clearing cash equities now and two more have been
announced. The big problem for market participants here is
when they trade on different trading venues, they need to
connect to different CCPs appointed by each venue. Unless
the CCPs interoperate, people have to use the CCP that is
designated by the trading platform.
The fragmentation of clearing is the challenge in Europe
that makes it quite difficult to do anything in a cost efficient
way and without the unnecessary operational risks.
Are European regulators working to harmonise the CCP picture
in the EU, as they are doing with other areas of trading?
In the cash equities area we are working with several
other CCPs to establish interoperability, but this is just for
outright transactions, not for securities lending.
Lending equities today is a manual and very
cumbersome process in the back office, so there is definitely
a need to make the market more efficient. People can reduce
a lot of back-office processing if the transactions can be fully
automated and standardized via a CCP.
The challenge in securities lending and borrowing is that
it is a very concentrated market. There are some very large
players who are the counterparties to small and medium-
sized players. These large players need to be convinced
that a CCP is beneficial for them. It is difficult to start with
the small players if the large firms do not join.
70 | Fundamentals4HNHaPUL |:WYPUN2011
Will the high volume/low margin future predicted by some
commentators make CCP more desirable for big players?
With a high volume/low margin environment, the
market will most probably consolidate into fewer players.
Large players have economies of scale and a CCP may not
be attractive to them. On the other hand, under Basel III,
the capital required for bilateral exposures will exceed that
required for exposure to a CCP, which could provide an
incentive.
What about beneficial owners? Do they see any benefit in
widespread market adoption of CCP?
While the brokers see clear capital impact benefits, the
beneficial owners might not see direct benefits from a cost,
operational or capital standpoint because they use third-
party collateral agents who also typically offer a guarantee
against borrower default. The cost of these guarantees
would attract capital requirements, which might make
agent lenders more open to a CCP model even though
it might create other complexities for them. Securities
lending is not essential for beneficial owners; if you impose
too many conditions on them, such as requiring them to
also post collateral, they will simply not lend.
Beneficial owners use third-party collateral agents who
look after cash reinvestment for them. If the transactions
go through a CCP, these intermediaries need economic
incentives to sign up to the CCP. They need to make
investments to modify their processes, and perhaps change
their service pricing structure. If borrowers want to move
to a CCP model, primarily because it attracts a lower capital
charge, lenders and their agents might have to consider this
option also to retain their current business.
Is there a danger that regulators will force market participants
onto CCPs? In that case should participants move to CCPs
early so they can do so on their own terms?
At the moment, regulators are more concerned about
OTC derivatives than the cash market.
I have not heard any suggestions that it will become
mandatory for securities lending to be centrally cleared.
However, at an industry conference last week, there was a
vote asking what would drive the buy-side to CCPs. Most
participants indicated it would be regulatory pressure.
Mandatory clearing is a concern, even if maybe it is not
imminent.
But some voices have warned that even though securities
lending is not regulators’ main concern currently, it is on
their radar.

The issue of using CCPs for securities lending is a hot
topic at many of the recent securities lending conferences.
The industry is considering the benefits of the model but
the take-up to date has been modest. Any involvement by
the regulators would accelerate the process.
It is worth considering the risks that could be
introduced to securities lending if securities collateral is
rehypothecated. The Lehman Brothers situation highlighted
that when securities which are pledged for any purpose
are in turn rehypothecated, reclaiming such collateral could
be very difficult, which might be one cause of regulators’
concerns. Borrowers that offer up securities collateral in
return for loans need to be aware of these risks.
With a CCP that wouldn’t be the case?
It depends on the risk model employed by the CCP. If
securities are passed from the borrower to the CCP which
in turn passes them through to the lender, the same risk
could exist. However, if the CCP retains control of non-cash
collateral on behalf of the parties, the risk could be avoided.
What about the danger that smaller players will have to
go via a clearing member, so instead of diversifying their
risk it will intensify the risk into one single counterparty?
Yes it is true that a smaller player will be exposed to
the clearing member it uses, because the contractual
relationship for clearing is between the smaller firm and
its clearing member and not directly with the CCP. The
smaller firms will need to do their own assessment, based
on a number of factors including financial robustness,
to determine which clearing member they go through.
Provided there is variety and a significant number of
clearing members, firms will be able to have a choice of
which firm they use.
What about default guarantees? If there is a regulatory push to
get lenders and borrowers onto CCP, will guarantees lie with the
members or government?
I do not believe any government will give that guarantee
because that creates moral hazard. There are schemes being
proposed for the orderly winding down of systemically
important institutions.
Even if the use of CCPs is mandated by regulations,
having taxpayers pay for firms mismanaging their own
finances is completely unrealistic.
Regulators and prudential supervisors, such as CPSS-
IOSCO, have devised standards to ensure that CCPs don’t
run into problems. A CCP will fail if a member of the CCP
goes bankrupt, has not provided sufficient collateral to the
CCP so the CCP sustains a huge loss beyond its available
financial resources. The CCP’s operational procedures
have to be such so that it calculates the sufficient amount of
collateral, collects that collateral from members promptly,
and has absolute legal rights to liquidate the collateral to
fill any losses that it might sustain after a member’s default.
Regulatory standards are set to ensure all of these elements
in a CCP’s construct are working properly and that the
system is safe.
That having been said, I don’t think that even if the tail
risk or black swan materialises, there could be a presumed
government bailout.
CCP: Diana Chan
For EuroCCP, what additional challenges are involved with
clearing securities lending compared to other products?
EuroCCP currently does not clear securities lending
transactions but I can offer some observations from analysis
we had done in the past.
In the case of cash equities we net all transactions to
settle them on T+2 or T+3. In the case of securities lending
we may be involved in reduced settlement cycles and
need to track the outstanding balance on a loan by loan
basis since each loan might have unique characteristics
to include different rebate rates even if the same issue of
security is involved. Loans may be for short duration such
as overnight, maybe rolled forward each day with a rebate
rate re-set if required or could be term loans for a longer
duration. Securities on loan may be subject to corporate
actions activity. In the case of dividends, the withholding
tax rate of securities to be loaned must be known and
agreed before the loan is made. More complex corporate
actions can be managed either via an unwind of the loan
prior to record date or the protection of lender rights. All
this implies an extra level of risk and operational know-
how.
How does cash reinvestment work in the CCP model?
Loans made versus cash collateral are agreed at a specific
rebate rate offered by the lender. It is important for the CCP
to pass through cash collateral to the lender so that they can
invest such collateral and pay the agreed rebate rate. The
CCP protects itself by securing margin from both parties.
This margin might be in the form of eligible securities. If
the margin is paid in cash the CCP will invest it overnight
and pay its customary interest rate. The parties involved in
the loan will track the interest rate paid by the CCP on any
cash margin paid, to ensure it is adequate.
Is it up to your members to decide what happens to the
collateral?
Cash collateral is passed via the CCP to the lender and
the CCP protects itself by margining both sides. In the case
of non-cash collateral we believe the collateral should be
held and controlled by the CCP.
What other challenges are there for securities lending and
borrowing CCPs?
In addition to the comments previously made regarding
corporate actions to include withholding tax implications,
the CCP must track each loan to ensure that rebates (for
cash loans) and fees (for loans collateralized with securities)
are calculated, billed and paid.
What are EuroCCP’s plans for the rest of 2011 and 2012?
If there is a big demand and we are sure that the large
parties are going to embrace CCP clearing we will certainly
look at it as an opportunity – we are responsive to user
needs. But so far we haven’t heard a groundswell of
demand.
If the big firms embrace CCP clearing, then there would
be a business case.
:WYPUN 2011|Fundamentals4HNHaPUL| 71
 Market focus: Japan

Japan focus
Roy Zimmerhansl provides a special report on the Japanese lending market and how
the devastating earthquake and tsunami that hit the country could affect the industry
Global securities lending volumes have a long way to on their performance for the month since the very
go before returning to the peaks of early 2008. If there difficult trading sessions of Monday and Tuesday.”
has been any bright spot in recent years, it has been Last year some market participants were writing off
the explosive growth in lending Asian securities. Asian Japan in favour of other markets and in light of events
economic activity has translated into rising markets Japan’s prospects may indeed have been damaged.
with more deals and new issues relative to North Francesco Squillacioti, regional director of securities
America and Europe. finance, State Street Asia Pacific, adds some perspective:
The Japanese securities lending market has been “The market has certainly been affected by the recent
an anchor of the business since the earliest days of tragic events, which have created some degree of
international lending. Yet 2010 saw HK surge ahead, uncertainty. The deal space has stalled somewhat since
with Data Explorers announcing late last year that lender the disaster comparative to the start of the year, which is
fees for HK securities had outpaced Japan to become the to be expected.”
biggest market in revenue terms. But by the end of But the breadth, depth and history of Japanese
the year, Japan had clawed its way back to equity lending might yet be its saviour.
the top. Deutsche’s Yanagisawa adds: ``The bank
Then in March the markets were We feel despite the remains incredibly positive on the
hit by the dual horrors of the events lately in Japan ability for the hedge fund industry
earthquake and tsunami. While we’re going to see to increase in size this year. We feel
the human tragedy was central further growth in the despite the events lately in Japan
to people’s thoughts, some we’re going to see further growth
were concerned with how the hedge fund industry in the hedge fund industry in
SecuritiesLending

market would respond to the in general. Global general. Global investors will
single biggest disruption since investors will continue to look at absolute return
the Lehman default. Masa continue to look strategies in volatile markets like
Yanagisawa, director and head these. ‘’
of global prime finance sales,
at absolute return Hedge fund analysts and portfolio
Japan at Deutsche Securities in strategies in volatile managers have long been familiar
Tokyo comments: ``When we last markets like these with Japanese companies and this
saw market events of this magnitude experience is helping them dig deep to
in 2008, I think that was far more jarring. identify opportunities on both the long
You can understand why people were selling and short side. Deutsche’s Donald expands on
last week and you can understand why we had these the point: ``Analysts are taking a look at manufacturing
market moves, but during the Lehman crisis it was just companies in the prefectures that were hit. How have
complete absence of liquidity.” plant capacity, or auto parts component supplies been hit
Adds his colleague Christopher Donald, managing and what are the implications on a case-by-case basis? It
director and head of global prime finance, Japan: ``When is really now a researchers’ game. Out of the companies
the Lehman bankruptcy occurred, the financing rate of listed on the TSE, the focus is on which companies are
the Japanese yen went right through the roof. This time, going to be able to respond, and even which companies
the Bank of Japan acted very quickly and they were are going to be able to pick up a drop in their own
responsive in flooding the market with Japanese yen, so or competitor’s capacity. It’s become a stock-pickers
the cost of funding did not increase. That provided a lot research-driven market.’’
of liquidity and comfort to the overall market.” As hedge fund results start to come in over the
While some Japan-focused hedge funds suffered coming weeks, we will be able to assess the impact on
double-digit losses in the immediate aftermath of the alternative space. The long history of the Japanese
the disaster, improvements have already been noted. equity lending business, considered by some to be a
In a letter to investors, Ed Rogers, of Wolver Hill weakness in 2010, will be its strength. Volatility brings
Asset Management, described the situation as the opportunities and every market participant contacted for
market stabilised some days later: “We have been this article carried the same message.
communicating with all of our managers constantly Chris Antonelli, head of prime services, Asia-Pacific
since last week. Almost every one of them has improved at Nomura Securities shares the experience of Japan’s

72 | Fundamentals4HNHaPUL |:WYPUN2011

largest securities firm: “Given the recent issues in Japan,
client focus has been more on the macro environment
rather than single stock picking”
DB’s Donald recaps recent activity: ``In terms of what
we saw from our hedge fund clients, trading volumes
and market feedback, last week was the highest volume
notional trading week in 2011 particularly in high-
frequency and quantitative funds. A lot of people were
using algorithms to adjust their portfolios, either to
take-off or take-on risk. We also saw in the long/short
space, a switch from clients actually doing individual
stock picking to clients investing in indices and sectors,
trying to target general movements rather than individual
underlying names.
Francesco Squillacioti adds State Street’s perspective:
“Japan continues to be an important market for us, and
one to which we’ve shown strong commitment for a very
long time. It remains one of the biggest securities lending
markets in the region and the world.”
There is a view held by many that Japan was better
prepared to deal with March’s twin catastrophes than
almost any other country. Hedge fund and securities
lending observers apparently hold the same opinion.
Sharia securities lending
Stephanie Baxter provides an insight into the world of Islamic banking and recent moves
towards introducing securities lending and short selling
Complying with regulation is not an easy task at the
best of times, but what if you had to also abide by an
ancient religious code that has spread its influence over
much of the world for more than 1,000 years?
Welcome to the world of Islamic finance, a unique
combination of traditional moral values and modern
banking. Islamic banking follows the law of Sharia
(Shari’ah), a code of conduct that is believed to derive
from the teachings of the Koran (Qur’an) and the
Prophet Mohammed.
Sharia forbids or restricts many activities that are
prominent in the non-Islamic world, including ‘usury’ –
the lending of money for interest, speculative activities
and engaging in investments that are ‘haraam’ such as
alcohol or pork.
Short selling is also prohibited because Sharia states
that you cannot sell something you do not own, and
it allows the investor to gain while the underlying
company loses value. While Islamic finance may appear
to be very restrictive in comparison to conventional
banking practices, the trend towards short-selling bans
in non-Islamic banking these last couple of years says
Islamic banking
GSL Japan Securities Lending Summit 2011
After our hugely successful Securities Lending
Summit last June in Tokyo we planned to
return to Japan in June 2011.
However, after the devastating disasters in
March, our colleagues in the Japanese industry
have asked us to postpone the event. GSL
hope to run a conference later in the year and
our thoughts are with the people of Japan at
this time.
Should you wish to receive GSL Summit updates
just register at:
fundamentalsmagazine.com/mailing-list
otherwise.
But some Islamic markets including Qatar, Pakistan,
Abu Dhabi, Dubai and Egypt are now turning the law
on its heels by introducing securities lending and short
selling on their stock exchanges.
“There wasn’t a huge demand for liquidity in the past,”
says Moshin Mujtaba, director of product and market
development at Qatar Exchange.
“But now that the market is growing and there are
more investors in the market, there needs to be more
liquidity in the market. There are lots of long-term buy-
and-hold investments in the market, and we don’t want
to lose those securities permanently from trading.”
Another driver behind the move is to re-classify these
frontier markets as developed markets. The MSCI index
currently classifies Gulf bourses as frontier markets, and
they must introduce short selling and securities lending
to become developed markets.
But how can short selling be Sharia-compliant if the
law says you cannot sell something you do not own?
The important point here that was left out in various
news reports covering the recent launches, is that Sharia
:WYPUN 2011|Fundamentals4HNHaPUL| 73
 Islamic banking

Islamic developments:
Save the date!
Oct 2010 - Deputy CEO of Qatar Exchange announces plans for short selling.
We will be holding a Middle
Oct 2010 - Deputy CEO of Abu Dhabi Securities Exchange asks UAE regulator East Securities Lending Summit
to allow short selling and introduce margin trading on 1st December in Abu Dhabi

Feb 2011 - National Bank of Abu Dhabi announces repo product Visit Fundamentalsmagazine.
com/MiddleEast to register now
Mar 2011 - National Clearing Company of Pakistan announced plans for a
securities lending and borrowing system on the country’s stock exchanges

short-selling will essentially be ‘covered’ short selling, most important changes in the Qatar market is that the
which is allowed under Sharia. This can seem confusing Central Bank is asking conventional banks to close down
considering the Islamic world’s criticism of short selling, their Islamic operations, which will see a segregation of
but Mujtaba explains that Islamic law does not consider conventional and Islamic banking activities. This is an
covered short selling to be short selling because it important space to watch.
involves selling something you actually own. “People “There is demand in the Muslim and Arabic world to
need to come up with clearer terms of short selling,” he make those products as Shariah-compliant as possible.
adds, reflecting the global industry’s criticism But at the end of the day, there’s going to be a
over the lack of clarity on the definitions of balance between conventional and sharia-
covered and naked short selling. compliant transactions.”
However, there are concerns that Finding this balance will not be an
Sharia funds can be too restrictive easy task judging by the lack of
in terms of the stocks participants Islamic finance is at standardisation across Islamic
are prohibited from investing in. a critical crossroad finance, primarily due to different
Mujtaba responds: “The interpretations of the code across
SecuritiesLending

where it will have

important aspect about Shariah Sharia advisory boards.
law is that it takes a holistic view to find the right The head of HSBC’s new
of human society. It stops you balance between division, Germain Birgen,
from doing things that aren’t traditional said that this demand for
good for you or not deemed right and modern harmonisation in the Islamic fund
for human society (i.e. alcohol, industry was one of the key drivers
etc). It’s not restricted to just
approaches to behind the launch. He talked about
finance.” banking the challenges investment managers
Furthermore, there is evidence that face when conforming to Sharia rules
investors are increasingly looking to and said that some do not even have
Sharia-compliant funds for their safe structures. their own Sharia advisory board.
Mujtaba states: “We have seen in the past that Sharia Big changes are happening in Islamic finance, and that
discourages speculation, and that’s where problems have is set to increase over the next few years.
occurred in the rest of the banking world.” It will certainly be interesting to see how Islamic
Despite the brave move by these various markets, bankers, lawyers and regulators can move Sharia
there are concerns that Islamic banking is struggling banking products forward and whether the recent
to maintain the right balance between conventional, launches of Sharia-compliant short selling and securities
modern banking and the Sharia code. This was the main lending will play a role in achieving that. Faruqui says
topic of discussion at a recent press conference with that while change is inevitable, it could either present a
the launch of HSBC Amanah Securities Services where danger or opportunity for Islamic banking.
Professor Mahmood Faruqui – senior advisor at the Bank
of London & Middle East – talked about how Islamic The key is choosing the right path on the road to
banking products can move forward to compete globally balancing tradition and modernity, which is no easy
but at the same time maintain the link to traditional task.
values. “Islamic finance is at a critical crossroad where
it will have to find the right balance between traditional
and modern approaches to banking,” Faruqui said.
Mujtaba echoes these comments by stating: “One of the

74 | Fundamentals4HNHaPUL |:WYPUN2011
 Repo: Asia
Don't fear the repo
Stephanie Baxter finds that the launch of an offshore yuan repurchase facility by Bank of
China Hong Kong is leading to increased acceptance of repo in Asian markets
Tapping into the repo market is an increasingly
popular way to prepare for the sustainable future,
but there has been somewhat reluctance to follow
this trend in many Asia markets.
With mounting pressure on banks to increase their
capital under new liquidity requirements, secured
funding has never been more important, so why has
Asia lagged behind in the race to repo?
Many repo experts have talked about a need to
educate Asia about the workings and advantages of
repo. But Asia’s banks and regulators are aware of this
and progress has already being made this year with
the launch of the offshore yuan repurchase facility by
the Bank of China Hong Kong in February. The bank’s
move is the first of its kind in the underdeveloped
offshore yuan bond market and its main purpose is
to help banks manage their intraday liquidity more
efficiently.
Tanweer Khan, global head of repo at Standard
Chartered, said in January at the Clearstream GSF
SecuritiesLending
conference that while Asia is beginning to move
towards repo, it is out of its comfort zone because
the region has an emotional attachment to unsecured
funding.
But that is changing as banks are becoming more
conservative in clean lending since the financial crisis
in 2008, says Esmond Lee, executive director for
financial infrastructure at the Hong Kong Monetary
Authority (HKMA).
He attributes Asia’s weak relationship with repo to
its banks’ inactivity in uncollateralised lending and
also deficiencies in the existing market infrastructure.
Asian banks are now switching to collateralised
lending to have a better management of credit risk,
Lee adds.
The HKMA is also planning to upgrade the repo
platform across Hong Kong’s four currency RTGS
systems later this year in order to promote the use of
repo. The regulator claims that these enhancements
will help automate several processes including
collateral substitution and valuation.
However, the new renminbi repo facility has been
criticised for being restricted to certain bonds, which
include sovereign bonds issued by China’s Ministry
of Finance, and bonds issued by the Bank of China
and the mainland’s policy banks. There is a fear
that this limitation could decrease the repo facility’s
76 | Fundamentals4HNHaPUL |:WYPUN2011
impact on liquidity in the market.
“The RMB interbank market has been operating
smoothly and efficiently since the liberalisation of
RMB businesses in July 2010 and we (HKMA) do
not see any liquidity issue due to the prevailing repo
arrangements,” Lee responds, pointing out that banks
can also do repo among themselves against any types
of securities agreed between the lender and borrower.
He also makes reference to the rapid increase in
RMB deposits from RMB62.7 billion at the end of 2009
to RMB330 billion the following year. This is partly
due to the extension of the RMB trade settlement pilot
program which Lee claims has helped Hong Kong
become an international financial centre. Industry
insiders called the move an important step to RMB’s
development into an international currency in global
trade.
However, the HKMA said that it will consider
expanding the current list of eligible securities for
offshore yuan repo if there is demand for it in the
future. There is also concern that current limitations
could increase borrowing costs for issuers who can’t
join the club. Lee immediately dispels this theory by
saying that while borrowing costs are affected by a
number of factors including credit standing of bond
issuers and present market conditions, restrictions
on eligible issuers should have “minimal impact” on
bond pricing.
Yet despite the new facility’s advantages, Lee says
that its usage remains very minimal at the moment
due to ample liquidity in the RMB RTGS clearing and
settlement system which had an average turnover
of RMB58 billion per day in March this year, which
accounted for only 14% of RMB deposits as of the end
of February. “Nonetheless, repo may be used more
frequently if more payments are settled through the
RMB RTGS system in the future,” Lee adds.
It is still early days to tell whether the yuan repo
launch will change Asian banks’ attitude to repo, but
it is clear that there is demand for it. On a wider scale,
Lee predicts 2011 to be a “crucial” year for the growth
of Hong Kong’s offshore RMB business and its status
as an international finance centre.
 CRAFTING THE vision FOR THE securities industry

The Essential Work of ISITC Continues.

ISITC June 2011 Industry Forum & Working Groups

June 5 - 7, 2011
The Four Seasons Hotel, Westlake Village, Los Angeles, CA

Don’t miss the chance to represent your firm and participate

in ISITC’s ongoing industry forums and working groups.

www.isitc.org

FOR ADDITIONAL INFORMATION VISIT www.isitc.org

390 Amwell Road, Suite 402, Hillsborough, NJ 08844
Phone +1 (908) 359-1184 Fax +1 (908) 359-7619 E-mail usainfo@isitc.org
 ISLA: Kevin McNulty
ISLA comment
Stephanie Baxter talks to Kevin McNulty of the International Securities
Lending Association about the push for education and transparency in
securities lending and why he is optimistic that demand levels will rise
These are uncertain times for the securities lending
world as demand for borrowing securities remains
low and regulators push for transparency and
control. Yet there is cause for “cautious optimism”
in the industry, according to Kevin McNulty, CEO
of the International Securities Lending Association
(ISLA).
While regulation is still a dominant issue as
European regulators put the finishing touches to the
AIFM Directive, new short selling rules and Basel III,
McNulty says that the more pressing issue is how the
market is emerging following the recession.
“The industry is slowly emerging from the crisis,
but people are cautiously optimistic that demand for
borrowing securities will grow.”
McNulty points towards the pick-up in merger and
acquisition activity, news that interest rates could
rise, and the fact that pension funds and other long
term investors are looking for alternative ways to
SecuritiesLending
invest. Together they suggest the securities lending
environment will improve and that demand will
increase, he adds.
Despite a strong supply of securities available
to borrow, the demand for those securities has
somewhat dipped over the past few years. This has
been primarily due to a reduction in the volume of
investment strategies that fuel demand, and the lack
of regulatory certainty in the marketplace.
These topics will come under the spotlight at the
ISLA annual conference in June, which this year
features a regulation workshop and hedge fund panel.
The two-day event will be held in Lisbon, which may
be a surprise to some following the downgrading
of Portugal’s credit rating. Some may ask, is it
appropriate to hold a securities lending conference in
a market that not only is suffering financially but does
not have a developed securities lending industry. In
recent years, ISLA has chosen to hold its conference
in small securities lending markets such as Berlin,
Lisbon and Barcelona. “But it isn’t necessary to hold
the conference in a country that has a developed
securities lending market,” says McNulty. “What’s
more important is the location to make it easy for
people to come over and do business.”
Transparency is another topic likely to crop up at
the conference following the US Senate’s recent call
78 | Fundamentals4HNHaPUL |:WYPUN2011
for increased clarity in the industry. “A lot of people
are talking about transparency, but it’s not clear what
anybody really means by that,” says McNulty. He
believes that the SEC is working to get clearer about
what it is looking for in terms of transparency, and
he thinks this could have as much to do with how
The industry is slowly emerging
from the crisis, but people
are cautiously optimistic
that demand for borrowing
securities will grow
securities lending actually works between the lending
and borrowing parties as the actual market data. The
UK FSA raised this very issue at the beginning of
2010 and ISLA responded by ensuring that suitable
educational materials were made available to pension
fund trustees.
McNulty refers to education a lot, which he claims
is something that the global industry just can’t do
enough of. He claims that education is paramount
and that one of its key areas should be to make
securities lending terms as clear as possible for
beneficial owners and other involved parties. “I think
we have become much better at educating but there is
always room for improvement,” he adds.
The conference will be structured around a number
of key panel sessions, one of which will feature senior
regulators from across Europe who will discuss their
priorities and how the processes that shape regulation
are changing. A panel of hedge fund managers
will address the recent growth of hedge funds and
consider whether that will continue and have a
positive impact on the securities lending business.
There will also be a focus on country-specific issues,
and more general issues such as cash collateral
reinvestment and central counterparties through
round tables, which McNulty claims will allow more
active involvement in the industry debates.
 in association with

20th Annual

International Securities
Lending Conference
28th – 30th June 2011 | Penha Longa, Lisbon-Sintra, Portugal

Organised exclusively by market participants, this conference is the only event of its
kind in Europe attracting in EXCESS OF 400 ATTENDEES such as senior market
participants from banks, broker dealers and asset managers, beneficial owners, hedge
fund managers and securities regulators.

The GLOBAL SECURITIES LENDING MARKET continues to present both

challenges and opportunities to borrowers and lenders alike — but how should industry
participants position themselves for 2011 and beyond? Attend this event to find out!

ATTEND TO:
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REGULATORY LANDSCAPE for securities finance

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REGISTER TODAY! www.afme.eu/isla2011

 GSL Summit Nordic 2011

GSL Summit: Nordic 2011

A report on the Second Annual GSL Nordic Securities Lending Summit

Video coverage of the event:

The Second Annual GSL Nordic Securities FundamentalsMagazine.com/Videos
Lending Summit picked up where last year’s Presentations and voting results
event left off, albeit with slightly less snow than FundamentalsMagazine.com/White-Papers
the 2010 event.
Opening with a market overview by Tim Smith
of SunGard Astec Analytics, including a specific
focus on some Nordic stocks, the day then moved
into the first panel discussion, on maximising
programme performance.
Audience members were asked to vote on a
range of issues, which revealed that two thirds of
attendees were optimistic about their 2011 returns
compared with 2010, while it was also revealed
that many people would be looking to collateral
management as a way of boosting returns – and
collateral would go on to become perhaps the most
SecuritiesLending

talked-about topic of the day.

However, the audience as split as to whether
collateral should be exclusively an “insurance
policy” (46%) or a revenue component (54%).
Unsurprisingly, upcoming regulations formed a
large part of the discussions, with Mats Beckman,
head of compliance at SEB Merchant Banking
Division, providing an overview of the short
selling landscape in Europe – a complicated issue
to be sure.
The second panel covered a range of topics that
could impact securities lending in the coming year,
from regulation to central counterparties.
On the central counterparty question, almost half
the audience (47%) felt that CCP would be in place
in all mature markets within five years, although
nearly a third (30%) said it would never be.
The second panel also took some time to focus
on repo, with audience members overwhelmingly
responding that securities lending and repo
participants now communicate more than in the
past. Nearly two thirds (62%) said they were
getting more communicative, while 16% felt that
the two industries were now integrated.
Thanks again to all of our sponsors and everyone
who came along. We head to Chicago next on 12th
May - we hope you can join us.

80 | Fundamentals4HNHaPUL |:WYPUN2011
 GSL Summit Nordic 2011

Thanks to all our

speakers....
Market Activity with Tim Smith of SunGard Astec Analytics
Panel 1: Moderator: Tom McKeown, Director, GSL
Maximising Panellists: Tim Harrold, Executive Director, J.P. Morgan
Programme David Lewis, Securities Lending Business Development, EMEA,
Performance Brown Brothers Harriman
Simon Lee, Senior Vice President, eSecLending
David Little, Director, Strategy & Business Development, Calypso
Feature: Short Selling
with Mats Beckman, Head of Compliance, SEB Merchant Banking Division
Panel 2: Moderator: Tim Smith, Executive Vice President, SunGard Astec Analytics
2011 Industry Panellists: Sunil Daswani, Head of Sales & Relationship Management, Northern Trust
Discussion & Gösta Feige, Global Securities Financing, Clearstream
Analysis Joakim Håkansson, Head of Equity Finance, Handelsbanken
Arne Theia, Head of Repo and Collateral Trading, UniCredit
Magnus Ward, Head of Sourcing, SEB

:WYPUN 2011|Fundamentals4HNHaPUL| 81
 Conferences: IMN Beneficial Owners, Arizona
IMN Beneficial Owners'
Securities Lending Conference
Highlights from the 17th Annual Beneficial
Owners' Securities Lending Conference in
Arizona, February 2011
Beneficial Owner Executive Panel:
Christine Bosco, senior securities lending analyst at
Franklin Templeton, said that her firm had spent 2010
“re-evaluating” their programme. While the core business
had remained intact, they were now taking a “modified
approach”, looking at increasing transparency.
Charles Rizzo, CFO at John Hancock Funds, told a similar
story. Words such as “tweaking” of guidelines indicated
that while the crisis had altered the firm’s perception of
how to conduct lending, any changes would be on a softly,
softly basis.
Emerging Markets Panel:
Christopher Poikonen, executive vice president –
SecuritiesLending
business development and strategy at eSecLending,
stressed the point that any beneficial owners considering
lending into an emerging market should remember that
they already have a long position in that country, indicating
that it has already passed some level of risk criteria at their
organisation.
Jerry Davis, chairman, board of trustees at New Orleans
Municipal Employees’ Retirement System, asked his
fellow panellists whether it made sense for a fund to make
its assets lendable in a market that may have only a few
tradable firms, outlining concerns at these stocks then being
shorted by hedge funds.
82 | Fundamentals4HNHaPUL |:WYPUN2011
To read more coverage of this and all industry
events, please visit FundamentalsMagazine.com
CCP Panel:
Mick Chadwick, head of trading, securities finance
at Aviva Investors, began by saying that it was
“incontestable” that CCPs provided a very useful
function in “some markets”. However, he was “not
entirely sure” that securities lending was one of these
markets.
Gregory DePetris, co-founder and chief strategic
officer of Quadriserv focused his piece on what CCPs
offer beneficial owners, summing it up with one word:
“distribution” DePetris explained that a CCP allows a
beneficial owner to gain access to a much wider range
of borrowers than before, without affecting things from
a credit point of view. More borrowers should mean
higher returns, he added.
Cash vs Non-Cash Panel:
James Slater, COO for global securities lending at
BNY Mellon, noted that in the previous day’s beneficial
owner executive panel, when the question of non-cash
had been put to the panellists, there was not great
appetite.
Slater suggested that in his native Canada, the same
would have been true if the question had been about
taking cash as collateral. This trend had led Slater to
spend his last few years in Canada (at CIBC Mellon,
before his appointment at BNY Mellon), to try to get his
clients to broaden their collateral profile to include
cash. The same was true of his European clients.
Anthony T Toscano, managing director, head
of US trading at Deutsche Bank, continued the
theme by likening the question to manual versus
automatic transmission in a vehicle: they are
different, but “both will get you somewhere”.
However, Toscano said that there was “no
question” that cash is the best collateral, adding
that non-cash requires the additional step of
liquidating the collateral in the event of a default.
Instead, a desire for non-cash as collateral was
coming from the broker/dealer side of the
transaction, he suggested.
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 The Fundamentals Glossary
AFME Association of Financial Markets Europe
APJAsia-Pacific & Japan
ASICAustralian Securities and Investments Commission
ASLAAustralian Securities Lending Association
Asset managementThe professional management of investments such
as stocks, bonds and real estate.
Basel Committee on Banking SupervisionProvides a forum for
regular cooperation on banking supervisory matters, aiming to improve the
quality of banking supervision around the globe.
Basel IIIAn update to the Basel Accords (recommendations on banking
laws and regulations in the G20 countries) which are currently under
development. Under the new rules, banks will have to increase their core
tier-one
capital ratio
Beneficial owner The actual owner of the asset, but that does not mean
they are necessarily the legal owner. The beneficial owner enjoys the benefits
of ownership even though the asset is under another name.
Broker-dealerAn agent that trades securities for its own account or on
behalf of its customers.
Buy-side firms This refers to firms that invest money or ‘buy’ securities.
Capital requirements A bank regulation which tells banks and
depositories how they must handle their capital. They are put in place to
ensure that institutions are not holding investments that increase default risk
and that they have enough capital to cover operating losses.
Cash collateral Negotiable securities such as certificates of deposit and
gilt-edged securities that are accepted as collateral by lenders because of their
low risk and ability to be converted into liquidity.
Cash reinvestment Where the service provider reinvests cash collateral
under the terms agreed with the client.
CASLA Canadian Securities Lending Association
Collateral management A process of dealing with collateral
transactions, where its main function is reducing credit risk in unsecured
financial transactions.
Collateral pools Cash collateral provided by the borrowing party in a
securities-lending transaction, which is then pooled and invested in short-
term securities to generate return.
Contract for difference (CFD) A contract between two parties where
the issuer agrees to pay the buyer the difference between the asset’s current
value and its value at time contract was made. The buyer pays the issuer if the
difference is negative.
Corporate actions An action which is part of a process that brings
change to a company’s stock, such as stock splits, mergers, dividends and
acquisitions. Some corporate actions have a direct or indirect impact on the
shareholders, while others do not impact them at all.
Covered short selling The opposite of naked short-selling (see below)
where the short seller has a binding stock lending agreement in place.
Custodial agent An agent, bank or trust which looks after an individual’s
mutual funds or an investment firm’s assets.
Custodian bank Financial institutions that look after the financial assets
BackOffice
of an individual or firm.
Dodd-Frank Wall Street Reform and Consumer Protection
Act A US federal statute that was signed into law in July 2010 to promote the
financial stability of the US and to put an end to the bailing-out of the banks.
Exchange-traded fund (ETF) A security that tracks like a stock on an
exchange instead of having its net asset value evaluated every day like a mutual
fund. It tracks an index, commodity or pool of assets like an index fund.
Fed Federal Reserve (US)
FSA Financial Services Authority (UK)
Hedge fund A largely unregulated portfolio of investments that are catered
for sophisticated investors. These funds are often partnerships or mutual
funds that aim to make high returns by taking advantage of ups and downs in
the markets.
IOSCO International Organisation of Securities Commission (US)
IRS Internal Revenue Service (US)
ISDA International Swaps and Derivatives Association (US)
ISLA International Securities Lending Association
Liquidity The more liquid an asset, the easier it is to convert it into cash.
Liquidity is also known as marketability.
Margin collection In securities trading, it’s the difference between the
loan amount advanced by a stockbroker to a speculator.
Market maker A broker-dealer firm that creates a market for financial
obligation. They hold a certain number of shares of a particular security
to ease up trading in that asset. Market makers therefore help to keep the
financial markets running efficiently.
Naked short-selling A practice that is illegal in many countries, where
the short seller does not borrow the security in the first place or does not
ensure that it can be borrowed. It allows manipulators to drive down stock
prices, ignoring normal stock supply and demand patterns.
NAPF National Association of Pension Funds (UK)
NY Fed Federal Reserve Bank of New York
OCC Options Clearing Corporation
PASLA Pan-Asia Securities Lending Association
Prime broker A broker who provides a special group of services to clients
such as securities lending, leveraged trade executions and cash management.
Prime custodian A custodian who takes responsibility for managing a
client’s custody relationships when they have several global custodians across
a number of portfolios.
Private equity Equity capital that is not put on the public exchange,
where investors and funds make direct investments into private firms or buy
out public companies that results in a delisting of private equity.
Proprietary desk/trader A trader who deals with a securities firm’s
transactions that affect the firm’s accounts but not the accounts of its clients. The
bank uses its own balance sheet to take positions in shares, bonds or commodities.
Proxy voting Where someone acts on behalf of a company member at a
company meeting where at least one vote is taken.
Repo A repurchase agreement which is the sale of securities tied to an
agreement to buy the securities back at a later point.
Request for proposal (RFP) A document used by many organisations
to receive offers of services from potential suppliers. It enables organisations
to receive the right information to make good business decisions.
RG 196 Australian short selling regulation that was introduced by the
Australian Securities and Investments Commission in April 2010.
Risk mitigationTaking efforts to reduce the exposure to risk. Also called
risk reduction.
Risk versus return The balance between the risk of loss and the
potential return. Usually, the higher the risk of loss, the greater the potential
return, while the lower the risk of loss, the lower the potential return.
RMA Risk Management Association (US)
SAS70 audits Standards that an auditor must use to assess the contracted
internal controls of a service organisation.
SEC Securities and Exchange Commission (US)
Securities lending The lending of securities from one party to another
in return for a fee. The borrower is obliged to return them either on demand
or at the end of the agreement.
Sell-side firms Investment banks that provide buy-side firms with
services and products.
SFC Securities and Futures Commission (US)
Short selling An advanced trading strategy in securities lending where
the short seller hopes to capitalise from a fall in the asset price. ‘Going short’
is the opposite of ‘going long’.
SIFMA Securities Industry and Financial Markets Association (US)
Single stock future (SSF) A futures contract with the underlying asset
being one particular stock. It gives investors more capabilities to leverage
themselves in the market.
Swap-based ETF ETFs that use swap arrangements to replicate markets
where there may be difficult access or poor liquidity. Unlike standard ETFs,
swap-based ETFs hold a pool of securities which may have no relation at all
to the index being tracked.
Third-party lender A firm specialising in securities lending which is not
the custodian of the beneficial owner’s assets.
Triparty collateral managers These provide a centralised service
to manage, clear and hypothecate collateral among different OTC
counterparties in the market.
Workflow management Managing and defining a series of tasks within
an organisation to produce a final outcome.
 www.pensionfundsonline.co.uk
The Online Source for UK and
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www.pensionfundsonline.co.uk is the online source for pension fund

www.pensionfundsonline.co.uk is the online source for pension fund
information created by the publishers of Pension Funds and their Advisers
information created by the publishers of Pension Funds and their Advisers
(AP Information Services Ltd.) and the joint publishers of International
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magazine).
This innovative online product has been developed to compliment the
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 Directory of services
Custody & Clearing

DnB NOR is the leading provider of Custody, Clearing and Remote Member
Service in Norway. DnB NOR offers a full range of securities settlement, T: +47 22 94 92 95
Corporate Action and cash management services for both foreign and domestic F: +47 22 48 28 46
institutional clients. The bank has a strong commitment to the Custody business Contact: Bente I. Hoem, Head of
in Norway and the staff is highly knowledgeable and experienced. In addition, Global Relations & Network
DnB NOR provides a wide range of value-added services for foreign clients such E: bente.hoem@dnbnor.no
as Securities Lending, Income Collection, Proxy Voting, Tax Reclaim, and MIS W:www.dnbnor.com
reporting.
As the largest commercial bank in Norway, DnB NOR offers clients full services
in securities trading, registration, foreign exchange and Money Market.

Nordea is the leading financial services group in the Nordic and Baltic region
and operates through three business areas: Nordic Banking, Private Banking
and Institutional & International Banking. Nordea is the leading custody services
provider in the region. Nordea provides high quality, tailor-made custody services
Contact:
for local and foreign investors dealing with Nordic and Baltic securities. Due to
Nina Groth
the unique history of being formed from four established banks, Nordea is the
Head of Sub-custody and Clearing
only Nordic custody provider with strong local presence and expertise in all four
Tel: +45 3333 6124
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E-mail: nina.groth@nordea.com
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local market’s requirements.
• Leading Nordic custodian:
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Hedge Fund Administration

Apex Fund Services Ltd is a global hedge fund administration solution for hedge C: Peter Hughes
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BackOffice

Custom House Global Fund Services Ltd. (“CHGFS”), the Malta based parent Custom House Global Fund
company of the Custom House Group of Companies (“Custom House”), was Services Limited
established when Equity Trust’s fund services division was merged into Custom Head Office Address:
House in September 2008. CHGFS is recognised as a fund administrator and Tigne Towers
licensed under a Category 4 license as a Custodian for Funds of Funds and is also Suite 33
an authorised Trustee for Trusts. Tigne Street
Custom House offers a full 24/5, “round the world”, “round the clock” Sliema 3172
administration service out of its offices in Amsterdam, Chicago, Dublin, Guernsey, Malta
Luxembourg, Malta and Singapore. This service, which enables Custom House
www.customhousegroup.com
to offer daily dealing NAVs covers all aspects of day to day operations, including
Contacts: Dermot S. L. Butler,
maintaining the fund’s books and records, carrying out the valuations, calculating
Chairman
the NAV and handling all subscriptions and redemptions, as well as over-seeing
dermot.butler@customhousegroup.
payment of the fund’s expenses.
Custom House uses the PFS-PAXUS fully integrated fund administration system. com
Reporting is effected through CHARIOT, Custom House’s secure web-reporting T: +353 1 878 0807
platform for managers and investors. Albert Cilia, Managing Director
Custom House is fully SAS70 compliant and the Dublin office was the only hedge albert.cilia@mt.customhousegroup.
fund administrator in the world ever to be awarded a Moody’s Management Quality com
Rating. CHGFS and its subsidiaries are fully regulated, as required, by the relevant T: +356 2702 2799
authorities in their jurisdiction.

86 | Fundamentals4HNHaPUL |:WYPUN2011
 Directory of services
Securities Lending
Visit www.jpmorgan.com/visit/wss or
contact:
J.P. Morgan Worldwide
Securities Services
Francis Jackson, francis.j.jackson@
jpmorgan.com or 44-207-3253742
Huw Williams, huw.c.williams@
jpmorgan or 44-207-7775434
Technology
Eagle Investment Systems LLC
The Bank of New York Mellon Financial
Centre
160 Queen Victoria Street, London
UNITED KINGDOM
EC4V 4LA
Phone Number: 44 (0)20 7163 5700
E: sales@eagleinvsys.com
W: www.eagleinvsys.com
Visit SunGard at
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C: Mr Ras Sipko
T: +1-201-291-7747
E: ras@kogerusa.com
W: http://www.kogerusa.com
Consultancy
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J.P. Morgan Worldwide Securities Services (WSS) is a premier securities servicing
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Eagle Investment Systems LLC is a global provider of financial services technology
serving the world’s leading financial institutions. Eagle provides enterprise-
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York Mellon Corporation. To learn more about Eagle’s solutions, contact sales@
eagleinvsys.com or visit www.eagleinvsys.com.
With annual revenue of USD5 billion, SunGard is a global leader in software and
processing solutions for financial services, higher education and the public sector.
SunGard also helps information-dependent enterprises of all types to ensure the
continuity of their business. SunGard serves more than 25,000 customers in more
than 50 countries, including the world’s 50 largest financial services companies.
KOGER is a leading provider of technology solutions to the fund administration
industry. KOGER products are used by some of the largest and most respected
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provides comprehensive 24/5 technical support.
NTAS (New Generation Transfer Agency System) is the premier shareholder
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With annual revenue of USD5 billion, SunGard is a global leader in software and
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companies.
:WYPUN 2011|Fundamentals4HNHaPUL| 87
 Pensions: Dinnae tell me to retire...

Pensions: Dinnae tell me to retire...

Ageism and angry old people
The pensions focus in this issue of Hot on the heels -
Fundamentals puts one in mind of the ageism Summer Issue (ISLA / Fund Forum)
debate currently rampant in the western world. published June 2011
There have been a number of concerns raised at
Islamic Finance, Shari’ah-compliant Securities
the treatment of older people in the public eye.
Lending and Sukuk Repo
In the UK, Sir Menzies Campbell, while leader · Interview with the CEO of the International Islamic
of the now-in-power Liberal Democrats, was Financial Market
ridiculed in the press for his age at the time – he · Investor appetite for Islamic financial products and Sukuk
was in his mid-60s. fixed income
Meanwhile, a number of female presenters at
the BBC feel they are being pushed out of their UCITS IV and KIID
jobs to make way for younger women. · Interview with a senior officer (TBC) of the European
Commission
In the USA, as you will have seen earlier in the
· How to implement KIID and remain compliant
magazine, the Senate has even been forced to set
up a special committee on 'aging' which even Business Process Offshoring
made it into the securities lending world. · Pitfalls to watch for – outsourcing the problem or working
How will the world cope with an aging in partnership?
population and all the proposals to increase the
retirement age to somewhere approaching 100? Performance Measurement
· Interview with the CFA Institute on GIPS
· Case Study on GIPS best practices

Will pensioners
become The reason he is still going strong is because
pickpockets? any younger man that tried to tell him to retire
would, once the shouting had stopped, find himself
considering retirement himself.

For instance, the statutory retirement age of 65 in Which is probably a good thing.
the UK was removed on 5th April 2011.
Are all jobs that involve a public profile to be See you next quarter....
the reserve of 20-somethings with flashy smiles
and the gravitas of a child’s balloon?
No more the serious, grave voice reading the
news; no more the staid, solid statesman.
BackOffice

It seems that while the average person

is getting older, the television increasingly
represents a world of eternal youth and over-
exuberance that will make that average person
- who will be around 80 - put their walking stick
through the screen in disgust.
Of course there are exceptions to this rule that
says all public figures must be buried aged 30.
Sir Alex Ferguson has been in charge of
Manchester United, the UK’s most successful
football club (for the past two decades at least),
since 1986 and is still going strong at the age of
69 – the same age at poor old Menzies Campbell.
But there are always reasons behind exceptions
and Sir Alex is, well, no exception.

88 | Fundamentals4HNHaPUL |:WYPUN2011
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