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Global Securities Lending

Markets Asia, US, Canada, CEE Infrastructure Tri-party Collateral Management, Repo, Risk Management ProfIles EquiLend, CalPERS, Eurex, Anetics Gsl Issue 02

Sold Short Has the lending industry been unfairly treated?

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

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eDItorIaL

Lend an ear “Securities lending is the missing building block for market completeness” Markets US, Canada, CEE

Infrastructure Tri-party collateral management, Repo, Risk Management

ProfILes Brian Lamb, Dan Kiefer, Paul Wilson editor: catherine kemp ([email protected]) reporters: Joseph corcos ([email protected]) Ben roberts ([email protected]) Group editor: Giles turner ([email protected])

contributors: Brian Bollen, anthony Harrington Design: David copsey operations Manager: sue Whittle ([email protected]) Publishing Manager: Monique Labuschagne ([email protected]) commercial Manager: Jon Hewson Publisher: Justin Lawson ([email protected]) ceo: Mark Latham ([email protected]) 16-17 Little Portland street, London W1W 8BP t: +44 (0) 20 7299 7700 f: +44 (0) 20 7636 6044 © 2008 Investor Intelligence. all rights reserved. no part of this publication may be reproduced, in whole or in part, without prior written permission from the publishers. Issn 1759-0728 Printed in the uk

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The securities lending industry is an increasingly essential part of the financial machine. However, as an industry which has been strengthened by growth in the alternative funds sector, the FSA ruling on short selling and SEC ruling on ‘naked’ short selling has caused controversy and debate. In a month, which has brought disaster of fictional proportions to the financial services industry, we attempt to answer some of the questions raised by the FSA ruling on short selling and its effect on securities lending (p14). In readiness for the RMA’s 25th Anniversary securities lending conferences in Texas, GSL looks at the securities lending markets in North America. Joe Corcos provides an update on the securities lending industry in the US (p21) and Catherine Kemp investigates the regulatory changes that have lead to growth in Canada (p27). Transparency and the ability to ensure an accurate view of your risk remains a Sisyphean dilemma. GSL talks to Dan Kiefer of the California Public Employees’ Retirement System (CalPERS) about the value of auctions in ensuring transparency and why beneficial owners should be able to retain their right to vote proxies while securities are out on loan (p19), and Paul Wilson at JPMorgan about how securities lending has evolved into a front office function that chases alpha (p56). Jerry May from OPERS writes on risk from a lenders perspective (p55). Elsewhere Francisco Gonzalez at Eurex SecLend discusses the future of electronic lending (p50), Anthony Harrington discusses the challenges of ensuring an accurate global view of collateral risk exposure across all asset classes (p39), and David Little from Rule Financial discusses the industrialisation of collateral management (p44). GSL continues to explore emerging markets. Ben Roberts looks at the numerous obstacles to developing securities lending in the Czech Republic, Poland and Hungary (p31), while Brian Bollen encounters the world of Asian repo and the potential for growth (p35). The bankruptcy of Lehman Brothers, the buy out of Merrill Lynch, the declassification of the Morgan Stanley and Goldman Sachs as investment banks, the buy out of HBOS, and the restrictions on short selling globally, are events which have dramatically changed the landscape of the financial services industry. How long these seismic shakeups will change the securities fincance industry is difficult to tell. What is for certain is that the waters will remain choppy for some time. Catherine Kemp

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contents News 4

news

8

news analysis

12

across the atlantic

14

short selling

16

ceo Profile - Brian Lamb

20

Lender Profile - calPers

Country Profiles 21

country overview - usa

27

country overview - canada

31

country overview - eastern europe

34

australia - esecLending

Industry Insight 35

asian repo

39

tri-Party collateral Management

44

Post crunch trends

46

swift on securities lending

48

anetics on asset management

Technology 50

eurex - francisco Gonzalez

51

sunGard on risk management

54

statistics on the short selling volatility

People 55

opers - Jerry May

56

JPMorgan - Paul Wilson

56

rMa 25th conference Preview

62

appointments

64

Meet the future - nora reemts

Companies

eSecLending - 18, 22, 40 Eurex - 50 Euroclear - 40 Federal Reserve - 8, 22 FSA - 13 Goldman Sachs - 17, 24, 36 ICAP - 20 IMC Trading - 64 iSEC - 20 ISLA - 13 JPMorgan - 56 Lehman Brothers - 8 LendEX - 18, 59 Merrill Lynch - 8, 12, 17 Morgan Stanley - 24 Northern Trust - 24

Anetics - 48 ANZ - 10 Bank of America - 12 BBH - 21 Bear Stearns - 12, 17 BNY Mellon - 38, 39 Budapest Stock Exchange - 32 CIBC Mellon - 30 Citi - 35 Credit Suisse - 24 CSOB - 31 Data Explorers - 22, 54 DTCC - 13 EquiLend - 17

OhioPERS - 55 Opes Prime - 10, 34 Penson - 26, 29 Performance Explorer - 27 Quadriserv - 20 Raiffeisen - 31 RBC Dexia - 27 RMA - 12, 58, 59 Rule Financial - 44 State Street - 12 SunGard - 51 SWIFT - 46 TSLF - 8 UNIVYC - 31 Warsaw Stock Exchange - 10

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News

Global securities lending news Top industry stories at deadline. For more recent updates go to www.isj.tv

Participant (GCP) of EuroCCP (European Central Counterparty Limited). This will provide clients with simple and rapid access to Turquoise, the new pan-European share trading platform launched on 15 August 2008. This service complements those that are already available on new trading venues like the Chi-X pan-European alternative trading platform, as well as on the traditional regulated markets. SGSS’ clients can also access a wide range of post-trade services on the main regulated and multilateral trading facility (MTF) markets.

Paris - SecFinex and LCH.Clearnet have launched central counterparty services for stock borrowing and lending across the SecFinex Order Market multilateral trading facility for Euronext markets. This will include stock loan transactions in France, Belgium, The Netherlands and Portugal. This is the first time that stock borrowing and lending markets will be able to take advantage of the services offered by a central counterparty. Vienna - JPMorgan has launched its Asia offshore payments clearing system, designed to process payments from initiation to settlement. Intended to service the global trading needs of the bank’s financial institution partners and their customers, it will allow them to keep liquidity in the region, clear in multiple regional infrastructures, concentrate their accounts and benefit from same-day finality. Paris - Société Générale Securities Services (SGSS) has become a General Clearing

New York - Erste Group Bank has selected Citi Global Transaction Services to provide a single integrated electronic execution and custody solution. The service provides a single counterparty to execute, settle and provide custody in all major execution markets worldwide. Through the linking of Citi’s capital markets and securities capabilities operational inefficiencies and risks that come from dealing with multiple providers are removed. London - SIFMA, ISLA, RMA, PASLA & ASLA released the following statement on the 26 September 2008 in regards to developments within the lending industry: “Against the background of the current market turmoil, the International Securities Lending Association (ISLA), Risk Management Association (RMA), Securities Industry and Financial Markets Association (SIFMA), Pan-Asian Securities Lending Association (PASLA) and Australian Securities Lending Association (ASLA) recognise why regulators around the world have put in place temporary restrictions on short selling of financial shares and support their objective to protect the integrity of markets and guard against financial instability. It is vital, however, that these temporary measures are designed as far as possible to

avoid unintended damage to the liquidity of cash equity and related derivatives markets. In particular, dealers must be allowed to take short positions in the course of providing liquidity for their customers. They need therefore to continue borrowing financial shares from lenders, such as pension and investment funds and insurance companies, for this purpose. Continued lending is also important in order to prevent chains of failed settlements. For these reasons, we ask that regulators do not introduce measures that might prevent or discourage lending of financial shares. For example, selling shares that are currently on loan should not be treated as entering into a short position where the seller can recall the lent shares within the normal settlement cycle. Lenders should also be able to lend in good faith without requirements to make enquiries about or obtain documentary proof of the intentions of borrowers. More generally, we encourage lenders to continue to make financial shares available for lending in order to support market making and efficient settlement. Any wholesale withdrawal of financial shares would have highly unwelcome consequences for liquidity in the cash equity and derivatives markets that would be against the interests of investing institutions and contrary to the stated intentions of regulators in introducing these measures. We are encouraged by the response of securities lenders and again urge them to continue to lend and to maintain their on-loan positions as appropriate in light of their respective goals.” Abu Dhabi - Standard Chartered Bank has expanded its custody services in UAE with the recent addition of Abu Dhabi Securities Exchange (ADX and now provides a full custody services in three markets, including Dubai International Financial Exchange (DIFX) and Dubai Financial Market (DFM) in the Middle East.

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Natixis

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News Madrid - Family Investments has appointed Santander Asset Management UK to manage its GBP1.5 billion investment portfolio. This is the first institutional asset management mandate win for Santander Asset Management in the UK, and reflects its growing reputation in this market. The Family Investment Portfolio comprises of 23 funds, including the Family Child Trust Fund, and the Family staff pensions scheme. Santander Asset Management UK will take over management of the portfolio during Q4 08. Belgium - To ensure the transparency of the shareholder structure of listed companies, new transparency legislation in Belgium requires investors to notify the regulator and the company at which shares are held whenever they exceed specific shareholding thresholds. The Belgian regulator Banking, Finance and Insurance Commission (CBFA) also now requires companies to disclose the information their investors need in order to submit these notifications, and are also required to disclose the information received in these notifications themselves. Vienna - The Polish National Depository for Securities (KDPW) is implementing Microsoft BizTalk Accelerator for SWIFT, for the transport, management and exchange of more than 4 million SWIFT transactions per year. As the central institution responsible for the management and supervision of clearing and settlement in Poland, KDPW will use Microsoft’s leading solution for financial messaging integration, leveraging BizTalk Accelerator for SWIFT to help about 10 domestic and global customers efficiently and effectively connect to SWIFT. Munich - Algorithmics announced that it is working with Allianz Group on a strategic insurance risk management project that will enable Allianz to calculate its risk capital across the entire group and meet its Solvency II requirements. Tom Wilson, CRO of Allianz, said: “Our goal is to be able to quantify all our risk types across our entire organization and shorten our reporting time for economic capital significantly. Ultimately we want to be

able to use our risk measures in our business decision making in 12 months’ time.” Brussels - Fortis Bank, Old Mutual and Tianjin TEDA Investment Holding entered into an agreement for Old Mutual to acquire the 49% stake that Fortis holds in ABN AMRO TEDA Fund Management a major Chinese asset management joint venture, for a cash consideration of approximately EUR 165 million. The sale is the result of regulatory compliance following Fortis’s acquisition in April 2008 of the asset management business of ABN AMRO Group, and is subject to approval by the China Securities Regulatory Commission (CSRC) and relevant government authorities. New York - Dresdner Kleinwort has been awarded a third party US equity securities lending mandate by Colorado Public Employees’ Retirement Association (Colorado PERA). PERA is the 23rd largest public pension plan in the United States, and at the end of 2007, the fund had over USD41 billion in assets available for benefit payments. Tim Smollen, global head of agency securities lending at Dresdner Kleinwort, said: “We interface seamlessly with Colorado’s custodian, Northern Trust, using straightthrough processing technology.” PERA provides retirement and other benefits to the employees of more than 400 government agencies and public entities in the state of Colorado. New York - DWS Investments, the mutual fund arm of Deutsche Asset Management and the second-largest European mutual fund company, has selected EquiLend’s trading and trade reconciliation services to enhance their securities finance business. “Choosing EquiLend reflects DWS Investments’ commitment to strengthening automation across its business lines as it aims to mitigate operational risk and achieve greater processing efficiency. EquiLend will help us to maximize the “alpha” generation for our investors in an efficient manner“, says Dirk Bruckmann, managing director, DWS Investment GmbH.

“We are very pleased to welcome DWS Investments which further strengthens our German client base. This underscores our ongoing commitment to providing innovative securities finance solutions to the Global Securities Finance marketplace,” says Sharon Walker, managing director, EquiLend Europe Ltd. Tokyo - Asian clients are now able to use Euroclear Bank’s triparty services to close overnight repo transactions with European counterparties at the end of their business day, thereby leveraging their end-of-day securities positions as collateral, and have full use of these securities the next morning. European-based firms, in turn, are now able to finance their yen and other Asian currency exposures with local Asian securities and counterparties. Clients can use Euroclear Bank’s triparty collateral management service to move securities and/or cash automatically between the relevant accounts, and to automatically substitute securities that are used in financing deals when needed to fulfill other transaction settlement needs. New York - A group of global commercial and investment banks, including Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, and UBS, today initiated a series of actions to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets. Specifically, the banks are working together to do the following: First, to assist in maximizing market liquidity through their mutual commitment to their ongoing trading relationships, dealer credit terms and capital committed to markets. Second, to establish a collateralized borrowing facility, which ten banks (Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Merrill Lynch, Morgan Stanley, and UBS) have committed to fund for USD7 billion each (USD70 billion in total). The facility will be available to these participating institutions

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News for liquidity up to a maximum of one third of the facility for any one bank. It is anticipated that the size of the facility may increase as other banks are permitted to join the facility. Third, to help facilitate an orderly resolution of OTC derivatives exposures between Lehman Brothers and its counterparties. This effort included opening the OTC derivatives market for trading this Sunday afternoon. New York - JPMorgan Securities Lending has become the first major agent lender to lend Greek and Polish equities, and is now actively lending in over 30 international markets. “JPMorgan’s approach to opening new markets means our clients are at the forefront of opportunities to enhance returns through securities lending,” explained Nick Rudenstine, Global Securities Lending Product Head, JPMorgan Treasury & Securities Services. Entering both the Greek and Polish markets ahead of the competition allows the bank’s clients to take advantage of higher fees driven by increased demand and limited supply. JPMorgan began lending Greek equities within seven business days after the Hellenic Capital Market Commission approved using the over-thecounter facility for securities borrowing and lending. The first trade in Polish equities followed shortly behind. London - JPMorgan has announced that its GlobeClear business will now offer third party clearing for Warsaw Stock Exchange (WSE) members who wish to trade Polish securities. JPMorgan will be providing clearing and settlement capabilities to clients who want to transact in equities and fixed income products on the WSE. This latest offering marks the 23rd exchange supported directly by JPMorgan GlobeClear. Its first client went live on the WSE with JPMorgan GlobeClear on 5 August 2008. Alex Dockx, GlobeClear product executive, JPMorgan, said: “By providing direct access to the WSE, international investors can now directly trade in one of the most promising and vibrant markets in Europe. Central Eastern European markets are rapidly growing, and the WSE is a leading trading centre. Through JPMorgan GlobeClear’s single access portal, which

provides clearing and settlement of trades in more than 65 markets and 23 exchanges, clients benefit from a wide coverage at low cost.” New York - Fundtech, a provider of global transaction banking solutions, announced the introduction of Global CASHplus (GCP), a new generation transaction banking platform that combines comprehensive global cash management with the full range of automated financial supply chain features. For banks, GCP provides a competitive edge with its integrated features, operational efficiency, and Web 2.0-inspired user interface. Corporations will benefit from an unprecedented level of global financial control, enabling them to optimize their working capital while managing risk. GCP is an extension of Fundtech’s end-toend-to-end (also referred to as E-to-E2) strategy, which expands the traditional boundaries of global end-to-end transaction banking to include corporate clients and their trading partners. With far more visibility into their clients working capital needs, banks are able to provide new services that deliver greater financial leverage through just-intime cash. London –The Financial Services Authority has banned short selling of financial stocks, in a move designed to address market concerns. The FSA will require from 23 September daily disclosure of all net short positions in excess of 0.25% of the ordinary share capital of the relevant companies held at market close on the previous working day. Disclosure of such positions held at close on September 19th will also be required on Tuesday September 23rd. The FSA stands ready to extend this approach to other sectors if it judges it to be necessary. These provisions will remain in force until 16 January 2009, although they will be reviewed after 30 days. A review of the rules on short selling will be published in January.

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News

News Analysis

Lehman collapse sparks loosening of collateral The sheer angst emanating from the financial sector these days is palpable. Mortgage firms and investment banks once the pride of Wall Street have been humbled, brought low by their own blind greed and stupidity, and the knock-on effects are reverberating throughout the world economy. The sight of Lehman Brothers employees standing despondent outside their Canary Wharf offices, clutching their boxes of personal items was only the latest of the losses of the crunch. Playing the role of desperate fireman trying to douse the worst of the conflagration is the US Fed. With the collapse of Lehman Brothers, which, after a fruitless search for a buyer, filed for bankruptcy with debts of USD613 billion, the Fed has decided more action is necessary to infuse liquidity into the ailing market. And no, this doesn’t mean a multi-billion dollar bailout for Lehman. Instead, after an emergency meeting between Ben Bernanke, central bankers and industry figures, the Fed has decided to expand the types of collateral it accepts for its sec lending programme. Whereas before it was only accepting Treasury

securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities, it will now accept all investment-grade debt securities, making it easier for everyone to offload what they can’t sell onto the Treasury. Furthermore, the Fed has decided to add USD25 billion to the pot of securities on offer. This means there is now a total of USD200 billion available. This was in reaction to the price of lending climbing rapidly on news of the Lehman collapse. Fed funds were trading as high as 6% after the bank announced it was bankrupt. This is a full 4% above the target rate set by the central. It is hoped that with a massive infusion of liquidity from the Fed that the rate will go down to normal levels. So continues the financial bailout of proportions that have rarely been seen before. This means that there will be little accountability for those whose profligacy is now being exposed, but in effect the Fed has little choice but to continue with its emergency measures, lest the entire system sink further into the morass. The Fed created the Term Securities Lending Facility (TSLF) back in March in the wake of Bear Stearns spectacular collapse and bailout, the first major soap opera of the crunch. The TSLF was created alongside the Primary Dealer Credit Facility to aid the markets. But with the most recent round of collapses and near-collapses many are predicting that interest rates are soon to be slashed as well. It will take months for Lehman to unravel all its deals. Lehman, along with many other outfits, was an enthusiastic user of the repo market in order to gain funding. The Fed is claiming these measures are temporary. However how temporary is questionable. What the long-term effects of the conflagration will be are uncertain. Some are predicting the demise of the independent broker/dealer. Bear Stearns is no longer, Lehman Brothers has bit the dust and Merrill Lynch has been bought by the Bank of America. Only the future will see if JP Morgan, Goldman Sachs, et al will survive. Even if they do, a radical change may be

needed for their business models. Meanwhile, ten large banks, including JP Morgan and Goldman Sachs have set up a fund of USD70 billion in order to help the market stay liquid. The industry and regulators are scrambling to head off the crisis, which together they have created, but only time will tell if they will be successful. To many it seems as if things are falling apart, as if the centre cannot hold. Many will wonder if some revelation is at hand. News Analysis

JPMorgan opens the door to securities lending in Greece and Poland JPMorgan has become the first major lending agent to lend Greek and Polish equities. The bank’s securities lending business began lending Greek equities seven business days after the Hellenic Capital Market Commission approved the use of the overthe-counter facility for securities borrowing and lending. The first trade in Polish equities followed shortly after. The bank announced the news on 10 September 2008 and is now actively lending in over 30 international markets. “JPMorgan’s approach to opening new markets means our clients are at the forefront of opportunities to enhance returns through securities lending,” explains Nick Rudenstine, global securities lending product head, JPMorgan Treasury & Securities Services The expansion of the securities lending market into emerging markets such as Asia non-Japan has been a major trend in the industry for a number of years. However, emerging markets in Europe are now the new point of interest for exposure hungry lenders. Lending in emerging markets can be lucrative, often creating higher returns relative to holdings of equities in more developed markets. This is because there is less supply of securities and so people are willing to pay higher fees. Currently, Poland is the dominant equity

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Some think something extra. We think customized securities lending.

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News

market in Eastern Europe. Companies across the region list on the Warsaw Stock Exchange to draw in cash from pension funds and benefit from surging share prices. The Warsaw market, whose companies have a combined market value of USD155.2 billion, is already larger than bourses in Prague and Budapest, at USD50.5 billion and USD39.3 billion respectively. Poland has had 28 initial public offerings of shares this year, while Hungary has had three. Two share sales in Prague this month will be the first IPOs in two years. The Greek government forecasts the economy to grow 3.6% this year, below a previous 4% estimate due to higher oil, energy and food prices, and global economic turmoil. The European Commission expects growth of 3.4%. In 2007, data shows that Greek mutual fund investors pulled cash out of domestic equity and bond funds in 2007 switching into funds investing abroad for diversification. In August 2008 foreign investors took a net EUR262 million (USD372 million) out of

Greece’s equities market in August but still owned half of the market’s free-float, data from the Athens stock exchange shows. Month-on-month, the Greek equity market’s total capitalisation fell 2.5 % in August 2008 to EUR124.5 billion, which represents about 54 % of the country’s gross domestic product (GDP). Year-on-year the market’s value fell 32.4 %. However, the government plans to combat the global financial crisis with new taxes and changes to labour markets. JPMorgan’s move to open up the lending markets in Greece and Poland is welcomed by industry representatives. They think that securities lending won’t necessarily have an effect on the level of these markets, but moving into these markets will provide more liquidity, by for example making it easier to have an index derivative. And it will aid the development of these markets and making them more attractive for foreign investors. It will be interesting to watch as these two very different markets expand with the opening up of securities lending.

News Analysis

Down turn down under for ANZ The sacking of two senior executives at Australian bank ANZ after a rigorous internal review of its securities lending operation revealed this year’s themes of risk management and operational oversight will still keep financial institutions on their toes. The review, overseen by chief executive Mike Smith, concluded that there were deficiencies in staff knowledge – most notoriously the inability to distinguish between securities lending and equity finance. Further, the bank’s involvement with the troubled broker Opes Prime was deemed to have cost the bank damages to its reputation. Opes Prime went into receivership in March this year following the revelation by Deloitte, the receivers, of “a number of cash and stock movement irregularities” on its accounts. It had been a significant player within the securities lending market, with ANZ a key business partner, with the bank also providing the broker with equity financing. This financing allowed Opes Prime to provide margin loans, with ANZ retaining the official ownership of the shares. With the demise of Opes Prime many of the shares supplied by ANZ have also gone astray, and various companies whose shares were involved in the exchanges between the bank and broker are seeking compensation. Over the last few months Beconsfield, a small cap investment firm, have made the news in their battle for shares. Legal proceedings will begin on the 8 October, with specialists ING representing Beconwood. The firm is said to be seeking the shares or compensation of around ASD6 million. Mike Smith has said that the review – despite posing serious questions to the entire lending division - exonerates the bank from the ensuing legal wrangles. Turn to page 34 for an Australian update

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26/9/08 16:16:00


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 25/9/08 19:14:22

news

Across the Atlantic Michael P. McAuley, chairman of the RMA Committee on Securities Lending, discusses the current challenges facing the industry.

The securities lending industry in the United States has been coping with concerns in the credit markets, as well as the recent fallout and subsequent regulatory responses to those events. Bank of America’s acquisition of struggling Merrill Lynch & Co., the fire sale of Bear Stearns to JPMorgan and the loss of Lehman Brothers Holdings, Inc. to bankruptcy have led to an unprecedented consolidation of market players. The intervention of US federal agencies, namely the US Treasury’s conservatorship of Fannie Mae and Freddie Mac and its bailout of American Insurance Group, the Securities

and Exchange Commission’s Emergency Order with respect to short selling and new regulations have clearly changed the landscape and will have an impact on the future of the industry — both in the US and abroad. Much of what our industry will face going forward will be determined by how we deal with these extraordinary events. The hope is that beneficial owners will take comfort in the borrower default indemnities provided by their agent lenders, the manner in which their agents work through the Lehman default and other evolving circumstances, and the stabilising controls that regulators have put

into place. Importantly, another hope is that beneficial owners will have the confidence to continue lending to viable counterparties, as appropriate. Amid all the market turbulence of the past year, beneficial owners have earned significant revenues from securities lending due in large part to the unusually wide credit spreads. Those who had confidence in their agent lenders’ ability and commitment to provide disciplined risk management were rewarded with appropriate risk-adjusted returns. Strong risk management practices will remain the foundation of successful lending programs, especially given the fact that we now have fewer trading counterparts, leaving potentially higher balances concentrated in the hands of fewer borrowers. Also, the trend toward non-cash collateral will increase as those counterparties closely manage their balance sheet and capital requirements. Lenders that have flexibility in the forms of collateral they are willing to accept can benefit by meeting this market need. Finally, I would like to touch on my role as incoming chairman of the Risk Management Association’s (RMA) committee on securities lending. I have set several goals for the coming year, not the least of which is joining with the rest of the committee members to continue our work with the Securities Industry and Financial Markets Association, the International Securities Lending Association, the Pan Asia Securities Lending Association, the Australian Securities Lending Association, regulators and other industry participants to attend to those challenges that confront our industry and help set a prudent course for continued growth. Also, in this new environment, I would like to spotlight more attention on the important work our subcommittees are doing, most notably the operations and legal/regulatory/ tax subcommittees. Through this column, I will strive to keep Global Securities Lending readers informed about what’s happening in the securities lending marketplace from this side of the Atlantic.

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news

David Rule, chief executive, ISLA ISLA’s chief executive defends securities lending markets and provides an update on how ISLA has been attempting to fine tune the securities lending industry.

Charged with facilitating short selling and, so it is argued, driving equity prices lower, securities lending markets remain under the spotlight of regulators and commentators. ISLA has continued to put the case for the industry, pointing out the academic evidence that short selling has no long-term effect on share prices and emphasising the importance of securities lending to the wider liquidity of wholesale markets. Meanwhile, ISLA’s broader work to improve industry standards has continued. In July, we published a recommended model for agency lending disclosure (ALD) in Europe, which builds on the successful US model, using the same file formats and the DTCC as a file-transfer hub. But it adds reporting of agency repo trades and optional reporting of agency reverse repo trades, and addresses reporting of triparty and Crest DBV collateral to meet the needs of borrowers under Basel 2. The UK FSA has said it will welcome the proposal, which will help borrowers to meet the FSA requirement to obtain daily data about their exposures to underlying principal lenders by 1 January 2010. In May, ISLA published a draft new version of the Global Master Securities Lending

Agreement (GMSLA) for comments. The new version updates the 2000 version; seeks to clarify the tax obligations of borrowers and lenders; addresses areas of that agreement that are commonly amended by borrowers and lenders in side letters, such as whether failure to deliver equivalent securities and collateral is an event of default; and brings the agreement into line with other industry standard agreements in some areas, such as set-off procedures following default. Over twenty comments on the draft have been received, with lively debate over some of the proposals. ISLA is now recalling its working group of lawyers from member firms to discuss the next steps. ISLA has continued to work with regulators and infrastructure providers to improve the environment for securities lending in Europe. For example, the Spanish authorities are expected to publish a regulation permitting Spanish UCITs funds to lend securities shortly. That follows ISLA’s earlier work on the Irish, Luxembourg and UK regulations. In order to help educate regulators, commentators and market participants about the market, ISLA will be running its first securities lending workshop on 12 November in conjunction with the established ICMA/ SIFMA repo and collateral management course. Details are available on the ISLA website.

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news

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

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news

selling to customers without the ability to hedge yourself by going short. And so dealers continuing to be able to perform their vital role in providing liquidity for customers in the cash equity and derivatives markets.” ISLA has sent out a press release urging lenders of financial shares to continue to lend in order to facilitate market making and efficient settlement (see insert). However, both CalPERS and Dutch pension fund APG stopped lending certain bank stocks on Friday 19th September to help bolster the markets. CalPERS temporarily restricted the lending of securities of Goldman Sachs, Morgan Stanley, State Street, and Wachovia. APG was less specific, but a spokesman said: “We have stopped stock lending in several American but also European banks whose shares face the most downward pressure, among others from short sellers. By doing this we are trying to discourage short-selling activities, and provide stability to the market. We do not disclose the names of these banks.” The danger is that lending will become synonymous with short selling, in the sense that it facilitates short selling. Some anticipate that this will decrease liquidity and be dangerous for the health of the market. The defence from the hedge funds is that they use fundamental financial analysis to find out whether a company is too expensive or not – companies are bought when they are cheap, and sold when expensive. By doing this they are putting the prices at the level they should be, not pushing them down. From a securities lending perspective, hedge funds often promote the growth of markets because they drive demand, increase utilisation and profits from both sides. This in turn increases liquidity. Sir Peter Burt, former chief executive of Bank of Scotland which merged with Halifax to form HBOS seven years ago, has said that HBOS was a “victim” of speculators after a sustained and dramatic fall in share price.

However, Data Explorers released data that indicates only 3% of HBOS stocks were on loan during the tumultuous week beginning 15th September, which indicates that it was not the shorting of its shares that made it too expensive for them to borrow money to appease their debt – but the instability of the financial system itself. There is a case for saying that the value at risk is a system that works well for broker dealers because they constantly change positions as the market changes, but for the owners of stock it can make everything so short term that there isn’t time to recover. However, some still believe short selling is a fair practice, even beneficial to the market. The FSA ordinarily embrace it as a fundamental driver of growth. Hedge funds, which often have aggressive shorting tactics, have been blamed, but Charlie McCreevy, the EU Commissioner for International Markets instead believes: “As much as some people want to demonise hedge funds, they are not the cause of the difficulties in the market. Let us not forget where the present crisis has its roots.”

PROHIBITION ON SHORT POSITIONS IN FINANCIAL STOCKS Against the background of the current market turmoil, the International securities Lending Association (IsLA) understands why the Financial services Authority (FsA) and other regulators around the world have prohibited temporarily the creation of new net short positions in financial shares and supports their objective to protect the integrity of markets and guard against further financial instability. nonetheless, IsLA believes that the role of short selling in the markets for many financial shares recently has been overstated. The underlying drivers of share price movements are not the actions of particular groups of buyers and sellers but rather underlying changes in the expected future earnings of companies. IsLA welcomes the reiteration by the FsA that short selling is a legitimate investment technique in normal market conditions and looks forward to the removal of these temporary restrictions when the current extraordinary market conditions pass. IsLA welcomes the exemption from these restrictions for market makers, which should allow dealers to continue to perform their vital role in providing liquidity for customers in the cash equity and derivatives markets. It also notes that the FsA has not imposed restrictions on securities lending and urges lenders of financial shares to continue to lend in order to facilitate market making and efficient settlement. IsLA Chief executive David Rule commented today, ‘Any wholesale withdrawal of stock available for loan could have highly unwelcome consequences for liquidity in the cash equity and derivatives markets that would be contrary to the stated intentions of regulators in introducing these regulations’.

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EmErging markEts

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CEO PrOfilE

Brian Lamb Giles Turner speaks to Brian Lamb, CEO of EquiLend, about the future of the company, and the development of products within the securities finance industry It has been nearly been three years to the day since Brian Lamb took the job at EquiLend. Lamb, formerly of Barclays Global Investors, joined EquiLend in 2005, succeeding former President and CEO Dirk Pruis. While some may wonder whether Lamb may have wished for a luckier third year in the securities finance market, Lamb on the other hand, is anything but negative. The recent issues regarding the market shake-up of investment banks may have caused much hand wringing at EquiLend as the company is made up of a number of ‘global financial institutions joined together, looking for ways to optimise efficiency in the securities finance industry by developing a standardised and centralised global platform for trading and operations services.’ These institutions included Barclays Global Investors; Bear, Stearns & Co. Inc.; Credit Suisse; The Goldman Sachs Group, Inc.; J.P. Morgan Chase & Co.; Lehman Brothers; Merrill Lynch; Morgan Stanley; Northern Trust Corporation; State Street Corporation; and UBS. Recent market events have changed the ownership structure of EquiLend. Lamb takes such changes in his stride: “Bear, Merrill and Lehman’s are owners in EquiLend. Typically these matters take some time to be worked out regarding the intricacies of what is actually done with the holdings and anything that is owned by these companies. In the case of Bear Stearns, JPMorgan Securities bought that company, so we fully expect our current relationship to be incorporated within their existing business. In the case of Merrill, it

turns out that Bank of America was not a client of EquiLend, so fortuitously that may result in a net positive for us. Lehman’s is perhaps the most complicated of all for us because. Time will tell but the net of it all is that we will see more consolidation among our ownership group and we still have more than 40 non-owner clients so our client base continues to grow at a healthy rate. Before such black swans crashed into Wall Street, Lamb has made the most of these past three years: “Time flies when you are having fun, but no-one could have foreseen what has happened in the credit markets in the past 18 months. But in regards to securities finance some things have been predictable. The adoption of technology solutions to support the growth for the global industry. The adoption of electronic trading in securities finance as a paradigm that people are willing to utilise. Clearly our place in that space continues to evolve. We have been up and running now for over six years and we are well past the tipping point and at a stage where we are evolving into new things and doing the old things better than before.” Time also flies when you remain busy, and EquiLend have continued to develop at pace. The roll out of Trade2O, a trading services that allows traders to negotiate and agree trade terms for global equities and fixed income securities and process them straight through to a proprietary system without having to use the telephone or other manual methods. The platform, released in January 2008, has already had good feedback, with many of

EquiLend’s client institutions using Trade2O for their daily borrowing and lending needs. Lamb was personally behind the development of this product: “I very much see it as EquiLend fixing what it tried to do six years ago. We had a product (One-to-One Negotiation) in this space but it was ahead of its time and as a result not adopted by the market. Part of what goes on regarding product take-up is real behavioural and cultural dynamics. People like to do things the way they have done them before. I understand that as I traded for years. For example people don’t like to give up of real estate off their screens. They like to use the phone. They like to deal with the same people. They get into a comfort zone. It is difficult for any electronic trading platform to penetrate that dynamic. But we are really pleased with the result as we have tried to go about it differently. We have specifically utilised input and feedback only from people who have experience trading.” Trade2O has predominantly been used for the US equity market. Though there has been some interest in Japan, and increasing development in Europe and the UK. Lamb also believes that there are also some interesting possibilities for basket trading. Lambs ‘can-do’ attitude continues by seeing the securities business through a global perspective. Rather than defining it ‘securities lending’, as is the term of choice in Europe, Lamb sees the industry as ‘securities finance’, offering possibilities beyond just lending. Regarding EquiLend’s expansion, Lamb sees a dichotomy between the equities side and

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CEO PrOfilE

the fixed income side of the house. “The fixed income side of the house on the dealers side has repo and not securities finance, although essentially the dynamics are pretty much the same. I think there is some potential for EquiLend to add functionality to the fixed income securities finance side.” The growth of the securities finance business has allowed EquiLend to differentiate itself within the industry, something that many find it hard to do. In Europe, the confusion over the services offered by EquiLend and eSecLending, an electronic and securities borrowing and lending agent, was often down to the similarities in phonetics, rather than products. However at the turn of the century there were several dot-com offerings that sprung from the securities finance industry, EquiLend and eSecLending included. Some survived, others did not, however all got lumped together into the same basket. “People rarely paid attention to what it exactly each company were offering, instead making the assumption that we were all was offering the same thing. eSecLending is a lender, period. Their lending style makes use of an auction platform. It is as simple as that,” states Lamb. “EquiLend is a consortium that caters to lenders and borrowers. Because eSecLending is a lender they are a very natural client of EquiLend and I hope that they will a very big client some day.” Europe holds a continued misrepresentation of EquiLend, often describing it as an auction platform. EquiLend does indeed offer auction functionality in the shape of AuctionPort, a browser-based portfolio auction service that allows the lender to host an auction of a securities portfolio. However this auction functionality represents less than 1% in terms

of EquiLend’s offering to the marketplace. EquiLend’s real prowess lies in its trading platform. Lamb explains: “In terms of new trades done everyday on our platform we see 15-20,000 each and every day, globally in 27 markets around the world. That’s roughly USD15-20 billion of new deals done every day. That is the lion’s share in what EquiLend is all about, trading.” Lamb remains positive about the future, but only if people remain at the top of their game, and the quickest way to providing high-end products is if clients continually demand more. “In regards to competitiveness and the global landscape, I hope that clients, institutions, dealers, custodians, and hedge funds continue to be even more discerning and more demanding of their service providers in order that the providers offer solutions like ours that are global, 24/7, and enable the client to achieve a lot of efficiency as a result. There are too many disparate solutions out there in my view.” Does this mean that people are failing to demand enough from their service providers? “Historically there has been a tendency for people to be accepting of less.” On a global perspective, Lamb sees great promise in the now almost emerged markets. “I am very excited by the dynamics in the Asian securities finance marketplace. EquiLend has always had clients in Japan. We have always had securities lent and borrowed on our platforms from the Asian markets.” EquiLend has also made inroads into the Australian market, and as of last year EquiLend offered post-trade services and are hoping to offer trading services, if not by the end of this year then by early 2009. Similarly there are lots of opportunities in Taiwan, India, Korea, Hong Kong. EquiLend’s trade and electronic confirmation services

meet the requirements of the Hong Kong exchange, giving a real boon for clients wishing to avoid filling out of forms for each and every transaction common for interregional transactions. Although EquiLend are not planning to have an office out in Asia any time soon, training is supplied on a regular basis.

How has being a trader helped you? Obviously being a trader i understood what i needed to do to trade. in terms of any sort of system design i can at least consult on some of those things and ask the developers questions before we put export to the trading community. also as a trader i think that you need to be able to make decisions very quickly and take in as much information as you possibly can in order to make a very quick and educated decision and then move on to the next thing. i think those sorts of things have helped me in this role and hopefully they will continue to help me.

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lEndEr PrOfilE

Dan Kiefer GSL speaks to Dan Kiefer of the California Public Employees’ Retirement System (CalPERS) about the value of auctions and why beneficial owners should be able to retain their right to vote proxies while securities are out on loan. opportunities arise, they are analysed on a case-by-case basis. We work with our agents and utilize the auction to gather information and determine which, if any, route to market is most appropriate. CalPERS was the founding client for eSecLending, taking part in their inaugural auction in October 2000.

Can you tell me how you got involved in the world of securities lending? In August of 1993 I came to CalPERS as a research analyst in the fixed income group. In 1999, after spending several years managing a convertible bond portfolio, I took over the securities lending program. Immediately, I questioned the custodial and traditional agency structure. There was too much inefficiency and too little transparency; I knew there was a better way. With the help of many resources, an on-line blind auction

model was developed. Our first auction, which was actually conducted telephonically, was a tremendous success. As of April 30, 2008 CalPERS investment portfolio had a market value of USD 248.4 billion. What proportion of this is lendable at any given time? In general, slightly over half of the portfolio is lendable at any given time. As new portfolios are funded and new securities lending

What attracted you to the auction model and how successful has it been for you? After spending time evaluating the securities lending business, the inefficiencies in the market became clear to us at CalPERS. Following a review of our route to market options available at the time, we determined that the best way to optimize our lendable assets would be to offer them directly to the borrower community for exclusive access via a blind competitive auction. In 2000, we codeveloped an auction program based upon our specific needs and objectives. The result was a product that offers CalPERS a lending solution other than the traditional custodial or other third-party structure. Through our auction based platform, we have obtained greater transparency and control over our lending activities while achieving significantly higher returns; the auction model has facilitated this growth without comprising our risk parameters. The model has been extremely successful for CalPERS and our approach and philosophy has not changed. Today, we are still achieving premium returns and we have complete transparency into the program for everything from performance and risk to all operational components. Over the last eight years, CalPERS has auctioned nearly USD 800 billion in assets through 30 separate auction events. GSL | 19

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lEndEr PrOfilE

How do you choose what to auction and what not in regards your lendable assets? CalPERS auctions everything. The auction itself is a great mechanism for price discovery and route to market allocation. It effectively exploits the inefficiencies of the lending marketplace and we use it as a tool to determine how best to optimize each lending portfolio or market. Through the auction we invite bids from both exclusive principal borrowers and agents. We use the results to make decisions as to which assets are best optimised via an exclusive, and which may be better suited to trading on a discretionary basis. With discussion still raging about transparency, what is your view as one of the biggest lenders? The demand for greater transparency and best execution in the securities lending market is continually growing. I expect this trend to continue in the coming years as asset managers look to optimise an objective, regulatory-friendly and auditable securities lending program. What are your views on the SEC’s initiative in regards to “naked” short selling? In general I believe that short selling helps create pricing efficiency and liquidity in the market. Although the order has expired, if it were to be implemented again it would benefit the overall securities lending market because it would increase the demand to borrower securities to comply with the new rule. In particular, it makes exclusive arrangements more attractive because of the ease in demonstrating access to the particular positions. Describe how the industry has been affected by the credit crunch over the past twelve-months and what has the industry done to respond? While on loan balances have decreased, beneficial owners accepting cash as collateral should be enjoying the benefit of record earnings due to increased spreads on both intrinsic and reinvestment sides of their program.

The credit crunch has raised awareness among industry participants and in particular the cash collateral reinvestment portion of a lending program has become more of a focal point. The need for diligent and sophisticated counterparty risk management has also increased given the current market environment and we believe many agents are enhancing their analytics to better understand and monitor perceived credit risks. All of this has caused beneficial owners, to place an increased emphasis on risk management across both the lending and cash collateral reinvestment portions of their programs. We want to know where returns are being generated and what risks are taken to achieve them. I think these types of questions have helped educate the entire industry which in the end is a good thing.

How do you measure against your peers’ securities lending programs? While we actively monitor our securities lending performance and are mindful of benchmark returns, we understand each plan is unique. Given CalPERS characteristics, the auction platform was most beneficial in determining the most efficient route to market. It works for us and have been pleased with our earnings since moving to this platform. How do you manage your risk/return profile? Comprehensive reporting is key for us. CalPERS keeps a balance between managing risk and returns in mind when making investment decisions. To that extent, we have worked with our agents to build several forms of daily and weekly reports. These reports enable us to make continued adjustments to our program and keep our risk/reward profile in balance. The reports are designed to address the risks inherent in any securities lending program including: counterparty, operational, reinvestment, and legal/contractual. Our fiduciary responsibilities are balanced between enhancing total return through securities lending fee revenue and by

protecting CalPERS’ interest as a shareholder through corporate governance. CalPERS promotes a highly collaborative effort between our Corporate Governance and securities Lending units. The guidelines set by the Corporate Governance group are supported by strong operational procedures and we believe that we lead the industry regarding best practices for securities lending and corporate governance. With all the new technology platforms and trading venues over the last five years from ICAP iSec to LendEX and Quadriserv, where do you see the market heading with regards to electronic lending platforms? The securities lending industry has come a long way from negotiating rates over the phone. There has been a tremendous increase in the emergence of electronic trading platforms in the last couple of years. These platforms have certainly created significant efficiencies and increased the level of automation for many participants in the securities lending marketplace. There is still significant room in the market for further automation and technological advancements for operational processing and trading. Given the increased focus on best execution and transparency, I expect that we’ll see a more rapid progression towards screen based trading and more efficient post trade processing in the years to come. If you could change one thing in the world of securities lending what would it be? Proxy tracking. Beneficial owners should be able to retain their right to vote proxies while securities are out on loan. For instance, if DTC could extend the mechanism for income tracking to cover proxies it would facilitate an easier balance between corporate governance and securities lending.

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COuntry PrOfilEs

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

A

merica is a large place, and in several arenas this size is reflected. The American consumer sets the barometer for the world economy and New York-based companies still dominate the financial services sector. As well as having the largest equities market and the largest bond market, the US securities lending infrastructure remains heftier and more developed than any other. Therefore any trends and developments in the US market are watched closely by the rest of the world especially during the current climate of change. The continuing wake of the credit crisis has seen change happen in many areas. Hedge funds, pension funds, banks, prime brokers, regulators and others are all frantically reassessing and re-evaluating their practices. Meanwhile, the securities lending sector, with its ability to inject liquidity and boost price discovery has cemented its vital role in the financial tapestry. The credit crunch has actually highlighted the benefits of sec lending and both lenders and beneficial owners are seeing record earnings as a result of widening of spreads. Volumes have also been more or less maintained throughout the volatility. Elizabeth (Missy) Seidel, senior vice president and head of global relationship management at Brown Brothers Harriman, says: “With recent credit events there have been challenges for all market participants, and securities lending has been able to provide some stability in the capital markets via liquidity.” Many of those in the industry see the Federal Reserve’s decision to create its own securities lending facility as part of its emergency lending programme as a vote of confidence in the function of securities lending. Under the Term Securities Lending Facility (TSLF), the Federal Reserve has GSL | 21

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COuntry PrOfilEs promised to lend up to USD200 billion of Treasury securities to various primary dealers. Initially the term for these was overnight, but this was recently extended to a term of 28 days with the option for further extension. When announcing the expansion of the programme, the Fed stated: “The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.” The fact that the Federal Reserve has extended this facility, alongside its Primary Dealer Credit Facility rather than just cutting rates is of course evidence of how seriously the Federal Reserve regards the current volatility and lack of liquidity in the market. Of course the practice of securities lending overall is also seeing some gradual change, some of which is the result of the crunch, some of which is not. As in most sectors, there is a renewed emphasis on both transparency and risk management. Beneficial owners now wish to be more informed of what is occurring in the lending and cash collateral reinvestment side of their programmes. While this trend has been snowballing for the last few years, the events of the credit crunch have exacerbated it. Seidel adds wryly: “The credit crunch has been an enlightening time for many clients in lending. “The returns have been exceptional, but clients have also been drawn to potential risks within their programs, particularly on the reinvestment of cash. The concept of risk adjusted returns is becoming more prevalent again.” The result of this is that agent lenders are under more pressure than ever before to put in good performances. This is a sea change from the early days of the industry. Ten years ago securities lending was more of a back office function where, on the whole, if lending agents were making enough to pay custody fees then clients were satisfied. Obviously today the function of securities lending has evolved, moving closer to the front office and becoming an alpha-generating tool. Chris Jaynes, of eSecLending, says: “Beneficial owners are paying more attention to their programme, trying to understand the returns they’re generating and the risk they’re taking to generate those returns. They are taking a greater interest in revealing the performance of their agents and determining

if they have allocated their portfolio in the best way among different agents and routes to market. “The more knowledgeable the beneficial owner base is and the more the beneficial owner is paying attention and challenging agents and asking them questions about performance and risk, the better. Ultimately the more this happens, the better the lenders and lending agents will get and the more the beneficial owners will receive.” The lending agents who are slow to latch onto this trend will certainly suffer for it. Northern Trust’s deputy head of global securities lending, Jeff Benner, says: “There’s definitely been a trend for transparency. We’re active in communicating with our clients and independent data providers to see how well our clients have performed versus benchmarks, whether it be the RMA or others.” Seidel says that clients are now choosing lending agents using the same criteria as they would an investment manager. Agents must now be able to tailor programmes to specific clients’ needs. Increased transparency is “the future for lending.” Hand in hand with transparency is a trend towards greater examination of risk management across the entire spectrum of securities lending. Awareness of counterparty risk is ever more important and risk relative to return is now a major concern of clients. As the complexity of lending has increased, lenders have an increased responsibility to provide risk management. Another symptom of the evolution of securities lending is the desire for the unbundling of services, which is something that has been happening in the US for some time and is also being replicated worldwide. Increasingly beneficial owners are utilising different routes to market and tending to unbundle from custody. Some do not regard this as necessarily beneficial and believe that the credit crunch may have slowed the trend. JP Morgan’s head of business development for securities lending, Bill Smith, says: “I think the jury is still out on the long-term value seen in diversifying your lenders. But I think that has been slowed significantly as we’ve gone through this turmoil, because this has been a period when knowing that your agent has USD125 billion worth of shareholders equity capital to back up its indemnities

and underscore the strength of its ability to deliver products and invest in its business has suddenly come back in vogue and is seen to be a valuable attribute. “Prior to the credit crunch that may have been undervalued a bit as we saw more boutique providers enter the market who may have been single strategy or single security type players. “I think the pendulum has swung back now to look for a big fortress-like provider and gain the comfort from that, that change will be here for a while now.” Whether this is true is debatable. While many clients may indeed appreciate the security of a big player, increasingly some will prefer specialists to optimise their lending portfolio. A further trend, that has risen partly out of the need for more risk management, but which has other catalysts as well, is a preference towards non-cash collateral among borrowers. Historically the US securities lending industry has always preferred to take US dollars as collateral. This is in contrast to Europe where non-cash collateral has historically been preferred. However currently both regions are shifting more towards each other’s ethos, with the US leaning towards non-cash collateral and Europe becoming more familiar with cash collateral. Many lenders and agent lenders in the US have found that accepting non-cash collateral can cut the risk of clients’ overall collateral exposure. Northern Trust’s Benner says: “When we look at the assets and liabilities, the assets being the collateral and the liabilities being the loans, the correlation of the two is very positive. If one goes up the other one goes up with it, or if one goes down the other one goes down with it. “Taking that as part of the mix of our collateral we are trying to optimise the collateral we are taking so that we actually reduce our clients’ VaR.” In the last year, up until 29 August the amount of US equities being lent against non-cash collateral has risen by almost 29%, according to numbers from Data Explorers. The amount of US equities being lent against cash collateral on the other hand has risen by barely two per cent. The recent preponderance towards using non-cash, including equities and debt, has

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Country Profiles

Elizabeth Seidel - senior vice president and head of global relationship management, Brown Brothers Harriman

“We’re going to see some activity there [130/30]. It’s been more of a challenging market for these funds to take off lately. But as these funds do expand, we will likely see some increased opportunities in the lending market with the introduction of the short side of that equation.”

been caused by clients having qualms about reinvesting their cash collateral in the present climate. Additionally, non-cash collateral is attractive to clients who are inclined to us their long inventory as collateral, which means that they don’t have to convert into cash. Overall, the sec lending industry in the US and elsewhere is set to expand. The desire to borrow securities is growing, though for now supply still far outstrips demand. Lenders and agents are looking at the much-trumpeted 130/30 strategy to be a major driver of growth in the future. However, in 2008, despite all the hype, 130/30 funds did not grow significantly. But many are predicting that from next year we will see many former long only institutional asset managers use the strategy. This is good news for lending agents, as it will make sense for asset managers to use those agents they work with to lend securities to help them borrow in order to establish long short portfolios. Consequently many agents are now busily shaping their products to comply with such strategies. Seidel predicts of 130/30: “We’re going to see some activity there [130/30]. It’s been more of a challenging market for these funds to take off lately. But as these funds do expand, we will likely see some increased opportunities in the lending market with the introduction of the short side of that equation.” Obviously any strategy that involves hedging strategy can only be a boost to securities lending. Thus the expanding uptake in quantitative strategies and synthetic vehicles will also have an effect. Northern Trust’s Benner says: “Long run, we’re very bullish on the long-short strategies to continue. I think 130/30 took off in 2008, but I think they’re going to come back as the quantitative approach gets better performance. “We’re expecting 130/30 to grow, we’re building our 130/30 capabilities in being able to service those clients from the custodial and fund administration standpoint. We are definitely looking at 130/30 as an opportunity going into 2009 and beyond.” There is no doubt that the securities lending industry as a whole is preparing itself for growth. Once the liquidity issues in the market sort themselves out – as they must eventually – firms’ balance sheets increase, cost of funds decrease and the current de-leveraging ends,

the industry will certainly see this substantial growth. But one issue that still needs to be ironed out is the standardisation of messaging between the supply and demand sides of the business. Currently there are several platforms available for clients, and as volumes rise, lack of standardisation could become an obstacle. Currently the EquiLend platform is the most widely used in the market. Created in 2000 the platform has 11 large firms behind it, including Barclays, Credit Suisse, Goldman Sachs, State Street, Northern Trust and Morgan Stanley. It touts itself as being a full solution, encompassing front, middle and back office functions. Seidel says: “I do think that there is a real need for more standardisation, particularly as supply and complexities increase in the market. With more volume, there is a real need for increasing efficiencies with counterparties. We’ve seen some great progress with the likes of an EquiLend, and that’s a real need going forward to ensure that we create efficiencies and standardisation between the supply and demand side.” The issue of a standardised platform may be solved in the near or more likely, the distant, future. But what is more important is that the securities lending industry has come through the credit crunch not only intact, but positively vindicated as a vital component of the wider financial machine. Now the industry is gearing up to process the higher volumes that are almost certainly over the horizon. And the middle-men are poised to reap the fees that will come with that volume. Let the lending begin and the good times roll.

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MarkWeeksGSL203x267.pdf

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Country Profiles US equities lent: non cash vs cash 560,000.00

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What are the largest challenges - fiscally, market or otherwise - facing the securities lending industry? In my experience, the industry operates quite smoothly. The biggest problems seem to crop up in relation to changes in regulation (i.e. dealing with the Securities Exchange Commission (SEC) emergency order this summer) and the relative lack of documentation and formal checks and balances covering intermediate lending firms in the lending chain. My experience is that the market operates informally based in large part on relationships/ contacts.

Penson’s senior vice president Andrew Koslow gives his views on the industry

Are more clients asking to unbundle the lending function from custody? Not in my experience.

Does stock lending add liquidity and transparency in the wake of the credit crunch? Based on the apparent importance to prime brokers with whom our clients are negotiating documentation of rehypothecation rights for derivatives collateral and of being able to access not only margined securities but also fully-paid securities, it seems as though the lending market is robust and a very important source of revenue for broker-dealers - which would imply that the practice is adding liquidity to the market. My experience is that prime brokers are even more focused on this revenue source postcredit crunch (i.e., summer of 2007). I don’t know of ways in which stock lending adds transparency.

Is there a need for standardisation in securities lending platforms? Is it a practical possibility? Based on my experience there is no such a need. The market seems to operate quite smoothly. I do think that it would be possible to standardise, however given that the structure, in its current form, seems to work smoothly, I don’t know why it would be worthwhile to do so. I am not aware of many failures or problems in the transactions.

by the big prime brokers - all of whom are still operating. The situations developing with Lehman and Merrill should not change things much. Is the range of different kinds of collateral considered acceptable, expanding? No. If anything lenders are pulling back and requiring cash or treasuries only. The one context where I see broader collateral accepted is in the arranged short lending and global netting products used by prime brokers to extend more credit to customers. Even there, dealers have tightened up collateral requirements since the credit crunch, including, for example, disallowing substitution of collateral without consent. Do you expect the uptake of the 130/30 strategy to increase stock lending? Yes - if the “arranged short” product is considered to be securities lending (which it should be - but it could also be distinguished since the lending transaction is inextricably linked to the long side, managed portfolio securing the stock loan).

What effect is increasing consolidation having on the industry? I don’t have the impression that the biggest consolidation to affect big players in the industry (ie the Bear Stearns-JP Morgan merger) has affected the industry much at all. My impression is that the industry is dominated

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Bring it on Changes in regulation and tax laws have allowed Canada’s securities lending market to grow significantly, writes Catherine Kemp

The Canadian securities lending and borrowing market has grown considerably over the last seven years, with approximately USD1.1 trillion dollars available to lend, according to Performance Explorer. Four regulatory and tax changes opened up the market to new lending opportunities. In 2001 mutual funds were given the right to lend securities; in 2005 the 30% cap on investing on foreign markets was lifted; and in 2007 the prescribed market rule was decoupled from securities lending and the cross boarding withholding tax was removed. This has introduced cash collateral into the market, increased volumes of available lendable securities - both Canadian and foreign origin - and increased lending opportunities in other markets. However, the opening up of the market has been a slow and discursive process, and market participants have been cautious about expansion. In 2001, a movement by Canadian lending institutions working with mutual funds in lobbying regulators prompted a regulation change to allow mutual funds to lend securities.

“The regulators had a clear view of the industry and the phenomenal track record it had had over the previous decades,” says Mark Fieldhouse, head of technical sales in the Americas at RBC Dexia. “They realised that there was no reason not to allow mutual funds to participate and that the funds were essentially hampered by not being allowed to participate.” The decision to allow mutual funds to lend securities boosted the market place as many took advantage of the additional revenue to be generated from lending assets. At the end of August 2008, 35% of securities available for loan belonged to Canadian mutual fund companies, according to Performance Explorer. This represents a pool of USD381 billion, with USD55 billion on loan, which represents a 14% utilisation rate. (The Performance Explorer universe is believed to represent around 90% of the lending activity in the market place, with all large lending agents submitting their data.) However, it took a few years for funds to have an impact. “The lending of mutual funds put well over hundreds of billions of assets into the

Canadian market place, that was a key event in 2001,” says Fieldhouse. “But it wasn’t a shotgun start. There were a few clients that came on board initially and then gradually more and more funds moved over in the last three to four years. These recent entries have really pushed growth.” This caution is characteristic of Canada’s securities lending and borrowing market. While the decision to allow mutual funds to lend is now widely considered a positive step, there were debates about the effect of allowing mutual funds to lend. James Slater, senior vice president of capital markets at CIBC Mellon says: “The vast majority of our mutual fund clients now lend their securities. Initially market participants thought that the additional supply would exert downward pressure on fees. This has not been the case. Several factors have helped to mitigate dilution of returns, including the growth demand for securities by hedge funds, and the increasing allocation to foreign markets among Canadian institutional investors.” The removal of the 30% cap on tax-assisted savings and pension plans investment in

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Canadian Securities timeline

2007 the prescribed market rule was decoupled from securities lending, which ensured that Canadian pension plans were not only able to invest in foreign markets but lend in them as well. Bill C-28 was passed in December 2007 and eliminated the withholding tax on fees or interest on cross-border loans against cash-collateral. 2005 the 30% cap on tax-assisted savings and pension plans investment in foreign markets was lifted

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

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foreign markets in 2005 has allowed pension funds to make much larger investments in foreign assets, including access to the Asian markets. “It’s becoming more important for securities lending participants in Canada to combine their local knowledge with global access as pension funds look for more supply of international stocks as well as finding value from lending out their international positions,” says Richard Mills, division director, at Macquarie Securities in North America The rule change has caused the market to become far less Canada-centred as a result, explains Fieldhouse. “It has increased the breadth of lendable securities considerably. Before this rule change, growth in the Canadian market was centred on buying and selling Canadian equities. There was really a critical mass with regards to assets available to lend, so by allowing diversification there has been an increase not only in holdings in large cap stocks in some of the more established markets.” However, market participants are cautious about expansion into these markets. “There wasn’t an immediate change,” says Slater, “people didn’t just jump into foreign markets. Pension plans and other institutional investors very carefully structure their portfolios, typically based on some form of asset liability profile that drives an investment strategy. So it took a while for plan sponsors to do their analysis. Over the last couple of years we have seen a gradual shift of assets, where clients are starting to reduce some of their Canadian equity allocations, increasing foreign bond and equity as they go into emerging markets.” Fieldhouse adds that it has taken a long time for the large institutional investors to evolve their asset allocations to take advantage of the opportunities presented by the change in regulation, but RBC Dexia has seen a gradual movement to a steady increase in the allocation to non-North American markets, with a proportion heading to emerging markets. The changing of the qualified security issue in December 2007 ensured that Canadian pension plans were not only able to invest in foreign markets but lend in them as well.

In the Tax Act the rules around securities lending before 2007 stated that for a security to receive favourable tax treatment in a securities lending transaction, it must be a qualified security - most importantly, it had to be listed on a prescribed stock exchange. This list did not include most emerging markets, which inhibited growth. Canadian agent lenders lobbied the finance department in Canada to amend the legislation and in 2007 the finance minister announced that

Lending into foreign markets is driving securities lending profits generally, because there is less supply in these markets and so it creates a high price threshold for what what people are willing to pay the prescribed market requirement was to be decoupled from the securities lending rules. This has meant that the ‘qualified securities’ that market participants are allowed to lend has been extended to include those traded on any exchange anywhere in the world. “There was a restriction in certain markets so that if you did a lending transaction it would be classified as a sale and repurchase,” says Fieldhouse, “which obviously created some restrictions on what our clients could do. The rule change has also opened up lending opportunities in emerging markets, which our Canadian clients hadn’t been exposed to before. Emerging markets are where a lot of the growth is coming from and is where a lot of the big revenue opportunities come from.” According to Fieldhouse, RBC Dexia’s clients’ returns from lending in emerging markets are much higher in comparison to their Canadian holdings. Lending into foreign markets is driving securities lending profits generally, because there is less supply in these markets and so it creates a high price

threshold for what people are willing to pay. Slater explains that while many larger pension plans and retail investors had enjoyed a greater exposure to global markets through the use of derivatives, the regulatory change has meant that these more expensive positions have been unwound and have been replaced by direct investment which has expanded the range of securities lending opportunities. “Increased global allocations has made more assets available to borrowers since these positions had previously been held in derivatives,” he says. “These additional assets have brought greater diversity in our lending pool and new opportunities to enhance returns for our clients. With more diversity comes greater capacity to satisfy our borrowers globally, and greater access to a broader pool of securities.” Terry Bourne, CEO of Penson Financial Services Canada, says they are also seeing growth in this market. “At this time we are certainly seeing an increase in volume and interest in these markets. With our firm this has impacted our trade desk more so then our lending desk. We have seen a growing interest in global lending and are working with a clearing customer today to help put this in place for their firm.” The commodities boom has also bolstered the lending market, says Slater. “Demand for resources has been on the rise and Canada is one of the richest countries in the world in terms of natural resources. This has really fuelled our capital markets by pushing up asset values and resulted in an influx of new players coming into the market. This has also meant that the Canadian dollar has done remarkably well against the US dollar, and means that pension funds and institutional investors see current market conditions as favourable for diversification out of Canada. That’s very positive for us from a securities lending perspective because of the lending opportunities this creates.” Rising commodity demand has also lead to increased attention to the Canadian equities market from internationally based funds. Mills explains that it’s becoming more common to be dealing with a European or Asian based fund that is looking for exposure to Canada. The Canadian securities GSL | 29

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Country Profiles lending market has become more focused on servicing these clients, offering these international funds local expertise and access. Bill C-28 was passed in December 2007 and eliminated the withholding tax on fees or interest on cross-border loans against cash-collateral. The rule change has meant that the Canadian market has gone from zero use of cash as collateral to an estimated 20% use of cash as collateral in a year and a half. And means that it is becoming increasingly like other securities lending markets globally, like the US where cash accounts for around 60% of collateral and in Europe, where cash collateral is increasingly being used. “The rule change has opened up additional avenues for collateralising transactions,” says Slater. “We expect this increase in business to carry on through this year, into next year, and to continue to build. It has also driven an increase in activity from global borrowers and given lenders maximum flexibility in meeting the stringent demands of borrowers. Along with an increase in tri-party collateral, the Canadian market is becoming more consistent with global trends in composition.” Canada has abroad range of government backed fixed-income securities that are widely used as collateral in transactions. There is also a trend for using equities as collateral. This combined with cash collateral capabilities makes Canada very attractive for borrowers. “Allowing for greater use of cash as collateral builds on the flexibility of clients to cover borrower requirements,” says Fieldhouse, “which makes the market that much more attractive for borrowers and ensures that securities are that much more likely to be borrowed.” Market participants consider that crossborder lending against cash collateral will continue to grow. Beneficial owners are becoming more likely to accept cash on a domestic or cross boarder basis as they begin to recognise the benefits of enhanced returns, with minimum risk, earned from reinvestment of collateral in a well managed program. However, Slater explains that growth has been hampered by the credit crunch as the broker-dealer community is less likely to collateralise loans against cash than other less expensive forms of collateral. But CIBC

Mellon anticipates cash balances to increase as greater liquidity returns. The growth of the hedge fund market has also dramatically increased demand. Canadian hedge fund managers now control over CD37 billion in assets, according to Investor Economics in Toronto. This represents only 5% of the overall retail mutual fund market - but as Slater explains, “pure hedge funds are only a part of the story”. “Increasingly long-only managers and institutional investors are driving additional demand for borrowing as they wade into alternative strategies. Canadian retail mutual funds are now permitted to hold up to 20% of the value of a fund in short-positions, with regulatory approval. In two years this hybrid segment of the market has grown from

It’s becoming more important for securities lending participants in Canada to combine their local knowledge with global access as pension funds look for more supply of international stocks as well as finding value from lending out their international positions

in the coming years.” This has allowed the demand side of the business in Canada to keep pace with the growth from mutual funds joining the lending programmes. It has also led to new global entrants to the Canadian securities lending landscape as well as an offering of more sophisticated products. “Funds are looking for their securities finance teams to provide a wide array of solutions, whether physical or synthetic” says Mills. “Firms that can offer flexibility in collateral continue to have success. Canadian equity finance desks are becoming one-stop shops leveraging their local knowledge with global access.” The changes in regulation and tax law have given the market considerable room for expansion, and greater lending opportunities will drive volumes in the market. As institutional interest in the hedge fund market grows and lenders increase their parameters, Canadian securities lending can only grow in size and become more competitive internationally.

around CAD7 billion in assets to CAD15 billion, according to Investor Economics research. “Furthermore, Canadian pension funds now hold around CAD20 billion in alternative asset classes, representing around two per cent of their overall holdings, according to CPF Investment Directory. This is a small allocation but the figure is growing as most funds above the CAD 1 billion asset threshold are beginning to allocate to these investments. In fact, some of our custody clients have stated a goal of achieving up to 20% of their assets in alternative investments

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Country Profiles

At the starting line The Czech Republic, Poland and Hungary are yet to get off the blocks when it comes to securities lending despite interest, writes Ben Roberts For out-and-out trading, the Czech Republic, Hungary and Poland are three markets growing, diversifying and deepening, with subtle differences between them and other countries. For lending and borrowing, however, all three remain “at the starting line”, according to Tomas Karban, an analyst at Wood & Company, a trading and research firm. This view is common among many active in the region, from banks such as Raiffeisen and Erste Bank that have developed networks of custodial and security services in the region, to local players such as the Czech bank CSOB, to the stock exchanges. Regulation, legal issues, supply, market awareness and infrastructural issues combine in different ways to hinder the development of a liquid economy for lending and borrowing that is at all recognisable to the rest of Europe and the US. Alexander Schleifer, head of custody at Erste Bank, says the stability of the three markets has actually prevented many market players from thoroughly examining the benefits of securities lending. He compares Central and Eastern Europe (CEE) to the BRIC (Brazil, Russia, India, China) markets, which have seen such an unprecedented boom this decade that they were encouraged “to look at this topic”. The CEE, by contrast, small but steady, is only just opening to extensive foreign trade and so “there was not much liquidity coming in to the market. If there was the same boom then they will have to deal with that – at the moment there is progress but all market players look at lending but no one is running that much money. The Czech market growing 20-40%, but now we’re seeing a downturn in the market they may be looking for alternative.” Babett Pavlics, director of Raiffeisen’s financial institutions division, thinks along similar lines. “Pension funds might avoid security lending because they think ‘oh, the markets are going this way, why should we do this?’ But Raiffeisen explains to them

that securities lending can bring even more transactions to the market,” she says. The Czech Republic, on first analysis, looks to have many of the right credentials. It has a central securities depository called UNIVYC, the chief settlement body in the country that maintains a pool of securities, including those for lending, with an increasing divergence of assets. But Karban explains that the pool is small and a capacity to lending securities “is not interesting for the lenders”. He adds that the conditions are not really favourable for mutual and pension funds; they have not discovered “the beauty of lending and borrowing, as these markets were growing fairly rapidly so the margins in borrowing and lending are so small they don’t care”. These “conditions” include a current rule that pension funds cannot lend their stock. “There are limits, for instance if they are buying the shares they cannot sell them below the purchase price. They have to keep them and sell them higher – they are not allowed to make a loss on the trade”. Further, securities can only be loaned for 30 days, according to Ivo Mestanek, spokesperson for CSOB bank in Prague. “The reason of this limitation originated from the history of the lending and borrowing system. From the very beginning of the system, the main lenders used to be funds and lending of funds’ assets had been limited by the legislation - 30 days. According to latest information from UNIVYC, there is possibility of changing this rule because UNIVYC is open to discuss changing it or cancelling it at all.” There have been stalled plans for the development of a new central depository to improve supply and encourage lending and borrowing. In the latest annual report, Helena Cacka, general director of UNIVYC, writes that the plans stopped last year “due to the non existence of evaluation of the Prague Securities Centre databases”. However, “at the end of the year we will be preparing modifications in the clearing of securities,

which were formerly intended not to be implemented until the central depository was created. This way trade clearing will become more effective for the participants”. Karban believes the creation of a new depository will be vital as the fulcrum for generating interest in lending and borrowing, a business that Wood & Company is keen to develop. “There is no one institution which would put these parties together: someone who would organise, take these stocks from the fund, convince funds this is interesting, convince politicians that they should make changes in their local legislation and bring in customers to borrow the shares,” he says. “There are clients looking to borrow the shares, but they don’t know how much it will cost, where they will borrow them, whom to ask, there is no pool for them.” He adds that it is the international custodians that hold pools of stock, and the lending agreements are essentially over the counter. Further, securities lending is subsidised by prime brokers in London, and hedge fund managers are using prime brokers in these financial centres primarily due to a lack of contacts in the local market. “You don’t need to inform the stock exchange in Prague about transactions being done in London; I don’t think that goes to the local market at all. These transactions are purely done outside the country.” The reliance on foreign brokerage outfits and with no requirement for the exchange to be informed means the Czech Republic stands outside the centre for its own potential market for securities lending. By contrast, repo transactions are a lot more common for entirely local transactions, Karban says. Ivo Mestanek at CSOB believes that a central security depository will help to improve the current weaknesses of the borrowing and lending system, including the official change of beneficial ownership according to the Czech legislation. The success of a new system, he says, depends on GSL | 31

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the shareholders’ readiness to put their shares into it. On a brighter note, he adds that the appetite to be a lender is “steadily increasing. Investors are looking for new means of increasing the profit of their assets and this relatively safe possibility can be accepted in the near future because of the cash collateral provided by the borrower and full UNIVYC guarantees.” Poland, home of the highly ambitious Warsaw Stock Exchange, is beset with legislative problems different to the Czech Republic but an equal hindrance to securities lending. There is current confusion as to whether lending securities will entail a 1% stamp duty charge for each transaction. President Lech Kaczynski is soon to sign an amendment to the Financial Act that Karban believes will clarify the matter, and says the security centres are “not of any help - they don’t care about developing new business opportunities they just follow the strict wording of the legislation”. Unlike the Czech market, a fully functional CSD ensures that all transactions, including potential short selling from foreign traders, must take place on the local market. But again, the issue is local appetite for the activity, although Karban adds that the WSE rarely rests on its laurels. “WSE is very proactive, the most aggressive in the region. It has built up a very efficient market, it is lending and bringing in international securities to the market, offering remote membership,” he says, adding that the lending will inevitably begin with blue chip companies. Hungary has opened up significantly to foreign investors. Orsolya Bozso of the Budapest Stock Exchange estimates that 80% of the listed securities on the exchange are foreign owned, the highest proportion in Europe. She adds that some of the biggest securities lenders in Hungary have foreign background and they lend securities also from their foreign funds. Hungarian lenders have been working recently to acquire international partners and customers she says, but adds that this process “requires more time to make its effect felt”. However, much of Hungary’s securities lending business exists on the basis of

private, bilateral agreements outside the central security depository, called Keler, according to Bozso. “Since 2006 pension funds are permitted to lend securities after the modification of the Pension Fund Act but against expectations it did not spurred the lending market,” she says. “Only the few biggest pension funds take advantage of securities lending as an additional revenue source, most of them are still cautious. The volume of lent securities in Hungary is closely dependent on the actual market situation and valuation levels. Lending activity slowed somewhat recently as a strong negative trend persists since July 2007, and at such low valuation levels investors are reluctant to take short positions. We expect to see acceleration of the lending market after a rise in equities valuations.”

There are clients looking to borrow the shares, but they don’t know how much it will cost, where they will borrow them, whom to ask Pavlics of Raiffeisen, who has headed a new financial institutions department since January, is wholly critical of the potential structure for securities lending in Hungary. Firstly, like Poland, there is legislative uncertainty. Pension funds are not sure if engaging in securities lending entails the portfolio manager signing each contract or the pension fund – or both. Even the authorities, she says, have no clear idea. At the moment “the pension fund must be involved in each transaction because a securities lending transaction is usually something that has to be done very fast. So we have to go to the pension fund and the portfolio manager to sign the contract and this is not easy”. Secondly, the act says the securities lending agreement must be concluded for a specific term. This means that each loan needs a starting date and the end date. However, she

continues, “if the brokers want to borrow for short selling they usually don’t know how long they need the security - sometimes one month, two month. Again, this is something the pension fund doesn’t like because in its portfolio evaluation they have to somehow indicate an end date for the transaction”. She describes the Keler system as inflexible. The possible lender must contact Keler to create a securities pool, she says, “but this is what the pension funds don’t like to do - they usually go on a transaction-by-transaction basis. So Keler’s system is not working.” Raiffeisen has developed a unique answer to the problem. The bank has plans, according to Pavlics, to reinvent itself effectively as a CSD for the region using its central ‘mother’ bank in Vienna as a kind of securities hub. The bank’s international market contacts will provide a platform for Hungarian pension and investment funds to have access to lend and borrow securities around the world. At the same time, the local contacts in the market will generate and sustain a local appetite for securities lending. Pavlics reveals that her team has already converting a number of pension funds to this line of business. “Local broker-dealers were lacking securities to borrow [if they are] lacking transition for the compulsory settlement or for short selling. So they would call an international bank – such as JPMorgan – because they could not find a partner in Hungary. Or they found a partner in Hungary but these only one or two transactions. There is a need for such an institution, such as Raiffeisen Hungary, who could actually start this teaching/education process and we’ve started to get the possible borrowers on board and tried to establish a system whereby these lender could lend.” The strength of the plan, she explains, is to maintain a ready supply of borrowers and lenders. Hungary, she supposes, could be seen as the bank’s “pilot”. It could be argued that Raiffeisen itself is a pilot for banks operating as a CSD in a market still developing sufficient resources for securities lending. For Ronald Nemec, head of securities lending at Erste Bank, the question for each market remains: is securities lending

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CZECH MATE: the Prague stock exchange has seen a tempestuous year 1955 1905 1855 1805 1755 1705 1655 1605 1555 1505 1455 1405 1355

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needed? “I would say there are hedge funds looking for securities lending, but maybe this is a question of which new products are available.” He says the launch of certificates such as oil and gold by Erste Bank in February newly listed on the Budapest Stock Exchange is an example of the more exotic assets available. He adds that equity lending especially gives markets additional liquidity. Tomas Karban believes the Czech Republic, Poland and Hungary have great potential as competitive arenas for lending. Foreign business will bolster the market, he believes, and local players will have to work hard to compete using their indigenous knowledge. But a sound framework needs to be in place first. “I’m very much interested in borrowing and lending because I believe in a bright future for it. But we are struggling to bring about legislative changes.”

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POLES AXED: the Warsaw stock exchange has seen a similar decline over a year 4250 4000 3750 3500 3250 3000 2750 2500 2250 07-09

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HUNGARIAN CONTRARIANS: the Budapest stock exchange has been steady 30,000.00 25,000.00 20,000.00 Close

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A Prime target for scrutiny Simon Lee, senior vice president, business development, EMEA at eSecLending, analyses the effect of the Opes Prime fall out on transparency in securities lending in Australia.

Following the collapse of the Australian stockbroker Opes Prime earlier this year, May saw the conclusion of the Beconwood versus ANZ Banking Group Australian court case. Judge Finkelstein confirmed the effectiveness of transfer of title to securities lent under industry standard securities lending agreements. What began as a story of a victim of a turbulent market quickly became an extensively reported examination of the securities lending industry in Australia, with a specific focus on the form of legal agreement that all securities lending transactions worldwide are conducted. The Opes Prime business unravelled at the beginning of the year leaving many private investors facing substantial losses as ANZ sold off borrowed stock positions to cover cash shortfalls realised through the failure of Opes Prime’s margin lending business. At the heart of matter was the form of securities lending

agreement that Opes Prime was using to lend client assets to ANZ. This was a version of the industry standard Australian Master Securities Lending Agreements (‘AMSLA’), itself an adaptation of the Master Securities Lending Agreement (‘MSLA’) used globally. While the activities undertaken by Opes Prime bore only the briefest resemblance to the workings of the global securities lending industry, some press reaction ensured that the securities lending market in Australia was put under the spotlight like never before. The situation in Australia quickly drew the attention of securities lending practitioners worldwide. The International Securities Lending Association noted “the concept of title transfer is fundamental to securities lending and repo markets, as it is critical to the ability of the receiver of the securities to give good title to a third party to whom it may transfer those securities. This ruling will give further certainty to market participants that securities loans governed by agreements such as the Global Master Securities Lending Agreement are legally robust.” Ultimately, securities lending in Australia has continued in much the same way as it had before the Opes Prime story broke without suffering the widespread interruptions that had been predicted. That said, lenders in Australia were compelled to place their lending programs under great scrutiny, satisfying themselves as to the prudent management of their programs, the amount of transparency being received, the adequacy of their risk management, and whether or not the financial rewards were commensurate with all these factors. Through this process,

it has become clearer now that securities lending should be treated as an investment management function. As such, lenders should be viewing their choice of provider in the same manner, and making decisions based on the same quantifiable factors, often summed up as ‘best execution’. Currently, Australian regulators are focused on a disclosure regime that satisfies interest in securities lending and short selling. It remains to be seen what form this takes and whether or not the increased disclosure solely focuses on short selling, or is expanded to take in securities lending activities. Whatever the outcome, it is inevitable that the level of transparency in the Australian market will increase, which the majority of market participants would agree is a good thing for the securities lending industry as a whole.

The views expressed are the views of the author only through the period ended 31 August 2008 and are subject to change based on market and other conditions. The information we provide does not constitute securities lending advice and it should not be relied on as such

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inDustry insight

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

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Industry InsIght

a broadly valuable tool to control against certain uses of it.” When it comes to discussion of the big issues affecting the market, the answers sound reassuringly familiar. The big players, like Citi, would like to see a harmonisation of, or even better the removal of, any withholding taxes on repo transactions. The provision of financing, and the increased liquidity afforded by repo markets should warrant a simplification, or ideally an exemption, of incremental withholding taxes on repo transactions, runs the argument. A complicated WHT regime will likely limit or eliminate the use of repo, resulting in significant inefficiency and economic loss, while the incremental tax revenue on repo transactions is likely to be small in comparison. They would also like to see a strong legal framework, which includes: the agreement by all participants to use standardised documentation; acceptance within the local legal framework of the need to allow a true title transfer of repo collateral, and the ability to use that collateral as needed and as specified within the repo documentation; cross –border participation in repo markets. Also on the wish list is a level-playing field for participation by foreign institutions in the local repo markets. Major trends identified by undertaking a straw pool of market participants include an increasing awareness of repo as a useful funding tool for liquidity management, and the use of repo by regional financial institutions using repo as part of their funding toolkit. Liquidity is singled out as a major driving force, both for funding and trading liquidity. “Regulators are emphasising more strongly the funding diversity of financial institutions,” says Ed Gildar. “At the same time, everyone is increasingly aware of the value of trading liquidity to the overall stability of financial markets. Repo in Asia is a work in progress, moving in the right direction, at a reasonable pace, but with a substantial amount of work still left to do.” Comparing the landscape and market with Europe can be an interesting exercise, especially as the latest International Capital

Markets Association survey on repo in Europe hit the streets during the preparation of this article. Asia, some people argue, has a better understanding of the risks and benefits of repo markets compared to Europe when it was at a similar stage in its development. Others recognise the need for growth in Asia because of the experience they have had in Europe. However, Europe was at a similar stage to Asia nearly 20 years ago, and there remains a significant amount of work to do, to get the market to an as equally welldeveloped position as Europe is today. “It is a multicurrency, multi-jurisdictional, multi-cultural region with different rules for onshore and offshore participants,” adds Alex Blanchard, head of Asian Money Markets at Goldman Sachs in Tokyo. And in looking forward to the expansion of business in nonJapan Asia as well as further growth in Japan itself, he adds: “That won’t change in the foreseeable future, but we think there is a business case in non-Japan Asia and we will be looking to build repo in the region, even though it won’t be easy due to the difficulty in generating economies of scale.” So, what happens next? Again, the answer is very familiar, and has been said of many other products and services over the decades: education, dialogue and support. Continued education of the market participants, continued dialogue with the market regulators, and continued support for the evolution of the repo markets. What needs to be done to take the market forward? “Promoting a deeper understanding that the more liquidity sources an institution has, the better they are positioned to withstand market turmoil and disruption,” says Ed Gildar. “Luckily, Asia was not the centre of the current market disruption, so it has avoided any major impact. The authorities will certainly learn from the troubles of other financial institutions, and should continue to support the development of repo markets to allow a stronger, more diversified funding structure for Asian institutions.” Alex Blanchard adds: “We need to see domestic institutions recognise the opportunities that repo presents, or at

least recognise the concept. And increased international participation is needed to grow it. We are here for the longer term and will be glad to work with local institutions and regulators so that we can all take advantage of the huge opportunities that I believe exist here. No market will become a major financial centre unless it has liquid equity and bond markets, and you need a liquid repo market for the latter; people won’t buy government bonds unless they can fund them, and you need to be able to fund in order to invest. We believe that in three to four years Korea, China and India could have liquid, actively traded bond markets, with regular corporate as well as government issuance. Once you have a liquid market, people can trade in and out of positions, and price discovery becomes easier. Everyone benefits. We build our franchise, governments can sell their bonds to a wider range of buyers, and local taxpayers benefit as the government debt burden reduces because the interest rates it must pay drop in response to the greater demand. There will be some cynicism given the difficulties that the more developed economies have found themselves in lately, but there couldn’t be a better time to promote liquidty. Without a liquid funding market in the US, things could have been very much worse. If anything, the repo story is even more compelling today than it was a year ago.” In the meantime, at the risk of overgeneralising, the appetite for risk, the eagerness to take a bit of a gamble, is notoriously greater in Asia than in some other parts of the world. It is safe to say that compared to elsewhere, more market participants are comfortable taking moderate economic risks within a near-term time horizon. “However, there is little appetite for taking any tax or regulatory risks, and also a lower level of appetite for economic risks beyond a certain time horizon, or beyond a certain value,” adds Ed Gildar. That can affect the market by slowing down the development of new markets or other innovation, because most innovation requires development in the absence of precise regulation, with the regulation coming later. A resistance to taking regulatory risks when considering new products or uses

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Industry InsIght

of products, will inevitably lead to fewer, or at least slower, incremental innovations. There are, however, two sides to that debate, as not all innovation is necessarily proven to be useful. Spreads have increased in Asia in line with the overall tightening of credit in the last 12-18 months, comments Ed Gildar; profitability follows spreads in developed markets. “However, the local markets for repo are not developed to the stage where we are focusing on incremental profit growth, but more about development of a robust The perception that repo itself is problematic has receded completely, contends Ed Gildar. “The regulators have moved well beyond that and are focused on maximising the value of repo, while ensuring a framework for controlling against any excessive or unwanted effects of its use. I think during and immediately following the Asian Crisis 10 years ago, there was a suspicion of leveraged access to markets, and short-selling which was extended to include repo financing, since repo financing can be used in these ways. In contrast to equity markets, where there is more acceptance of short-selling, and the impact is on a single stock, fixed-income markets impact the entire

macroeconomic framework of a country from its currency to its fiscal position. Rightly so, governments are concerned about the impact from trading activities on more serious matters of fiscal budgets and economic growth. However by working through the issues, and identifying the value of trading activities and funding diversity, and more precisely targeting the regulations to restrict excessive behaviors, there is an increased understanding of the value of repo as a liquidity tool.”

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

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Analyse Asia with Dominick Falco Dominick Falco, BNY Mellon’s managing director, broker-dealer services in Asia, who carves out a living selling collateral management and valuation services to potential users, describes himself as a fox among the chickens, referring to his own previous life as a user at Morgan Stanley and the late, lamented NatWest Markets. “The fashion for more aggressive collateral management in Asia has taken off completely,” he comments. “Historically, the region never had to pay too much attention to it, because the market was relatively small. Now they want to get a similar level of efficiency as you will see in the US and Europe; they want to grow repo and other collateral transactions quickly, because of the cost of cash. Demand is being pushed by assets on the balance sheet, and pulled by the desire to have new, even unique, investors. The primary issue is one of education, explaining to potential investors why they should move into collateralised transactions rather than non-collateralised, something that most people would regard as a ‘no-brainer’. But when some people look at repo, instead of thinking in very simple terms – you are lending, do you want collateral or not? – their view is fixated on the differences between repo and other forms of financing. They are like deer caught in the headlights; they simply don’t understand that a new level of comfort is being offered to them. It’s not that they are suspicious, although I applaud healthy scepticism of anything of which you’re uncertain, it is just that more education is needed.” “By contrast, dealers understand that if they are putting out collateral against their own borrowing then it is better for them and their liquidity ratios (the ratio of secured borrowings to unsecured borrowings). The higher the percentage of your borrowings are secured, the better your liquidity ratio. With most dealers, to the extent that you can repo, you can borrow cheaper than something that is not repo’d; if you can use something to generate cash, it becomes self-funding. The discipline of working in secured financing environment should make it beneficial from a cost/risk standpoint.” He says there are two main way to educate potential users. One is to meeting potential customers on a one-to-one basis. The other is to hold introductory seminars, and to participate in industry seminars. “The tide is turning,” he says, reaching for another metaphor to 38 | GSL encapsulate the trend. “But like anything, it takes time.“ GSL 16-35 BR to DC.indd 38

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Industry InsIght

Three way street A flexible collateral profile has become a key selling point for those in the middle of tri-party deals, writes Anthony Harrington

The credit crunch has sharpened the way organisations of all kinds approach risk management and their use of collateral. When liquidity is tight, there is considerable pressure on assets, and both borrowers and lenders look to maximise the potential worth of their portfolios’ contents. This has put collateral management very much centre stage. This is good news for the tri-party agents and just about anyone else in the collateral management game. Mark Higgins, head of sales and marketing and with responsibility for business development EMEA at BNY Mellon, has over 10 years’ experience in collateral. “Our traditional product at Bank of New York was tri-party repo, but an expanding part of our business is now the provision of outsourcing services for bi-lateral parties,” he says.

In 2006, BNY Mellon started looking at providing services to derivatives deals. “Here we become the outsourcing receiving centre making margin calls on behalf of our clients, who are typically buy-side players,” he says. When the bank’s systems and capabilities handle the collateral management, the buy-side is able to move from being reactive to pro-active. “We can help them with independent valuations of the swaps and collateral. This means that if you are a small player, you can operate on an equal footing with a player who has 4,000 agreements.” When a pension fund or an investment fund enters into a securities loan or an interest rate swap with a bank or other institution, the trade creates exposures that need to be margined. This is the kind of service that BNY Mellon is ideally placed

to provide, particularly with respect to equities, since it can measure and generate actions on that exposure. “Some 80% of the world’s collateral in the derivatives space is cash, and if there is a margin call of a certain percentage per million, that will generally be a cash call; or if it is coverable by securities, they will be sovereign securities. We can make calls on behalf of our client against the dealer. We agree the numbers, provide the custody if necessary and any clearing that is required around the collateral,” he explains. In the current climate, an agent is particularly suited to these transactions for those receiving securities as collateral wanting to take advantage of rehypothecation (the assignment of the securities to the lender). They are going to want to onward lend the securities and generate payment in return. However, the bi-lateral world is generally a 39 | GSL

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Industry InsIght simpler affair for an agent to manage, with one line of cash being matched to one line of securities. “We see a pool of assets which the agent lender wants to lend out at a fee,” says Higgins. “So institution A will lend a dealer a range of securities that the dealer wants and will take collateral in return that will be either equities or more bonds. The dealer will provide a slight excess of collateral over the loan. Margins and margin calls have become a very critical area, and there are lots of very busy people making and receiving margin calls in the derivatives space right now because of market volatility. Dealer downgrades, too, will result in additional margin calls, all of which needs to be managed. That creates real service opportunities for us.” Twenty years ago, trading was a very gentlemanly activity and margins were not necessarily adhered to, he explains. But today regulation and risk mitigation are the watchwords and “the mechanics of collateral might not be that different, but the controls around collateral have tightened very significantly”. Christopher Poikonen, managing director and global head of trading at eSecLending, the independent third party securities lending manager, says there is a very strong market for beneficial owners that have a flexible collateral profile. “Collateral flexibility has become increasingly important and the most successful beneficial owners will be those who can accept a broader range of collateral options, regardless of their jurisdiction,” he says. “The recent market events have heightened the demand for lenders to increase their collateral flexibility because borrowers who are looking to manage their balance sheets more proactively will offer premiums to those clients who can accommodate different collateral types including US dollar cash, Euro cash and non-cash collateral.” However, cash collateral in particular requires careful management to ensure both sufficient liquidity and also prudent investments and it is an area where a specialist service provider like eSecLending, can add significant value. “Cash collateral is a much larger percentage of all trades in the US than it is in Europe, where around 70% of

lenders currently accept non-cash collateral only. But where lenders are prepared to accept various forms of cash and non cash collateral with proper margining, they are best positioned to capitalise on the increased returns that the market is offering.” “The credit spreads have been enormous as a result of the crunch, so lenders taking cash collateral and investing are making above average returns,” says Poikonen. It should be done in a prudent fashion, with a sound, conservative investment programme behind it. eSecLending has a team of people who are dedicated solely to risk management as a value added service to the client. “One of the paradoxes of this market is that although beneficial owners, broker dealers, and agents are strained more than ever before, they have the opportunity to realise record earnings from their securities lending activities and collateral management – provided that these activities are prudently managed,” he comments. Olivier Grimonpont, director and head of collateral services at Euroclear, says due to the number of different transactions that require exposure management there is scope for Euroclear to expand its tri-party support activities beyond tri-party repo. For example, when two counterparties to a securities lending transaction have agreed that they want an agent involved to manage the collateral passing between them “we then take the rules and agreements that constitute the fundamentals of the bi-lateral transaction and ensure that all the collateral movements fulfil the rules set by the counterparties. Our role in this is completely impartial and neutral to both counterparties,” he says. Often Euroclear will also be acting as a custodian for one or both parties, so it will have a view of their existing portfolios. This enables Euroclear to automate a huge amount of the back office functions involved in managing the collateral in a bi-lateral arrangement. “What is key here is that there are ways of capitalising on the use of a single pool of collateral to manage exposures against a range of different transaction types beyond repo,” he comments. This is what makes using an agent so effective. They bring their tremendous overview of the collateral pool to the table, along with automated procedures that make light work

of swapping out part of the collateral that a counterparty might want to trade. The system will automatically move a counterbalancing package of securities into the collateral taker’s account that fulfils the terms of the collateral agreement specified in the bi-lateral contract as a substitute for the securities removed for trading and settlement purposes. “The important fact is that neither counterparty needs to contact us to make this arrangement. Provided there is a sufficient volume of securities in the collateral giver’s portfolio to do the substitution, the system will automatically detect and release the securities the counterparty wants to sell, and move just the right type and amount of securities from this counterparty’s portfolio into the collateral taker’s account,” he says. In the unlikely event that the collateral giver did not have sufficient securities in its portfolio to cover the substitution, the system would automatically flag this as a problem, inform the client and would not release the security used as collateral. “At this point, we would be phoning the collateral giver to tell them that they need to bring new eligible securities into their account if they want to press ahead and trade securities already used as collateral,” he comments. It is key here that when securities need to be substituted, the collateral taker’s exposure is never unsecured. Similarly, Euroclear can automatically enable the counterparty receiving securities as collateral to use them in turn to collateralise an exposure they might have with another counterparty. “These securities could be used to cover a securities lending, derivatives, secured loan transaction or any other transaction requiring collateral as agreed between the two parties,” he comments. This is known as rehypothecation, or the re-use feature of triparty collateral management. “It is very important in the derivatives world where counterparties are accustomed to using cash to secure exposures. For these counterparties to use securities instead of cash, the rehypothecation feature was a prerequisite. Typically, you might have an open derivatives position with one dealer and a reverse position with another dealer. Here you might have collateral movements

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Industry InsIght

simultaneously. These kinds of complexities, once again, are best handled by a specialist collateral management agent, unless the organisation concerned has built up a very substantial collateral management capability in-house.” The demand for rehypothecation has picked up among agent lenders. “They sit between the two counter-parties and act on behalf of the beneficial owner of the collateral, and interface with the borrower. They can use a triparty agent to administer the collateral movements when lending their client’s securities to a borrower, receive the collateral and ultimately move the collateral back to the beneficial owner,” he notes. Grimonpont believes holding all a client’s assets and treating them as a single pool of collateral to be used across all exposure types is a significant benefit for clients using a triparty collateral management agent. Grimonpont also notes that as a result of Basel II regulations, intra-family collateralisation is now a growing business. If, say, the asset management arm of an institution is doing a transaction with its banking arm, Basel II says that they need to collateralise the transaction even though it is all under the same roof. Collateral requirements for longer term secured loan transactions are also growing in importance where, in many instances, the transaction will be open ended and the composition of the loan might change on a daily basis. The tri-party agent will manage the collateral, pulling in securities from the collateral giver’s total portfolio in accordance with the rules set out between the collateral giver and the collateral taker. The alternative to going to an agent is to build a full-on collateral management capability in-house, fully supported by the appropriate IT systems. This is a very big deal indeed, says David Little, head of securities finance at the specialist IT consultancy Rule Financial. Rule is seeing a lot of interest in

collateral management systems from Tier One investment banks and hedge funds. Little points out that many of the traditional IT systems in the dealing space already have some kind of collateral management capability or support function. “Trading system software providers such as Global One, Martini, Anvil and 4-Sight all offer some kind of collateral

Collateral management agents are in a good position to help their clients achieve this global view, and Little reckons that Rule Financial’s operation is well-placed to build the necessary systems interfaces to let the banks take maximum advantage of the services offered by tri-party and bi-lateral agent collateral managers.

“One of the paradoxes of this market is that although beneficial owners, broker dealers, and agents are strained more than ever before, they have the opportunity to realise record earnings from their securities lending activities and collateral management – provided that these activities are prudently managed,” Christopher Poikonen, eSecLending management support, and there are also the specialist collateral management systems providers. Some of the back office systems such as Midas and Wallstreet also have some capability, but until now there’s been no system a Tier One bank could buy that does everything today’s collateral manager requires,” he says. Little says in-house collateral management has historically been very silo based, with separate collateral management desks for fixed income, equity securities and derivatives, often with separate systems and teams providing the management. “The challenge organisations face is to get an accurate global view of their entire collateral risk exposure across all legal entities and all asset classes, with the ability to cover all the business process requirements,” Little adds. These requirements would include trading capabilities, settlement capabilities, swaps and rehypothecation.

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Industry InsIght

Post-crunch trends in collateral management An industry focus on collateral has produced new outlooks regarding vendor packages, risk management and transparency, says David Little, head of Securities Finance, Rule Financial. The credit crunch has cut across a number of emerging trends in collateral management. Some of these will continue once the global financial services sector finally emerges from the shadows, but others will probably not - or not in their current form. Speculation is rife on the new developments emerging in the post-crunch world. When the crunch started to bite in August 2007, collateral management became a more integral and high-profile element of both risk management and corporate governance. Looking back over the past decade, it is clear that the supporting IT infrastructure for securities finance has moved from favouring in-house bespoke systems to vendor packages. This move has been driven largely by cost pressures as organisations begin to appreciate the high total cost of ownership associated with bespoke systems. Confronted by a more agile and dynamic environment, “hard-coded” legacy bespoke systems prove themselves to be anything but responsive and costly to maintain, let alone alter. Vendor packages provide the opportunity to offload continuing development work to the supplier and to spread the cost across a much larger client base. The importance for collateral management is that the scale of the management, administration and reporting tasks involved requires substantial systems support. The typical investment bank in 2008 has collateral agreements with literally thousands of counterparties, so IT support is essential. Typically, until very recently, this support would be provided on a silo basis with different departments each having their own collateral management desk. This created a fixed-income trading silo, a derivatives trading silo and an equities trading silo. Prior to the credit crunch, the prominent trend was to create efficiencies by bringing

these separate silos together as a common collateral management desk. To compete, organisations had to go for scale. With margins decreasing and volumes increasing, substantial investment in systems is needed to cope, while scale is essential to cover the investment costs. This is essentially the “industrialisation” of the collateral management environment through the use of strong, scalable IT systems and processes. Straight through processing (STP) and automation are the twin goals here, and both are increasing in the drive for improvement. Among leading banks, for example, STP percentage ratios are probably in the high 90s, which is about as good as it‘s likely to get. The only elements receiving a human touch nowadays are exceptional items requiring skilled decision-making. It is important to note that organisations which have reached this point of maturity in their handling of collateral, and which now support systems with this kind of capability, are looking to leverage that systems base, and their own skill sets, to develop and design new products to bring to market. This in turn has created a trend that has seen collateral management moving from being a purely back office function to being a profit centre in its own right. Indeed, the aim now is to make money out of your collateral, borrowing it in at “x” and lending it out again at “x + y”. The returns organisations can expect on their collateral book might be a couple of basis points in the repo market, while in the equities market 10 basis points is acceptable, with some trades generating substantially more. However, here too, margins are getting squeezed as the on-lending of collateral becomes more industrialised. So once again, if the lending organisation is not in the scale business, then it will find itself unable to win a significant share of this market.

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Industry InsIght

If these were the patterns prior to the credit crunch, what might we expect to see a year or two down the track? “Business as usual” does not look like an option. Instead, some of the trends are likely to accelerate while some new trends might also emerge. One prominent new development is the rise of liquidity risk. It already seems clear that liquidity risk - hardly a consideration prior to the crash of the Bear Stearns funds - is going to stand shoulder to shoulder with credit and market risk. Managers will be asking themselves: “What’s the risk that I won’t be able to shift this chunk of collateral I am taking, tomorrow if I have to?” Consultation papers have already been issued by the Basel Committee on Banking Supervision relating to liquidity risk: might they be the pre-cursor to Basel III? There is an increasing awareness that risk systems need to be unified to provide a holistic view of the organisation’s total risk portfolio. The old days of apportioning different risks to different risk managers and different risk management teams look like fading into history. Some of Rule Financial’s major clients are already pulling their standalone credit and market risk teams and systems together into one, unified team. Then we come to the most important issue: collateral itself. Natural as it now seems, the ball only got rolling in New York in the 1970s and 1980s. Collateralised trades were a high maintenance proposition from the outset. They are so much more complicated than a straight buy or sell trade which is only on the books for two or three days through the settlement period. A collateralised trade might be a rolling trade, remaining on the books for years. On top of this, inside the collateral there can be a raft of corporate events requiring maintenance and management. Given this complexity, the rise of the tri-party collateral management agents such as Clearstream and Euroclear was inevitable. The agents have removed all the intricacy associated with the back office administration of collateral and, instead, offered its management as a well-paid service, one to which they continue to add value. Take the experience of bond traders of the 1980s, for

example: the only time they needed to borrow bonds was when someone failed to deliver, and they had to borrow to complete delivery to a client. The bonds in all probability would be lent as a favour and the idea of collateral would never come up. Where might this lead? One could suggest that we might start to see the rise of central counterparties for repo*. The central counterparty in this scenario would be an institution whose ownership would be probably split between the banks and governments. They would occur on a marketby-market basis and their great attraction would be that they would dismantle credit risk. The exposure of the two parties to the transaction would each be to the central counterparty, with government guarantees. This is a kind of mirror image of the way CLS has come into being in the foreign exchange markets. The key here is that the central counterparty, as a government backed institution, would be “cast iron” and highly unlikely to fail. Funding for such a development would come from the players in the sector, who would pledge margin for it, and their gain would be the guarantees they’d enjoy from the central counterparty if their counterparty failed to fulfil their obligations. Again, there is no guarantee this will actually happen, but it shows the kind of completely new developments we could see in a postcrunch world. As markets mature, they tend to develop similar characteristics, with a central exchange, a central clearing house and settlement venue. At the moment, bi-lateral collateral has no such institution available to it. However, since collateral management services can be highly profitable, some organisations would prefer to retain these themselves, so one can expect some resistance to such a scheme. Further, we will see more demand for new transparency in certain vital areas, such as triparty allocation. At present, the agent carries out all the allocations automatically through their systems, catering for asset swaps and substitutions. They may report to the lending bank on a daily basis via a batch report, but it is a challenge to get that information back into the bank’s risk systems. Without this, the risk manager lacks a complete view of their exposure. They may think that their exposure

to a certain stock or asset class or region is ‘x’, when it is really ‘y’. We expect to see real time feeds integrated into risk systems and at Rule Financial we are already implementing projects on this theme for some clients. The risk manager can then see at a glance what their exposure is - for example, to oil related stocks in BRIC countries. One of the drivers here is the bank’s ability to get the advanced ratings on regulatory capital. It need to be able to show the regulator that they have a complete handle on all its risk. It is not convincing to say, “I can’t see my intra-day exposure on this or that line of business”. It must tell the regulator that it know exactly how a particular transaction is collateralised and that you have a real time feed on that. In the current illiquid climate there has been a dip in the volumes of transactions as everyone is hanging onto their cash instead of lending it. However, this will pick up. During this period, organisations have time to revisit their supporting IT systems and can allocate time and resources to re-architect those systems. Rule Financial is seeing a number of clients taking advantage of the fall off in trading volumes to do exactly this. * See “Containing Systemic Risk: The Road to Reform” issued by the Counterparty Risk Management Policy Group, chaired by E. Gerald Corrigan (Goldman Sachs) and Douglas Flint (HSBC) August 6th 2008. www. crmpolicygroup.org/docs/CRMPG-III.pdf

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A perfect match An initiative between SWIFT and six major prime brokers to create a new trade-date matching solution for hedge fund trades is set to reduce costs and risks for prime and executing brokers worldwide, writes Thea George at SWIFT for the brokers, and help them to improve their service to their hedge fund clients.” Which firms are involved? The brokers working with SWIFT to help create the new pre-settlement matching solution include Citi, Credit Suisse, Goldman Sachs, Lehman Brothers and Merrill Lynch. A pilot is targeted to start in Q4 2008, with a view to the solution going live in Q1 2009. SWIFT and the prime brokers are also working together to raise awareness and encourage the wider community of brokers processing trades for hedge funds worldwide to take advantage of the new solution.

Failed securities trades are a considerable source of cost and operational risk in the industry. The longer it takes for errors in the details of a trade to be discovered, the more likely it is that the trade will fail to settle on time, requiring expensive manual intervention to fix. As trade volumes grow, so does the cost of manual repair. In an environment in which margins are falling, rising operational costs are a highly undesirable trend. The level of operational risk created by high trade fail rates is also unacceptable given the increased focus on risk management and improved transparency in the marketplace today. Prime broker/executing broker trade matching: the challenge In recent months, the cost and risk of failed equity and fixed income trades has been a particular problem for prime and executing brokers processing trades originating from hedge funds globally. Discrepancies between trade details submitted to prime brokers by the hedge funds on one hand, and their executing brokers on the other, have the

potential to prevent trades from settling on time. Today, these errors are often not discovered until late in the process, at the local settlement agent level. Timely automated matching of trade details between counterparties offers an opportunity to identify problems early enough to prevent settlement fails, thus reducing cost and risk and improving straight-through processing (STP). A new initiative under which SWIFT has been selected by six major prime brokers to develop and operate a pre-settlement matching solution is aimed at reducing the operational risk of processing hedge fund trades – and cutting the escalating cost of fixing failed trades manually. Says Fabian Vandenreydt, Head of Broker/Dealer and PreSettlement Services within the Markets division of SWIFT: “By enabling trade matching on trade date or T+1, the new solution will allow errors that could cause settlement fails to be identified up to two days earlier than they are today. This will reduce risk and cost

Why SWIFT? SWIFT was chosen to provide the new pre-settlement matching solution following a competitive selection process, with the brokers having done due diligence on a number of providers before picking SWIFT. An important factor in the brokers’ selection of SWIFT was that they had decided on a central matching – rather than a local matching – model. Central matching is a more efficient solution than each party using local matching in an environment in which prime brokers are managing feeds from multiple executing brokers. Executing brokers are routing trade confirmations to multiple primes, and hedge funds are typically engaged with multiple prime and executing brokers. SWIFT has been providing central matching for foreign exchange (FX), FX options and OTC derivatives trades through its Accord service – used by banks, brokers and investment managers worldwide - for a number of years. To support pre-settlement matching for equity and fixed income trades, SWIFT is extending its existing Accord solution, adding functionality to match securities messages to the system’s existing capability to match FX messages. Because SWIFT is not creating

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industry insight By enabling trade matching on trade date or T+1, the new solution will allow errors that could cause settlement fails to be identified up to two days earlier than they are today. This will reduce risk and cost for the brokers, and help them to improve their service to their hedge fund clients.”

this system from scratch, it is able to meet the brokers’ requirement for a rapidly delivered solution to the problem of hedge fund trade matching. Since the brokers that have signed up to use the new solution are already users of Accord, adoption of the functionality for equity and fixed income trade matching is simplified, and will require minimal IT disruption. Additionally, the new solution will be based on ISO standard messaging, meaning the brokers can tap into their existing messaging expertise to take advantage of trade-date matching for hedge fund trades. Jitu Parmar, Head of Broker Dealers, Treasury and Derivatives, UK and Ireland at SWIFT, says: “We are building on our experience of providing central matching for FX. That experience is very important to the prime and executing brokers, because they know we understand the business of matching, irrespective of asset class.” Once the ability to match securities trades has been added to Accord, it will be positioned as a truly cross-asset matching solution, enabling financial institutions to exploit the benefits of central matching across a wider range of their trading activities. Expanding asset class coverage is a continual focus for SWIFT, says Vandenreydt, because “brokers and asset managers are looking for solutions that cover as many asset classes as possible through a single interface”. How will the solution work? Hedge funds typically notify their prime brokers about executions at the end of the trading day. The prime brokers then match the trade details with those they receive from the funds’ executing brokers, in a process that currently involves disparate systems and often manual work. As a result, discrepancies between trade details are frequently not

uncovered until the day before settlement or even settlement date itself, increasing the risk of settlement failure. Once the new pre-settlement matching solution is in place, trade details will be submitted to Accord in ISO standard format by both the executing broker and the hedge fund’s prime broker. Accord will then match the trades, and flag any mismatches and the reasons for them to the brokers as close to T+0 as possible – meaning any problems that could cause trade fails are identified much earlier, leaving plenty of time to fix the breaks. What are the next steps? SWIFT has been working with the brokers for several months to establish their requirements for the new pre-settlement matching solution, and is now engaged in adding the necessary new functionality to Accord. Once the pilot scheduled to begin later this year is complete, the solution will go live in Q1 2009. As part of their commitment to use the new solution, the brokers are working with SWIFT to raise awareness of the benefits of pre-settlement matching among other brokers executing trades for hedge funds globally. As with any central matching solution, the more market participants use it, the more widely the efficiency benefits will be felt across the industry. In addition, the brokers will also oversee the evolution of the solution going forward, as SWIFT continues its efforts to help the broker/dealer community implement automated solutions to eliminate cost and risk in other areas of their business. “The broker community is the driver for us, to inform and educate us in terms of what we should be doing,” says Parmar. “We are a cooperative, and they are our members.” The brokers working with SWIFT to

help create the new pre-settlement matching solution include Citi, Credit Suisse, Goldman Sachs, Lehman Brothers and Merrill Lynch. A pilot is targeted to start in Q4 2008, with a view to the solution going live in Q1 2009. SWIFT and the prime brokers are also working together to raise awareness and encourage the wider community of brokers processing trades for hedge funds worldwide to take advantage of the new solution. Why SWIFT? SWIFT was chosen to provide the new pre-settlement matching solution following a competitive selection process, with the brokers having done due diligence on a number of providers before picking SWIFT. An important factor in the brokers’ selection of SWIFT was that they had decided on a central matching – rather than a local matching – model. Central matching is a more efficient solution than each party using local matching in an environment in which prime brokers are managing feeds from multiple executing brokers. Executing brokers are routing trade confirmations to multiple primes, and hedge funds are typically engaged with multiple prime and executing brokers. SWIFT has been providing central matching for foreign exchange (FX), FX options and OTC derivatives trades through its Accord service – used by banks, brokers and investment managers worldwide - for a number of years. To support pre-settlement matching for equity and fixed income trades, SWIFT is extending its existing Accord solution, adding functionality to match securities messages to the system’s existing capability to match FX messages. Because SWIFT is not creating this system from scratch, it is able to meet the brokers’ requirement for a rapidly delivered solution to the problem of hedge fund trade.

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technology

the trading hub Rob Sammons from Anetics on global securities lending and its role at the centre of modern day asset management.

G

lobal securities lending is no longer a practice limited to the facilitation of short selling or dividend arbitrage. It touches on almost every aspect of a firm’s asset management. Assets that can be used as fee-generating instruments or corresponding collateral and swapped with a trading partner on terms that facilitate customer dealing, reduce costs, generate income, manage risk, and adjust the balance sheet. For a firm to be successful at this new style of securities lending, there are two key requirements - one internal, the other external. The securities lending desk sits in the middle. The internal requirement may sound simple, but not always: You must know your position. To wit, what instruments do I have available to lend or sell, and on what terms; what instruments should or must I borrow or buy, and on what terms. These instruments include securities, cash currency, and certain derivative products. Depending upon the size and complexity of the firm, this information may be readily available from one master system. More likely, the securities lending desk must compile it from a series of internal sub-systems. The external requirement has, at its foundation, a dealing agreement with at least one or more trading partners - the marketplace. In the case of just one trading partner there is little to do. The day’s work is submitted to the trading partner, terms agreed, resulting deals then turned over to the middle and back office for execution, settlement and maintenance. But most firms don’t deal with just one trading partner. They have dozens if not a hundred or more trading partners - each offering a distinctive product or benefit in a hierarchy from most-favoured to counterparty of last resort. And it is here, in leveraging these relationships, that the

securities lending professional earns his or her keep. Each business day the race is on to satisfy the firm’s internal requirements by making favourable external deals in the marketplace. An absolute prerequisite to accomplish this work is Information: Who’s long and willing to sell or loan, who’s short and needs to buy or borrow, at what rates, with what offsetting collateral. Sounds like this too should be simple, however… The dissemination of information between trading partners, a prerequisite to dealing, is where the industry is stuck in the twentieth century. Sure, now there are trading hubs that aggregate some information. The major agent and custodial lenders publish daily, if not real-time, lists of aggregate holdings available for loan, but this is only part of the picture. Aggregate lists are just that – big lists that don’t necessarily reflect sub-lists of opportunity. The industry may have graduated from the use of fax as a means to distribute lists, but it remains mired in a patchwork of electronic messages and phone calls as a key dealing medium. The Pareto principle (the 80-20 rule), or Dr. Joseph Juran’s observation of the “vital few and trivial many,” applies to this industry just as others. The securities lending desk likely can satisfy 80% of the firms dealing requirements with 20% of the day’s work. The remaining 20% of firm dealings requires 80% of the effort. One might conclude: Adjust the work to diminish those trivial tasks that take 80% of the time. But that theory is flawed as some of these trivial many tasks belong to the vital few of your best customers. You end up weakening your franchise. The better approach, and this is where the future of technology has its best opportunity, is to aim to adjust the joint ratio from 80:20 to, say, 70:30 or 60:40. Admit that you’ll never get to 50:50. In practice, if the Pareto

principal is to hold true, your firm will always drift back to 80:20 even as you strive for, say, even 75:25. But it will be a stronger, more efficient 80:20. Trading hubs are useful, especially the largest with order routing and straightthrough bookkeeping and settlement. But it is unreasonable to believe that there will ever be one hub with access to every opportunity. Instead, the securities lending desk must be prepared to aggregate and leverage the various hub opportunities with its own bilateral relationships. This is where telephone, e-mail, Bloomberg messages, chat, spreadsheet attachments, all flying around, aim to fill the gap. Let’s digress for a moment. Price, or rate transparency in securities lending, is a popular topic. Admittedly, it is helpful to know, for a specific security, the level at which others are dealing, to benchmark or gauge where, say, my firm should be dealing. It is a bit like a homeowner asking a neighbour with a similar house, ‘What was the total cost to heat your home last winter?’ as a way of benchmarking total heating costs. But without knowing the myriad factors that go into actually heating a home, temperature preferences, fuel and source, heating system age and type, et al, such benchmarking can be misleading. Furthermore, in evaluating performance, it isn’t about specific instruments, but the total value of what one can deliver to a customer, firm, counterpart, trading desk, or any other aggregation unit. And even that value isn’t just income or expense. It has risk, durability, and balance sheet considerations. It is unlikely there will ever be a big board defining the bid/offer dealing levels in the borrowing or lending of a security. The reason being that the purchase or sale of a security on an exchange like the NYSE has absolutely nothing to do with who is buying or who is selling – only that buyer and seller

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met in that market at a single point in time and agreed on price and quantity. Conversely, borrowing or lending a security has less to do with the subject security (other than certain key attributes, like fungibility) and everything to do with who is borrowing, who is lending, and why. As such, price or rate discovery in a security borrow/loan transaction is primarily a bilateral process with the market for each counterparty pair specific to the level at which they agree and deal. Any firm that fails to acknowledge this reality and deals at, say, blanket or benchmark rates for the bulk of its requirements is potentially dealing at the wrong level, or missing deals entirely. Right now, today, we may be seeing as much transparency in securities lending as we will ever see - or need to see. With the advance of technology that enables more automated bilateral discovery, transparency is of lesser importance. The market value to borrow or lend any security will be the weighted average aggregate of the firm’s dealings. The level other firms are dealing at doesn’t matter. That’s their deal. Let’s assume for this discussion that your desk has the requisite system tools to present a complete and accurate picture of current settled and pending positions, and your tasks for today’s work are any of the fairly typical, borrow to enable short-sale settlement, loan to reduce financing costs, refinance to optimize earlier short coverings, raise cash, return and re-borrow items that have been recalled, et al. You know what you have to do. Question is, How to do it quickly and easily? First step likely is to leverage any automated resource available to your desk. Trading hubs, coordinated order routing, bilateral auto-borrow/ auto-loan, and the like. This cleans up 80% of the work in 20% of the time. Next, on to the future of technology…

You have a utility that runs on your desk that you and your team use to engage in serial, bilateral communication with your hierarchy of trading partners, in the order you favor, as you seek to do deals. We won’t take this too far into the future so we’ll assume the favored communication medium is e-mail (it can be secure, there is an already existing audit trail). Your e-mails will be generated at your direction by this desk utility, it will maintain a database of what you distribute and to whom, and the e-mails will be in a format that is also machine readable by the counterparts you aim to do business with. Since the entire Street will have moved to this future of technology, your counterpart’s desk utility, upon receipt of your e-mail, will have already compiled your transmittal into its database and alerted your trading partner of your request. Your trading partner will then review your request against his or her own position and any other requests that may be pending, and respond to your inquiry in minutes if not seconds. This response goes directly into your desk utility upon receipt, you are alerted, any deals you agree to do are accepted and forwarded directly to your trading system with no further key entry. A confirming e-mail is automatically returned to your trading partner’s desk utility so it can book its side of the deal. Done; two minutes and fifty-two seconds of elapsed time; on to the next trading partner. In practice, this is bilateral dealing as it has been since the dawn of commerce: Offer,

counteroffer, acceptance, execution. This is just what is happening across securities lending desks today but with frequent document copying and pasting, double or triple key-entry of data, and a team of people that must remember the state of play on each negotiation. While the purpose of this discussion is to focus on the 20% of the work that takes 80% of the time, this future desk utility is not just for bilateral deal hunting, but would communicate, desk to trading hub, desk to coordinated order routing, desk to auction house; a complete dealing solution. And while for simplicity we’ve discussed serial bilateral negotiations, with computer, database aided tracking, multiple negotiations may occur simultaneously. Middle and back office operations like mark-to-market and corporate actions are not addressed in this discussion but can benefit from the same sort of common, straight-through exchange of information – day’s work appears on a screen, counterparts agree, one click and the action flows straight through to settlement on both sides (through automated messaging). This is not a single platform, but any number of platforms that know how to communicate. On to the future!

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technology

technology interview: Francisco gonzalez The head of Eurex SecLend discusses his role and the future for an electronic lending market.

F

rancisco Gonzalez has been instrumental in designing the products offered by Eurex SecLend and has done much to shape the automation of securities lending and borrowing trading. As head of business and product development Eurex secured funding product line – covering both securities lending and repo – he demonstrated early and impressive intuition in the industry in 2002, when it was a lot smaller than today’s multi-trillion market. Now the key is to bring this market forward to the next level of trade automation, execution and integration. “The electronification of the securities lending market is pervasive and revolutionary. The difference between mailing and electronic trading seems very small compared to integration efforts. One major step is the integration of trading activities with the bank’s infrastructure, including collateral management; integration with the settlement and custody network, including tri-party facilities, is another important step in realising full STP.” Gonzalez says trading activities have shifted towards high-quality collateral. As a result, last year volumes declined in certain segments due to the financial crisis. “Sovereign securities, serving various financing needs, have been in high demand,” he says. “This is the main focus for many investment professionals who use Eurex’s

secured financing marketplaces. I don’t see that an electronic trading system on its own can dramatically lift trading volumes.” He cites the fragmentation of the market, meaning there are a number of sub-markets, each of which represents part of the invisible overall market. Eurex’s goal is to streamline processes and minimize fragmentation at the trading layer by channelling various settlement and custody networks. He mentions SIS SegaInterSettle AG’s Triparty SecLend service as an example of a sophisticated and valuable service featuring fully integrated and automated settlement and risk management functions. He adds that in view of increasing market standardisation, a partially open marketplace such as Eurex SecLend seems well positioned. Gonzalez emphasises the increase in opportunities available to traders thanks to expanded horizons. One key success factor for a trader is his or her personal network in the industry. This factor is being protected and placed above other business drivers, even best execution. However, he acknowledges that the personal relationships between market participants – the fulcrum of overthe-counter (OTC) trading – will not diminish very much. “I think a trader needs relationships with corresponding counterparts at an appropriate level,” he says. “But in order for a profit-oriented trading

desk to process all the flows of opportunities with the best possible price discovery (best execution), it is necessary to automate by introducing an electronic trading system like Eurex SecLend.” “At present, services like collateral management, corporate action services and mark-to-market services are at the top of the banks’ wish lists. I think this will also push centralised facilities forward.” Will the hard-to-borrow market be traded electronically in the near future? “Yes, I think it will,” he says. “The market does not seem ready yet, but in my opinion, it is on its way. One major advantage of a system like Eurex SecLend is the fact that a bank can reach far more counterparties at the same time and that the counterparties all apply the same standards for trading and collateralisation (eg, collateral schedule). This makes fees more easily comparable and volumes deeper.” Eurex SecLend, spurred by Gonzalez, has adapted to change. “I think a service provider like Eurex has to develop different models which offer added value for market participants.”

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technology

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

With the continued evolution of the Basel Accords in Europe, the most recent Basel II capital adequacy directive is designed to create an international standard for safeguarding clients against the financial and operational risks banks face. It seeks to accomplish this by establishing rigorous risk and capital management requirements so banks hold capital reserves appropriate to the risk inherent in their lending and investment practices. In the securities financial world, agents

can lend on behalf of undisclosed principals, and any problems with lending transactions can negatively affect all parties. Pillar 1 of Basel II complements the minimum capital requirements and the supervisory review process by encouraging market discipline through enhanced and meaningful public disclosure. By increasing the banks’ disclosure requirement, industry participants are allowed to have a better picture of the overall risk position of the bank and allow the counterparties of the bank to price and deal

appropriately. This enhances transparency, giving investors and industry participants the ability to better evaluate a bank’s capital structure, risk exposures and capital adequacy. A Co-Operative Solution to US ALD Since the start of October 2006 the disclosure of underlying principal details has been a regulatory requirement for agency lenders in the US. The introduction of this additional regulation produced unprecedented level of co-operation between market participants,

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provides a lead-time to allow FSA-regulated participants to get automated processes in place. To assist the market in implementing a solution, ISLA formed the ALD Working Group, in which SunGard is a founding member, and has worked in conjunction with consultants Capco to identify a workable model for the final solution. The solution is largely based on the existing US model, with additions to specifically handle: DTC access for non-DTC members Repos/reverse repos Tri-party collateral DBV collateral Industry Classification Codes regulators and IT solution providers. Parties worked together for two years, incorporating the credit pre-qualification process, in order to ensure that the requirements could be met in the most effective manner. SunGard, EquiLend and DTCC joined forces to provide a service that allow lenders and borrows to supply files to a single service provider, regardless of the service used by the end user of the data. Today, over 100 market participants provide their files directly into the SunGard hub, with more than two million records being transmitted through the hub on a daily basis. European ALD/Basel II Co-Operative Solution to US ALD The disclosure of principal requirement was initially to be implemented throughout Europe from the start of 2008. However, there still appears to be much confusion in the market as to whom this impacts and what must be done. This may be partly because there are multiple authorities involved, introducing the potential for each to translate the EU Basel II requirements differently. In the case of the FSA, there is the option for interim monthly reporting, with the move to the mandatory daily reporting deadline being held-off until January 2010. Although this does not give the borrowers full relief from the capital implications of dealing with lenders who do not provide the necessary trade and collateral reporting files daily, it

An implementation timetable has been drawn up by ISLA, working towards full compliance by January 2010 latest. Interim Solution In the meantime, the priority for the brokers has been to receive data from their largest lenders and they are now exchanging files through the existing mechanisms. With this in place SunGard understands that brokers will now be encouraging their remaining lenders to provide the required data files on as frequent a basis as possible. Even lenders who provide details of the underlying principals at the time of trade are required to provide loan and collateral information in the agreed file formats in order to allow the brokers to carry out the necessary capital adequacy calculations. Automation of this process can greatly reduce the effort and opportunity for error that this additional reporting burden represents. Like ALDoP, the disclosure of principal required for Basel II is a very large, complex project. The introduction of ALDoP in the U.S. ran smoothly because the industry worked together with regulators and IT solution providers from beginning to end. SunGard’s ALDoP service was successfully implemented and continues to run well. It is anticipated that a similar model can be replicated in Europe.

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next issue industry view: GSL looks back on the events of week September 15th and analyse the effect on the securities lending market. gsl looks at securities lending in the nordics: Sweden, Norway, Denmark and Finland, Iceland. UK pension funds’ involvement in the securities lending market and gauges the effect of the FSA’s September ban on short selling. Asian tri-Party collateral Management – In June, BNY Mellon became the tri-party collateral holder between Goldman Sachs and Rabobank. Is this the first of many deals in the continued merge of Western banks and Asian countries within securities lending? south Africa:

RMA Conference Review....

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

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STATISTICS

Neither borrower nor lender... Data Explorers have released graphs documenting market cap out on loan versus value of stock in the period running up to HBOS acquisition by Lloyds TSB, Lehman Brothers filed for bankruptcy, and Merrill Lynch’s acquisition by Bank of America. HBOS

% Market Cap on Loan

700.00

18.00

600.00 500.00

16.00

400.00

14.00

300.00

12.00

200.00

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% Market Cap on Loan

Price

20.00

16.00 18.00

14.00 16.00

12.00

14.00

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% Market Cap on Loan

Merrill Lynch

Price 40.00

16.00 14.00

35.00

12.00 10.00

30.00

8.00

Price (USD)

% Market Cap on Loan (%)

There has been a general decrease in the short positions in Merrill Lynch (MER), from a %MCOL of 5% in early August to 2.6% today, although short interest has picked up from 2% on September 8th. Utilisation is at just 11% so there is plenty more left to borrow.

18.00

Price (USD)

Market Cap on Loan (%)

Data Explorers: “Lehman (LEH), who filed for bankruptcy last September 15, saw an enormous spike in short interest the previous week, presumably as short investors got wind of the possible catastrophe at the weekend.”

8

8

8 -0 ay -M 12

14

17

-A

-M

pr -0

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8

10.00

Lehman The percentage of LEH MCOL increased from 10% to 18% between September 5 and 11. Utilisation jumped from 35% to 63% in the same time frame.

Price

20.00

Price (GBP)

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

Market Cap on Loan (%)

HBOS’ Market Cap out on loan (%MCOL) to short investors showing that short positions were covered between September 16 and September 17 this week, with the MCOL falling from 2.96% to 2.75%.

6.00 4.00

25.00

2.00

20.00

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11

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PeoPLe

Ignorance is the enemy Jerry May, cash securities lending officer at OhioPERS, writes on managing risk in an unstable market.

In January 2007 securities lending programs in the US were anticipating a strong year for earnings. The Federal Funds rate was at 5.25% having just experienced 17 regimented increases of 0.25% by the Federal Reserve. There was some speculation as to whether the Fed had overshot its intended target, and just how soon and at what trajectory rates would come back down. Cash collateral managers were in their sweet spot by being able to take advantage of extending durations in cash portfolios, and picking up some amount of incremental yield. Rather quickly in the year, though, there were signs of difficulties with sub prime mortgages at the forefront of many analysts’ concerns. Bear Stearns’ hedge funds had publicised problems, and by August of that year, there had been significant tightening of liquidity within the marketplace. For the last year now, the securities lending market, as well as other short-term markets, have been dealing with this liquidity crisis. Risk has been significantly re-priced in the cash markets, with financials taking the brunt of the change in investor sentiment. In addition, securities lending programs have had to deal with the rapid deterioration in a significant counterparty – Bear Stearns – and the implications of that situation upon the industry as a whole. Even though most organisations were aware of the pressure upon investment banks, it seems that the suddenness of Bear’s decline is worth re-

examining for an industry that is largely dependent on the ability of counterparties to return borrowed assets. Yes, there are measures in place to counteract this situation, when a counterparty is unable to return assets, but no one wants to endure the headaches of actually having to enact these measures. Boards and management of beneficial owners have had to get involved in an activity that is not risk-less. Fate or providence has a way of reminding participants of this fact every decade or so. So, what do market participants do now? Where do we go from here? If one examines reactions after the difficulties in the early to mid-1990’s, some insight could be found into what may happen in the next few months and years. If memory serves correctly, to some firms the word “derivative” became synonymous with dumping barrels of money into a river, never to be seen again. As most now know, derivatives can, in fact, be acceptable if all of the parties understand the risk and the reward involved, and the actual structure of the security being contemplated. The same reaction might be in store for the term “leverage” after the current crisis. The problem with reacting, though, is that it leaves you little time for anticipating. What may be a more appropriate response is to educate participants in the risks of the

lending process - from counterparty risk to operational risk; from reinvestment risk to legal risk. Boards, in particular, seem to have a skewed view of lending, and the risks involved. Whether this has been of their own choice, or from communication they have received, these individuals, who bear the most risk in the process, need to be educated in what those risks are, how those risks can be quantified, and what can be done to mitigate those risks. Some steps that can be taken include: an in-depth review of cash investment guidelines with all parties so that risks that can be taken are well known; a discussion with the cash manager of the program so that the risks that are being taken are communicated, and all parties are comfortable; and a formal look into the aggregate counterparty risks being born, including securities lending. Ignorance is an enemy of the securities lending industry, as we have found out time and time again. Education is one way to fend off problems, and difficulties that may occur after a crisis. While no individual or firm is able to correctly identify all potential problems, a legitimate effort to educate those who are the risk takers will create some degree of trust, as well as provide a foundation of knowledge from which management out of the crisis can take place.

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PeoPle

Paul Wilson, global head of client management and sales in the securities lending division at JPMorgan, talks to Joe Corcos typically a large custodian, was earning enough to pay custody fees then everybody seemed to be happy. Overall however, much of the debate in the industry still centres around the same subjects as it did when I first started; best route to market, the risks of cash collateral management, impact of lending on proxy voting, risk management and transparency. What do you find particularly interesting and gratifying about your role as Global head of client management and sales in the Securities Lending division at JPMorgan? What part of the job is the most demanding?

What major changes have you seen develop since you first started working in the sec lending arena? A major change has been the transformation of lending from being a back office ancillary function to a front office alpha-generating activity. With this has come an increase in focus on risk management. Clients have also become significantly more demanding, taking

a greater interest and active involvement in lending activities. Also, most agent lenders have developed their own specific style of lending so that most of the major lenders actually look very different to each other. The industry has also become much more competitive; when I first started in the industry ten years ago, questions about the lending agent’s performance weren’t asked as much. In those days, if the agent, who was

The feedback that we have had from our client base over the last year on the way in which we have managed the market turmoil has been exceptionally pleasing and rewarding. I think this is an area where both JPMorgan and specifically our securities lending business have really been differentiated. I also find it interesting to look at the different trends and issues in the market and how they vary from region to region. The issues, challenges and opportunities do vary across the different regions of Europe, Asia and the US. I would add that it has also been very satisfying that we have continued to invest and build out our client management and sales teams across the globe, to the point where we now have more than 70 professionals globally in our client management and sales team. As a result the business has grown dramatically over the last 2-3 years, as well as significantly improving the experience for our clients. As corporations grow beyond their own countries and markets become

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PeoPle more liberal, there is now a greater need for cross-border financing, how has this impacted sec lending? Any source of new demand, i.e. new organisations needing to borrow securities or having new reasons to borrow securities, can only be positive for the securities lending industry. As we have seen from many of the industry statistics, over the last five years there has been quite a lot of new supply coming into the market, and you obviously need to balance that with new sources of demand. Clearly, if supply dramatically outstrips demand, that will have an impact on price. That’s pure economics. It has to be a positive that these new sources of demand are out there, and long may there continue to be new sources of demand. One of the things I’ve also seen in my time in the business is that as the lending industry has grown and new sources of supply have come into the market, the industry has done a very good job of responding positively and absorbing that without any significant detrimental impact. How has the role of the lending agent evolved? As I have already mentioned, the business has transformed from being a back office ancillary function to a front office alphagenerating activity. In the “good old days” lending was virtually an automatic add-on to custody. Now we’re assessed on how good our risk management and indemnity are, on our reporting and client management, as well as on our ability to generate superior earnings within a client’s management framework. The role of the lending agent has become more focused on risk management and certainly has become more consultative. And with that, many clients are now demanding for more detailed revenue performance and attribution reporting in respect of what value has been added and where out-performance has been achieved relative to the peer group. I think the role of the agent has changed in that regard. It’s these and a wide variety of other things that have moved us from a sleepy back office function into a front office alpha-creating activity. How has the credit crunch affected the role of sec lending in the broader financial system?

The debate has always been there regarding the role and impact that securities lending has on the market. I think that the credit crunch specifically has highlighted many of the positive aspects that lending brings to the market. As an example, securities lending is a way of putting additional liquidity into the market, particularly at a time when the market was looking to borrow very high quality treasury securities for collateralisation and financing purposes, as additionally evidenced by the Fed implementing its own form of lending programme for exactly the same reason. Secondly, with the markets being volatile there has been an increase in trading activity, which gives rise for the potential for more failed trades. Lending provides a way in which many such failed trades can be avoided. In this regard lending also provides another form of liquidity in certain stocks and securities where trading volumes are thin and may be difficult to trade in tight markets. Having the ability to borrow those securities gives rise to more efficient markets and creates greater pricing transparency. Thirdly, and perhaps this is less often realised, securities lending agents have large sums of cash that must be invested every day, and historically a lot of that has been invested in secondary money market instruments which have provided sources of financing for issuers and companies. Is the dealer community now requesting more diverse types of collateral? If so, why? The amount of cash collateral as an overall percentage of collateral in the market has declined, which has been caused by two things. Firstly, the broker dealers themselves have been looking to reduce the amount of cash collateral, given the cost of doing so and also balance sheet constraints. Secondly, from a client’s perspective the investment of cash collateral is where they consider the most risk to be. So what has happened is that these two things have come together and, naturally, that has led to more non-cash collateral. Right now, collateral flexibility is definitely the name of the game. The broker dealers are looking for more flexible and cheaper ways to finance some of the lending trades, but similarly clients are also looking to diversify and expand collateral. However, from the client perspective, having diversified collateral does not necessarily mean taking more risk.

Of late there has been increased growth in both hedge fund activity and the use of 130/30 strategies, which has in turn boosted desire for the lending of securities in order to support short positions - has this noticeably benefited lenders and agents? 130/30 and long short trading strategies have become much more talked about, but to what extent that has translated into vast amounts of additional lending volume resulting from these types of trading strategies is unclear. Certainly there is more to come. From a JPMorgan perspective, we have focused a large amount of our investment over the last couple of years actually integrating the ability to support 130/30 and long short strategies with our securities lending product. We see a number of asset managers and pension funds who are owners of securities and want to lend them, but are also launching 130/30 funds where they need to borrow securities, which from our perspective is all part and parcel of the same process. So we have developed the capability to effectively lend on the long side and then help our clients finance/borrow the short side, which has been quite a critical development for us. Some may argue that this is the start of convergence between prime brokers and agent lenders/custodians, but I would actually disagree. Nevertheless we are certainly involved in things, which we weren’t two years ago, because of the advent of the 130/30 long short product. Have you seen the desire from clients for more unbundling of services? Absolutely. The biggest growth in our business right now is in our non-custody lending book. I hate to call it “non-custody,” because I look at and consider JPMorgan as a global lending agent. The location of the underlying assets is just geography. What we are now selling is our style of lending, our performance and revenue generation, and our risk management supported by the JPMorgan balance sheet, along with the depth, strength and expertise across the entire JPMorgan organisation. The US market has been unbundled to an extent for a considerable time, but we’re starting to see more and more of that in Europe as well.

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RMA CoNFeReNCe

As investment banks topple, short-selling halts, and the entire financial system is reappraised, one glimmer of joy remains amid the encroaching tides of despair. That’s right, the RMA 25th Annual Conference on Securities lending is right around the corner. And perhaps the timing of the conference is just right. Players in the industry may welcome the chance to reappraise, take a break and take the opportunity to chat with colleagues and engage in a bit of analysis and reflection.

european-based folks will also grab the chance to flee the onset of shivery autumn winds and bask in the heat and hospitality of San Antonio, Texas. The conference is to be held in the Westin la Cantera Resort and will feature a veritable deluge of cocktail receptions, tennis tournaments, golf tournaments, live bands, buffet dinners, and more cocktail receptions. But amid the merriment some serious business will be taking place. A ‘Fall Securities lending Round Table’ will

take place on the 14th, which everyone is invited to. This has been described as ‘a discussion on key issues affecting the industry’. The State of the Industry Update from Spitalfields’ Mark Faulkner takes place on the 15th, and is followed later in the day by the Industry leaders Panel, Treasury Market Practice Group Update, Hedge Fund outlook and the keynote speech by Steven D levitt, co-author of the iconic Freakonomics, and author of the lesser known children’s book,

Dinner Buffet 7:30 p.m. – 10:00 p.m. Compliments of Barclays Global Investors Citi Jefferies & Co Macquarie Morgan Stanley Ramius Securities llC Southwest Securities

Tennis Tournament 1:00 p.m. – 4:00 p.m. Compliments of WachoviaSecCommand Cocktail Reception 5:30 p.m. – 7:30 p.m. Compliments of www.rbccm.com

live Band/Music from the Oh So Good Band! Dance Floor, Cocktails 8:00 p.m. – Midnight San Antonio’s Oh So Good Band! Number one for variety dance music and entertainment.

Breakfast with exhibitors 7:30 a.m. – 8:45 a.m. Compliments of Penson Financial Services Inc Coffee Break 10:45 a.m. – 11:00 a.m. Compliments of FINACe MF Global Golf Tournament 1:00 p.m. – 5:00 p.m. Compliments of locateStock Cocktail Reception 5:30 p.m. – 7:30 p.m.

The Boy With Two Belly Buttons. on the 16th there will be a Market outlook Panel, Cash Collateral and Balance Sheet Management Panel and a primer panel on swaps and securities lending. That night will see the annual Goldman Sachs blow-out to end the conference. But after a few days of sun, cocktails and general hobnobbing, perhaps things may not look so bad and the Goldman folks, along with the rest of the attendees, will let their hair down.

Itinerary

Monday, October 13th Cocktails, Food, Monday Night Football, Baseball Playoffs, and Bull Riding. “Welcome to Texas” Reception 7:30 p.m.– 9:30 p.m. Compliments of Frost Bank Penson Financial Services Inc Tuesday, October 14th live Band/Music Dance Floor, and much, much more! opening Reception 6:30 p.m.– 8:30 p.m. Compliments of BNY Mellon Deutsche Bank Dresdner Kleinwort Kellner Dileo & Co Merrill lynch The Northern Trust Co

Wednesday, October 15th Breakfast with exhibitors 7:30 a.m. – 8:45 a.m. Compliments of Coffee Break 10:15 a.m. – 10:30 a.m. Compliments of

Thursday, October 16th

Compliments of SunGard Additional Conference Sponsors Bottled Water Compliments of State Street www.statestreet.com Internet Kiosks Compliments of J.P.Morgan Keycards Compliments of Cantor Fitzgerald USB Pen/Flash Drives Compliments of ING Financial Markets

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RMA

Congratulations to The Risk Management Association on your 25th Anniversary Conference from:

On behalf of RBC Dexia Investor Services, we would like to congratulate the Risk Management Association on the occasion of this historic milestone – the 25th anniversary of the RMA Annual Conference on Securities Lending. For the past quarter century, your significant contributions to the securities lending industry have been instrumental in its continued growth and development. Additionally, the annual conference has served as an integral forum for business leaders to address and discuss the most important issues facing the industry.

Congratulations to The Risk Management Association on your 25th Anniversary Conference from all of us at LendEX. LendEx 30 Montgomery St. Suite 1502 Jersey City NJ 07302 USA

RBC Dexia continues to advocate the importance of such conferences in helping to shape the future of the industry. We are delighted to have had the opportunity to participate and contribute to this annual conference throughout the years. 4sight offers our congratulations to the RMA for 25 years of success. Once again, congratulations on your silver anniversary and we wish you continuing success in the years ahead. Reeve Serman Global Head, Securities Lending Trading & Market Execution T: 416 955 6901 E: [email protected] Yvonne Wyllie Global Head, Product Management, Securities Lending T: 416 955 7517 E: [email protected]

4Sight Financial Software Conference House 152 Morrison Street Edinburgh

All the best from:

GSL|

Global Securities Lending

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PeoPle

Access the Experts from Everywhere, Anywhere

Regulation in Rio, technology in Tuvalu and securities services from the Square mile. ISJ.tv brings you the latest news around the globe from the people who participate. 60 | GSL

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PeoPle

From your mobile to your mainframe, expert analysis is now available. Wherever you are. GSL | 61

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PeoPle Moves

Appointments

Jörg Debé, relationship management director in Germany

Jon Anderson, global head of over-the-counter (OTC)

for Société Générale Securities Services (SGSS)

derivatives for GlobeOp

September

was previously head of communications at US Trust and before that head of communications for The Private Bank at Bank of America.

RBC Dexia has appointed of Padraig Kenny as managing director, Ireland. He was previously investment director at Private Wealth Managers Ltd. in Ireland Tamie Gardner, formerly of Ferox Capital Management, has joined Brown Brothers Harriman’s (BBH) securities lending trading desk in London as a vice president. She was previously employed in the equity finance group at Citigroup Global Markets. Philippe Lopategui previously of Morgan Stanley, has joined the Royal Bank of Scotland (RBS) Equity Finance & Collateral Trading (EFCT) team as the global head of Equity Finance Distribution. Temenos has appointed Mike Head as global partners director. Prior to Temenos, he was responsible for the start up of Pecaso. Bernd Knobloch has resigned from the board of managing directors of Commerzbank with effect from September 30 2008. Knobloch is leaving the bank at his own request and by mutual agreement. Aviva Investors has appointed of Aline Sullivan as global corporate affairs director. Sullivan will lead the global communication activities of Aviva Investors. Sullivan

Standard Chartered has announced the appointment of John Paynter as an independent non-executive director with effect from 1 October 2008. Paynter has experience in the fields of corporate broking and financial advisory, serving 29 years with Cazenove, and latterly JP Morgan Cazenove, where he was vice chairman. Paul Abberley has joined Aviva Investors’ executive committee. Previously CIO of Fixed Income at ABN Amro Asset Management, Paul will be chief executive of Aviva Investors’ actively managed portfolio business, Aviva Investors London. Société Générale Securities Services (SGSS) has appointed Jörg Debé as relationship management director in Germany. Previously responsible for institutional and fund administration for BNP Paribas Securities Services in Frankfurt, he will be responsible for handling relations with institutional clients. ICAP has hired Robert Rees and Steve Bingley to lead the firm’s new London Metal Exchange base metals broking business. Rees and Bingley’s role will be to build the firm’s LME business and offer expert sales

Mike Head global partners director at Temenos

and execution services on LME products. Previously, Rees and Bingley were joint global heads of Base Metals at Bear Stearns. Data Explorers has appointed Maria Volpe as director of business development. Maria Volpe joins from Reuters, where she was director of ratings and led Reuters’ Machine Readable News from inception. Maria also helped build and launch Reuters Investment Banking and Corporates businesses in EMEA. Data Explorers has appointed Ken Read as its head of sales for the Americas. Joining Data Explorers from Williams Lea, where he led the North American financial services outsourcing practice. BNP Paribas Securities Services (‘BNP Paribas’) has appointed Alan Cameron as the new head of clearing, settlement & custody (CSC) client solutions. Alan joins from Citibank where he spent nearly 20 years and was most recently director of business development for direct clearing and custody. Jon Anderson has been appointed GlobeOp’s global head of OTC Derivativesand will be based in the company’s Manhattan headquarters office. He will also join GlobeOp’s Operating Committee. Wachovia Securities have announced that Craig Overlander, formerly of Bear Stearns,

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PeoPle Moves

Malcolm Hobday, Rule Financial

Mathew Harrison, Rule Financial

will join the firm as managing director and global head of Fixed Income, beginning September 15.

Jon Jodka, founding partner of the hedge fund Copper Arch Capital LLC, has joined UBS as managing director and head of US prime brokerage sales within its equities division. Jodka previously spent 13 years at Morgan Stanley.

CLS Bank International have appointed Roger Rutherford as the new head of product management. Rutherford joins from ICAP, where he was a global product manager. He previously worked for EBS, the global currency and metals e-trading platform acquired by ICAP in 2006. August RBC Dexia has appointed Nick Emmins and Conor Hoey as directors, sales & relationship management in RBC Dexia’s London office. Emmins most recently worked with BNP Paribas as head of business development - UK retail. Hoey was previously with Capita Group in the position of business development director. Garrett Curran has joined Credit Suisse as a managing director and co-head of European securities sales. He joins Credit Suisse from Dresdner Kleinwort where he was a member of the Dresdner Kleinwort Executive Committee. Credit Suisse Group has appointed HansUlrich Meister as CEO Switzerland and a member of the executive board. Hans-Ulrich Meister was previously head of business banking for UBS.

State Street has hired David Puth to join the bank as head of State Street’s investment research, securities finance and trading activities worldwide. Puth was previously at JP Morgan until 2006, where he was head of global currency and commodities, sales, trading and research, after which he founded the Eriska Group at the end of 2006.

of equities for Asia. Peter Hilton joins as head of Asian equities research and David Sarkis will relocate to Tokyo as head of equities for Japan. Following Rule Financial’s recruitment of Matthew Harrison, the founder of Martini, the firm has further strengthened its securities finance practice with the recruitment of Malcolm Hobday. Malcolm spent a total of 21 years at UBS, with the past 15 years in SBL on both the trading and product control sides of the fence, most recently as head of product development/ business controls for SBL and Swaps.

Kaupthing Singer & Friedlander has hired Johannes Brenner within its treasury division where he will be in charge of securities finance. He was previously managing director within Citigroup’s Prime Finance division in London, running Funding & Collateral Trading. Foppe Zwikstra has left Kas Bank. Roel de Groot who will act as temporary head of Securities Lending until a new head is appointed. Peter Irvine is now head of ABN AMRO’s Asian Equities business, and will relocate to Hong Kong. Irvine will also continue his role as head of global equities finance and collateral trading. Kin Cheung will take on the role of head of trading and deputy head GSL | 63

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PeoPle

Meet the Future Nora Reemts speaks about work, life and aspirations were your impressions of the event? It was our first time at the conference. IMC has grown significantly over the past years and we are continuously exploring related business areas. The conference was very useful in giving us a good overview on the securities lending industry and its participants. If you were nominated employee of the year, how would you celebrate? I would thank the people around me friends, colleagues and family - by throwing a big party - there would be no success if they were not around. If you were to choose the location and venue for the IMC Christmas party where would it be? As our headquarters are located in the wonderful city of Amsterdam, I would choose a nice big boat to cruise the canals. Who are your role models in life and why? My main role model is my mother. I admire strong women who live a self-determined life and challenge the existing, often out-dated status quo. My other role model is Elvis Presley – because he had a beautiful voice, and I wish I had one.

Since its inception in 1989, IMC Trading has grown into one of the world’s leading proprietary trading firms. With investment strategies in nearly every major market in Europe, the United States and Asia Pacific, and now involved within Equity Finance, the company strives to capitalise on the continuously changing conditions in the global capital markets. Justin Lawson speaks with Nora Reemts in the continuation of the Meet the Future series. When did you start working for IMC Trading and how would you describe your role? I started working for IMC as relationship manager 10 months ago. In my role I look

after external relations such as trading counterparts. I also travel a lot representing IMC at conferences and industry events. What aspect of your current position do you find most enjoyable? I really enjoy the dynamic and energising atmosphere in the dealing room. No one day is like another and we have a very international team of traders. I also very much enjoy travelling and meeting new people. With offices around the globe IMC is the ideal company to provide the grounds for that.

What life experiences have changed your attitude towards your profession? Being a mother has put everything else into perspective and has given me a different sense of being. It’s a great source of joy and energy that has a positive influence on my view on work and private life. If you could do one thing in life what would it be? I find the thought very difficult to restrict myself to one thing or situation only. But if I had to choose I would want to spend time with the people dear to me. Where do you see yourself in five years’ time? I will happily give an interview in an “Arrived at the top” column.

How did you find yourself at the RMA / ISLA Conference in Prague and what

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Maximize returns. Control risk.

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GSL pp01-15 GT2.indd 11

5/8/08 12:06:02

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