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Securities INDUSTRY INSIGHT
Interactive Data, books and records,
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PROFILES
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GSL ISSUE 03

Counterparties
Risks and resolutions

GBP 50
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 EDITOR'S LETTER

Michael P. Paul Lee, at Hermes

McAuley of the Equities Ownership Rupert Perry,
GSL News 6 RMA 10 Services 24 Pirum Systems 12

Interactive Data Nordic Market News Analysis:

54 Update 60 Watson Riot 8

Counterparty Credit Risk 15

Prime Time 19

David Rule,
ISLA 11

.GPF important part of the

securities services industry.
impact of the inabilty to
rehypothecate on hedge
by improving operational
efficiency is an ongoing
CPGCT It provides vital liquidity to funds. Joe Corcos provides theme. GSL talks to Rupert
the fixed income, equity and an overview of naked Perry co-founder of Pirum
“Securities lending is the money markets and stability short selling, what it is and Systems about need for
missing building block for to the market as a whole. where the problems lie. operational efficiency as
market completeness” It has also demonstrated And Spitalfields Advisors volumes increase. Cherry
that it can cope with a large report on the impact of the Reynard looks at books
default. Lehman Brothers collapse and record systems. Bob
Counterparty credit risk, the This issue of GSL focuses on beneficial owners. Cumberbatch, Interactive
changing world of prime on risk and the resolutions. The conflict between Data, writes on the vital
brokerage and the new short Ben Roberts looks at the views of the long necessity of accurate data
selling regulations have counterparty credit risk and investor verses the short in managing risk and our
all featured heavily in the debates the value of the first term have been a central panel looks at collateral
securities lending landscape. securities lending central theme. GSL talks to Paul management.
For the first time in more counterparties in Europe Lee of the Hermes Equity Many view this as a time
than 15 years there has been and the US. The impact of Ownership Service about of decision: are you in or are
a depletion in volumes and the various short selling the thought behind lending you out? If you are in you
market participants, as regulations on the securities securities (pg 24). We should gear up for increased
people weigh up the risks lending market in Europe also talk to Jason Kennard volumes, by improving
and rewards. However, and the US are analysed, head of SLB and Collateral operational efficiency and
it is clear that this is very while Brian Bollen reviews Management and Neill examining risk perameters
much viewed as a period of the arrival of China's Ebers, COO at Lionhart and procedures. If you are
reflection and change rather securities lending market. about why securities out, you may well return
than the end. Giles Turner focuses lending is important to their later.
Securities lending is on the changing world of strategies(pg 36).
viewed as an increasingly prime brokerage and the Preparing for the future Catherine Kemp

2 | Global Securities Lending Magazine | 2009

 
  
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CONTENTS

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News
33 | Asia Companies
6 | News China embraces sec lending,
Top industry stories Brian Bollen reports on Aite 31
the impact of short selling APG 6
8 | News analysis Asset Control 7
regulations on Asia
Watson Wyatt causes a stir BNY Mellon 6,7,39
and Standard Bank makes a 36 | Borrower Profile: Carne Global 19
change Lionhart CalPERS 28

10 | Across the Atlantic Catherine Kemp talks Clearstream 7,33,39

Two trade association figure to Jason Kennard and Conifer Secuirties 7

heads give their view from Neill Ebers about value of Credit Suisse 19

Editor: either side of the pond securities lending to hedge Citi 36

Catherine Kemp funds Data Explorers 28, 56
(Catherine@2ipartners.com) 12 | CEO profile Deutsche Bank 19
GSL talks to Rupert Perry 38 | Panel collateral EquiLend 63
Senior Reporter: management eSecLending 7
Ben Roberts at Pirum Systems about
Industry experts give their Eurex 6,7
(Ben@2ipartners.com) growing demand for
view on the market Euroclear 39
operational efficiency
Group Editor: FSA 10,31
Giles Turner 61 | 101 Reykjavik Greenwich Associates 14
(Giles@2ipartners.com) Industry Insight
Nick Pratt looks at the Goldman Sachs 19
Contributors: 15 | Counterparty challenges facing the Nordics ICAP 31
Brian Bollen, Nick Pratt, Cherry credit risk Interactive Data 6,54
Reynard, Joseph Corcos Ben Roberts looks at the rise Technology ISLA 10,15,28
of CCPs and the resolutions JPMorgan 39,56
Photographer:
to risk 50 | Back to front Lehman Brothers 10,29,24,26
Lucy Johnston
Cherry Reynard reviews Lionhart 28,36
Front Cover Illustrator: books and records systems
19 | Prime Time Lombard Risk 6
Morgan Miller
How will the changing face against a landscape of London Pension Fund Auth. 6
Operations Manager: of prime brokerage affect growing complexity Morgan Stanley 19
Sue Whittle
securities lending? Northern Trust 6,14
(Sue@2ipartners.com) 54 | Interactive Data OCC 14
24 | Lender profile: Bob Cumberbatch looks at Omgeo 22
Associate Publisher:
Justin Lawson Hermes the vital importance of data Penson 58
(Justin@2ipartners.com) Catherine Kemp talks to in managing risk Pirum Systems 13
Paul Lee at Hermes' Equitiy Quadriserv 7,14
Commercial Director: Ownership Service 56 | Statistics
RBC Dexia 6,
Jon Hewson Available inventory and
(Jon@2ipartners.com) RMA 10
26 | Benificial owners lending on US and UK retail
Rule Financial 39
CEO: Mark Latham
Spitalfields Advisors asses and banking stocks
SecFinex 7,15
(Mark@2ipartners.com) the impact of the Lehman
SoftSolutions! S.r.l. 64
collapse on beneficial owners People
Spitalfields Advisors 26
28 | Sold Short II 58 | People Moves Standard Bank 8
What has the impact of FSA Appointments and State Street 6,35
GSL| Global
Securities
Lending

and SEC regulation on short SunGard 28,50

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
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without prior written permission from
the publishers. ISSN 1759-0728
Printed in the UK
departures
selling been? Watson Wyatt 8
Zimmerhansl Cons. Serv. 8,24
63 | Directory
30 | The short selling Consulting, data, lending and
regulations
technology service providers
Short selling bans, disclosure
rules and naked short bans
64 | Meet the future
around the world
Amy Sussman talks to GSL
about work, life and cowboys
31 | Naked Short
Joe Corcos looks at the
problems of naked shorting

4 | Global Securities Lending Magazine | 2009


 



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2009 | Global Securities Lending Magazine | 5

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NEWS
)5.0GYU
Top industry stories at deadline. For more recent updates go to www.isj.tv/securities-lending
Collateral Management
London - Lombard Risk, a
global provider of specialised
software solutions for
collateralised trading and
regulatory compliance, has
won seven contracts for
its COLLINE collateral
management software since
March 2008. Contracts have
been won from: Lombard
Odier Darier Hentsch &
Cie, Jyske Bank A/S, SBAB
and Daiwa Securities SMBC
Europe, a large US East Coast
based asset manager with
over USD 120 billion under
management.
New York - It has been
reported that J.P. Morgan's
collateral management
business has grown 40% over
the past several years. The
company began a three-year,
multimillion dollar initiative
in July 2007 to build a new
technology and operating
environment for collateral
management to serve its
clients as well as internal
investment bank and asset
management divisions.
6 | Global Securities Lending Magazine | 2009
It has been reported that
BNY Mellon's collateral
management business has
expanded. The firm handles
more than USD1.8 trillion
dollars' worth of collateral
management business. BNY
Mellon's global collateral
management services team
facilitates the tri-party
collateral management
process, helping to manage
its clients' inventory. It also
helps firms manage collateral
to mitigate risk.
Luxembourg - Eurex Repo
and Clearstream announce
that the eligible collateral for
the GC Pooling market and
the Eurosystem Collateral
Management Services is
extended to French bonds.
This means that customers
now have access to a wider
range of securities to pledge
as collateral to the European
Central Bank (ECB) allowing
them to access liquidity in an
efficient and secured way.
London - Lombard Risk has
announced new automated
transaction reconciliation
functionality as part of
the company's end-to-
end proactive collateral
management solution at the
ISDA Symposium in Sydney.
The Colline Reconciliation
module expands Lombard
Risk's collateralised trading
solution by automating more
of the critical post trade
workflow, which historically
has been a time-consuming
manual process within the
OTC derivatives market.
Repo
New York – It has been
reported that the USD7
trillion US repurchase or
"repo" market has been
judged by traders and
analysts to be frozen as rates
fall close to 0%. Banks and
fund managers are under
pressure to accumulate less
risky assets and as a result
lenders are hoarding safer
government securities and
activity has dried up.
Securities Lending
Illinois - The Teachers'
Retirement System of the
State of Illinois (TRS) has
selected State Street to serve
as its new master custodian
and securities lending
provider, subject to contract
execution. State Street
replaces Northern Trust who
had been TRS' custodian
since 1996.
London - A survey released
by RBC Dexia Investor
Services, which maintains
the industry's most
comprehensive universe of
Canadian pension plans and
money managers, shows that
in the CD 340 billion RBC
Dexia universe, Canadian
pension plans suffered the
largest quarterly decline in
a decade, tumbling 8.6 %
in the three months ending
September 30.
London - Vanguard,
Strathclyde pension fund,
E. On pension fund, and
London Pension Fund
Authority all stopped
securities lending
temporarily. A spokesman
for Strathclyde pension fund
says: "Our concern is with
the disorderly nature of the
markets at the moment.
Ultimately the reason we
have stopped lending is, it
is a very marginal source of
income for us. So if there is
increased risk, it is simply
not worth our while to
continue."
London - APG, the Dutch
pension fund, stopped
lending a number of US
and European stocks to help
try to stabilise the market
following the UK Financial
Services Authority's (FSA)
ban on short selling and the
US Securities and Exchange
Commission's (SEC) ban on
naked short selling.
Technology
New York – Interactive Data
Corporation announced
that its Pricing and
Reference Data business
now provides daily
independent evaluations
of commercial paper
issues to Standard & Poor’s
Index Services for its
recently launched S&P US
Commercial Paper Index.
The S&P US Commercial
Paper Index is a new,
broad-based index designed
to serve the

investment community’s
need for a benchmark for US
commercial paper.
London - BNY Mellon Asset
Servicing has launched its
new Trustee Board Reporting
solution. This advanced
reporting package combines
asset liability matching
information and advanced
analytics alongside more
traditional core performance
and historic risk reporting
to assist trustee boards and
investment committees in
evaluating the progress of
their investment programmes.
San Francisco - Conifer
Securities is now offering
prime brokerage services
to hedge funds including
financing, securities lending,
asset custody and daily
account reporting. Conifer
is a provider of business and
operations solutions to asset
managers and institutional
investors, and is offering these
new prime brokerage services
through J.P. Morgan's Broker
Dealer Services business.
New York - Asset Control, a
financial data management
solutions provider,
announced that eSecLending,
a full-service securities
lending agent, has chosen
Asset Control's AC Plus
financial and reference
data management software
following a rigorous search
and selection process.
eSecLending will use AC Plus
to support the company's
efforts to further increase
automation in their securities
lending programs which rely
on complete and accurate
securities data including
ratings, end of day prices and
corporate actions.
Market Infrastructure
London - The International
Securities Lending Association
(ISLA) published a statement
of market guidance on billing
comparison in the securities
lending market. The
statement recommends that
monthly billing statements
should be communicated
using automated
reconciliation tools where
possible. Statements should
be received by the second
business day of each month
and cleared by the tenth
business day where possible.
In the event of a discrepancy,
partial payments should be
made for the undisputed
portion of the bill. Best
practice is for no billing to be
outstanding at the end of a
month.
Zurich - SecFinex Limited,
a NYSE Euronext Company
and the leading European
electronic trading platform
for equity finance, and SIX
x-clear AG, the Central
Counterparty (CCP)
and licensed Swiss bank,
announced that they have
signed an agreement to
launch CCP services for stock
borrowing and lending across
the SecFinex Order Market
multilateral trading facility
for key European markets.
Madrid - The International
Organisation of Securities
Commission's (IOSCO)
Technical Committee has
created three task forces to
deal with regulation for
short selling, derivatives
NEWS
trading and activity by
currently unregulated
entities such as hedge funds.
A task force will work to
eliminate gaps in various
regulatory approaches to
naked short selling, including
delivery requirements and
disclosure of short positions.
It will also look at how to
minimise adverse impacts on
legitimate securities lending,
hedging and other types of
transactions that are critical
to capital formation and to
reducing market volatility.
The Task Force will be chaired
by the Securities and Futures
Commission of Hong Kong.
Luxembourg - Eurex Clearing
AG and Clearstream Banking
Luxembourg S.A. announced
that they will introduce a
central counterparty service
(CCP) for securities lending
in Q2 2009. Eurex Clearing
will act as the clearinghouse
for Clearstream's widely used
strategic securities lending
program ASLplus.
New York - Quadriserv, Inc.
is working with the Options
Clearing Corporation
(“OCC”) on an agreement
to operate a centralised
securities lending platform.
The OCC would provide
clearinghouse services
for all securities lending
transactions submitted
through Quadriserv’s AQS™
securities lending platform,
bringing market structure,
transparency and efficiency
to borrowers and lenders of
securities. AQS will operate
a centralised securities
lending platform for domestic
equities. =
NEWS ANALYSIS
News Analysis
A new Standard?
What is Standard Bank up to? Llewelyn
Ford, head of securities lending and
futures at the Cape Town-based
custodian, has given a few hints
concerning a new model for its
securities lending operation. “We are
looking at a new system to have in place
within the next 12 months connected
with India,” he said, regarding the
challenges of South African securities
lending.
Aside from these plans, the
challenges to South African securities
lending are very similar to other places.
Ford states: “Up until June this year
there has been significant growth, often
as much as 35% growth year on year.
But recently we have seen the total
loan position drop of between 30-40%,
along with a sell off in bond portfolios.”
He added that many clients have
been re-evaluating their securities
lending set-up and the bank has fielded
“a lot of enquiries”. One ongoing
sticking point seems to be the fact that
cash collateral must be in South African
Rand, a volatile currency. “The volatility
does affect things a bit, particularly
offshore borrowers who would like to
trade in a more stable currency.”
Standard Bank has a few countries
in its sights to develop securities
lending: Nigeria and Kenya. The
Central Bank of Nigeria invited Ford
to talk about securities lending amid a
wider summit about inflation targets.
Botswana is also a potential next step.
“It is open to securities lending in terms
of liquidity and a higher number of
stocks listed there,” said Ford. “We’re
looking at dual listings and countries
with strong operations.”
Mark Kerns, global head of Investor
Services at the bank, said: “Nigeria
is a target, although, while there
is rationale for a securities lending
program the Central Bank has not yet
introduced it.”
For the bank’s home market, he said:
“The trading volume has not been too
bad given the volatility.” Kerns adds that
South Africa has benefited from not
8 | Global Securities Lending Magazine | 2009
having short selling restrictions, though
further enquiries by beneficial owners
have continued nevertheless. “People
are very focused on the dynamics of
securities lending and understanding
risk.”
He adds that Standard Bank's policy
of only dealing in cash collateral was a
cautious but timely policy in risk-averse,
cash-hungry market circumstances.
“You can see the benefits of that in
terms of cash flow where the issue for
clients becomes, ‘what risks are there of
broker default’.” However, there is some
room for government bonds. “Fixed
income we can leverage on our clients
behalf and make a return on that.” =
News Analysis
Watson Riot
The November 2008 Watson Wyatt
report: Securities Lending Loses It's
Shine, has caused controversy. It
advises pension funds to ‘suspend
securities lending activity if they are
in any doubt about their lending
guidelines and arrangements’ and
identifies counterparty, collateral
and indemnification risk as the main
areas of concern. It also says that
'by and large' the securities lending
industry coped well with the Lehman
Brothers default but that the default
demonstrated the risks within securities
lending. Although it acknowledges that
agents were able to re-purchase most
clients’ assets within two days of the
Lehman Brothers default.
In some ways the report is difficult
to argue with – if the risks outweigh the
rewards, perhaps lenders should stop
lending. What is controversial is that
many think the report infers that the
industry is now more risky than it was
before without explaining why.
Roy Zimmerhansl of Zimmerhansl
Consulting Services, said:
“What is lacking is any kind of
substance about what they think is
a potential issue. Do they think the
market has changed, do they think there
is some new experience as a result of
Lehman where the legal agreements
haven't performed as proposed, or that
the controls and risk procedures or
the liquidation of the collateral hasn't
worked well? ”
David Rule, CEO of ISLA said:
“The headline: Securities lending
loses it's shine, was not merited by the
report's substance. It just reiterates what
has always been the case, which is that
beneficial owners need to understand
the risks they are taking. The headline
seems to be designed to scare lenders.
Some risks have been crystallised, and
we have had a counterparty default,
but as they say very few people who
were lending securities to Lehman have
ended up with losses because of the way
that the industry manages risk. ”
Another crucial aspect of the report
that concerned Zimmerhansl was the
recommendation to accept government
bonds as safe collateral. “The big
challenge in a default is to make sure
that you can liquidate collateral,” he
says, “ensure you have enough money to
buy back the stocks you've loaned out.
Ideally you want assets that track each
other so that if the value of the stock
you have on loan goes up or down, so
does your collateral. Treasury bonds
are therefore not necessarily the safest
collateral. Frankly I don't think Watson
Wyatt has the expertise to give advice on
this subject.”
In response to questions put to
them about these issues, a Watson
Wyatt spokesperson said: "We accept
there have always been risks and we
have always made sure our clients are
conscious of these risks. However, the
losses suffered in some programmes this
year do make it sensible for asset owners
to rethink the cost benefit trade off of
these programmes." =
ACROSS THE ATLANTIC
#ETQUUVJG#VNCPVKE
Trade association figureheads from either side of
the Atlantic update GSL on their activities
over the last few months.
Michael P. McAuley, Esq.
chairman of the Risk
Management Association's
Committee on Securities
Lending and managing
director and chief product
officer in State Street
Corporation's securities
finance division, writes of
tax, Regulation SHO and the
RMA's ongoing dialogue with
regulators.
It continues to be a challenging and
unprecedented time in the global
financial markets. The future of the
securities lending industry will be
determined by how we respond to the
extraordinary events taking place in
today’s environment.
In the US we are working feverishly
to address the issues presented by
these events and striving to deal with
the many unintended consequences
impacting our industry as a result of
the regulatory changes in other parts
of the financial markets. Much of
this effort involves establishing new
relations and maintaining ongoing
10 | Global Securities Lending Magazine | 2009
dialogue with various government
regulators, and providing education
about how our industry works both
at a high echelon and in detail at the
operational level. I believe providing
this counsel will be one of the most
important tasks for our committee
over the next few years.
The Risk Management Association
(RMA) remains resolutely positive
about our industry. Although
attendance at our recent 25th
annual Conference on Securities
Lending was understandably lower
than anticipated, the lending and
borrowing professionals who did
attend participated in several notable
panel presentations and were privy to
some of the liveliest and most frank
discussions about topical issues and
concerns that I can recall from any
conference.
The RMA and its subcommittees
continue to work on behalf of its
members. Of recent note is the work
the securities lending committee did,
with the help of counsel Rom Watson
of Ropes & Gray and other industry
groups, with respect to obtaining a
revenue procedure from the Internal
Revenue Service (IRS) that addressed
the tax issues relating to the default
of a borrowing counterparty. After
opening a dialogue with the IRS and
explaining the concerns, the IRS
responded quickly and issued Rev.
Proc. 2008-63. This welcomed ruling
prevented recognition of gain or loss as
a result of a borrowing counterparty’s
failure to return securities and, in
effect, treated buy-ins as if they were
returns of the loaned securities.
Rev. Proc. 2008-63 also provided a
blueprint for resolving similar tax
issues in other countries.
The securities lending industry
is also struggling with the close-out
requirements imposed by Regulation
SHO. As executing brokers have rushed
to comply with the new rules and
avoid potential penalties, many of
the market practices that previously
existed regarding the notification of
buy-ins are no longer being followed.
The RMA and the Securities Industry
and Financial Markets Association
(SIFMA) are collaborating to help
resolve these issues. We are hopeful
that, together, we can reach a solution
that is mutually beneficial to the
industry and our clients, while still
meeting the regulators’ requirements.
Lastly, I am pleased to announce
the securities lending committee has
formed a new legal subcommittee
which has participation from a
broad range of our members’ legal
and product development staffs. Its
objective is to help the committee
respond to legal and regulatory
changes. The legal subcommittee’s first
challenge will be to partner with our
operations subcommittee to provide
an industry response to the request
for comments on the changes to
Regulation SHO. =

The International Securities
Lending Associations’s (ISLA)
CEO, David Rule, writes of
short selling regulations,
ISLA's GMSLA review and the
Lehman default.
In September, regulators around
the world introduced emergency
restrictions on short selling without
consultation or notice.
ISLA has focused on countries
where short selling restrictions have
affected securities lending. In France
and Belgium, regulators have asked
institutions to refrain from lending
financial shares except for outstanding
transactions or where not facilitating
short selling. In Italy and Spain,
regulators have interpreted naked short
selling to include selling where shares
are on loan.
ISLA aims to influence permanent
regulations put in place when the
current temporary restrictions expire,
to avoid any restrictions on securities
lending and to promote disclosure of
short interest in shares at aggregate
rather than individual level.
LIBA, AIMA and ISLA
commissioned a study by Professor
Ian Marsh of Cass Business School
into the effectiveness of the short sale
restrictions in major markets. That
study found that the restrictions had
had no discernible effect in reducing
share price volatility (see table below
for UK shares).
As part of its review of the Global
Master Securities Lending Agreement
(GMSLA), ISLA members discussed
the Lehman default. ISLA intend to
adopt the post-default procedures
of the Global Master Repurchase
Agreement, which give more
flexibility to the non-defaulting party.
Freshfields has written a protocol
that allows market participants to
substitute the new procedures in
existing documentation. We hope to
finalise the new version of the GMSLA
and the protocol early in 2009.
In October, ISLA wrote to the UK
tax authorities following the default of
Lehman asking for relief from capital
gains tax on unintended disposals of
lent shares following a counterparty
default and from stamp duty/SDRT
on sales of collateral and repurchases
of lent securities in the market. The
UK Pre-Budget Report in November
included a paper stating that measures
to introduce these changes would be
introduced in the Finance Bill 2009,
with retrospective effect to cover the
Lehman default.
ISLA conducted a survey on how
members managed counterparty
risk, including counterparty limits,
collateral eligibility, and haircuts. It
asked for views on the introduction of
a central counterparty in the market.
2009 | Global Securities Lending Magazine | 11
ACROSS THE ATLANTIC
The importance of disclosure by
agent lenders to borrowers of their
exposures to underlying principal
lenders has been highlighted. On 15
July, ISLA published its agreed model
for EU Agent Lender Disclosure and
subsequently the FSA welcomed the
model reiterating its requirement for
UK-regulated borrowers to receive full,
daily disclosure by January 2010. In
November, ISLA conducted a survey
gauging members ALD plans following
a well-attended roundtable on 20
November. Results show agent lenders
intend either to adopt the ISLA EU
ALD model or to disclose principals
at point of trade and use collateral
allocation letters, while borrowers
expect their agent lenders to use a mix
of these two approaches and bilateral
email.
The Lehman default
understandably led many beneficial
owners to reconsider risks in securities
lending, including counterparty
selection, collateral eligibility,
collateral valuation and haircuts,
cash reinvestment mandates and
indemnities from agent lenders. Some
suspended lending programmes, in
most cases temporarily. Securities
available for lending globally are
estimated to have decreased by 10-
15%. =
12

4WRGTV2GTT[
Rupert Perry, co-founder of Pirum Systems, talks to Catherine Kemp about automation and the quest
for better lender-borrower communication.
As dot.com boomed in 1999, Rupert
Perry and Jeff Armstrong were inspired
by Hotmail to co-found Pirum
Systems, a leader in the automation of
post-trade securities finance.
“It was the first time we had seen
that a complex application can be
delivered through a web browser,”
says Perry, who was working with
Armstrong at UBS on the automation
of its securities lending department.
“At that time there was really no
automation to speak of between banks,
only internalautomation. We felt that
there was an opportunity to link banks
together and make processing more
efficient using the web. The aim of the
company is to automate all post-trade
processes, making them more efficient
and more controlled. Funnily enough,
most of the ideas that we had back
then have since been done either by us
or others.”
Rupert Perry graduated with a
degree in computer science in the early
1990s. He became an accountant at
Ernst and Young. He entered securities
lending when he moved to SG
Warburg, now UBS, setting-up Global
One, the transaction software now
owned by SunGard.
“When I started at SG Warburg,
back in the early days when Global
One first went in, it wasn’t connected
to any other systems at all,” he recalls.
“Everything was double-keyed and
there were a lot of problems, which
very much affected volumes. "You can
get to a certain level without putting
the automation in place and then,
thereafter, it reaches a point where
manual procedures don’t work any
more. As you get more and more
transactions coming through,
you need the automation in place
to manage the growth in volumes."
The vision for Pirum came from
realising the necessity of having an IT
group working outside of the banks to
develop systems that would enable the
banks to link together.
An attractive aspect of securities
lending is that it is not completely
vanilla, says Perry, nor as straight-
forward as a buy transaction or a sell
transaction. This is where much of the
job satisfaction resides. “The whole
lifecycle is a lot more complicated than
people seem to realise - it’s a challenge
to get all of the processes fully
automated. Our services are designed
to make operational procedures much
more efficient, controlled, automated,
less volume sensitive, and generally so
that they work much better.”
Contract comparison and billing
comparison are Pirum’s two original
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services. Both were designed with
greater speed and operational clarity in
mind, as well as an essentially paperless
future.
The contract comparison extracts
information from clients books and
records system daily and compares
it with the counterparty’s records to
highlight possible discrepancies.
“Without this system, people have
tended to send a faxed report of the
outstanding positions to the other
side, and somebody has then had to
go through it by hand, ticking all the
details off. This takes a long time and
means people don’t do it nearly so
often, certainly not on a daily basis,
because they would need an entire
2009 | Global Securities Lending Magazine | 13
CEO PROFILE
army in the back office to do so,” he
says.
The billing comparison system takes
information from both counterparties
on a monthly basis and compares the
bill with what the counterpart expects
to pay. The system compares the trades
daily and highlights exactly where the
discrepancy lies between the bill and
what people are expecting to pay. This
means that the bill is paid or received
on a more timely basis, and improves
the relationship with the counterparty.
They also take the data in most
formats, which reduces development
costs.
“Without this automation,” says
Perry, “one side will send the bill to the
other on paper. If it’s a big relationship
with thousands of trades the bill
may run to hundreds and sometimes
thousands, of pages and at the end of
it there is a grand total line. The first
thing they do is look at that total and
hope and pray that the number is close
to what they were expecting on their
own system. If it isn’t close, they then
have to work out why, which is like
looking for the proverbial needle in the
haystack.”
Perry says client inform him
that the bills paid first are from
counterparties that they reconcile with
automatically. “All the more difficult
manually reconciled bills get put to
the back of the queue, which causes
friction with the counterparty.”
The firm is also now providing billing
on an Excel spreadsheet, he adds,
making it easy for the recipient
to search and filter the bill as required.
A couple of years ago Pirum
brought out the marks and exposure
service, which was the first exposure
reconciliation system with a real
time reconciliation capability. All
transactions between the lender
and borrower that contribute to the
CEO PROFILE
exposure or that need to be marked to
market, are compared and prioritised
by those causing the biggest problems,
or biggest differences in price.
Non-cash collateral is a classic example
of this, he says. The exposure in this
case is on the collateral side, where
fixed income securities are often
used. He says traders commonly run
into problems with the static data,
where they are unaware they are
not calculating the accrued interest
correctly as some data is missing. “They
are getting a price coming in from the
vendor every day, a clean price - but
in order to use it for valuation process
they have to convert it into a dirty
price, which means adding on the
accrued interest,” he explains.
“This is the accrued interest since
the last coupon was paid. If they
don’t have the right coupon rate and
payment date set up for that coupon
they won’t calculate the accrued
interest, to date correctly and the
system will undervalue the collateral as
a result."
Other problems include prices fed
through at 10 times the valuation, or
the accrued interest is missing, or only
one party is updating their price each
day, or data is present but it is based
on an old security. Corporate actions,
he adds, have also caused problems.
“If you haven’t got the time to find
these sorts of issues they come back to
bite you later because you valuation
will be wrong, and that effects your
view on what your exposure is to the
counterparty,” he says. “The right
automation gives you confidence that
your data is accurate and complete
and that you’ve got everything re-
collateralised on a daily basis.”
The newest service to be rolled out
focuses on a better automation of
borrowers communicating the stock
they would like to return. Currently
borrowers produce a report saying
what securities they want to return
and the lender has to relate the
corresponding transactions in their
14 | Global Securities Lending Magazine | 2009
system and enter a return, so that
both sides then instruct the custodian
to return the stock. As with contract
comparison, the system is looking for
parity in the instructions between the
counterparties."
The evolution of the industry is very
much tied up with volume, as with
any market, he says. “Back in the early
days there was very little volume by
comparison to what there is now.
This is the first time, certainly in
my experience in the industry, that
volumes are actually shrinking.”
People are going to have to decide
whether they are going to be a market
participant for the long term, Perry
believes, and technology will be
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integral to their decision. “For people
to continue to play in the market
going forward they are going to need
to use all of the different technology
platforms, both pre and post trade, so
they can make their business processes
as efficient and controlled as possible -
particularly around operational risk."
“In current conditions it is essential
that you have confidence in your books
and records, and in order to do that
you need efficient, automated, straight-
through processing, with tools that
help you understand any exceptions
you’ve got, why they are there. They
get identified quickly and easily so that
your operational staff can investigate
them.
“Automation means that you are
much more scalable and that you can
grow your volumes. So that when the
industry recovers and volumes start to
rise again, you have the right platform
in place so that you can grow the
volume in a controlled manner.
“What can happen is that volumes
get very high – people get behind in
dealing with the exceptions because
they are trying to cope with the
enormous volume of transactions
that are going through, so by using
automation and getting all the
processes as automated and controlled
as possible, it provides the platform for
the industry to grow the volume to the
next level. If you are a very small player,
that doesn’t have enough volume to
justify the investment in technology, it’s
going to be difficult to stay in.”
The International Securities
Lending Association (ISLA) and the
Risk Management Association (RMA)
in the US have both produced best
practice papers saying that automated
operational tools are recommended
as best practice. This is used as a
benchmark between borrowers
and lenders as to whether they are
operating in accordance with best
practice.
“Some lenders now tell us that
they view this as an important
consideration, and will direct more
business to those who have automated
platforms in place,” he says. “What I’m
seeing is that there are people in two
camps: there are those that are sure
they are going to be in the industry
long term and if they aren’t already
using a tool they are being pushed very
hard by counterparties; on the other
side there are others who are looking at
the turmoil going on, and putting any
technology initiatives on hold to wait
and see what will happen.” =

%QWPVGTRCTVKGU
US lawsuits and portfolio re-evaluations have redefined securities lending in the last quarter. But how
will the market take to central counterparties to minimise trading risk? Ben Roberts reports.
Securities lending’s move out from
its back-office origins has connected
the industry with many of the
major themes of the credit crunch.
Counterparty risk, the fear that
disrupted inter-bank lending and
exploded credit default swaps market,
has found its place within lending and
borrowing just as it had done in out-
and-out trading.
Amid wider regulatory upheavals,
securities lending participants and
technology vendors across continents
have taken a long hard look at the
roulette of bi-lateral agreements and
responded in different ways. In the
US, this has occasionally ended in a
legal dispute. In September 2008 the
University of Washington, Seattle
filed a lawsuit against Northern Trust
on the back of losses incurred from
its securities lending program and
the refusal by the custodian to fully
compensate.
Then on 21 October, the BP
Corp. North America Savings Plan
Investment Oversight Committee
filed a lawsuit against the same bank
after incurring losses resulting from
investments linked to its securities
lending programme. The disputes
highlighted for some the need for
greater clarity in the responsibilities of
bank and pension fund trustee. In the
wake of the case, numerous pension
funds pulled their securities lending
operations.
In parallel with these cases,
plans have developed on both sides
of the Atlantic to create central
counterparties for securities lending.
On 9th October Quadriserv, the
technology provider, announced it
is to create a centralised securities
lending platform with the Options
Clearing Corporation (OCC). The
OCC would provide clearinghouse
services for all securities lending
transactions submitted through
Quadriserv’s AQS™ securities lending
platform. In Europe, SecFinex, the
online market for securities lending,
is leading the development of three
central counterparty using different
clearing houses.
Dev Clifford, principal at
Connecticut-based Greenwich
Associates, says doubts around the
credit worthiness of collateral and
cash reinvestment have joined fears
2009 | Global Securities Lending Magazine | 15
COUNTERPARTY RISK
surrounding counterparty risk to
make the traditional side project of
asset lending more dangerous than
it was worth. “From the lenders
perspective they weren’t netting a lot
of money; it was typically used as a
way to offset trust and custody fees
and bring those from a cash outlay
stand point to zero.”
“The original problems that
cropped up late 2007, early 2008, had
to do with the fact that some of the
collateral being offered, while rated
very highly, contained some of the
mortgage securities that caused the
trouble. With the declining value this
would lead to calls for more collateral
being added and, of course, if you’re
a distressed participant, you may not
have the collateral to put up.”
Greenwich Associates recently
undertook detailed research into the
concerns of pension fund boards. In a
survey of 141 institutional investors,
92 had tightened investment criteria,
43 made changes to their lending
programs, and six had cancelled
lending altogether. Clifford expects
many more pension funds to at least
review their lending programs.
COUNTERPARTY RISK
He highlights the danger in blurring
the division between a custodian
and a trustees’ responsibility, and
says securities lending is now taken
more seriously whereas the potential
risks may have been overlooked
before. “There have always been
some questions about the fairness
or adequacy of the split with the
trust and custody bank that run the
programmes,” he says. “I wouldn’t
say they got a ‘free ride’ but probably
not far from that, at least from a risk
standpoint. I think with the issues that
arose… you need to step back and
take a look at this and ask yourself ‘is it
worth the risk?’”
That some may have considered
securities lending as ‘free’ is echoed by
Bo Abesamis, senior vice president and
manager of the Master Trust, Global
Custody, and Securities Lending
Group, at San Francisco-based advisers
Callan Associates. “What has happened
here in the US, and all over the world
is, complacency. Because some have
classified securities lending income as
‘free lunch’ – it has masked the other
side of the equation, which is ‘there’s a
risk attached to this lunch’,” he says.
Mark Faulkner, managing
director of Data Explorers, the stock
lending analyst, is incredulous that
any lender or adviser involved in
securities lending could ignore the
risks. According to the firm’s data, the
industry, even post global deleveraging,
is generating annualised income in
excess of USD14.6 billion a year. “This
income is not risk free. There’s no
such thing as a free lunch – if it seems
too good to be true then it probably
is. In the US, the vast majority of the
collateral taken is cash and currently
an average of 98% of the US lender’s
revenue comes from reinvestment
rather than the intrinsic securities
lending rental. Not all programmes are
configured this way and some lenders
are lending stock for nothing (or even
at a loss) to hold on to the cash they
have. The process by which collateral
is reinvested is still a central part of the
16 | Global Securities Lending Magazine | 2009
debate.”
Abesamis, who heads the team for
securities lending advice at Callan,
reports an increase in client enquiries
as to the risks attached to lending and
borrowing. “It’s very tough to take
the emotional argument when the
expectation is that securities lending
should be relatively safe. The intent
really is to look at this is a rational,
logical manner.”
Abesamis cites counterparty and
reinvestment risks of quite startling
complexity, with a lack of transparency
underlying much of the confusion.
“Securities lending could be in any part
of in investor’s portfolio: it could be in
index funds, in mutual fund holdings,
or in a custody-based programme
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or the cash funds. So there’s a lot of
confusion and frustration.” In this
way, a client may not be aware they are
engaged in securities lending indirectly
if part of the portfolio is invested in
funds that lend securities. The result
is greater dimensions of complexity
with a further challenge to risk
management.
Abesamis adds that many
pension plan sponsors know who is
borrowing their securities, and says
there are potentially two forms of
counterparty risk. The first instance
is in the solvency of those borrowing
the securities. The second is in the
reinvestment of the cash collateral,
where “there is a counterparty to
the issuer of the short-term debt
instrument”. The ratings assigned by
the much-maligned agencies such
as Standard and Poor’s and Moody’s
to certain investment products also
compounds the doubts surrounding
this latter form of counterparty risk,
he adds. “If a rating agency says a
product is AAA, Aa1, then it’s less risky.
But is the transparency correct? In an
environment where there is a liquidity
crisis I think everybody realises now
that the triple-A rating may not
necessarily mean it’s less risky.”
Ahmed Maudarbocus, equity
trading and financing, Paris head of
securities lending trading at BNP
Paribas, says the upshot of compiled
risk and greater lender awareness
will inevitably cause the market to
cautiously retract. “The only thing you
can do is be more careful in the market
and be more careful as to which
counterparty you’re taking your risk.”
For the last four months, SecFinex
has made its intentions public to
establish a central counterparty for
European stocks. It has undertaken
a tentative, staggered approach using
different clearing houses for the stocks
of different groups of countries.
At the Sibos conference in Vienna,
the firm announced a link-up with
LCH.Clearnet to develop a central
counterparty for stocks on companies
from the Euronext market: France, the
Netherlands, Portugal and Belgium.
Francois Cadario, director of
business development at LCH.
Clearnet SA, explains that a central
counterparty would nullify the default
of a borrower by guaranteeing delivery,
effectively taking on the counterparty
risk. “The risk of default and the
exposure of credit risk for members
are so tight the benefit of effectively
having a position of a clearing house
and the guarantee provided up to the
final delivery is effectively something
more than attractive for the large set of
big players,” he says.
Then on 25th November 2008,
SecFinex announced a link up with SIX
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COUNTERPARTY RISK
x-clear, the Swiss central counterparty,
for an identical securities lending
exchange, this time for the Swiss,
Austrian, German and Norwegian,
Danish, Swedish and Finnish markets.
A third link-up is planned which will
create a CCP for a third set of markets,
including the UK.
Much seems to be riding on the
success of these central counterparties.
Robert Reynolds, global head of
sales at SecFinex, says the majority
of its shares had been bought by
parent company NYSE Euronext
in anticipation of these new
developments. “I think it would be fair
to say that NYSE Euronext’s interest in
SecFinex was because we were looking
to introduce a central counterparty,
or hoped to do so, for the securities
lending markets.”
SecFinex has two existing major
platforms. One is a private, bilateral
market where the borrower and the
lender know each other and negotiate
trades as if via the telephone or
Bloomberg. The second is an order
market, with a bid/offer details market
showing best bid and best offer depth
of book. The latter, says Reynolds,
is “pre-trade anonymous” but with
post-trade name disclosure - it is this
platform method that will form the
securities lending CCP to create “a real
price-driven marketplace”.
The model will contain trade
members for the transactions through
SecFinex, and clearing members for
the LCH.Clearnet side. The CCP
will guarantee to cover the default
of a clearing member, and a clearing
member will sign an agreement with
a trade member to clear their trades
and provide capital cover in the case of
a trade member defaulting. Francois
Cadario says if a clearing member and
a trade member default at the same
time, they will be treated as distinct
cases to minimise market impact.
Reynolds adds that he has been
surprised there is no existing central
counterparty for securities lending.
“The electronic platforms that service
the securities lending markets are
18 | Global Securities Lending Magazine | 2009
pretty small, and the market share is is a big issue. The realisation there is
pretty insignificant. In this bilateral would you be able to look into every
world people prefer to use relationships portion of the off-balance sheet items
and the electronic platforms have that are in the books of a counterparty.
carved out a very small market That’s one thing. Because of what’s
share. So we think the move to credit happening in the industry I’m pretty
implications and the move to CCP will sure transparency would evolve and
redefine the market.” regulators would probably inflict
Some believe the introduction of a requirements for people to disclose. If
CCP is timely. Ahmed Maudarbocus that’s the case, a central counterparty
at BNP Paribas says after the collapse might make sense.”
of Lehman Brothers, a central However, he warns that you can
counterparty is a “step in the right only create a central counterparty when
direction. One year ago or two no-one everybody agrees to the same rules of
would have thought it useful; now it’s disclosure, and says he would actually
definitely something which can be very prefer to have a concentration of risk
interesting.” in one place. “But would that achieve
Others have reservations. Patrick it in totality? In the US, especially with
Hannon of M&I Global Securities the large institutional investors, the big
Lending believes that although a corporate funds, the pension funds,
central counterparty would nullify the endowments, they normally have
the default risk of the borrower, their own risk modelling that they
a beneficial owner would still be undertake. It will have to match up
with those risk-modelling parameters.”
³6JKUKPEQOGKUPQVTKUM One influential factor to the success
HTGG6JGTG¶UPQUWEJ of the CCPs is if agent lenders are
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VJKPICUCHTGGNWPEJ´ of the operation. Mark Faulkner says
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&CVC'ZRNQTGTU trading members is uncertain in the
context of a market already nearing its
monetary, information technology and
exposed to the potential default of the psychological resource limits. “Capital
CCP trade members. Dev Clifford at is the scarcest commodity – whether
Greenwich Associates believes the idea agent lenders will want to step forward
would simply concentrate risk, adding, and become principles is still to be
“As we’ve seen, there is no limit to the determined,” he says. My concern is
size of an institution that can get into that there is so much going on already
serious issues.” that despite this being the right time to
Chris Taylor, head of securities consider this – the market may not be
finance in Europe at State Street, says a capable of doing so.”
CCP will only really benefit broker-to- Amid diverse views, there is a
broker stock loans. An agent lender will common interpretation is that the
not only have to buy into becoming a traditional agent lender model will
trade member but will be restricted to not be revolutionised tomorrow by
receiving cash collateral. central counterparty. Chris Taylor says
Bo Abesamis is more welcoming to State Street will remain outside the
the idea, in theory. “To have a central CCP and continue to receive a variety
counterparty, the idea is very noble. But of collateral. Mark Faulkner also sees
at the end of the day we still need to potential limits to the CCP initiative
make information, we need to quantify unless agents can be involved – “the
and often quantifying the level of risks, agent lender is deeply embedded in
quantifying what’s really underneath, market structure,” he says.=

2TKOG6KOG
The relationship between prime brokers and hedge funds has become increasingly volatile. Giles
Turner looks at who the costs are being passed to, and how this affects short selling.
Hedge fund mangers focus on short
term decisions. It is not surprising
that these same managers cannot
make up their mind regarding their
prime brokers. After the fall of Bear
Stearns, prime brokerage was a two-
horse race, with Goldman Sachs and
Morgan Stanley accounting for 70%
of the market. The collapse of Lehman
Brothers spread market confusion
and soon other players were picking
up brokerage business from nervous
funds. Credit Suisse and Deutsche
Bank have been substantial winners,
along with BarCap, with its acquisition
of Lehman’s US operations.
Initially, hedge funds were chopping
and changing prime brokers due
to counterparty risk, and avoided
traditional prime brokers for the safer
CHANGING WORLD OF PRIME BROKERAGE
triple-A rated custodians. At present,
Goldman Sachs and Morgan Stanley’s
counterparty risk has been reduced
because of capital injections from the
US government. And if counterparty
risk was the sole reason for worry,
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then Credit Suisse and Deutsche
Bank should be the industry’s major
winners, as no company named after
its country of origin will be allowed to
go under. But the collapse of Lehman
Brothers and Bear Stearns in 2008 has
2009 | Global Securities Lending Magazine | 19
broken the faith of any fund to reply
on the old broker-dealer model. Today,
the multi-prime model is prevalent
as a result of the need to the need to
difuse counterparty risk. The ‘one-stop’
shop for prime brokerage has been
broken.
According to John Donohoe, CEO of
Carne Global, an independent adviser
to the global hedge fund, mutual
fund management and private wealth
industries: “Between September and
October, managers have been setting
up multiple brokerage arrangements.
Instead of the two dominate players we
have four or five major players. A lot of
managers have also focused on the fact
that their securities might be better off
at a traditional custodian, rather than a
prime broker.”
CHANGING WORLD OF PRIME BROKERAGE
Custodians, some with less volatile
balance sheets and credit lines
straight to government coffers, are
seen as safer bets than the straight
forward prime brokers. At present,
these brokers have a lot to lose. A
significant amount has be earned on
the back of providing financing for
certain types of structure using high
levels of leverage. This financing has
decreased due to the contraction of
the prime brokers balance sheets, but
as conclusions are drawn about the
scale of de-leveraging, it is important
to remember that the typical long-
short fund wasn’t over-leveraged to
the hilt. Certain arbitrage strategies
had high levels of gross leverage, and
as financing changes, so will the these
types of investment structure. But
if the instruments change, will the
model change?
Donohoe continues: “A major
factor for prime brokerage is
custodianship. It is a very hard to
say what the model will be going
forward. There is a fine balance
between diversification of counter-
party risk versus operational risk,
so the more prime brokers you
have, you end up with a much more
complex operating environment,
and the risk of mistakes and losses
increases.”
A major debate is building around
the practice of reypothocation. This
practice, where client’s collateral
is used by their own prime broker
to finance deals, can cause major
problems when a prime broker
goes under. In mid-September, it
became clear that USD22 billion
of the USD40 billion held by
Lehman’s European arm had been
rehypothocated. Much like the
queues that trailed around Northern
Rock, clients are waiting in line to
see if they can extract their collateral.
This time, they are hedge fund
managers, not UK pensioners.
Ironically, the more cautious
the clients are with their prime
brokers, the more prime brokers
will be forced to pass the cost back
to the client. If funds refuse to allow
20 | Global Securities Lending Magazine | 2009
their broker to use their assets for
reypothacation, the prime broker
will suffer a major loss of traditional
revenue, and need to make a return in
some form or other. Caution comes
with a price, and can make some
strategies uneconomical. This outcome
will highlight to managers and hence
to investors the constituents of their
brokerage relationship and the real
costs versus risks being taken.
Whatever path investors end up
taking, there will be a cost. Donohue
explains: “The future of the prime
broker is tied into the future of the
hedge fund industry. There is increased
cost in terms of operations, as a multi-
broker model is more expensive to run,
you need more staff, you need more
systems and you need more controls,”
he says. “But also in terms of costs in
running the actual strategy, if you take
away the methods prime brokers use to
generate revenue, then there will be a
direct passing on of cost. This in turn
will have a direct effect on the account
size a prime broker can take on.”
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hedge funds will be forced to focus on ³#OCLQTHCEVQTHQT
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fees and management fees have
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CHANGING WORLD OF PRIME BROKERAGE
good relative performance. However
the reality is that the breakdown of
beta from alpha is still at large and
is still in demand from institutions.
Consolidation may be a factor but
there will always be a demand for good
quality alpha managers. What may
happen is that these managers may
become more institutionalised, and
the top managers will increase their
segment of the hedge fund pie.”
Whether the eventual model is
one of various prime brokers or a
blend of traditional prime brokers
and custodians, the players ability to
leverage hedge funds has decreased.
As a result, the amount of collateral
required for leverage has increased,
and leverage per asset has decreased.
Certain types of assets, such as
convertibles, have seen a dramatic
change from a high to low level of
debt-to-equity, dramatically impacting
hedge fund strategy.
This passing of costs between the
prime broker and hedge funds has
been exacerbated by the short selling
bans. A consistent source of revenue
for brokers, the ban on short selling
will “impact the profitability of
prime brokers,” according to Andrew
Shrimpton, a partner with hedge fund
consultants Kinetic Partners. This does
not help the evaluation of balance
sheets and the decision on who will
bear the brunt of the cost. Goldman
Sachs has been shedding hedge fund
clients rather than pass on the costs in
an attempt to gain efficiency.
There is a silver lining to the short
selling ban. The California Public
Employees Retirement System
(CALPERS) has reportedly banned
the lending of shares of Goldman
Sachs and Morgan Stanley in attempt
to stem the instability of these
companies. CALPERS has also sent
a letter to 60 fellow pension funds
urging a similar tactic.
In an unusual symbiotic situation,
the revenue prime brokers may have
earned from short selling has been
22 | Global Securities Lending Magazine | 2009
offset by pension funds continuing the
ban in order to protect the stability of
the brokers share price. This may be
an attempt to protect the portfolios
of the pension funds, however it will
be difficult to know when the pension
funds should stop their self-enforced
ban, as many prime brokers will
become increasingly desperate for
revenue generated by short selling.
Perhaps people are over-reacting. As
Mark Higgins, Vice President, Global
Collateral Management, Bank of New
York Mellon, states: “The short selling
issue is not such an obvious issue as we
all thought at the beginning.” What is
inevitable is that prime brokers have
changed beyond recognition. They will
no longer be able to offer a multitude of
add-ons to their prime broker package,
and hedge funds are now talking
to AAA-rated custodians regarding
ring-fencing accounts and avoiding
the problems of reypothocation. As
Higgins succinctly states: “What the
prime brokers grew up to become was
Historically pillars of safety for hedge
fund managers, the reliability and
the viability of service providers has
recently come into question. Managers
can no longer feel completely
confident that their service providers
offer absolute safety. The bankruptcy
of Lehman Brothers revealed a new
type of risk for hedge funds, who
now have to worry about the viability
and the balance sheet of their prime
brokers.
Those managers stuck with assets
frozen in Lehman’s bankruptcy
proceeding have learned this lesson
the hard way. Fortunately, the
average hedge fund employs two or
three prime brokers, either to access
liquidity or asset classes or to protect
their “intellectual property.” This
practice made moving assets and
switching prime brokers easier in the
run-up to Bear Stearns’ and Lehman
Brothers’ collapses.
not what it said on the tin, but there
were lots of added options that almost
became more important to them.” =
Marianne C. Brown, president and CEO
of Omgeo on hedge funds, on the future
of prime brokerage
It will certainly be important to
watch how the prime broker space
evolves in the year ahead. Will we
see a shift away from bank-owned
primes to more of a custodian or
outsourcing model? Surely the trend
of diversifying risk across multiple
primes will continue to grow, as hedge
funds simply cannot afford to put all
of their golden eggs in one basket.
Fund administration is not without
its challenges either, given that
two of the top prime brokers had
established strong franchises in fund
administration, this new “viability
risk” has to be considered with the
choice of an administrator as well
Highly public fund failures, which
were blamed on negligence of the
fund’s administrator, also show that
risk exists in outsourcer and service
provider relationships. Monitoring
and managing this risk should be a
part of every hedge fund managers’
daily operations. =
 AHP
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LENDER PROFILE
6JGNQPIKPXGUVQT
Paul Lee, a director at Hermes Equity Ownership Services (EOS), talks to Catherine Kemp about the
thought behind what stock to lend.
1. What is Hermes’ relationship with
securities lending?
Hermes is a fund manager wholly
owned by the BT Pension Scheme
(BTPS), the largest scheme in the UK.
We look on the world through the
eyes of the pension fund trustees and
as long-term owners of companies
and have always taken the view that
lending was a nice income to have, but
not the be-all and end-all.
Hermes used to have its own stock
lending team but closed the desk
about a year ago largely because it had
become a completely scale game. We
outsourced the lending but retained
various powers over those assets, not
least voting and also influence over
lending.
This is partly in cases of a key vote
but also because we have concerns
about the value of shares when rights
issues are happening. We take the view
that borrowers short selling the shares
could have a very long-term effect on
the health and future of the companies
2. So you don’t want the value of the
shares you own to potentially be
undermined by short selling?
Exactly. Short selling in normal
markets is a way of attaining the
right price and maintaining market
efficiency. In some markets it goes
beyond that. Certainly in the markets
that we have seen recently it’s looked
like short selling was undermining
individual companies. Particularly if
you have a rights issue and the selling
pushes the share price to within the
range of the rights issue price, then
you’ve got a very real problem.
We actually saw this happening
with HBOS over the summer. They
mounted a rights issue and the share
price got severely squeezed. And you
24 | Global Securities Lending Magazine | 2009
)NQDCN5GEWTKVKGU.GPFKPI
will recall that it was that week that the
greater disclosure on the short selling
of financial stocks came in because the
regulators were, frankly, very scared by
what was going on in the market.
3. So how did Hermes react?
Prior to the big noise on HBOS and
the disclosure rules, we put HBOS and
Bradford and Bingley onto our stock
lending ‘stop list’ - an actively managed
list of stocks that should not be lent.
We added another 15 odd financial
stocks to the list, just prior to the
regulators taking their dramatic step of
banning short selling.
In October we added Spanish stocks
to that list, because for whatever
reason the Spanish regulators had
not installed any ban on short selling
and it looked like those companies
were being exposed. The Hermes
Equity Ownership Service (EOS),
maintain the list on an active bases,
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identifying problem issues. We have
about a dozen pension fund clients
internationally with whom we share
that stock lending stop list.
4. There is a view that banning
short selling has not supported the
prices of the stocks of those financial
companies and has made the market
more volatile?

It’s a pretty blunt instrument isn’t it? In
a sense you wouldn’t need to ban short
selling if all long-term owners acted in
a responsible way. I’m not sure that a
ban on short selling would have been
necessary if they all actively managed
their lending policies in the way that
we have.
5. The responsibility lies with the
beneficial owners?
I can’t see that responsibility sitting
anywhere else. One of the problems is
that a lot of the beneficial owners don’t
actually recognise lending for what it
is. If they are lending, they are actually
selling the shares and agreeing to get
them back at a later stage. Perhaps the
industry needs to help those beneficial
owners to understand what’s going on
a little more so the beneficial owners
can take those decisions more actively
than they currently are.
I hope that people in the industry
will take this as opportunity to reassess
and start afresh with a few more
protections in place. The risk is that
the lending industry falls into further
disrepute and actually loses its licence
to operate if you like, because nobody
will want to touch something which is
so badly tarred.
6. What about the need for liquidity?
The list typically has no more than
20 companies worldwide. That’s
20 out of 8000 in which our clients
currently invest. But certainly 20 out
of the biggest four to five thousand
companies in the world. At the
moment the list is longer on the
financial side. So we are talking nearer
50 companies on the list. It’s still
not a huge proportion of those 5000
companies. So you are not stopping
lending adding to the efficiency of
markets. You are just being a little bit
more responsible and therefore making
sure that the industry can continue
into the future and doesn’t get tarred
with some very black brushes.
7. So you still lend stock, but not the
50 on the list?
Actually BTPS took a decision in
October to cease lending altogether
until January, when they will
reconsider at the same time as the FSA
reconsiders their short selling ban.
8. The difference between the
long and short-term investor is an
important theme. It’s the Warren
Buffet distinction, seeing the value
of shares in terms of balance sheet
rather than the flux of market
opinion?
Very few people are brave enough to
be contrarians and actually think on
those sorts of time scales. Most people
in this industry act on a rather more
short-term basis. The financial markets
would be a great deal more efficient
for the underlying owners if there were
more Warren Buffets around. Sadly, we
seem to be in a cycle where everybody’s
thinking about the next quarter rather
than the next 25 years. Frankly, that’s
what our team is there to do, to help
pension funds to think on longer time
horizons and to change the dynamic of
the discussion.
9. The relationship between
the pension fund market and
the alternatives market is fairly
symbiotic. Pension funds use hedge
funds to increase returns and
participate in securities lending
for similar reasons. How do you
reconcile this?
If you hire short-term focus managers
with the right parameters and controls
2009 | Global Securities Lending Magazine | 25
LENDER PROFILE
then that’s wholly appropriate. If you
just hire them and give them free
reign then that’s a very dangerous
thing particularly for the long-term
beneficiaries. Just as lending, though
wholly appropriate, can have some
risks at the margins, you need to
manage those risks
10. Like cash reinvestment risk?
Didn’t the risk really lay with
beneficial owner reinvesting their
cash in asset-backed securities, like
AIG?
AIG stopped being a pure insurance
company a long time ago. They didn’t
quite admit it, and the regulators
didn’t quite admit it.
11. So is the research that you have
done into the relationship between
short selling and the value of shares
done by internal data analysts and
market analysts, or is it just from
observing the market?
We are active participants in most
markets around the world and we get
to take a view.
12. Have you seen Data Explorers
press releases on this subject?
We’ve been subscribers to their data
for years. They are great people, love
the product, and that’s why we use
it. But they do have a vested interest
in maintaining the industry and
therefore spinning us a line. It’s not
surprising to see the press releases they
put out, and good on them. They at
least have some sensible data on which
to make some sensible comments. We
take it with a pinch of salt.=
BENEFICIAL OWNERS
+UKVUVKNNDGPG¿EKCN!
Regulatory changes and the Lehman Brothers default dramatically affected beneficial owners,
and many reassessed their participation in securities lending. Spitalfields Advisors reports on
the impact and advise on the future.
Beneficial owners have reacted in
different ways to the default of Lehman
Brothers and regulatory changes. Some
were comfortable with events, probably
due to good communication with
their counterparts or lending agents,
while others struggled to get reliable
and timely information. Without
exception, lenders will have weighed
up the rewards with the risks.
Regulators haven’t lost sight of the
benefits of securities lending and the
vital liquidity this activity provides.
Meanwhile, volatile markets have
reemphasised that short selling cannot
be the only thing that drives down
prices as the restrictions on short
selling have demonstrated. But how
will these events change the securities
lending industry?
+P.GJOCP¶UVGTOU
The argument that if a bank goes into
default there are bigger problems than
the securities lending programme
held true when Lehman Brothers
filed for chapter 11 protection in the
US and went into administration in
Europe. But the exposures needed to
be unwound.
For lenders accepting non-cash
collateral, the process was relatively
calm – lending agents largely took
the view that, regardless of legal
wording, the best practice is to sell
off the collateral and buy back the
26 | Global Securities Lending Magazine | 2009
lent securities. However, those who
dismantled the situation based on
wording in individual legal agreements
have potentially complicated matters
and caused concern to their lenders.
Falling equity prices (the lent
securities) and rising bond prices (the
collateral) has assisted in ensuring that
sufficient available collateral. However,
for lenders participating in a ‘collateral
upgrade’ trade - for example, lending
bonds and taking equity collateral
- there may still be a shortfall in the
liquidation of collateral.
Lenders taking cash collateral may
be feeling more nervous. It is a rare
money market fund that didn’t hold
some form of Lehman Brothers paper
that is now as good as worthless. Some
lending agents have stated that they
will stand behind certain losses in
their money market funds – essentially
suggesting they will cover losses in cash
collateral pools for lending clients.
Other custodian banks have
admitted that they hold Lehman
Brothers paper in their money market
funds but have not yet clarified what
this means for lenders. There are also
tax implications of the ‘unwind and
buy-back’ process and the industry
is now addressing this with the
authorities.
+PFGOPK¿ECVKQPU
Lenders now have a better
understanding of the value of their
indemnification – the insurance that
the lending agent will cover some
of the costs incurred from costs
counterparty default. The lending
agents approach to covering the cash
pool shortfall also requires exploration.
Lenders need to understand that if
providing cash indemnification is
likely to become market practice, it
needs to be explored with each lending
agent in detail and documentation
of any implied protection will be
required. Lending agents will be aware
that any formal acknowledgement
of such an indemnity will require a
relevant balance sheet calculation.
'ZENWUKXGU
Exclusives were popular among
beneficial owners, but we suspect
that perspectives will now be
fundamentally changed. Although
they are a good way for lenders to lock
in value, with borrowers continuing
to require key assets and indexes to
satisfy their hedge fund clients, the
days of whole portfolio exclusives to a
single borrower are probably limited,
certainly in the short term.
A survey Spitalfields Advisors
conducted in August/September 2008
highlighted that borrowers will also
be constrained by capital and will be
more selective about the portfolios
they bid for. For those in the process

of auctioning portfolios for 2009,
there will be many challenges to price
them. The short selling restrictions
is one factor, but the changing face
of financial institutions also makes
appetite difficult to gauge. Firms
merge, and as hedge funds change
prime brokers, the market is too
dynamic for borrowers to bid on
anything but the most attractive
portfolios.
We have spoken to a number of
lenders who have rather smugly
admitted to recalling all loans from
Lehman Brothers in advance of recent
events. We caution that this needs to
be managed consistently. Wholesale
restrictions to individual counterparts
based on bad news may be disruptive
to the ability of the lending agent to
lend securities. It could lead to the
counterparty effectively refusing to
borrow from the lender and generally
put stress on the relationships in the
securities lending chain.
%QNNCVGTCN
The liquidation of collateral positions
has been necessary for the first time
in recent years. Some lenders have
increased haircuts on certain collateral,
and to certain counterparties. A survey
conducted by Spitalfields Advisors in
September 2008 showed that haircuts
have moved from industry standard
2% and 5% (depending on the
currency of the collateral vs the lent
security) to as much as 20%.
This has emphasised the increasing
importance of tri-party collateral
agents and their ability to manage a
number of different parameters that
has allowed lenders to tweak their
collateral requirements. We suspect
that this model is likely to be an
ongoing trend, but we caution that this
needs to be arranged in conjunction
with lending agents. Not all lending
agents will have the capability to
manage restrictions to this level,
particularly where there are a number
of different lenders participating in
one collateral pool.
Borrowers will also be reluctant to
post increased collateral and lenders
are less likely to lend the security at
20% if others are prepared to accept
2% and 5% haircuts. Remember also
that providing a haircut to a lender
is effectively an unsecured loan that
requires a balance sheet hit. Borrowers
will also be reluctant to pre-pay, the
process for pre-collateralising loans to
avoid intraday exposures.
This brings us to cash collateral. It is
likely that some may choose to restrict
cash collateral. Lending agents are keen
to hold cash balances that will allow
investments to mature. Generally,
lending agents and borrowers have
been successful in managing this,
although recent events will have had
a detrimental effect on overnight
liquidity in some money market funds
and cash collateral pools.
5JQTVUGNNKPITGUVTKEVKQPU
There have been emotional discussions
regarding the various short selling
bans worldwide. Each is slightly
different and there is no consistency
in timeframes or coverage. We
understand why regulators felt the
need to act and think this has provided
a pause in the somewhat aggressive
headlines aimed at short sellers.
In fact, it has demonstrated that
short sellers have not driven down
prices as stock indices have continued
to decline. Also, the majority of loans
by value are fixed income loans that
are not required by hedge funds for
short selling but actually provide
important liquidity as collateral for
other financing activities.
Most of the restrictions applied to
financial securities, which regulators
felt were most vulnerable. Interestingly,
during the preceding days we had seen
a gradual shift of lenders to restricting
lending of these securities. We certainly
don’t advocate a wholesale restriction
of financial securities but accept that
lenders always have the right to recall
or restrict securities from lending.
On the other hand, companies
like JP Morgan have requested to be
removed from the list. Further, the
2009 | Global Securities Lending Magazine | 27
BENEFICIAL OWNERS
Chinese authorities have approved
rules that allow short selling. We
continue to read stories of lenders
who have stopped new lending or are
recalling loans. This is not a decision
to take lightly. In falling markets, the
additional revenue from securities
lending is welcome. Reduced lending
activity will also result in more assets
under custody, which will incur
custody fees. A full pull out of lending
for cash takers is more serious. In
addition, if all lenders decide to
restrict activity then this will have a
detrimental impact on liquidity in the
cash equity and derivatives markets.
6JGHWVWTG
Many lenders wish to continue
securities lending but say that they
need to revisit their programme
structure to reflect best practice. We
recommend that all lenders should
consider this, which is likely to include
a review of the following elements:
risk management, risk adjusted
returns, counterpart exposures,
legal documentation (including
indemnification language), use of
triparty agents, collateral requirements,
the use and application of exclusives.
Benchmarking can no longer
be restricted to performance and
monitoring risk. The supply and
demand mechanics have changed
– some lenders will take a while to
come back to the market and others
will restrict the counterparties they
are prepared to lend to. There are less
counterparties to lend to which will
restrict general collateral demand.
Prices will increase for high quality
government bond portfolios and
“hard to borrow” securities.
On the demand side, short selling
regulations have led to questions
about the 130/30 and hedge funds
that typically short sell. Investors
potentially putting on hold investment
decisions may pull money from these
strategies as the regulatory uncertainty
impacts performance. Both will have
an impact on demand for securities
from lenders.=
THE SHORT SELLING BAN
On 19 September 2008 the Securities
and Exchange Commission (SEC) and
the Financial Services Authority (FSA)
banned the short selling of financial
stocks. It was a coordinated response to
what Callum McCarthy, chairman of
the FSA, described as “volatility and...
incoherence in the trading of equities,
particularly for financial institutions”.
The regulators did not change the
rules on securities lending, nor did
they change the rules for market
makers – except for in relation to
uncovered, or ‘naked’, short selling.
Similar regulations were then rolled
out in most securities lending markets
around the world (see table on page
30) and have been hotly debated. For
some it is hard to distinguish between
the effects of the new regulations and
other market events. The credit crunch
had been unfolding for a year before
the Lehman Brothers collapse and the
buyout of Merrill Lynch.
The rules have directly affected the
trading strategies of hedge funds. As
the primary borrowers of securities,
this has impacted borrowing volumes
in the securities lending market.
Volumes of borrowed financial
stocks have significantly decreased
since the ban’s inception. According
to Data Explorers Securities Lending
Index (DESLI), a weighted average
of the quantity of stock that is lent
28 | Global Securities Lending Magazine | 2009
5QNFUJQTV++
and borrowed indexed at 100 on 1
September 2008, had fallen by 60% by
14 November.
Jules Pittam, head of sales at Data
Explorers, said: “After the ban we saw
people stopping short selling securities
and so there was a buying back of
short positions. If you look at the bank
sector, for example, there was a 60%
drop in the amount of stocks being
borrowed. Not so much in the UK,
which has a 40% reduction by 14th
November.”
The US - whose ban was repealed on
8 October - has also seen a significant
decrease in borrowing. According to
SunGard ASTEC Analytics (see graph,
facing page), ex-financial stocks on
loan reduced by 20% during the ban.
Even after the the ban had expired,
the volume had reduced by 30% on 1
November 2008. Over the same period,
financial stocks on loan reduced by
42%, and to 50% by 1 November.
Aaron Gerdeman at SunGard
ASTEC Analytics says he expected to
see an influx in short sellers back into
the market to reclaim short positions,
but this did not happen. “We’ve only
seen a stabalisation, a new norm,” he
says. “It’s hard to measure the effects of
the short selling ban without factoring
in other market events, but from what
we hear about hedge funds, who are
the primary borrowers of securities,
Speaking to a cross section of
market participants including
beneficial owners, market
analysts and borrowers,
Catherine Kemp reviews the
impact of the various
short-selling bans.
many of them are on the sidelines
not executing as many trades today,
or they are receiving large amounts
of redemption requests from their
investors. So as hedge funds’ assets
decline, the increased decline in
borrowed US equities demonstrated
on the chart, after the end of the ban,
makes sense.”
According to Gerdeman, the ban
has meant that hedge funds have been
unable to carry out normal trading
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operations because they have been
unable to hedge their purchases with
a short. This has resulted in less new
borrows and more managers pulling
their capital out of the market and
buying back positions that they are no
longer able to hedge.
The retraction of cash has not
supported prices. Valuations of
financials and ex-financials have
continued to decline since the ban.
According to Bloomberg’s S&P 500

index, prices fell from 1250 basis
points on 1 September 2008 to 750
midway through November. Some say
it is too early to fundamentally analyse
how much the declines have been
influenced by other market events,
though some see the bans as a major
factor.
“Once the regulators put these short
selling bans into place, the share price
of the banks dropped substantially,”
says Neill Ebers COO of Lionhart,
a global multi-strategy arbitrage
fund. “The new regulations froze out
affordable liquidity. It forced people to
unwind trades that they had already
positioned and prevented increased
activity, which was very damaging, at
a time when the market was already
illiquid.”
VIX, the volatility index, shows
increased turbulence since the bans,
leaping from 20 on 1 September to 80
on the 5 December, having previously
been reaching highs and lows of 30 and
15 on average.
Gerdeman says: “Buying and selling
interest in the market ultimately helps
to reduce volatility in the market and
to add liquidity. Taking that away has
made the market more volatile.”
Volatility has also impacted
convertible bond arbitrage, says Ebers.
“You could hedge out the credit and
interest rate component but you
couldn’t hedge out the equity, because
you couldn’t go short on banking
stock anymore. So a natural arbitrage
which would actually increase liquidity
because you’ve got more buyers of the
debt who are looking to hedge out one
of the risks within that component,
were stopped from being able to do it.
It froze out a part of the market which
has actually grown rather large as an
asset class.”
Hedge funds have also been ushered
out of the market having received
redemptions as a result of poor
performance. Deleveraging as a result
of the Lehman’s collapse and the
lack of liquidity has also decreased
borrower volumes and stock prices and
increased volatility.
PRIME BROKEN: US borrowing declines
Available inventory on loan has also
decreased since the beginning of the
ban. DESLI’s weighted average of the
quantity of stock that is lent and stock
inventory available to borrow for all
regions and industry sectors globally,
shows that inventory dropped from
100 to 80 since the inception of the
ban.
Pittam says people were still
able to lend because the regulatory
environment had only targeted short
selling, but they didn’t want to.
The California Public Employees’
Retirement System (CalPERS) and
APG, the Dutch pension fund, both
pulled certain financial stocks out
of the market shortly after the short
selling bans came into place. Hermes,
a fund manager wholly owned by BT
Pensions Scheme, the UK’s largest
pension fund, claims it has stopped
lending entirely for the same reason.
Strathclyde pension fund and the E.On
pension fund have also temporarily
pulled out of lending.
Karen Jones, head of the GBP6.3
billion Aviva staff pension fund, said
it was reviewing its lending policy.
Philip Neyt, the chairman of the
Belgian Association of Pension Funds
(BVPI), called on Belgian corporate
and industry-wide pension funds to
stop the practice of lending securities
in October.
Paul Lee, a director at Hermes
Equity Ownership Services (EOS),
says: “We look on the world through
the eyes of the pension fund trustees
and as long-term owners of companies
and have always taken the view that
2009 | Global Securities Lending Magazine | 29
THE SHORT SELLING BAN
lending was a nice income to have, but
not the be-all and end-all. We take the
view that borrowers, short selling the
shares, could have a very long-term
effect on the health and future of the
companies.”
Hermes has not permanently
stopping lending, and plans to review
the situation in January when the FSA
repeals its ban.
According to DESLI, around 13% of
stocks globally have been withdrawn
from the securities lending market,
says Pittam, higher than the 8-9%
withdrawn when the dot.com bubble
burst. “It has taken liquidity away from
the market, driven up fees in some
circumstances, which for lenders can
be a good thing. We expect the market
to flatten out at around 13% and then
bottom out. We expect people to come
back to the market as and when the
regulatory environment returns to a
more stable footing. Very few have said
it will be permanent.”
Gerdeman estimates that the
availability of shares borrowed by
institutional investors or hedge funds,
declined by 12%. “This reflects sales by
hedge fund borrowers as well as sales
among suppliers of securities,” he says.
“In the US it was 10%.”
Gerdeman explains that, on average,
90% of beneficial owners are still
continuing their securities lending
programmes, because lending has
provided good income. Many lenders
are making more income than ever
before because the lack of lenders has
driven up fees.
Jane Miller, a market specialist at
SunGard Securities Finance, says:
“One of the things stock lending does
for investment managers, specifically
ones who accept cash collateral, is to
provide liquidity, which as we know
is a problem right now. Additional
liquidity, as well as income, may well
be another factor influencing decisions
to stay in or get out. It gives them
another reason to lend over and above
what was considered a primary reason
in the past.”
Pittam explains the other side of this.
THE SHORT SELLING REGULATONS

“Lenders are very keen to maintain

Country Ban still in effect? Naked shorting? Disclosure cash balances, as has been reflected
in some of the figures where people
Australia Until 27 January 2009 Banned All daily stock are lending at very low rates in order
lending just to get the cash,” he says. “Banks
don’t want to give cash because it’s
Austria No Banned for shares expensive. This hasn’t helped the
of Erste AG, money market funds at all, and caused
Raiffeisen AG, problems if anything.
UNIQA “Volumes have also reduced because of
Versicherungen long selling. Investors are selling stocks
Wiener Stadtische because they were going down in value
China No so significantly.”
As stock prices decline pension funds
Denmark Banned for Shares issued are selling their stock, and pulling out
shares issued by banks wth of investments with hedge funds.
by banks with Danish banking In the US short sellers did not
Danish license license rush back into the market after the
ban was lifted, it remains to be seen
France Equity securities what will happen in the UK. At the
issued by credit or moment it seems that hedge funds and
insurance firms lenders are being extremely cautious
traded on French and regulatory risk will be a primary
markets concern.
“The one things hedge funds, or any
Greece No (expired 31 Dec) Shorts positions other investor hates, is regulatory risk,”
in excess of says Pittam. “Short-term regulatory
0.1% of flux, that you can’t legislate for, can’t
company hedge for, and that can have a dramatic
effect on market activity and prices,
Ireland Yes, for Irish bank Banned worries people. I suspect hedge funds
stocks are now looking for a more normal
period of activity but they will be very
Italy Banned nervous about the future and they will
be taking that into account, which will
Lux’bourg Banned have an impact on securities lending,
because no short selling means no
Korea Banned demand to borrow securities.”
However, overall Miller concludes
Norway Yes Banned that it won’t affect volumes in the long
term.
Portugal Yes, eight banks’ Report naked Mandatory for all “The majority of people clearly
stock banned shorts to CMVM Euronext/PEX understand how important the ability
to short-sell is,” says Miller, “and
Russia Yes Banned that securities lending facilitates that
capability. I would say that while
Switzerl’d No Banned (all Swiss positions have gone down, there’s still
stock) a lot of volatility in the market, and
it’s probably going to take a while to
Taiwan Yes, all listed stock stabilise, the need to borrow, as a result
except shares trading of shorting, will not go away.”=
higher than previous
closing price

30 | Global Securities Lending Magazine | 2009


If president-elect Barack Obama`s
inspirational speeches ushered in a new
and more positive zeitgeist for America
and the rest of the world, the markets
didn’t notice. As stock prices continue
their depressing plunge, regulators are
still trying to figure out where it all
went wrong. Short selling continues to
be an area of hot debate and political
action, and naked shorting - selling a
stock short without first borrowing
the shares or ascertaining that it is
possible to borrow them, which some
would see as the ugly side of the
shorting - has particularly come under
the microscope. In the next quarter it
looks certain that a final decision will
be made as to how to effectively control
naked shorting for the health of the
financial system.
Despite the debated connection
between short selling and volatility,
regulators have generally considered it
an acceptable investment strategy.
All this changed in September 2008
when the markets went into freefall,
0CMGF
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As the financial crisis contin-
ues the practice is now firmly
in regulators’ sights, writes Joe
Corcos.
Lehman Brothers collapse, and
suddenly short selling became public
enemy number one. Many countries
acted swiftly to ban the practice either
on specific stock or outright a move
that many saw as being more political
than practical. Now in retrospect most
will agree that any positive impact
the ban has had on the fortunes of
the various companies it protected
was debatable at best – as prices have
not been supported. Some would
agree that short selling does play a
valuable role in ensuring stocks are not
overpriced, providing liquidity and
reducing volatility. However, far fewer
are of the opinion that there is a place
in the system for naked short selling
– undoubtedly the black sheep of the
short-selling family.
In naked short selling a ‘fail to deliver’ form is temporarily going short prior
occurs when the seller cannot obtain
the shares in time, or had no intention
to. While tracking the number of fail to form is day trading, consisting of not
deliver cases is not a concrete indicator covering a sale with a borrower because
of naked short selling activity, an
elevated number of failures is usually
taken as a sign that naked shorting has
occurred. Naked shorting is a potent
speculative tool in manipulating the
markets, and though its use to this
end is illegal, enforcing regulations has
proved difficult.
“I’m not a fan of naked short selling
unless there’s an excellent chance they
can locate the security,” says Matt
Samelson, a senior analyst for Aite
Group and an expert in equity market
2009 | Global Securities Lending Magazine | 31
NAKED SHORT
structure.
“I don’t like the idea of being able
to purely leverage what’s out there
without anything of underlying
fundamental value.”
Within the securities lending
industry the general feeling towards
naked short selling is negative.
Securities lending serves a vital
function in traditional short selling,
and therefore the industry was largely
disappointed with the short selling
bans. However, this support does not
extend to naked short selling. The
perception is that naked shorting adds
volatility and significant distortion to
the market.
Roy Zimmerhansl, an industry
veteran who was previously securities
lending marketing director at Deutsche
Bank and recently the head of
e-securities lending at the interdealer
securities broker ICAP, says: “I believe
that naked short selling – defined
as selling shares where there is no
availability of shares to borrow, or
indeed even where there is no intention
to borrow – is inappropriate and
should be permanently banned.
“It distorts the market and
injects counterparty risk into a cash
transaction which is wholly improper.”
David Rule, chief executive of the
International Securities Lending
Association, specifies that naked
shorting comes in three forms. The first
to borrowing for the purpose of a quick
trade to hedge a position; the second
one expects to close the position before
settlement; the third is deliberately
trading to fail. Rule believes that only
the first two should be permissible.
He says: “Personally, I would limit
naked short selling by having effective
settlement discipline that penalises
failed trades and by enforcing market
abuse rules that would penalise anyone
who deliberately sells a large value of
a security that it could not possibly
cover in the borrowing market with
the purpose of temporarily moving the
NAKED SHORT
price.”
However, while most in the
industry agree that naked shorting
is undesirable, the role that it played
in the fall of financial royalty like
Washington Mutual and the Lehman
Brothers has probably been inflated by
politicians.
“I personally think that naked
short selling has played little to no
fundamental role in the failure of these
banks, though it did come in to play
at certain stages,” says Josh Galper, the
managing principal of the financial
consultant Finadium.
“I think that naked short selling
was possibly contributed to some
decline in the stocks price, but I think
that these banks would have failed
with or without naked short selling
being present. Rather, I would say that
a lack of reporting and knowledge
about short selling activity allowed for
possible bear raids or other directed
market activity outside the radar of
market regulations.”
Some have even argued recently that
naked shorting can provide a beneficial
service to the financial markets. In their
paper ‘The Economics of Naked Short
Selling’ Christopher Culp, a professor
of finance at the University of Chicago,
and JB Heaton, a partner at Bartlit
Beck Herman Palenchar & Scott, argue
that the only difference between naked
shorting and traditional shorting is
who is effectively lending the security.
They write: “Naked short selling
creates competition in the market for
security lending by allowing a new
buyer to provide the service of being
owed the share rather than allowing
only the current owner to do so.
“To the extent that competition
in the securities lending market is
desirable then naked short selling,
far from being detrimental, may be
valuable in facilitating the gains from
short selling.”
Whether many would agree,
especially in the current climate,
is doubtful. The financial services
industry is in disarray and it is now
32 | Global Securities Lending Magazine | 2009
obligatory to question processes which
were more or less permissible in the
past. Regulators and politicians are
unlikely to be receptive to arguments
favouring practices like naked shorting.
Though the extent to which naked
short sellers have deliberately traded
to fail in the past is impossible to
quantify, as is the effect of such naked
shorting, naked short selling has now
come under the regulators’ collective
magnifying glass. In September the SEC
adopted rule 10b-21 which requires
short sellers and broker dealers to
deliver securities within three days
of the sale transaction date – known
as T+3. This essentially makes fail to
delivers a violation of the law.
When the rule was adopted SEC
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chairman Christopher Cox said: “These
actions today make it crystal clear that
the SEC has zero tolerance for abusive
naked short selling”.
More recently Cox called an
emergency meeting of the International
Organization of Securities
Commissions on 24 November to
discuss the current financial crisis. The
result of this was the creation of three
task forces focussing on coordinating
global regulation of the financial
system. One of these is to tackle naked
short selling. All three task forces are
set to present their results to IOSCO in
February and to the next G-20 summit
early next year.
Like many recent government and
regulator measures, this is being seen
as something that perhaps should have
been done before the crisis hit. Already
many have accused the SEC and others
of effectively shutting the stable door
after the horse has bolted.
Galper says that action had not
been taken previously because naked
shorting was simply not a problem for
the investment banks and firms under
the auspices of the SEC.
He says: “Naked short selling
allegedly created some level of profit
or at least operational efficiency;
traders were incented to lobby for its
protection. Once those same banks
were negatively affected by naked
short selling, or at least the threat of it,
they became incented to lobby for its
elimination.
“I do not believe that until now
regulations on naked short selling have
been enforced. Further, I feel that the
fines that have been meted out for
naked short selling violations have
been too small to influence changes
in behaviour – they have been more
additional tariffs on the cost of doing
business, not a deterrent themselves.”
It is hard to predict the concrete
results of the task forces. However,
when being seen to take strong
measures against financial volatility is
the order of the day politically, strong
new rules against naked shorting will
be the most likely result.
Zimmerhansl says: “Time will tell as
to what the outcome will be, but I am
a very big supporter of the task force
objectives.
“My concern with the initial
restrictions and bans on short selling
was that they were hastily imposed and
done without forethought. The task
forces are the correct way to approach
the issues.”
Whether this is so is yet to be seen.
What seems certain is that soon enough
naked short selling may become much
harder to do undetected, and may
become a thing of the past.=
 ASIA

0GYVQVJGVCDNG

Brian Bollen looks at the arrival

of China’s securities lending
market, against the backdrop
of short selling restrictions
throughout Asia.

Anyone predicting the arrival of
securities lending in China would
have probably been given a wide berth
by most sane people until relatively
recently. But we live in extraordinary
times, and - whisper it gently - such
is the pace of change in the People’s
Republic that securities lending has
appeared on the financial services
industry’s radar and could well be with
us in the not too distant future.
“China is the most obvious example
of the radical changes in attitude
that are taking placing in the region,”
says Phillipe Metidou, head of client
relationship for Asia Pacific, the
Middle East and Africa at Clearstream
in Hong Kong, a veteran of 20 years
there. “It used to be very restrictive,
but securities lending is being spoken
about openly in the market, has pretty
much been accepted, and preliminary
consideration is being given to
implementing it there.”
Nothing much, in fact, needs
to change, he observes, given the
sophistication of the CSD’s systems,
and the support that key players are
offering. “It is more a question of
the political will, and the arrival of
convertibility and transparency of the
Chinese currency,” he continues. “We
should see that within the next five
years.” That might seem a long time to
wait for we impatient westerners, but
the Middle Kingdom has never been
renowned for placing the emphasis on
the short-term. Putting developments
in the region in further context,
Philippe Metidou recalls that when
he first posited setting out guidelines
for securities lending there in 1993,
the reaction was less than enthusiastic.
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“I was crucified,” he says. “Everyone
was against it! Things have changed
dramatically since then and it’s now
part of daily life; it is those centres that
don’t have securities lending that are
the exception.”
Increased interest in securities
lending reflects the broader changes
in underlying investment behaviour.
“More and more investors are
interested in the region and we have
introduced direct links to a number
of markets, including Japan, Australia,
New Zealand, Hong Kong, Singapore,
Malaysis, Indonesia, Thailand and
Korea,” continues Philippe Metidou.
“There is a political will in most
countries in the region to develop a
yield curve; everyone is keen to attract
and retain international investors, and
without a strong securities lending and
repo culture, the big boys just won’t
play.”
However, Asia is not looking to
simply replicate developments in
other international markets in the
use of securities lending, he contends.
“Asia is looking to establish its own
best practices. It hasn’t implemented
securities lending to catch up with
others who are doing it but because
it wants to do it. Asia now has critical
mass and is much more independent
than in the old days.”
Roy Zimmerhansl, creator of the
ICAP securities lending platform
and now an independent industry
consultation, argues that no other
region in the world has made as
much progress with short selling
and securities lending as Asia over
the past decade. “However, given

2009 | Global Securities Lending Magazine | 33

ASIA
the unprecedented market turmoil
this year, regulators in the region
have revisited on short selling and
by implication securities lending,” he
says. “Having spent years removing
outright restrictions on short selling,
eliminating up-tick rules and paving
the way for a vibrant securities
lending business, each market across
Asia and Australia re-evaluated their
regulations.”
Pretty much every country already
had a prohibition on “naked” short
selling (selling shares without having
borrowed them), he continues. This
may be intentional, or accidental - the
net effect is that the sold stocks will
not be delivered. Some countries
- including Japan, Hong Kong and
Singapore - have reiterated their stance
against naked shorts.
Since the summer of 2008,
most countries in the region have
implemented short selling restrictions
on a temporary basis. The notable
exception here is Hong Kong, where
the Securities and Futures Commission
has very publicly led the way by
saying it was confident in its rules and
reporting requirements and never felt
the need to further restrict market
activity. However it emphasised that it
would keep monitoring the situation
and would act swiftly and harshly if it
felt the spirit or the letter of the rules
were being violated. Hong Kong’s
leadership is best exemplified when
it took the lead role in the recently
announced IOSCO Task Force on
Short Selling.
Japan and Australia have announced
new disclosure requirements and
Singapore has issued a paper seeking
comments on enhanced disclosure
reporting requirements. Australia
found itself embroiled in securities
lending scandals throughout 2008
concerninghe bank ANZ and the failed
prime broker Opes Prime (see the
Spitalfields Advisors report of March
2008: Putting Australian Securities
Lending in Context). As a result,
recent legislation has been introduced
on short selling and a more rigorous
34 | Global Securities Lending Magazine | 2009
disclosure system implemented.
The bottom line on stock lending in
Asia is that it has made tremendous
strides in the past few years, says
Roy Zimmerhansl. “Some of that
good work has been undone, but
importantly there hasn’t been any
market that has banned stock lending
in the same way as Malaysia did in
the Asian crisis in the late 1990s. Any
restrictions on short selling have been
temporary, with the exception of naked
short selling which almost everyone
globally agrees is manipulative and
should be outlawed.”
The bigger story in Asia is the
demand side, he argues. “What has
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been the experience with respect
to Asian hedge funds? Many Asian
hedge funds have employed trading
strategies that involved market neutral
or hedged positions. The impact of
short selling restrictions therefore had
a very large impact on these funds. For
example, convertible bond arbitrage is
a very traditional Asia focused hedge
fund strategy. If you are running a
convertible bond arbitrage fund, and
you suddenly can’t short sell the stock,
it dramatically affects your ability to
hedge and engage in any trading. It
forces the fund to change its strategy
and may result in closure or style drift
to more of a credit focus.”
“The Asian hedge fund industry
is relatively new, and has been
expanding rapidly after enjoying five
straight years of double digit growth.
More frequently with newer funds,
Asian hedge funds have employed
equity long-short strategies and have
had far fewer credit-based funds.
Thus the equity turmoil has had a
disproportionate impact in Asia.
Asian hedge funds have suffered worse
performance than their counterparts
elsewhere in the world. According
to Eurekahedge its universe of Asian
hedge funds showed a loss of 22.2%
for the year as compared to a loss of
just over 12% for their total hedge
fund universe. Some analysts predict
redemptions from investors in Asian
funds to be in the neighbourhood of
25-30% and this does not take into
account those hedge funds that have
restricted withdrawals or those funds
that have shut down. Eurekahedge
also reported that hedge fund closures
in Asia jumped 19% from a year earlier
by the end of August and anecdotally
that trend has continued.”
Hedge Fund Research (HFR)
reported a 13% decline in assets
under management at Asian hedge
funds in the third quarter alone. This
compares to an increase in assets under
management in the third quarter of
the previous year in Asia of 8.7%.
Assets in Asian hedge funds dropped
in the third quarter of 2008 by over
USD13 billion with USD10 billion
coming from performance losses and
the remainder from client withdrawals.
KSD, Korea’s central securities
depository, which introduced securities
lending and borrowing in 1996,
mainly for the purpose of settlement
facilitation, tells us that it is the leading
intermediary for stock lending and
borrowing with roughly 80% of
transactions done via its programme.
The programme has about 110
participants with borrowing positions,
and 183 with borrowing positions,
with a considerable overlap between
lenders and borrowers, reports the
KSD.
“In the case of Korea, the current

financial crisis has had a deep impact
on the stock lending and borrowing
market as well as other sectors,”
the KSD says. “One, short-selling:
plummeting stock prices have focused
on short-selling as a possible culprit,
which in turn has led to stock lending
and borrowing being singled out as
a contributing factor. Short-selling
was banned in October 2008. The
ban is temporary but there is no
definite date set for lifting the ban [the
KSD is referring to covered short-
selling; naked short-selling has never
been permitted in Korea, it reminds
readers]. Two, risk management:
market volatility and the bankruptcy
of Lehman Brothers have made market
participants more cautious regarding
risk management. In the case of
securities lending and borrowing,
the Financial Services Commission
(FSC) increased the collateral level
for securities lending and borrowing
transactions to 130% and SLB
intermediaries are placing stricter
rules for eligible collateral. Three,
foreign investors currently account
for the majority of stock lending
transactions, although there are some
restrictions on their activities due to
foreign exchange regulation issues. The
limit on borrowing by non-residents
borrowing from local lenders without
prior-reporting to the Bank of Korea
was increased from KRW 10 bn to
KRW 50 bn from 17 December 2007.
At the same time, it became possible
to use foreign currency collateral
for securities lending & borrowing
transactions.”
Prospects for securities lending in
Korea in the near future do not appear
favourable, the KSD says. “Market
conditions are currently uncertain. The
ban placed by the FSC on short-selling
is still in effect with no definite date
set for the lifting of the ban (time of
writing: early December 2008). Many
big lenders (e.g. the National Pension
Fund et al.) have suspended or reduced
lending activities for the time being.
The resumption of securities lending
activities as usual will depend largely
on the improvement of the financial
market situation.
Interest in securities lending
has been on the rise in the region,
adds Francesco Squillacioti, senior
managing director and regional
business director in Asia Pacific
for State Street’s securities finance
division. “This is a factor of increasing
asset growth among institutional
investors and their desire to earn
incremental income through
established, well-respected securities
lending programmes. State Street
has seen clients and prospects closely
reviewing and considering overall
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programme parameters — such as
performance reporting capabilities,
counterparty risk management and
collateral guidelines — all leading
toward a requirement for greater
transparency. This scrutiny has been
with a view toward understanding
and addressing the different risks in
securities lending. State Street has
historically placed a great amount of
focus on these aspects of securities
lending and that discipline resonates
with our clients and counterparties.
The change in the Asia-Pacific region
has been to look beyond just revenue
generation, and toward to risk-
2009 | Global Securities Lending Magazine | 35
ASIA
adjusted performance. State Street
believes this is the right approach. Our
philosophy has long been to provide
our clients with incremental revenue
within the context of sound and
prudent risk management.”
“We believe the future looks
optimistic for securities lending in
the region. The long term dynamics
and growth prospects of the capital
markets and the various institutional
players in the region who would
ultimately participate in securities
lending programmes point to
continued demand for the product. As
with any other industry, technology is
vital to securities finance. The goals of
heightened efficiency and transparency
in the face of growing and more
complex business conditions are very
much present in State Street’s strategy.
That’s why we invest significant
resources back into the business and
our technological infrastructure.
In Asia Pacific, our regional clients
benefit from the strength of a world
class global franchise and our expertise
as a niche specialist in securities
financing solutions. Our three regional
offices and trading desks located in
Hong Kong, Sydney and Tokyo house
36 experienced professionals dedicated
specifically to securities financing
activities — including trading,
operations and risk management;
product development, legal and
compliance; sales and relationship
management.” He argues, in effect, that
State Street is the only global service
provider that has a complete range
of product capabilities in this region.
Readers should feel free to dispute this
claim if they feel so inclined.=
BORROWER PROFILE
2TWPKPIVJGDWUKPGUU
Neill Ebers, COO, and Jason Kennard, head of SBL and
collateral management at Lionhart talk to GSL.
1. What is Lionhart’s involvement
in the securities lending market
- are you a borrower or lender, or
both?
Kennard: Lionhart is a global multi-
strategy arbitrage fund. Our strategies
primarily focus on capital structure
arbitrage, convertible bond arbitrage,
special situations and thematic
relative value arbitrage. Due to the
techniques we employ, we are usually
a borrower of securities. These are
used to cover the short-side aspect of
the arbitrages that we invest in. We
have on occasions engaged as a lender
of securities; however, our primarily
activity is that of a borrower.
2. In what ways is securities lending
important to your business works?
Kennard: SBL very much drives the
hedging of certain positions and can
in itself generate trading ideas. If we
are unable to secure a borrow then we
cannot hedge the position/strategy
and the dynamics of the investment
change. For example, if Anheuser
Busch was having a rights issue - and
assuming these were trading at a
small discount - we would purchase
the rights while simultaneously
[borrow and sell short Anheuser
shares] sell the underlying security. At
the appropriate moment you would
exercise your rights to create shares
and these shares would be used to
close out your short share position
in Anheuser and, subsequently, the
stock borrow. As you can see, if you
were unable to borrow the securities,
you would be unable to execute this
strategy.
3. As a borrower, how have has
market volatility, the Lehman’s
collapse, and the lack of interbank
36 | Global Securities Lending Magazine | 2009
lending impacted you ?
Kennard: We were in the process of
de-leveraging before the short selling
regulations came into play. We were
reducing our exposure to the market,
and just going after the better return in
trades that were out there. I have seen
a reduced amount of stock available
to borrow on the market, increased
fees, more attention to counterparty
risk, more attention to collateral. It’s
had a real knock on effect to the whole
industry. You only have to look around
on network sights like Linked-In and
see the amount of people who are either
out of work, or between jobs, it has had
a really serious impact on our market.
4. The world of prime brokerage has
been changed dramatically by recent
events. How is this affecting you as a
hedge fund?
Ebers: The first shock wave was Bear
Stearns – it challenged the model of
a single prime broker. There were a
number of people who were trying
to run to safe havens and didn’t have
anywhere to run to because they didn’t
have a second prime broker. With Bear
Stearns, JP Morgan came in, which is
a safe pair of hands. The continued
write down of credit by UBS, Lehman
Brothers and Merrill Lynch gave people
real concerns about counterparty risk.
If you didn’t have concerns about
counterparty risk from the first part
of this year I think you were probably
fundamentally missing something from
your risk management process. It was
very clear that both firms were actually
highly leveraged within this market –
their cost for financing and funding
was going through the roof as they
had to buy more paper in the market
place. At the same time, there was
instability within their global company
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infrastructures. I didn’t think that
Lehman Brothers would go bankrupt
and others have said that to me. But as
a firm we identified the risk of Lehman
Brothers and Merrill Lynch early on.
It’s a counterparty relationship we’ve
always enjoyed, especially from a
Lehman’s perspective, but I’m happy
to say that we weren’t exposed from a
prime brokerage standpoint or from
a swap standpoint when they fell into
demise.
5. What are the major issues with
rehypothecation and client money
protection?
Ebers: Client money protection is one
of the terms that everybody usually
waives, especially if you are a leveraged
fund. We are a leveraged fund and you
tend to waive it because you tend to
be a net borrower, as opposed to net
long cash, so you don’t really need
the forms of protection which client
money offers. There are a number of
money managers out there who are
actually net long cash who can go
out and get client money protection.
Rehypothecation is one of the most

hotly debated subjects in prime
brokerage and has been for the last
couple of years. The Lehman Brothers
collapse demonstrated what happens
when your balances, which you thought
were being held with a London-based
company, suddenly disappear overnight
and end up in the US. Your accountant
says you can’t recover them, because at
that moment they can’t actually identify
your assets. So you are not able to risk
manage your positions, you are not able
to cash P&L, you don’t know what to
write down against your net asset value
and you get into the legal interpretation
of what does rehypothecation mean.
The other issue is equivalent
securities. It means that in
rehypothecation someone returning
your assets can actually return
equivalent securities to you. An
example of the legal interpretation of
equivalent securities is: if I’m long on
Microsoft and IBM is valued exactly
the same as Microsoft, someone can
deliver back to me IBN shares, rather
than Microsoft. The Lehman Brothers
collapse opened up Pandora’s box. It
raised the issue of your legal rights with
regards to the right of substitution,
equivalent securities and someone’s
right to rehypothecate your assets. Also,
where does our free cash go, how is that
protected, and how does someone go
and get that back?
Within 24 to 48 hours of the huge
runs on Morgan Stanley and Goldman
Sachs, their duopoly broke. I think
it’s good that the dominance of those
companies has been put into question,
but on the other hand it raises the
issue of consolidation in the prime
brokerage landscape. Lehman Brothers
was the largest prime broker and left
the market place. Bank of America may
– if it’s shareholders vote goes through
– actually buy Merrill Lynch’s prime
brokerage business. Bear Stearns was
brought by JP Morgan. JP Morgan had
already launched it’s own very good
fixed income prime brokerage business
but did not have a very good equity
platform so you’ve got consolidation
there.
The huge question mark is - where
BORROWER PROFILE
are the safe havens? I think previously
there were around 25 different safe Ebers: Custodians have always wanted
havens and now you can probably to get into the prime brokerage arena
count them on two hands. and they now have a wonderful
opportunity to do so. A number of
6. Where are the safe havens? firms, such as BNY Mellon, State Street
and JP Morgan, are striking tri-party
Ebers: Firstly, you look at where agreements. Comparing all the models
they are supported by banking out there, I love J.P. Morgan’s model.
infrastructure. I would say Deutsche It’s a prime broker, a custodian, a tri-
Bank as it has already received the party arranger, a cash facility, and a
confirmation from the German retail bank – it offers everything. The
government that it would be supported. bank will be able to pitch its business
UBS I would count as a safe haven and to anyone, and win some of the large
Credit Suisse, as the second largest mandates out there. Investors are also
Swiss bank, will definitely be protected going to have much more impact
by its government. State Street, is and will drive some of the scrutiny
more of a custodian, but has a prime regarding the details of legal contracts,
brokerage business. Then there are the as hedge funds have done with their
favoured four and a half: Goldman counterparties. It will be like someone
Sachs, JP Morgan, Citi, and Bank of is looking over your shoulder and make
America – the half is Morgan Stanley. sure that you are crossing all the ‘Ts’
We may be wrong in this observation and dotting all the ‘Is’. There is a very
but the Federal Reserve has always clear delineation from a FSA standpoint
seemed to approve of these banks. between the role of a custodian
Goldman Sachs and J.P. Morgan have and the role of a prime broker. The
always had a special relationship. Citi requirements are a lot tougher on
has just proved over night that it has a global custodian than on a prime
a special relationship with the Federal broker
Reserve, having received one of the
biggest supporting packages that any 9. How do you think securities
company could receive, USD306 billion, lending industry will evolve?
on top of USD25 billion that Citi is
going to get from the Troubled Assets Kennard: Personally, I think the
Relief Program (TARP), and the USD20 industry is in survival mode. People
billion it previously received. have got to look at their internal
counterparty risk and operational
7. Is the prime brokerage model risk, and really overhaul their risk
broken? management and overall returns on
the product. Banks are in trouble with
Ebers: The model is changed rather deleveraging and definancing. A lot of
than broken. People are looking banks in the past didn’t go into detail
for client asset segregation, client about their collateral and funding costs.
money protection, the removal These have now significantly increased
of rehypthecation language, and so they are going to have to look at their
steady and consistent funding. trades and unwind the ones, which are
Rehypothection was one of the reasons no longer profitable. A few houses, as
why prime brokers were able to be with some of the beneficial owners, will
very competitive in their financing. pull out of the industry. A few strong
With rehypothecation and leverage houses, which keep all these factors in
diminishing the revenue streams have mind, will get bigger and bigger. It’s
changed dramatically from that which about figuring out how to adapt to
prime brokers were previously securing. change, getting through the difficult
times and come out with a stronger
8. How will it evolve? business at the end of it. =
2009 | Global Securities Lending Magazine | 37
PANEL COLLATERAL MANAGEMENT
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1. How has the credit crunch affected
collateral management?
Morosini: Our volumes have never
been so high with record peaks at
EUR433 billion in November 2008.
Our wide customer base composed
of private banks, commercial banks,
central banks, internationational
banks, investment banks, and local
and global custodians has enabled us
to support various collateral structures
in the last 12 months. Allocations to
central banks for tenders and central
counterparty (CCP) has grown
exponentially. The quest for secured
products and liquidity has benefited
Clearstream because of its access to
central banks and cash via the Euro
GC pooling repo offering with Eurex.
Funds, insurance companies, and asset
38 | Global Securities Lending Magazine | 2009
 2CUECN/QTQUKPKKUGZGEWVKXGFKTGE
 VQTJGCFQH)5(5CNGUCPF4GNCVKQPUJKR
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ENKGPVU*GLQKPGFVJG%GFGN)TQWRKP
UVCTVKPIKP1RGTCVKQPUVQFGCNYKVJ
EQNNCVGTCNXCNWCVKQP

managers are now willing to be more
secured towards their custodian or
bank, pushing the collateralisation for
securities lending to an all time high.
Some counterparties have awoken to
the unsecured risk they were running
in their business – and this has been
driving a large part of the volumes.
Collateral to cover: Cash Correspondent
Credit lines, Securities Loans, Cash
deposits, Derivatives, Structured
Financing etc. are common these days.
Grimonpont: The recent liquidity
and credit crisis means that there is a
temptation for firms to curtail their
lending activities. However, those
firms that are monitoring their risks,
exposures and collateral positions
tightly are taking advantage of business
opportunities while maintaining an
/CTM*KIIKPUKUXKEGRTGUKFGPVCPF
JGCFQH$WUKPGUU&GXGNQROGPVHQT'/'#
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attractive risk/return ratio. Therefore,
it should come as no surprise that
when firms now trade with each
other, they are taking measures to
collateralise their exposures against
stricter eligibility criteria, with shorter
maturities, wider spreads and higher
margins. They are also seeking to make
the collateralisation process as risk
controlled and efficient as possible. We
expect this trend will continue into the
foreseeable future as an appropriate
business practice and, in time, possibly
as a result of more stringent regulatory
pressures.
Higgins: We have seen a significant
growth in the use and acceptability of
collateral in the past year. We support
the use of collateral as a traded asset in
tri-party and as a risk mitigation tool in

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QXGTUKIJVHQTUVTCVGIKEKPKVKCVKXGU
 hot topic in 2008 and many institutions
the OTC derivatives markets.
Throughout the liquidity crisis cash
has become harder to access and terms
for collateral eligibility increasingly
stringent. Collateral schedules were
updated during the crisis, reflecting a
flight to quality. Many required only
minor adjustments, which perhaps
reflects the greater awareness of risk.
On the risk mitigation side, we have
seen considerable volumes of cash
collateral, which only goes to reflect the
recent statistics published by ISDA. It’s
still very much cash and government
bonds.
Rivett: Counterparty risk now has a
very high profile in all organisations
and collateral management is an
important mitigant of that risk.
Lenders have narrowed their range
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of acceptable collateral, focusing on
fixed income because of the volatile
equity markets, and increased their
haircuts. Counterparties have also
moved towards entities that have
acknowledged strong financial balance
sheets in a ‘flight to quality’.
Little: In so many ways the big names
have disappeared. Those remaining
are rethinking their business strategy
from the top down, causing extreme
volatility. But I think I’d single out
liquidity issues as the most significant
for collateral management. The lack
of liquidity in the money markets
and unsecured businesses has driven
banks towards repo and tri-party repo
in particular. The lack of liquidity
in some securities and asset classes
has also caused huge difficulties and
2009 | Global Securities Lending Magazine | 39
PANEL COLLATERAL MANAGEMENT
made pricing and valuing positions,
even of good quality securities,
almost impossible at times. However,
the regulators are now focusing on
liquidity risk and we will see a major
effort to measure and tame this over
the coming year - but the benefits of
collateralised over uncollateralised
lending are undisputed.
2. What will be the impact of the
recent FSA liquidity risk guidelines
on the market?
Morosini: We saw the impact of these
guidelines before the FSA issued them.
Liquidity management has been the
have worked towards establishing all
possible routes to liquidity starting
with mobilising all assets belonging
to different entities of the same
group through triparty collateral
management. Many liquidity managers
have pushed repo desks to put
contracts in place with counterparties
“just in case” despite no immediate
economic benefits. Liquidity has
become the priority before profits.
This is why all Clearstream Collateral
Management participants are setting
up the route to the FED discount
window to access the TAF, to the ECB,
to Euro GC Pooling of Eurex and to
other long cash institutions in order
to demonstrate their capacity to access
liquidity. We even saw members of
the same group establishing the same
routes, having their own access on top
of being interconnected themselves
to strengthen their potential via
rehypothecation in triparty.
PANEL COLLATERAL MANAGEMENT
Higgins: From a collateral perspective,
liquidity is key. Historically,
collateralised lending has been the
sustainable method of ensuring
liquidity in periods of turmoil. Within
The Bank of New York Mellon’s Global
Collateral Management programme,
there is a greater demand for the re-use
of collateral. Collateral can no longer
only be used for the initial move, it
needs to be re-used to gain the required
efficiencies. Now that most firms
have moved to a fully collateralised
environment, we are seeing a greater
demand for collateral. To avoid a
collateral shortage in the market, firms
can no longer afford not to re-use
collateral. And if a cash lending firm
needs to raise liquidity, they must be in
a position to benefit economically from
collateral received.
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Rivett: The FSA’s desire to introduce
a liquidity risk measure by taking the
difference, over a given period, between
‘stressed’ inflows and outflows and
dividing them by non-capital liabilities
is an understandable addition to their
regulatory framework. Companies will
be better positioned to understand
their future cash positions. They should
develop a strategic approach to term
repos and financing transactions to
manage this risk. While term repos do
have other risks associated with them,
if they are managed correctly they will
provide a useful tool.
Little: The impact will be greater than
most people realise. The requirements
are far reaching and go beyond the
basic additional reporting obligations.
There is also a requirement for more
modelling and stress testing in order
that UK legal entities protect themselves
against the actions of other legal entities
in the same group. This all adds up to
40 | Global Securities Lending Magazine | 2009
big changes in 2009. Companies with
modern flexible risk architectures will
be significantly better off, but it won’t
be easy for anyone.
3.Collateral reinvestment risk is one
of the main areas of concern in the
industry at the moment, what is your
view?
Morosini: We don’t use cash as
collateral. Although it has affected us
on the revenue side, we have kept many
lenders in our programme because
the collateral is composed of A- Bonds
being ring fenced and kept on their
behalf. Our simple ‘bonds versus bond’
model proves to be safe and secure.
Grimonpont: Taking securities as
collateral is the simplest and most
secure market practice to follow,
guaranteeing their return at the time
of trading. A triparty agent such as
Euroclear Bank is able to enhance
returns by accepting more complex
collateral, as the agent provides a well-
controlled risk environment. This is
the model that still prevails in Europe.
However, we acknowledge that there
might be cases where cash is considered
the best form of collateral for mitigating
risk or as a means to add extra
revenues. In both cases, cash collateral
reinvestment is a business in and of
itself, with its own risks and returns.
Firms willing to use cash as collateral
should understand the risks and
rewards of both the securities lending
and cash reinvestment.
Higgins: When understood and
controlled, it is something to be used
and viewed positively. For example, the
ripples from Lehman’s have created
an increasing demand from both buy
and sell side organisations looking to
provide segregated collateral accounts
with The Bank of New York Mellon.
Rather than post all collateral to a dealer
as the funds would have usually done
(net mark to market and independent
amount), we have received requests to
provide creative assistance and ways to
‘ring fence’ assets. We have been able to
apply traditional tri-party mechanics to
support derivatives based exposures and
activities. The central custody of the
collateral by the custodial agent, as with
tri-party, presents an ideal way to access
the stock loan and repo markets while
knowing that much of the collateral
posted will remain in full view at The
Bank of New York Mellon.
Rivett: Volatile markets, by their very
nature, will increase this risk. Mitigation
of this risk has to be conducted as
part of a larger strategy of hedging an
entity’s exposure to this volatility. This
can be expensive and hence the returns
from such transactions are reduced.
Little: Hedge funds have been
particularly badly hit. According to
the Financial Times, USD 22 billion of
the USD 40 billion held by Lehman’s
European Prime Brokerage had been
rehypothecated. Hedge funds haven’t
been able to get these assets back
and may have to wait years to get a
proportion of their money returned.
This is likely to be a defining moment
for the industry and it’s still too early
to say whether it spells the end of
rehypothecation; it certainly means
it will be priced and monitored more
closely. One option would be for a more
limited use of rehypothecation where
prime brokers could just use the hedge
fund long positions for their capital
requirement under Basel II. This would
reduce the risk of having to get the
stock back as it would only be held in
the prime broker’s depot.
4.Historically collateral management
has been very silo based. Can you see
a drive away from this?
Morosini: Some groups have had strict
instructions to mobilise all collateral
 


















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PANEL COLLATERAL MANAGEMENT
from all pools within the group
to allocate them to the ECB or the
FED. Most institutions had collateral
management teams that have suddenly
became a more important function.
In some institutions, the collateral
still remains fragmented in silos with
different usage of triparty collateral
management. This is mainly due to the
fact that there is no centralised collateral
management function serving the needs
of the treasurers, repo desks, borrowing
and lending desks, derivative desks etc.
Grimonpont: In many firms collateral
is still managed per business line. I
believe those days are over. The recent
credit crisis has accelerated this change.
It makes no sense for firms to have
one line of business wasting good
collateral while another is struggling
to finance with poor collateral.
Similarly, it makes no sense to
exchange large pieces of collateral
back and forth between business
lines, when centralised collateral
management increases efficiency by
only requiring collateral to cover netted
exposures. This is no different from
the cash side of the business where,
a few years ago, it was not unusual
to see different businesses within the
same firm lending and borrowing cash
with the same external counterparty
instead of centralising the financing
needs of the entire firm. This practice
is now in place at most firms and will
become common practice for managing
collateral as well. Granted, centralised
collateral management is more
complex, but the potential benefits are
even larger.
Higgins: Over the last ten to fifteen
years many of the larger banks have
moved their operational and risk
management functions to within
central ‘Global Margin/Collateral
Management’ units. This has given
them economies of scale and extended
levels of operational risk control. It is
now very common to have the SBL,
repo, prime brokerage, derivatives and
event ETD margin management lines of
42 | Global Securities Lending Magazine | 2009
business all working together, often with
the same technical platform. The next
challenge will be to see if the business
lines can or will need to move closer
together. For example, should the fixed
income and equity repo/SBL business
be separate or would they benefit from
operating under one functional line.
Rivett: The increased requirement
for collateralised transactions in
combination with the need for
entities to squeeze more value from
their portfolios will drive collateral
management away from silos. A risk
manager who can draw on a single pool
of assets to collateralise any type of
transaction will be more efficient.
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Little: The trend towards a global
cross asset view of collateral has been
evident for some years. Current events
will strengthen this trend. Vendors
are improving their products to offer
genuine cross asset capability. I don’t
think anyone questions the benefits of
merging the silos, but the expense is
considerable and it isn’t necessarily the
highest priority for institutions.
5.What are the major advantages of
using a triparty?
Morosini: Well, the “old” core features
such as multiple assets, multiple
currencies, eligibility checks and
sufficiency checks and the right of
unlimited substitutions are the main
key differentiators from bilateral
agreements. Combined with the
rehypothecation feature, in place since
2006, and the increasingly sophisticated
eligibility criteria, it is a powerful and
reliable way of many types of securing
exposures.
Grimonpont: There are a number
of critical issues in collateralising
transactions. One is making sure that
the required collateral is in the right
place at the right time. Another is
making sure firms are optimising the
use of the collateral, that is becoming
increasingly scarce due to the demands
placed on it. Third, it is vital for firms
to understand the procedures and
challenges inherent in liquidating
collateral in the event of a counterparty
default during the life of the
transaction. When the worst happens,
it is critical to have immediate and
reliable information on the collateral
received as well as immediate access to
collateral. Euroclear Bank, as a triparty
agent, enables the immediate transfer
of collateral minutes after an event of
default is declared.
We think transactions between
counterparties will be increasingly
collateralised and there will be greater
focus on managing the various
risk-related parameters involved in
managing collateral, such as haircuts
and concentration limits, which makes
the issues identified above even more
difficult to manage.
The use of a triparty collateral
management agent like Euroclear
Bank is an excellent way to manage
these issues. We are particularly
well placed to manage collateral for
clients very efficiently. The service
provided is settlement integrated, and
highly automated and flexible while
providing timely and granular collateral
use reporting. Triparty agents, like
Euroclear Bank, will be increasingly
viewed as the most reliable and
safe venues in which to collateralise
business.
Higgins: Cost, control, access to new
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PANEL COLLATERAL MANAGEMENT
business, better risk management to
name but a few. The automation of
the collateral selection process greatly
benefits the collateral giver of securities
as it allows them to concentrate on
trading in the knowledge that collateral
is always perfectly allocated while
within easy reach via substitution. Some
organisations enter triparty as a way to
reduce the operational risk associated
with placing and managing the life
cycle of a trade in the bilateral world.
For example, you may want to invest
cash in the repo market but don’t have
the ability to book, value and position
keep a portfolio of deals. With triparty,
you have appointed the central agent to
calculate the value of the cash accrual,
collateral portfolio and resulting margin
requirement. This is all packaged up
neatly in a nicely reportable format.
I think triparty will start to be
seen in a new light and not just in
the traditional sense of supporting
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collateral trading. Its many advantages
are working their way into the
derivatives sector as we speak.
Rivett: Triparty agents are experienced
collateral operators who have invested
heavily in infrastructure and technology
to mitigate collateral management
risks and provide counterparts with
a transparent and efficient service. It
reduces the cost of entry and minimises
settlement risk and transaction costs
while also enabling clients to execute
same day recalls and substitutions.
Triparty lends itself to the ‘single pool of
collateral’ concept - most agents have an
optimisation engine of some kind that
allows a collateral provider to allocate
collateral efficiently, irrespective of the
underlying transaction.
Little: There are many advantages in
a triparty arrangement: operational
efficiency in the front and back offices,
intra-day margining, use of small
44 | Global Securities Lending Magazine | 2009
collateral lines, automatic substitution
and reduced credit risk being the
main ones. These advantages have led
to the continued rise of triparty over
bilateral lending. Triparty lending
also coped remarkably well with the
fall of Lehman Brothers, when the
agents were able to settle counterparty
claims on collateral within a few days.
But there are also drawbacks. The
lack of visibility and inconsistencies
in static and market data are two
notable ones. Until recently, triparty
agents provided limited reporting of
collateral allocations to the principals.
Under Basel II and in current market
conditions, counterparts are demanding
- and getting - daily or intra-day feeds
of allocations so they can monitor
the exact collateral exposures. Pricing
discrepancies between the parties can
lead to significant differences of opinion
on collateral values. There can also be
a lack of standardisation in message
formats and content between tri-party
agents.
6. Over the past 12 months have
there been any major changes in the
rules and agreements that constitute
bilateral transactions?
Morosini: Certainly, any adhoc or
home-based contracts have been
replaced with industry contracts such
as the GMSLA or the GMRA. This
provided a more industry-like market
practice especially for liquidation
and valuation of the collateral. After
the Lehman default more stringent
collateral profiles were established
and the default procedures have been
reviewed.
Grimonpont: We have seen changes
in collateral-eligibility profiles – the
trend started off modestly then became
substantial with the Bear Stearns scare,
and has become drastic since Lehman’s
collapse. Maturities shrank; haircuts
and spreads exploded.
Clearly, the intense focus on
managing exposures against a wide
range of risks is a driving force for
collateralisation, both bilaterally and
through triparty. It is no surprise
to see so many initiatives providing
central counterparty (CCP) services
for securities lending transactions as
well as for general collateral financing
products. The delivery of a seamless
rehypothecation feature in collateral
management, such as that offered by
Euroclear Bank, was a prerequisite
to the introduction of a CCP in this
domain.
I would also not be surprised to see
more regulations placed on banks and
other financial institutions to meet
higher capitalisation requirements and
to run their businesses against more
stringent risk management criteria.
Market participants will also look for
efficient triparty collateral management
services through which to allocate pools
of eligible collateral in order to obtain
seamless access to central bank credit
facilities.
Higgins: Since the beginning of this
century we have seen a stabilisation of
generally accepted market terms and
agreements. The Credit Support Annex
(CSA), Global Master Repurchase
Agreement (GMRA) and Global
Master Securities Lending Agreement
(GMSLA) are now widely seen as
setting the bilateral standards for
derivatives, repo and stock lending
transactions. But as with past events,
we can expect to see new ideas and
policies working their way into these
types of documents in future. For
example after market defaults in the
late 1990s, The International Swaps
and Derivatives Association (ISDA)
worked with the market to publish the
2001 Margin Provisions document.
A paper technically admired by many
but applied by few as it was too hard
or expensive to apply many of its
directives.
In the triparty space we do not see
 )NQDCN5GEWTKVKGU.GPFKPI

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PANEL COLLATERAL MANAGEMENT
what is negotiated on a bilateral basis,
although we see directly what both
parties consider as acceptable collateral
and the terms under which it can be
applied. And as mentioned before, we
have seen all sorts of movements up and
down in this area over the last year.
Rivett: Most agreements probably
have narrower eligibility rules, even
in the bilateral world. The Lehman
default proved the strength of the legal
agreements GMRA and GMSLA, as the
majority of counterparts were able to
take possession of their collateral and
realise its value for their own purposes.
7. What change in the demand for
collateral has occurred in the last 12
months?
Morosini: More haircuts, more quality
bonds, more liquid securities, more
concentration criteria - anything that
could contain and soothe the collateral
liquidity crisis. Also, we have seen many
new types of institutions requesting
collateral, sometimes in a rush because
they discovered they were exposed
for many years -sometimes 100%
unsecured.
Grimonpont: Exposure collateralisation
was certainly a common practice a year
ago. We are now seeing a broader mix of
firms that are collateralising exposures
across a wider spectrum of transactions,
i.e. repos, securities lending, secured
loan and derivatives transactions, as
well as for central counterparty margin
management purposes. As a result of
the recent, increased inter-mediation
by central banks in order to ease the
pressures within the inter-bank money
markets, we have seen increased focus
on the collateralisation of central bank
credit facilities. We have also seen
a gentle tightening of the collateral
eligibility profiles in 2007 and a more
sharply defined trend in 2008. Collateral
takers are now more thoroughly
reviewing the basket of collateral they
are willing to accept.
It is very important for triparty
46 | Global Securities Lending Magazine | 2009
agents to be clear and transparent about
their collateral valuation methodologies
(including price sources) and operating
procedures in general. Regarding
collateral valuations, if there are no
fresh prices for securities being used as
collateral, nobody, including Euroclear
Bank, will have a true price. In addition,
even when a fresh price exists prior
to a far-reaching event of default,
such as Lehman Brothers, securities
are unlikely to trade at that price post
default. It is key for dealers to have a
true risk management process in place
that will allow them to determine what
collateral meets their risk profile, and
what haircuts and spreads are required
to justify the risks. Euroclear Bank is
completely transparent in terms of its
pricing sources, quotation ages, i.e.
when the price is updated, and in its
price collection model.
For example, prices used by
Euroclear Bank are either true prices,
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quoted by dealers or derived from
various real-time and dependable
sources, or theoretical prices that
are based on sophisticated pricing
models or directly purchased from
data vendors. As we are transparent
about this process, clients can then do
their own risk management, excluding
certain securities or imposing variable
haircuts based on newly defined criteria.
Higgins: Flight to quality is the obvious
answer. However, the derivatives market
was making headway into a new world
of collateral forms under Basel II, and
then during the recent market turmoil
reverted to what it knew and trusted
well – cash and government bonds.
The stock loan and repo markets have
been in flux for much of the year, with
a move back into equity as fixed income
became too expensive to source. There
is a direct relationship between the use
of collateral and the need to raise high
quality assets for use elsewhere.
Little: Basel II has had a massive impact
in the way firms are now able to use a
wide variety of securities to cover their
capital requirements. The greater cost of
borrowing cash due to the credit crunch
has driven borrowers to demand that
lenders take non-cash collateral.
8. Have margins increased and has
this had an effect on volumes?
Morosini: In general, haircuts have
increased. Some borrowers that
consider extra collateral as an unsecured
risk towards their counterparty have
reduced their outstanding and are not
willing to pay for an extra risk. It is not
a question of a good name or a bad
name. It’s just that in front of some
repeated demands by many lenders
to increase the haircuts - sometimes
with no real justification (8 to 10%
on a AAA-AA Government Bonds) -
most of the borrowers have used all
their counterparties and all routes to
do an efficient allocation of their best
collateral with the lowest possible cost.
Grimonpont: Margins and haircuts
have increased as collateral-eligibility
criteria has tightened and maturities
shortened. Market conditions have
led to changes in risk profiles and
risk appetites. Allowing collateral
management practices to adapt to those
changes is a pre-requisite for the market
to continue to function. If the market
were unable to cater for collateral
changes, volumes would have suffered
far more than they have.
PANEL COLLATERAL MANAGEMENT
Higgins: It is not changes in margins
that have effected lending or financing
activity, but rather the banks’ risk
departments’ reluctance to approve
lending. Several banks do not have
direct access to central bank funding
or other sources of general collateral
lending which have been seen to be
safer in recent months.
Rivett: The increased margins reflect
the increased uncertainty in the market
and among lenders and borrowers;
this has had a negative impact on
the amount of lending and financing
occurring in the market.
Little: The long term trend has been
growth in volumes and reduction in
margin. It’s difficult to say whether one
has caused the other as there have been
many factors involved. This long term
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trend has been violently interrupted
by recent events so that volumes are
significantly reduced due to fear and
uncertainty.
9. How will the market develop in
2009?
Morosini: We think that the actors and
some business structures will change.
We hope that unsecured transactions
will eventually all be secured
(collateralised), which will really
emphasise the need for triparty. In the
meantime, we will continue partnering
with the authorities and the central
bankers to propose services that will
bring back some more OTC trading and
restore trust. Whether it goes via a CCP
or not, it looks like there is an exciting
year ahead for triparty providers.
Grimonpont: Collateral, particularly
good collateral, will be of paramount
48 | Global Securities Lending Magazine | 2009
importance in the future. This trend is
not, as in the past, a result of regulatory
initiatives such as Basel II, but from
more fundamental reasoning. Collateral
is used to protect the collateral holder
from the default of its counterparty.
This seems very basic, but the market
somehow overlooked counterparty
risk over time. Market participants
now want to know, at any point in
time, where the collateral is held, what
collateral they hold, when it can be
liquidated and at what price. Triparty
collateral management service providers
are helping dealers with those needs,
a trend that I believe will continue
to increase significantly in 2009 and
beyond. Dealers are likely to reduce
their leverage and limit exposures to
each other in the foreseeable future, we
could expect more of the remaining
exposures to be fully collateralised.
A larger portion of collateral
management responsibilities will be
outsourced to triparty agents. And
we will see a dramatic reduction in
unsecured exposures and an improved,
but moderate, reduction in overall
exposures. Triparty agents will play an
increasingly meaningful role in making
that happen.
Higgins: We all need a crystal ball
for that one! It is hard to get a clear
vision in current markets but when
things do finally settle down it will
be possible to see a clearer path.
Regulation and perhaps even greater
depth and transparency of reporting
is likely to take hold this year. Many
more organisations now require good
quality data. Wherever and whenever
they need it, it will be down to service
providers such as The Bank of New
York Mellon to ensure clients receive
this information and service.
There are many working groups
busily considering what might be best
for us all in the years to come, whether
derivatives, stock lending or repo.
What they are working on will start
to influence us in 2009 but has the
potential to last a long time. One thing
is very clear, and that is 2009 is going
to be a different collateral management
world than before the recent crisis, last
month or even yesterday. The pace of
change is fast and to be taken advantage
of.
Rivett: While collateralised transactions,
as a percentage of total activity, will
rise in volume, the total activity itself
will probably reduce. The increased
internal focus on risk for all firms will
almost definitely force them to focus
on strengthening their balance sheets.
The potential introduction of a liquidity
risk frameworks shows the direction of
regulation. With financial markets and,
in particular, the stability of financial
institutions proven to be fundamental
to a country’s economic well-being,
there will be a move towards increased
transparency and management of ‘off-
balance sheet’ activity. As interest rates
begin to approach zero, the spreads
available to repo desks will also reduce.
Little: I think we will see a continued
preference for secured over unsecured
lending. This will fuel an already
buoyant collateral market. Firms will be
resetting their business strategies and
are likely to choose between returning
to core banking values or continuing
to seek the higher returns promised by
aggressive investment strategies. These
choices will result in major changes,
with some firms exiting parts of the
business. But whatever strategy they
follow, they are likely to retain collateral
management as an important part of
the business. No one can afford to leave
their collateral assets unmanaged.M
Mark Higgins isVice President and Head of Business
Development for EMEA Collateral Management in the London
office of The Bank of NewYork Mellon.The views expressed
herein are those of the author only and may not reflect the views of
The Bank of NewYork Mellon.This does not constitute securities
lending advice and it should not be relied upon as such.
THE WIDER VIEW
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TECHNOLOGY BOOKS AND RECORDS
$CEMVQHTQPV
Innovation in the front office is driving the need for efficient back office processing. Cherry Reynard
looks at the various books and records systems and the role they play in this.
Technology has fuelled significant
growth in securities lending. Previously
the business was built on old-fashioned
relationships between borrowers and
lenders, but technology has facilitated
the growth of the industry to its current
level of around USD 20 trillion. As the
business has grown in size and complex-
ity, books and record-keeping systems
have had to keep pace with new innova-
tion on the product side and increased
regulatory requirements.
Books and record-keeping systems
are the utilitarian end of securities lend-
ing technology. Frequently these systems
are simply parcelled up within a full end
to end system. They are something that
it is vital to get right, but do not generate
significant competitive advantages. They
tend to be part of an integrated solution
and downstream will be the general led-
ger of the firm (for in-house systems) or
client firm (for outsourced providers).
Jane Milner, market specialist, Securi-
ties Finance, SunGard says: “Securities
financing tends to be lifecycle-heavy.
It’s not like other areas where you do a
trade and it’s done. A trade could be on
the system for a number of years. There
is lots of activity that the system has to
manage and record on an ongoing basis.”
As such systems need to be sophisticated
and scalable. The development of books
and record-keeping systems is largely
the same as that of the wider securities
lending technology market because they
are usually part of a bigger system. Until
50 | Global Securities Lending Magazine | 2009
relatively recently, loans were negotiated
over the phone or via email, and record-
keeping was done via spreadsheets. It
is only within the past few years that
technology has emerged to help generate
scale and transparency.
The emergence of exchange traded
platforms has done most to generate
these increased flows and it has been a
key development for technology provid-
ers. The EquiLend system was launched
by 11 financial firms and sought to
revolutionise straight-through process-
ing in securities lending by introducing
standard protocols and infrastructure.
Compatibility with these systems has
become a vital criterion.
Now, there is increased automated
borrowing where securities are matched
when available. Lenders publish their
security inventory daily and borrow-
ers compete to locate and borrow those
securities. However, the European
settlement market is still fragmented and
this is mirrored by securities financing
technology. As demand increases the
technology is growing more streamlined
and efficient, although there is still a
significant amount of off-exchange busi-
ness.
Milner says: “The vanilla stuff is
now automated. This is where little
negotiation is required. But there is still
a high proportion considered to be
‘relationship’ business. This is hard for
any system to automate. The electronic
marketplace is still only dealing with
the higher volume vanilla deals. Various
initiatives have emerged to increase
the efficiency of the lifecycle, but noth-
ing is there yet.”
In terms of providers, for years Sun-
Gard’s Global One has been a key
application in Europe. Ed Oliver, senior
business adviser at Spitalfields Advi-
sors, says that their research demon-
strates that SunGard is a big part of
the picture, but there are a number of
other growing players building their
business in this space.
4sight Financial Software is the main
contender and has been increasing its
client base since BNP Paribas became its
first client in 1997, and a management
buyout in 2003 made it completely
independent. Oliver says that 4sight has
been gaining some ground on Global
One in recent years with its full front to
back office functionality.
Oliver says that connectivity to the
platforms has become key, but vendors
will have other aims. “If you look across
the board, vendor platforms must have
connectivity to the trading and back of-
fice systems such as EquiLend, “ he says.
“Buyers look at how well it links in with
this and any existing systems, but they
also look at how much experience those
providers have and their experience spe-
cifically in securities lending. Some are
more repo-based, for example.”
Other systems include Anvil, Murex
with its MX3 system, Suncorp’s Dimen-
sion, Openlink Findur and Pyramid.
Oliver believes that when looking to
external vendors people should ask how
many clients are linked into the system
they plan to use, what it allows in terms
of collateral and how it handles triparty
services.
Each company has a strong sense
of how it differentiates itself from its
competitors. 4sight, for example, believes
its key strength lies in its independence.
Judith McKelvey, 4sight’s global sales
director says: “We are the only indepen-
dent company left and our flexibility
is a huge advantage when it comes to
focusing on our customers. We meet
with our customers regularly and host
North American, European, and Asia
Pacific user groups. We look towards
future developments for the market and
our customers help us to prioritise the
product’s direction. We work towards a
4sight funded roadmap as a result of this
ongoing feedback.”
Other considerations include whether

the system offers the full front to back of-
fice solution, covering securities lending
and borrowing, total return swaps and
CFDs; whether it operates across the full
lifecycle and can be used on an agency or
principle basis. Some systems, like 4sight,
are modular. They slot in easily with
other systems and users can cherry-pick
the areas they want to use and tack on
additional functionality later.
SunGard has traditionally been seen
as the de facto market standard. Milner
says: “So many people use our system it
is easier to communicate with coun-
terparties. Our reports are standard
and well-known and familiarity with
our system is often a requirement for
people when recruiting.” She believes
that the group’s collateral handling
also sets it apart: “Collateral has to be
realigned every day. Our system au-
tomatically marks the trade every day
for both players to bring collateral into
alignment.”
Some, like Anvil, have grown out of
the repo market. The group was bought
by Dublin-based Ion Trading, a provider
of dealing systems for electronic fixed in-
come markets, in 2006. Anvil argues that
bringing together repo and securities
lending has significant benefits, notably
in collateral management efficiencies and
operational benefits. It says it has seen
strong demand for cross-product collat-
eral management and says it can reduce
operational costs by using one system for
multiple functions.
Spanish bank La Caixa and Banco-
lombia, the largest bank in Colombia,
are recent converts to Murex’s MX3 plat-
TECHNOLOGY BOOKS AND RECORDS
form. At the time Bancolombia said that
it liked the native asset class coverage of
MX3 and its proactive approach to risk
management. Like 4Sight and SunGard,
MX3 provides an integrated cross-asset
trading and risk management system,
which includes FX and money mar-
kets, cash and derivatives, fixed income,
emerging market products, interest rate
derivatives and credit derivatives.
OpenLink’s Findur has largely been an
US-based technology with recent new
clients such as Ontario Teachers and the
Home Loan Bank of Atlanta. But it has
made in-roads into Central and South-
ern America, notably with the Costa Ri-
can Central Bank, and Europe, with the
Europe Arab Bank selecting Findur for
its treasury and capital markets division.
Choosing a technology vendor is
also about relationships. Paul Wilson,
head of pre-sales at 4sight, says: “We go
out of our way to accommodate our
clients’ requirements. We have a close
relationship with clients and work hard
at maintaining that.” Some buyers will
appreciate having someone they know
on the end of a phone line, while others
will appreciate the experience of a larger
company. Wilson adds that if securities
lending groups are to undertake a large
scale outsourcing project, it is best to
team up with someone who already has
the experience of replacing certain legacy
systems. Of course, some institutions will
still look to build their own systems. This
will generally be groups who want to
ensure that they retain control or believe
it can give them some competitive ad-
vantage.”
Or it may simply be inertia. Oliver
says: “Some have patched together a
number of systems, particularly those
that have been involved with a lot of
merger and acquisitions.” They will
have a lot of legacy applications and
new functionality or applications have
been tacked on as securities lending has
become a bigger part of their business.
Many still use Excel-based models.
Wilson suggests another reason:
“Traditionally many of these systems
were built in-house because securities
lending was non-commoditised, but as
the market has achieved a level of ma-
turity, external vendors can encompass
the breadth and depth of functionality
required by a global securities finance
operation.” Building systems in-house
requires huge maintenance and staff-
ing costs and many underestimate how
much this control is costing them.
The outsourced providers will say
that they offer more bang for the buck.
They can bring down costs and improve
efficiency. So why are some institutions
hanging onto their old systems? Brian
Traquair, president, capital markets and
investment banking at Sungard, suggests
that this may be a result of a funding
battle between middle and back offices.
Or it could be an inherent fear of change
as the complexity of the process is often
held as intellectual capital by those cur-
rently doing the work. However, more
and more companies are seeing the value
of streamlining their processes, using
one or a number of outsourced provid-
ers and freeing up their front office to do
more value-added work. There is also a
TECHNOLOGY BOOKS AND RECORDS
risk management element to automat-
ing processes fully – corporate actions
aren’t missed, trades are automatically
reconciled with those of the counter-
party and regulatory requirements
are fulfilled. Milner says: “Those using
in-house systems are increasingly few
and far between. There are probably
less than a dozen players now. They will
have deep pockets, but there is no real
advantage. Large parts of the process are
not proprietary and are simply day to
day administration.”
Recent market termoil has created
business for outsourced technology pro-
viders. Institutions have realised than it
may well be cheaper and more efficient
to outsource. Risk management has
become vitally important and relying on
an ancient spreadsheet-based system is
a recipe for disaster. Wilson adds that he
has seen no drop-off in business since
the banning of short-selling on certain
stocks: “All of our clients are still in busi-
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RTQRQTVKQPEQPUKFGTGFVQDGµTGNCVKQPUJKR¶DWUK
PGUU´
,CPG/KNPGT5WP)CTF
ness but with reduced budgets; they are
looking to us for cost-effective, innova-
tive risk reduction functionality as they
formulate their budgets and strategies
for 2009 and beyond.”
The areas where securities lending
technology can really add value are in
risk management, collateral manage-
ment and scenario analysis. The use of
these is the only way to predict the im-
minent collapse of Lehman Brothers and
the impact it will have, but accounting
and record keeping systems ensure that
securities lending groups meet regula-
tory needs. This year’s banking crisis has
focused the minds of regulators. Oliver
says: “The events of this year have led to
much stronger requirements for report-
ing in terms of the loans themselves,
collateral and the haircuts in place. And
on the cash reinvestment side.”
He adds that reporting is not simply
52 | Global Securities Lending Magazine | 2009
a regulatory requirement. Clients will
demand a high quality of reporting
and a good capacity to run books and
records for them that may feed into their
own systems. Global One, for example,
feeds directly into the sub-ledger within
the books and records of the client firm.
After the events of this year, securities
lending groups want more information
on counterparties and their collateral to
protect themselves from counterparty
default.
Judith McKelvey of 4sight says: “The
International Securities Lending As-
sociation has issued agency lending dis-
closure rules. We ensure that our system
complies with these and any rules or best
practice directives.” Risk management
has become much more important over
the last five years with the Basel accords
and Sarbannes-Oxley. MiFID has meant
more scrutiny of the relationship end
of securities lending. People now know
more about their counterparties and
collateral than ever before, but they have
the headache of finding effective ways to
use that data.
From 2010, daily reporting will
come into force. Milner believes this is
the kind of thing that will change the
market. People will have to gather the
data from 200 lenders point to point. Are
they really going to do this themselves
or will they get someone who can do it
through a hub service?”Looking to the
future, the real innovation in securities
lending technology is likely to be at the
front-end. But the back office has to
keep up with the pace of change in the
front office.
Wilson says that as securities lend-
ing becomes more standardised and
consolidates its view on the potential
for exchange-based trading to in-
crease. He adds: “We are scaling up our
volume handling to a level that would
be unimaginable to even the current
largest stock loan business now.” The
emergence of the major exchange traded
platforms (EquiLend and SecFinex)
has been a major shift on the borrow-
ing side, freeing up the trading desk for
higher value activity rather than simply
entering trades. This has not yet been
mirrored on the lending side, but could
be an important development.
Wilson says that 4sight is also focus-
ing on collateral management. Collateral
requirements change all the time and
securities lending desks are moving
into new markets. He adds: “People are
becoming increasingly sophisticated
in their requirements for managing
collateral. For example, we have seen a
recent upsurge in requests for CSA OTC
derivatives support as desks look for
solutions for cross-asset class collateral
management of their Securities Finance
operations” Collateral standardisation
and re-use is a big issue for the industry
as a whole.
Overall, corporate action handling
remains a priority for many technology
providers. There are also developments
in the auctioning of hard to borrow
stock and many groups are developing
a global locating facility. Technology
providers are also aiming to do more
quotidian things like improve speed and
efficiency. For example, start of day loads
are now down to a few seconds. This is
an astonishing improvement over the
products that were available just 10 years
ago.
The challenge is to keep up with the
innovation going on at the front-end,
plus the increased volumes being gener-
ated by the growth of exchange-traded
platforms. These systems have a vital
risk management role to perform. Every
technology provider, whether in-house
or outsourced, needs to get this right.L

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INTERACTIVE DATA
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Bob Cumberbatch, Business Lines director at Interactive Data, looks at data management as a key
component of risk management.
understand what good data is and where
to source it.
At the core of data management is
the need for comprehensive valuation
information and high-quality reference
data that can help financial institutions
power mission-critical operations.
Institutions can manage risk more
effectively by prioritising reference
data management and having a more
complete understanding of the financial
instruments streaming through their
applications and databases. Critical
to this approach is the ability to take a
360° view of each financial instrument
held by an institution, understanding
the behavioural characteristics – both
on a stand-alone basis and within the
context of the portfolio – under a variety
of market scenarios. Determining how
an instrument is going to behave under
stress is essential to understanding the
risk parameters of that instrument. With
accurate and consistent reference data,
an institution is better positioned to
conduct the kinds of analyses which are
critical to understanding risk.
Financial institutions want to under-
stand the concentration and exposure
For many years, data management has
they have to various segments of the
been seen as an overhead by financial
market; this might include credit expo-
institutions. In today’s market environ-
sure and industry segment exposure.
ment, effectively managing data as-
Gaining this understanding requires
sets across the securities management
knowledge of the full ‘family tree’ of a
lifecycle, which includes trade confirma-
financial instrument. For example, if an
tion and settlement, can be viewed as
institution owns shares in a certain com-
a strategic advantage towards helping
pany, they may not realise that it is a far-
firms meet risk management and regula-
flung subsidiary of a major auto com-
tory demands. Effective data manage-
pany going through financial difficulties
ment can also help institutions continue
that could impact their holdings. With
to explore new opportunities and work
reference data, an institution could have
to grow their business.
a better understanding of their ‘concen-
The ever-increasing volume of
tration risk’ in a certain sector or among
data being consumed by large financial
organisations that are facing challenges.
institutions emphasises the importance
For instance, they could identify that
of effective data management. Firms
exposure to the auto industry makes up
need to have a high level of expertise
too large a percentage of their portfolio
and flexibility within their technical
and then make an informed financial
infrastructure, not just for systems and
decision to address this issue.
applications, but also for personnel who
Reference data providers can offer
54 | Global Securities Lending Magazine | 2009
clients detailed entity linkage informa-
tion that connects families of securities
and helps institutions understand the
relationships of the securities to the cor-
porate family structure. This informa-
tion is critical to maintaining compliance
with regulations that require institutions
to understand their exposure to a given
firm, industry or market sector.
It is also essential to have a compre-
hensive understanding of the underlying
elements of a financial instrument. Over
the past year, we have read stories about
firms that didn’t take these steps and
have been impacted by the far-reaching
tentacles of sub-prime securities. But
it wasn’t just financial institutions that
have invested in structured securities,
such as CDOs, that had exposure to
sub-prime loans; entities from govern-
ment organisations to pharmaceutical
companies have disclosed losses due to
sub-prime-related issues.
Effectively managing and review-
ing reference data can help investors
understand the underlying dynamics of
a security and help them determine their
risk exposure. For example, even though
a security may have an AAA rating, that
rating may be supported by internal or
external credit enhancement. To un-
derstand the risk profile of that security,
it can be crucial to know whether that
credit enhancement will hold up under
stress. Interactive Data delivers the
underlying ratings details of municipal
bonds needed to assess the underlying
risk profile of insured municipal securi-
ties. This information is critical as it
provides clients with additional transpar-
ency to somewhat opaque investments
and can be used to measure their risk
exposure. With consistent, timely and
accurate reference data, institutions can
gain additional transparency into these
details.
Interactive Data provides a huge raft
of essential reference data, which can
help institutions to realise a competitive
advantage by making more informed

investment decisions.
Some fundamental issues need to be
addressed before we will see the industry
making real progress toward the goal of
transforming reference data into the high
octane fuel that institutions need. First,
the industry must come together to agree
upon standard definitions for reference
data. The lack of standard data defini-
tions is not due to a lack of trying – over
the years a number of different initia-
tives have been undertaken by industry
organisations to establish a standard for
legal entity identifiers. Despite sincere
efforts to address standards for this criti-
cal aspect of reference data, agreement
has still not been reached.
In addition, a much greater under-
standing of data utilisation and data
requirements is needed across the data
management ecosystem. Individuals
given the responsibility for improving
data quality and ultimately reducing
operational risk must have a detailed
understanding of how the data is ap-
plied across the organisation and how
the business units derive value from the
data across the securities management
lifecycle.
This will result in much richer
conversations among suppliers, consum-
ers and all players in between. It is also
essential that senior managers make the
connection between data management
activities and managing operational risk.
It might be suggested that forensic analy-
sis of the firm’s data to realise quality
goals can be seen as a ‘root cause’ activity
for developing effective operational risk
management strategies. The drive to
understand operational risk across the
enterprise is supported by the drive to
achieving enterprise-wide data quality.
When it comes to valuations, trans-
parency and standards are fundamental
to the process. Investors and regulators
expect consistent, transparent and fair
pricing across all alternative investment
classes. Independent valuations of
complex OTC derivatives and structured
products, as well as evaluations of fixed
income securities, are seeing increased
demand. Financial institutions have
been working to ensure that they have a
firm grasp on the value of their holdings.
Assessing risk exposure is a key focus.
In response to this challenge, Interac-
tive Data delivers valuations for a range
of alternative instruments, including
credit default swaps (CDS), interest rate
swaps and bank loan prices. Interactive
Data also provides valuations of highly
complex OTC derivatives and structured
products as part of its wide-ranging
pricing and evaluation services through
an exclusive agreement with Prism
Valuation. Prism Valuation – whose
philosophy to valuation is built on three
pillars ‘people-data-models’ – provides
services that replicate the pricing and
risk analysis capabilities of a structured
products dealer, with an emphasis on
hard-to-value assets.
Providers of independent evaluations
can deliver significant value to finan-
cial institutions during these turbulent
times. For example, Interactive Data has
teams of experienced evaluators who
incorporate available transaction data,
credit quality information and perceived
market movements into the evaluated
pricing applications and models for fixed
income securities.
Global institutions have also been
impacted by a lack of liquidity as the
credit markets have tightened and they
have had to take a step back to determine
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EQORTGJGPUKXGXCNWCVKQPKPHQTOCVKQPCPF
JKIJSWCNKV[TGHGTGPEGFCVC´
their risk exposure. For their portfolio
valuation processes, these institutions
have looked to independent providers
of evaluations who put an emphasis on
building relationships with a broad range
of market sources.
In recent years, a deluge of new ac-
ronyms have taken on almost mythical
status in the financial services industry.
From the Markets in Financial Instru-
ments Directive (MiFID), to Reg NMS,
IAS 39 and UCITS III, new regulations,
standards and directives have impacted
the industry with new compliance
processes and procedures to implement
and follow.
In the midst of focusing on managing
2009 | Global Securities Lending Magazine | 55
INTERACTIVE DATA
risk and growing their business, firms
must follow processes that can help
ensure that they can remain compliant
with regulations. MiFID, designed to
broaden and strengthen the regulation
of financial markets in Europe and help
ensure market transparency, has posed a
series of challenges for financial institu-
tions. Interactive Data’s real-time and
reference data services can help clients
with the requirements of pre- and
post-trade transparency, evidencing best
execution, trade venue selection and
reviews of order execution policy, code
of conduct and client classification obli-
gations, transaction reporting, managing
conflicts of interest and managing risk.
Another main focus for institutions
during 2008 was the Financial Account-
ing Standards Board’s Statement of
Financial Accounting Standards No.
157, or FAS 157. This statement has
resulted in firms reviewing their existing
valuation policies and procedures and
having to develop procedures for fair
value disclosures in their financial state-
ments. To help clients prepare for FAS
157, Interactive Data has developed a set
of informational resources that disclose
the types of inputs by asset class that are
utilised to prepare evaluations.
Enhanced transparency can provide cli-
ents with information to establish their
own fair value hierarchy determinations
as required under FAS 157.
Risk management will continue to be
a key focus for financial institutions, and
regulation and other mandates will con-
tinue to be a main driver. By working
closely with clients to understand their
workflow, vendors are better able to ad-
dress market data and information needs
and develop services that can help clients
more efficiently comply with regulatory
requirements. L
STATISTICS

#FFKPIKVWR
#XCKNCDNGKPXGPVQT[CPFDQTTQYKPIQH7-CPF754GVCKNCPF$CPMUVQEMU
5QWTEG&CVC'ZRNQTGTU

7-EQPUWOGTUGTXKEGUUVQEMU
Borrowing on UK Consumer Services stocks has increased
60% since 1 Sept 2008, and available inventory reduced 14%.
There has been a big increases in the quantity on loan by
Whitbread (up 136% since 01/09) and Carnival (up 129%
since 01/09). TUI, which represented about a quarter of the
weighting went up by 23%.

75TGVCKNKPIUVQEMU
Stock on loan and available inventory on US retail stocks
has decreased since 1 September 2008. By 3 November on
loan stock had decreased by 28% and available inventory
stock by 10%. Since then the percentage of stock on loan has
increased by 17% but available inventory has decline by a
further 6%.

7-TGVCKNKPIUVQEMU
Available inventory on UK Retailing stocks has decreased
by 30% since 1 Sept. At the start of the period, Signet
represented c 20% of the lendable qty available in the UK
Retailing portion of the DESLI. The availability of Signet,
since then, has fallen by 97%. Whilst each of them are
individually smaller than Signet’s weighting, Inchcape,
HMV and Home Retailing Group all fell by 24%, 20% and
18% respectively.

56 | Global Securities Lending Magazine | 2009

 STATISTICS

7-DCPMUVQEMU
UK Borrowing has seen a
general decline across the
board. A peak though is
shown towards the end of
November. This is purely
down to HSBC quantity
on loan jumping from 231
million on 17 Nov to 1.18
billion on 21 Nov.

75DCPMUVQEMU
Apart from Wells Fargo, the
quantity of US Banks bank
stocks borrowed on DESLI
has reduced by 49% since 1
September 2008. Available in-
ventory has reduced by 21%.

2009 | Global Securities Lending Magazine | 57

 PEOPLE MOVES
#RRQKPVOGPVU
Felix Oegerli, head of prime finance at
Cantonalbank of Zurich (ZKB)
October
Charlotte Wall, former head of
Morgan Stanley’s European
equity finance desk joined Data
Explorers. She was responsible
for creating the team that
was awarded the number one
borrower by the International
Securities Finance (ISF) survey
for eight years in a row. She
was also an integral part of
Morgan Stanley’s Hedge Fund
Management Team and Client
Relationship Management
Committee.
Leonard Welter, former
executive director at Morgan
Stanley, has joined Data
Explorers as chief technology
officer. At Morgan Stanley
he was responsible for the
global development of new
securities lending analytic tools
and trading systems. He was
also responsible for European
securities lending portfolio
pricing and trading.
Cantonalbank of Zurich (ZKB)
has appointed Felix Oegerli as
head of prime finance. He is
responsible for expanding
58 | Global Securities Lending Magazine | 2009
Andy Jones, responsible for Penson’s Equity
Financing business in Europe
ZKB’s securities lending and
repo activities and to build
up the synthetic finance and
Delta One capabilities. Ueli von
Burg, former head of securities
lending and repo at ZKB, is now
head of prime finance trading,
reporting to Oegerli.
November
ING Global Securities Finance
appointed Ed Donald as
director and head of Global
December
Securities Finance Asia. He
manages their new office in
Singapore. Formerly he was
global head of European Fixed
Income Repo at ABN AMRO.
Nomura Holdings, Inc.
appointed Hideyuki Terauchi as
managing director of Nomura
International plc (Spanish
Branch) and Masaru Tokiwa
President of Nomura Bank
(Switzerland) Ltd.
Alexis Fosler, who was hired to
run Citi’s Prime Brokerage sales
team in Singapore, has left the
bank.
Roy Zimmerhansl left ICAP
to start his own company,
Roy Zimmerhansl,
primary at Zimmerhansl Consulting Services
Zimmerhansl Consulting
Services, which provides
securities lending business
consulatency services.
Morgan Stanley’s Andrew
Amstutz and Victoria Foster
left the firm. Amstutz, a
managing director and Foster,
an executive director had been
with Morgan for more than 10
years collectively.
The Alternative Investment
Management Association
(AIMA), the body for the
global hedge fund industry
appointed Todd Groome as
its non-Executive Chairman
together with the restructuring
of its Executive team. Prior to
this role, he has held senior
positions at the International
Monetary Fund and at
institutions in London, New York
and Washington DC, including
Deutsche Bank, Merrill Lynch
and law firm Hogan & Hartson.
Keith Babbitt, managing
director and co-head of
Securities Lending, Global
Prime Finance North America,
left Deustche Bank. Babbitt
joined in February 2007 after
spending 23 years at Merrill
Lynch.
Jeff Dorman, managing director
and head of Prime Finance
North America in the Global
Markets equities business at
Deutsche Bank is no longer
with the bank. Dorman joined
Deutsche in early 2007 to lead
its prime finance business in
North America. He previously
worked at Bear Stearns and
spent 18 years at Lehman
Brothers.
Andy Jones, former director of
equity finance at Landsbanki
Islands Hf joined Penson
Financial Services Limited,
where he is responsible for
the Equity Financing business
in Europe. He is now based
in London, reporting to Mike
Johnson, Head of Global Equity
Finance.
NORDIC MARKET UPDATE
4G[MLCXKM
From the sovereign bankruptcy of Iceland to growth in Sweden, Nick Pratt rounds up the prevailing
trends in Nordic securities lending.
Iceland has undoubtedly suffered the
worst in the Nordic region. In less than
12 months it has gone from topping a
United Nations poll as the “best place to
live” to a state of sovereign bankruptcy.
Its three major banks, Landesbanki,
Kaupthing and Glitnir – all collapsed un-
der colossal debts, trading was suspended
on the national stock exchange as assets
60 | Global Securities Lending Magazine | 2009
lost 90% of their value and the central
bank was declared insolvent.
Securities lending is consequently
not the primary concern for Iceland’s
financial authorities as they go cap in
hand to the IMF for the kind of multi-
billion bail-out package to keep an angry
population off the streets of Reykjavik.
But for the rest of the Nordic coun-
tries, the fate of the securities lending
market is a more prescient concern
with the inevitability that 2009 will
bring some kind of downturn. Accord-
ing to Chris Angell, principal at pen-
sions consultant Mercer Sentinel, the
majority of lenders have been review-
ing their position in terms of whether
the returns are adequate enough to
reward an increased risk.
“The biggest issues are facing those
clients that accept cash as collateral,” says
Angell. “Along with Lehman Brothers’
default, a number of cash vehicles have
gone to the wall which has impaired cash
pools. Those wanting to reinvest cash
have realised that the risks of taking cash
as collateral in a securities lending pro-
gramme is greater than they thought,”
says Angell.
Nevertheless, any changes are
unlikely to be dramatic, says Angell and
most borrowers will be able to adjust to
any changes in collateral conditions or
increased fees. “There will be a short-
term reverse undoubtedly but the un-
derlying demand for securities lending
will remain and will be satisfied.”
The Nordic market, in terms of
securities lending at least, is best viewed
in terms of its individual components.
Sweden is the most active of the Nordic
countries in terms of securities lending.
Not only does Sweden have the
most active equity market but it has
also been boosted lately by the fact
that the country’s regulators have
placed no ban on short-selling, unlike
most other European countries. Con-
sequently many Sweden-based firms
have enjoyed record volumes in their
sec lending programmes in the last
nine months, even if the value of these
stocks has reduced markedly in the last
three months.
“We haven’t seen many firms pull-
ing out of stock lending,” says Joakim
Håkansson, head of securities lending
and equity finance at Sweden-based
Handelsbanken Capital Markets.
“Maybe lenders are being more careful
about the volume of stocks that they
are lending and the GC level [the cost
of borrowing for more liquid stocks]
has increased a little bit but we have
seen little impact in the market so far.”
Any impact is likely to be in terms of
demand rather than capacity and the
short-term prospects for Handelsban-
ken’s domestic sec lending market is
very positive, says Håkansson, thanks
to the fact that Sweden, along with
Finland, has no restrictions on short-
selling. “I am cautiously optimistic. It is a
tough call as no-one really knows what
next year will bring but today we are
doing well.”
Finland is the second most active se-
curities lending market after Sweden and
is also yet to introduce any restrictions
on short-selling. Norway’s stock lending
industry is hampered somewhat by the
difficulty in accessing Norwegian stocks.
Current rules state that listed firms are
only allowed to lend 5% of their stock to
single clients (so in order to lend 50% of
their stock, they would have to find 10
separate clients).
While there has been pressure from
the market to relax these rules, current
market conditions make it unlikely that
there will be any regulatory relaxation
any time soon.
Denmark is still a niche market for sec
lending with Danske Bank and Nordea
the main proponents. Danske Bank has
not been involved in any stock lend-
ing in Iceland so the defaults from that
market have not had any effect, says Kim

Lilmose, first vice-president at Danske
Bank.
“We do see clients who want to
hedge their portfolios via futures and
options and those products have to be
delta hedged so there is still a need for
stock lending in this area,” says Lilmose.
“We have also seen very high volumes
on the exchanges so far, even if this
is likely to fall in the near future, and
we have seen a lot of stock lending to
secure settlement on this exchange
activity.”
Nonetheless, 2009 is likely to see a fall
in stock lending activity, says Lilmose, as
the poor market conditions take effect
and demand for securities lending de-
creases. On the positive side, at least there
are no capacity issues, says Lilmose.
“In terms of capacity we have the same
access to securities as we have had before.
There have been no changes there. Of
GSL| Global
Securities
Lending
End of the beginning?
On the eve of the scheduled end of the
FSA short selling ban on financial stocks,
regulators, industry associations, service
providers and participants in securities
lending discuss the turbulence of the
past year, the ban, and ask are we on the
road to recovery?
For speaking and sponsorship
opportunities please contact:
Catherine Kemp
Catherine@2ipartners.com Sponsor
Tel: +44 (0) 20 7299 7714
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Justin@2ipartners.com
Tel: +44 (0) 20 7299 7707
If you would like to receive your VIP
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NORDIC MARKET UPDATE
course we have seen some of the inves- As for the prospects for 2009, Lilmose
tors disappear from the market, par- says that the Nordic market is still niche
ticularly on the hedge fund side, so that in comparison to the more mainstream
access to securities has diminished but markets. “Our business on the likes of
there are still a lot of long/short investors delta hedging and failing settlement and
in the market.” these are both likely to continue, albeit
Fees are generally higher at the mo- with lower volumes.
ment, says Lilmose, due to the increased “There are less hedge funds out there
focus on counterparty risk and un- and less appetite for risk in the market so
predictable market movements. “With less willingness from the banks to lend to
a volatile market you have to look at these hedge funds but securities lend-
higher haircuts, which is something that ing remains a very viable business,” says
we have done.” Lilmose. L
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DATE
Thursday, 15th January 2009
LOCATION
Four Seasons Hotel, Canary Wharf
1:30PM
Registration/Coffee
2:20PM
Panel Debate: Risk
Chair: David Rule, CEO of ISLA
Panellists: Rupert Perry, director at Pirum Systems Ltd.; Roy
Zimmerhansl, principal at Zimmerhansl Consulting Services; Brian
Lamb CEO of EquiLend; Peter Fenichel, CEO of SecFinex; David
Little head of Securities Finance at Rule Financial.
4:05PM
Panel Debate: What Next?
Chair: Mark Faulkner, managing director of Spitalfields Advisors.
Panellists: John McEllin, head of securities lending at Bank
of Ireland Securities Services; Paul Wilson, managing director,
financing & markets products, Worldwide Securities Services, J.P.
Morgan; Jane Karczewski, managing director, Securities Finance
Sales, Deutsche Bank; Chris Taylor, senior managing director and
regional business director, Securities Finance, State Street.
4:45PM
Drinks Reception
DIRECTORY

Consulting

MX Consulting is a Securities Financing focused IT consultancy offering innovative W: www.mxcs.co.uk

business solutions. Experts in project management, Global One, 4Sight, Swift and STP C: Adrian Morris
solutions, software development, system migrations and back office outsourcing for the Head of MX Consulting
securities financing industry. M:07879 475105
E: adrian.morris@mxcs.co.uk
In 2008 MX Consulting managed the trading system migration of Global One to 4Sight at
a large asset manager, built a web-based proprietary payment, exposure and currency C: Richard Colvill
management system at a broker-dealer and also concluded a large Swift messaging Senior Consultant
project for a third-party agency business. M: 0777 1928113
E: richard.colvill@mxcs.co.uk

For over 10 years Rule Financial’s specialists have been working alongside their coun- C: David Little,
terparts at the world’s top banks and hedge funds, helping to lower costs, improve pro- Head of Securities Finance
ductivity and extract the maximum value from IT investments. Our expertise in the man- A: 101 Moorgate, London,
agement of change, project delivery and complex technology solutions has helped us EC2M 6SL,
build long-term relationships on a solid track record of success. Our prowess in system UK
design, testing and rapid application development has earned us a powerful reputation.
This means that at Rule Financial we have a thorough understanding of what the front, T: +44 (0)20 7826 4444
middle and back offices each require from their systems and processes, thanks to our E: david.little@rulefinancial.com
practical experience and capability across the broadest spectrum of domains. Buy-side W: www.rulefinancial.com
or sell-side, in both arenas we’ve attracted some of the best in the City to our doors.

Data Services

Data Explorers is the leading global provider of market information and consulting New York
services to the securities financing industry and the largest provider of global short-side A:75 Rockefeller Plaza
intelligence to investment managers. New York, NY 10019, USA
T: +1 212 710 2210
Our products provide market professionals with quantitative measures of securities
lending, performance and risk. We are based in New York and London and collect data London
from over 100 of the top security lending firms representing over 75% of the global A: 2 Seething Lane
securities lending market. On a daily basis we process more than 3 million transac- London, EC3N 4AT, UK
tions from over 22,000 funds. On 1 December 2008, this included over 220,000 fixed T: +44 (0)207 264 7600
income and equity assets worth more than USD11 trillion in lendable value of which
over USD3 trillion was out on loan.

Securities Lending
eSecLending is a full service securities lending agent and administrator of custom- T: US +1 617 204 4500
ized securities lending programs. Their program has been adopted by many of the T: UK +44 (0) 20 7469 6000
world’s largest and most sophisticated asset gatherers including pension funds, mutual C: Christopher Jaynes
funds, investment managers and insurance companies. They are a third party industry E: info@eseclending.com
specialist providing lenders with customized programs, high touch client service, W: www.eseclending.com
comprehensive risk management, and superior risk adjusted returns. The firm takes A: 175 Federal Street, 11th Floor
a highly consultative approach with their clients by structuring separate, non-pooled Boston, MA 02110, USA
programs and utilizing a competitive auction to determine the optimal route to market A: 1st Floor, 10 King William Street,
for their clients’ lendable assets. Having built their business to incorporate investment London, EC4N 7TW, UK
practices such as the use of specialists, multiple-managers, unbundling, price transpar-
ency, and competition, their approach ensures best execution and also provides clients
with greater control over their programs, allowing them to more effectively monitor and
mitigate risks and counterparty relationships. Additional information about eSecLending
is available on the company’s website, www.eseclending.com.

62 | Global Securities Lending Magazine | 2009


C: Judith McKelvey
T: +44 (0) 207 043 8319
E: judith.mckelvey@4sight.com
C: Jason Hayes
T: +1 416 548 7922
E:jason.hayes@4sight.com
C: Peter Sanders
T: +61 (0) 2 90378416
E: peter.sanders@4sight.com
W: www.4sight.com
Visit SunGard at
www.sungard.com
A: 54 Lombard Street,
London,
EC3V 9EX
T: UK- +44 (0)20 7743 9510
C: Michelle Lindenberger
E: michelle.lindenberger@
equilend.com
A: 17 State Street, 9th Floor
New York, NY, 10004
T: US- +1 212 901 2224
W: www.eurexseclend.com
T: +41 58 854 2066
F: +41 58 854 2455
E: info@eurexseclend.com
Eurex Zurich Ltd.,
Selnaustrasse
30, 8021 Zurich, Switzerland
T: +44 20 7220 0961
F: +44 20 7220 0977
C: Rupert Perry
E: rupert.perry@pirum.com
A: Pirum Systems Limited
37-39 Lime Street
London, EC3M 7AY
W: www.pirum.com
DIRECTORY
Technology
4sight Financial Software is a leading supplier of innovative software solutions to the
Securities Finance, Settlement & Connectivity markets with offices and clients worldwide.
4sight Securities Finance (4SF) is a flexible modular solution that empowers financial
institutions of all sizes, from the smallest direct lender to the global custodian, broker or
intermediary on an agency or principal basis. 4SF contains market leading functional-
ity that provides greater automation, faster trading, improved risk management, and
enhanced relationships with clients and counterparties. It supports borrowing, lending,
repo, swaps and collateral management across the equity and fixed-income markets and
provides 24 hour continuous operation, inter desk trading, a ‘global book’, real-time value
dated position keeping and a powerful web reporting module, allowing full front to back
office processing.
With annual revenue of USD5 billion, SunGard is a global leader in software and process-
ing solutions for financial services, higher education and the public sector. SunGard also
helps information-dependent enterprises of all types to ensure the continuity of their busi-
ness. SunGard serves more than 25,000 customers in more than 50 countries, including
the world’s 50 largest financial services companies.
EquiLend is a leading provider of trading services for the securities finance industry. With
its robust suite of automated trading tools, EquiLend enables its clients to scale their
businesses with great efficiency on a global basis in all securities finance markets. Used
by borrowers and lenders throughout the world, the EquiLend platform automates for-
merly manual trading and post-trade processes. Using EquiLend’s complete end-to-end
services reduces the risk of potential errors and eliminates the need to maintain costly
point-to-point connections while allowing firms to drive down unit costs. Firms can then
free more resources to expand their business and grow trading volumes without increas-
ing costs. This makes the EquiLend platform a cost-effective choice for all institutions,
regardless of their size.
Eurex is one of the largest derivatives exchanges and the leading clearing house in
Europe. Wherever you are located, we provide you with access to the benchmark futures
and options market for European derivatives. Eurex also offers short term funding prod-
ucts, such as Eurex Repo. Eurex Repo is among the forerunners in providing integrated
trading and clearing for repo transactions. Eurex’s latest innovative marketplace is called
Eurex SecLend. Eurex SecLend. Europe’s leading investment banks participate as
borrowers in the Eurex SecLend marketplace, acting as principal brokers, dealers and in-
termediaries. They all benefit from Eurex’s leading state-of-the-art trading and processing
services. For Eurex, service and technology innovation is not just a buzzword. New trends
are being transformed into inventions through the adoption of advanced trading practices.
Find out more on www.eurexseclend.com.
Pirum provides a full suite of automated reconciliation and straight through processing
(STP) services supporting Operations within the global securities finance industry. The
company’s on-line SBLREX service encompasses daily contract compare, monthly billing
comparison, mark-to-market & exposure processing, pending trade comparison, income
claims processing and custody reconciliation. Subscribers to Pirum’s services signifi-
cantly increase their operational efficiency and reduce their risk by using Pirum’s solutions,
as staff are able to focus on fixing the exceptions instead of using their time to check
and process routine business. These automated processes are more scalable and risk
controlled too, allowing significantly higher volumes to be managed without correspond-
ing increases in operations headcount.
2009 | Global Securities Lending Magazine | 63
PEOPLE
/GGVVJG(WVWTG
Amy Sussman, SoftSolutions
+PVJKUEQPVKPWCVKQPQHVJGµ/GGVVJG
HWVWTG¶UGTKGU,WUVKP.CYUQPURGCMU
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 5QHV5QNWVKQPU5TNKUC[QWPI
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GFIGUQHVYCTGVGEJPQNQI[EQPUWOGTU
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CNNCTQWPF'WTQRGHQEWUGFQPKVU
FQOCKPUTGCNVKOGGNGEVTQPKEVTCFKPI
U[UVGOU
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(:UOCTVQTFGTTQWVKPI
$GUV:CPF securitisation of the repo
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9JGPFKF[QWUVCTVYQTMKPIHQT
5QHV5QNWVKQPUCPFJQYYQWNF[QW
FGUETKDG[QWTTQNG!
It was exactly two years ago this month
when I joined the SoftSolutions! sales
team. My responsibilities include
increasing the presence of our real time
multi-market solution - XTrade! Square
Repo, plus account management and
identifying sales opportunities.
9JCVCURGEVQH[QWTEWTTGPV
RQUKVKQPFQ[QW¿PFOQUVGPLQ[CDNG!
Travelling adds variety and gives me
the opportunity to see new places,
experience different working cultures
and meet new people. The majority
of SoftSolutions! repo customers and
prospects are located outside Italy, so I
am quite the road warrior.
*QYJCUVJGTGRQOCTMGV
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CPFYJCVUWEEGUUKUVQDGJCF!
Resulting from the recent financial
market situation: Repos (as an
instrument of secured money
market transactions) have become an
important topic.
Financial institutions have been
forced to increase secured short term
funds, as the access to unsecured
interbank liquidity has become
very limited; for some banks nearly
64 | Global Securities Lending Magazine | 2009
impossible. The growing
use of securitisation has
increased the funding
capacity of banks. With the
securitisation of money
market transactions,
banks will no longer have
unsecured counterparty
risks in their books. This
development has resulted
in a significant increase of
the volume traded in GC
baskets on electronic trading
platforms.
deal and the advantage of a central
counterpart guarantees that there is no
counterparty risk. As a result, more and
more banks are moving from unsecured
transactions to the secured money
market.
+H[QWYGTGPQOKPCVGF
GORNQ[GGQHVJG[GCTJQYYQWNF[QW
EGNGDTCVG!
Being nominated employee of the year
must mean I doubled sales this past year
so I would celebrate by “inviting” my
boss to treat us all out for dinner.
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KH[QWYGTGVQEJQQUGVJGNQECVKQP
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%JTKUVOCURCTV[YJGTGYQWNFKVDG!
I would choose Prague. Up until the
RMA/ISLA conference last May, Prague
had been one of the few remaining
European cities I had not visited and I
found it to be one of the most beautiful.
I would choose to have the party in one
of Prague’s magical fairytale castles.
9JQCTG[QWTTQNGOQFGNUKPNKHG
CPFYJ[!
My parents are my biggest role models.
They have always pushed me to stand
up for what I believe in and encouraged
me to speak my mind. They motivated
me to stay focused on my goals and
have been so supportive in everything
I do.
9JCVNKHGGZRGTKGPEGUJCXG
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RTQHGUUKQP!
I was raised in a multi-cultural family. It
has prepared me to not only successfully
deal with people from different cultures
but also with colleagues and clients with
different backgrounds to mine.
+H[QWEQWNFFQQPGVJKPIKPNKHG
YJCVYQWNFKVDG!
I would choose an out-of-this-world
experience - a trip into space.
Pun intended.
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It would the late 1800s - the Cowboy
Era. I think I would fit right in to that
period. I have always loved horses. I was
very young when I moved from New
York to New Mexico. I immediately
took to the Western lifestyle... riding in
rodeos and practicing target shooting
on the range.
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I can’t give you an accurate answer due
to the current state of the market. It’s
wait-and-see. I do hope to continue to
advance professionally in a challenging
and rewarding environment taking with
me the valuable lessons I have learned
over the last five years.
 50 O
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