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Global Germany, Mexico
Industry InsIght
Lending Traders, RMA, Pirum


gsl Issue 06 Q4 2009

Share &
Share Alike
Is equity collateral
a viable option?
Plus: etfs - collateral innovation gBP 50
hedge funds - rising amid changes usd 85
eur 60
gsl on the road - amsterdam summit 2009
GSL06 Cover.indd 1 29/10/2009 10:46
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GSL06 Cover.indd 2 26/10/2009 12:08

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GSL06 1-17 final.indd 1 26/10/2009 11:59



Robbert Wijgerse, Citi
GSL News Robeco
Auctions 26
Exchange traded

Hedge funds

Geert-Jan Kremer

Lend an ear
Improved conditions in global produce the kind of returns that can entities, competition has intensified
finance have brought more lenders make the difference between portfolios further. How the innovations in prime
back, but with a caveat in line with when the relative performances are brokerage will affect the remaining
the findings of RBC Dexia Investor racked up. 'ruling class' of providers is yet to be
Services: there will be programme Our panel on reinvestment weighs up seen, as will the range of services that
changes ahead. these considerations, and our Q+A on brokers will cease to do for free.
It seems a fair trade off, and with European securities lending also gives At the same time the successful hedge
so much discussion cross-continents insight into how far the industry has funds will perhaps be more discerning
about the education and engagement developed. On the subject of Europe, with the services provided by their
of beneficial owners, their return GSL also made its first excursion to prime broker, or brokers.
should be unanimously welcomed. mainland Europe with its one-day Many of you might have read
Agent lenders with non-cash event in Amsterdam on 8th October. It about the SEC's two-day summit on
collateral programmes can was a successful and informative start short selling, which featured many
understandably feel satisfied. Cash had to the magazine's international tours representatives of the industry in
in some quarters become a by-word - with such a sophisticated market for securities lending, which showed its
for risk, illiquidity and loss through its pension funds and stock lending it sustained importance as an issue.
reinvestment. A non-cash philosophy seemed like a good place to start. Mary Schapiro, SEC chairman,
has helped companies – particularly The last quarter has vigorously explained that the regulator was open
the big European players – to convey reinforced a simmering trend from for what seems a rather ominous new
their strong risk management in this this year. Prime brokerage market debate concerning short selling and
space to new clients. share seems entirely up for grabs. Since any future restrictions.
But let’s not swing from one extreme 2008, which brought the removal of Now is the ideal time for regulators
to another. Cash is still good in one of America’s biggest brokers – the to continue the recent positive views
itself, still dominant in the world’s milestone collapse of Lehman Brothers they have expressed for securites
biggest securities lending market, and – and the effective extinction of Merrill lending, and the distinction between it
reinvested in the right conditions can Lynch and Bear Stearns as independent and short selling. Z
2 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 2 26/10/2009 11:59

Predictability in an unpredictable world.

Depend on us for market

insight, flexibility and
unwavering commitment
to service.

Expertise in securities lending. You face unpredictable markets and must respond to the evolving strategies of your clients
and competitors. CIBC Mellon offers you flexibility through innovative thinking, market knowledge and open dialogue. You can
depend on us for solid execution, professionalism, and a stable growing supply of lendable assets.

For more information on Securities Lending, please contact:

James Slater
Senior vice president & head of capital markets
+1 416 643 5130

Robert Chiuch
Executive director, global securities lending
+1 416 643 5400


©2009. A BNY Mellon and CIBC joint venture company. CIBC Mellon is a licensed user of the CIBC trade-mark and certain BNY Mellon trade-marks.

GSL06 1-17 final.indd 3 26/10/2009 11:59



News 26 | Panel: Reinvestment Companies featured in GSL

Risk, mark-to-market and
Editor-in-chief liquidation are just three of
Roy Zimmerhansl
6 | News 4Sight Financial Software 34,44
the issues considered by
roy.zimmerhansl@2i.tv Top industry stories. our panel regarding cash Aviva Investors 38, 48

reinvestment. Barclays Capital 7, 38

Features editor 8 | News analysis BBH 6,40
Ben Roberts 32 | From the Trading
Research and results that Floor BBVA Bancomer Mexico 20
have held a mirror up to RBC Dexia and Robeco Bear Stearns 8
Reporters the lending and borrowing provide analysis from the BGI 38, 44, 45
Craig McGlashan world. desks. Cantor Fitzgerald 7
Callan Associates 26
10 | Across the Atlantic
Kimberley Ferguson Conferences CIBC Mellon 6
Quarterly updates from
kimberley.ferguson@2i.tv Citi 19, 21, 28, 38
trade associations, including 34 | GSL Lending For Credit Suisse 36
Contributing editor new ISLA CEO Kevin Liquidity Summit Data Explorers 17,18,19,20,34
Anthony Harrington McNulty. GSL hosted an event in Deutsche Bank 44
Account managers People Amsterdam, a key country ED-HEC Risk 34
Patricia De La Grange
in Europe for pension funds Equilend 6
trish.delagrange@2i.tv 12 | Executive profile
and stock lending. eSecLending 35
GSL talks to Geert-Jan
Cicely Lewis Kremer of KAS BANK. Fortis Nederlands 36
cicely.lewis@2i.tv 36 | London event
ING 35
GSL dropped in on a
Front Cover Morgan Miller Collateral ISLA 4, 37, 41
London conference to pick
Digital media producer JP Morgan 7, 35, 37
up the key points
Peter Ainsworth 14 | Shares for shares KAS BANK 12
peter.ainsworth@2i.tv The use of equities as Laven Partners 36
40 | Panel: European
Operations manager
collateral for stock loans Lehman Brothers 9, 27, 33, 40
has divided opinion in the securities lending Noster Capital 22
Nicolette Whittaker
nicolette.whittaker@2i.tv industry. Anthony Harrington Four participants answer Omgeo 6
weighs the views. GSL's questions. Options IT 6
Managing director: peterevans 7
Jon Hewson 44 | ETFs
jon.hewson@2i.tv 16 | Market Profile: Pirum 24
Germany Europe's biggest The use of exchange traded Prudential Capital 38
CEO: economy has struggled funds as collateral has been RBC Dexia 26, 44
Mark Latham with liquidity issues in its increasing in the market, Rabobank 34
securities lending finds Craig McGlashan. Robeco 33, 36, 38
RMA 10
GSL 46 | Directory
Lending 18 | Market Profile: Mexico Rule Financial 37
A profile of the country. The service provider listing. Sophis 7
SPF Beheer 34, 36
2i UK, 16-17 Little Portland Street, 21 | Hedge funds: Rising 48 | Lender Profile SunGard 5, 12, 13, 15, 34, 35
London W1W 8BP, UK
T: +44 (0) 20 7299 7700
amid changes Sarah Nicholson of Aviva TABB Group 7, 8, 21, 22
F: +44 (0) 20 7636 6044 The sector's resurgence Investors talks to GSL.
comes amid huge
2i USA, 410 Park Avenue,
15th Floor, New York, NY 10022 changes in its brokerage
T: +1 212 231 8421 relationships, finds Ben
F: +1 212 231 8121
Roberts. “Liquidity risk would best be mitigated if
© 2009 2i Media
Industry Insight
appropriate short-term investments are
All rights reserved.
No part of this publication may be given proper considerations regardless of
24 | Operational comment
reproduced, in whole or in part,
without prior written permission from - Pirum market environment"
the publishers. Rupert Perry outlines Who said this?
ISSN 1759-0728 Printed in the UK the benefits of real-time
Find out, page 28

4 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 4 29/10/2009 11:21 !"#$%&%

The financial information
you need when you need
it. Because there’s no
pause button in business.

Considering the current economic environment, staying on top of your securities lending program and managing
risk has never been more important. So Northern Trust has launched a specialized securities lending technology
and reporting platform designed to provide you with transparent, targeted and timely information. Just one
of the reasons we’ve been named the top Connectivity and Automation provider.* For more information,
visit northerntrust.com/securitieslending or call Chris Doell at +1 312 444 7177 or Sunil Daswani at
+44 (0)20 7982 3850.
*International Securities Finance borrower survey 2009

Asset Servicing | Asset Management | Wealth Management

© 2009 Northern Trust Corporation, 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the United States. Northern Trust operates in Canada as The Northern Trust Canada, Branch which is an authorized
foreign bank branch under the Bank Act (Canada) and as The Northern Trust Company, Canada which is an authorized trust company under the Trust & Loans Companies Act (Canada). Deposits with Northern Trust and its affiliates are not insured
by the Canada Deposit Insurance Corporation. Northern Trust, London Branch (reg. no. BR001960) registered in England & Wales each with their registered office at 50 Bank Street, Canary Wharf, London, E14 5NT. Where Northern Trust’s UK
entities undertake regulated business, they are authorised and regulated in the United Kingdom by the Financial Services Authority. Northern Trust (Guernsey) Limited, Northern Trust Fiduciary Services (Guernsey) Limited, Northern Trust Fiduciary
Company (Guernsey) Limited and Northern Trust International Fund Administration Services (Guernsey) Limited are licensed by the Guernsey Financial Services Commission. Northern Trust International Fund Administrators (Jersey) Limited and
Northern Trust Fiduciary Services (Jersey) Limited are regulated by the Jersey Financial Services Commission. Northern Trust International Fund Administration Services (Ireland) Limited and Northern Trust Fiduciary Services (Ireland) Limited are each
authorised by the Irish Financial Services Regulatory Authority pursuant to section 10 of the Investment Intermediaries Act, 1995 (as amended). Northern Trust Global Services is authorised and regulated in the Netherlands by De Nederlandsche
Bank. Northern Trust Global Services Limited Luxembourg Branch and Northern Trust Luxembourg Management Company S.A. are authorised and regulated in Luxembourg by the Commission de Surveillance du Secteur Financier. Northern Trust
Global Services Ltd (UK) Sweden Filial is a BCD Passported branch of Northern Trust Global Services Ltd a firm authorised and regulated in the UK by the Financial Services Authority (‘FSA’).

GSL06 1-17 final.indd 5

!"#$%&%'()*+()*,-./01234!55666, 26/10/2009 11:59

News Round-up Top industry stories at deadline.

For daily updates go to www.gsl.tv

cover the securities lending operations in the Americas, and advice for investors and
market, in an effort to boost while collateral management private clients.
transparency and provide a expert Joanne Meaney joined
benchmark for the sector. The in the UK. John Shield has Market Infrastructure
S&P Securities Lending Index rejoined Lombard to take on a
Series has been designed to leading role in ongoing senior Twenty-six leading financial
measure the average cost level account management institutions have been
of borrowing US equities, of the firm’s collateral and approved as members of
reflecting the average lending regulatory clients. Keith Quadriserv’s AQS securities
rate for the members of the Butcher and Joanne McGarry lending platform. New
S&P 500, S&P MidCap 400 have also joined the company members include Bank of
and the S&P SmallCap 600. as finance director and America-Merrill Lynch,
group financial controller Citigroup Global Markets,
The US financial regulator, respectively. Mitsubishi UFJ Securities,
the Securities and Exchange Calyon Securities (USA),
Commission (SEC) hosted Cantor Fitzgerald hired Bob Interactive Brokers LLC,
Securities Lending a roundtable discussion Sherry and David Kim as ITG, Jefferies & Company,
focused on the opacity of COO for prime services and Newedge USA, LLC, Pershing
securities lending as well as director of prime services LLC, Susquehanna Financial
CIBC Mellon Global the practice of short selling. technology, respectively. Group, LLP, Virtu Financial
Securities Services SEC chair Mary Schapiro said Sherry has worked in the BD, LLC and Wedbush
implemented EquiLend's that the financial crisis has financial sphere for more than Securities.
AutoBorrow and Trade20 changed attitudes towards a quarter of a century, filling
software, in its aim to boost securities lending and short roles at ING, ABN Amro and Important initiatives and
efficiency and client returns selling "has undoubtedly Furman Selz among others. market exercises surrounding
in its securities lending. The produced more letters from Kim joins Cantor Fitzgerald liquidity and bank stability
deal followed EquiLend’s investors and brokerage from Citigroup, where he from the UK's Financial
earlier success when it gained firms, more enquiries from was senior vice president of Services Authority are in the
regulatory approval in the congress and more questions prime finance technology, pipeline for the final quarter
country as an alternative from reporters than any other in charge of management of this year. In the midst of
trading system (ATS). topic." and oversight of Citi’s hedge a wider global reform, that
fund technology services. was discussed by the G20
Securities lending participants People Moves Before Citi, Kim worked at finance ministers in London
are holding firm or adjusting Lehman Brothers, where he last month, the FSA will
their risk parameters rather Keith Haberlin moved was involved with a number implement its Liquidity
than suspending their across the pond from Brown of products, including the Reporting Regime and a
programmes, according Brothers Harriman’s Boston now-defunct firm’s client web market-wide analysis of
to the latest survey of office to run the Europe and portal, LehmanLive. Resilience Benchmarking.
beneficial owners and market Middle East securities lending More shares issuances by
intermediaries. Despite division from London. Mr Sandra A Urie of Cambridge banks are expected if plans
purported large-scale Haberlin, who joined the Associates is set to take a among the G20 finance
programme suspensions company in 2004, has been place on the board of 100 ministers to enforce higher
amid market volatility, only part of the securities lending Women in Hedge Funds, capital reserves come into
17% of 86 respondents to the team since March 2008. the non-profit organisation effect. Discussions in London
survey by RBC Dexia stopped for investment management led to an overall consensus
lending. The majority, 60%, Lombard Risk announced a professionals. Urie has that tougher regulatory
made no changes to their series of new appointments worked at Cambridge sanctions on bank capital
programmes at all. to bolster its global collateral Associates since 1985 and reserves, funded by a sale
management team. Solution is currently president and of new shares, needed to be
Standard & Poor’s (S&P) technologist Narasimha CEO of the firm, which enforced.
launched an index series to Kodihalli has joined the firm’s provides investment research

6 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 6 26/10/2009 11:59


The International Organisation brokerage arm unveiled a Capital predicted that the
of Securities Commissions product which aims to help The research concluded that traditional “duopoly” of prime
(IOSCO) published a series hedge funds manage their changes in the relationship brokers is to be broken, with
of regulatory standards for portfolios and risk across between hedge funds and their five or six major players to
the funds of hedge funds a range of prime brokers. prime brokers would continue populate the landscape in
market. According to IOSCO, iSophis allows funds to see as funds explore more options, the future. He was speaking
the regulations are aimed a consolidated view of their including the development at a London conference on
at protecting the increasing positions, providing reports, of using multiple prime securities lending last month.
number of retail investors who performance attribution and brokers and non-prime broker
partake in hedge funds through risk exposure, all from any affiliated custodian banks. Wilson was a recent recruit
funds of funds. The paper standard internet connection. from Bank of America Merrill
follows a document released in Funds will also be able to use The UK and US financial Lynch to serve as head of
June 2008 which identified two the software for stress testing regulators announced plans prime brokerage services
main areas of concern; namely if they decide to boost trading to work together on joint for Europe, Middle East and
how managers of the funds volumes or expand their regulatory requirements Africa. He now oversees the
deal with liquidity risk and the portfolios to include other asset for hedge fund reporting. investment banking divisions
structure of the due diligence classes. In particular, the Financial Prime Services franchise, which
process used by managers. Services Authority (FSA) and includes equities and fixed
peterevans, the financial Securities and Exchange income financing, futures and
Technology technology provider, launched Commission (SEC) hope to its cross-asset prime brokerage
a new product for managing agree a “common, coherent set platform. At BofA Merrill
and calculating daily margins. of data” to collect from hedge Lynch he served as a managing
Omgeo, the post-trade xanite Margin Engine (xanite funds, in order to help the director.
automation specialists, hired ME) aims to provide greater watchdogs identify potential
three new associates for its transparency for the trading risks to their own particular New York University's Stern
collateral management product risk profile of non-clearing goals. FSA chief executive School of Business found
Omgeo ProtoColl. Steve Anglin members and reduced margin Hector Sants and SEC chair that a fifth of hedge funds
joined from JP Morgan Chase risk exposure. A leading Mary Schapiro revealed the misrepresented elements of
to provide pre-sales market global investment bank – still decision, following the fourth their funds during investor
analysis. Greg Ballesty joins unnamed by the firm – is meeting of the SEC-FSA due diligence. The amount of
from Thomson Reuters and is already a customer. Strategic Dialogue. money they had entrusted to
to expand the offering in the their funds, their performance
Asia Pacific region. Antony SunGard launched ‘SunGard- JP Morgan created a Prime- and their regulatory and legal
Cure joins from Credit Suisse as-a-Service’, its fully managed Custody Solutions Group, histories, were three key areas
and will fulfil a sales support ‘private cloud’ service in the to focus on delivering the in which inaccurate accounts
role for the EMEA region. UK. company’s integrated custody were given.
and prime brokerage platform.
Options IT, a provider of IT The team will work with Repo
infrastructure to hedge funds asset managers and hedge
and prime brokers, bought the funds which are looking for Transaction volumes in the
hosted colocation business of TABB Group, the New York a combined prime brokerage European repo market have
BNP Paribas’ prime brokerage research firm, estimated that and securities services offering. increased since the start of
division. As a result of the prime brokerage would hit a JP Morgan opted for the the year in a sign the sector is
deal, some of BNP Paribas’ USD10 billion profit next year, move because of current stabilising. The latest survey
hedge fund clients will use IT with hedge funds achieving prevailing trends, under from the International Capital
infrastructure provided by an estimated USD1.5 trillion which hedge funds are opting Markets Association (ICMA)
Options IT’s Core solution, in assets under management. for long-only funds and are shows that outstanding
although all of these customers The company's latest research seeking custodians for their repo trades increased from
will continue to receive prime comprised of interviews with assets, while traditional asset EUR4,633 million to EUR4,868
brokerage services from BNP 62 US-based hedge funds, managers are looking for prime million from December 2008 to
Paribas and will stay on the concluded from current brokers to finance long/short the end of June, a rise of 5.1%.
BNP Paribas platform. performance that next year strategies.
would see a return to profits Turn to page 9 for an analysis of
Sophis and JP Morgan’s prime similar to levels in 2007. Ashley Wilson from Barclays the ICMA report.Z

2009 | Global Securities Lending Magazine | 7

GSL06 1-17 final.indd 7 26/10/2009 11:59


News Analysis
As markets 'come back' and GSL makes its Summit debut in continental Europe, there
have been many notable reports and studies that provide useful insight into today's
securities lending industry.
Ch-ch-ch-Changes restrictions (32%), and fear of cash Prime time to reassess
reinvestment losses (9%).
RBC Dexia’s recent survey on “Whilst these results show that in Prime brokerage revenue will hit
securities lending participants shows the short term, market practitioners USD10 billion in 2010, with their hedge
that beneficial owners and market are reviewing their structures and their fund clients expected to return to form
intermediateries are more likely to routes to market, in the long term, I with an estimated USD1.5 trillion in
adjust risk parameters than suspend think the focus on risk will remain. The assets under management, according
their programmes amid the current great thing about securities lending is to New York based research firm TABB
market volatility. that it is always changing. As emerging Group.
Whilst 60% made no changes at all markets become mature markets, and as Following extensive interviews with
to their programmes, only 17% of the globalisation continues, it will continue 62 US-based hedge funds, next year
86 respondents to the survey actually to grow.” would see a return to profits similar to
stopped lending. RBC Dexia’s survey also sought to levels in 2007.
An overwhelming theme of the explore the perceived link between Until then, the research concluded
outcome of the survey was the increase short selling and the movement of that the relationship between hedge
of focus on risk mitigation and capital share prices. 92% said it had some funds and their prime brokers would
preservation, with 80% of respondents influence, but it was not regarded as a continue current changes, including the
rating these areas as ‘highly important’. deterrent to securities lending.Z development of using multiple prime
Blair McPherson, head of technical brokers and non-prime broker affiliated
sales, global market products and custodian banks.
services at RBC Dexia, told GSL: The report highlighted September
“Where as it used to be returns, risk is Lending by 2008 as a turning point for hedge funds.
now the number one priority. It’s not
that people didn’t consider risk (prior
numbers The collapse of Lehman Brothers, just
a few months after the rescue of Bear
to the financial crisis), it’s just that the Stearns – two companies that claimed
Source: RBC Dexia Investor Services
understanding from an education stand around 30% of the brokerage market
point wasn’t as prevalent as it is now.” Key figures: – was the catalyst for many funds to
For those whom had undergone reassess the counterparty risk inherent
alteration to their programmes, the
most common adjustment was in
60% made no in their relationships.
"Typically we were talking to the
relation to borrowing counterparties, programme changes head trade, CIO, portfolio manager, so
cited by 38%, closely followed by 35% the funds range from those who were
who had made adjustments to the type
of collateral accepted.
17% stopped lending less than USD500 million, which we
consider small, from USD500 million

38% of those who

“For example, we are seeing a lot less to USD3 billion," Matt Simon, a TABB
cash being accepted as collateral. Whist analyst, told GSL.
it has traditionally been widely used, "We found a few major things this
due to its ease of management, when it
made changes altered
year which fall into the whole landscape
comes to reinvestment, it can be quite their list of borrowers and industry change in prime brokerage
risky,” Mr McPherson said. in the US particularly, post Lehman
The main drivers precipitating
alterations included: less confidence
10% ranked [Brothers] and Bear [Stearns] and the
bankruptcy of Merrill [it] had all been
in counterparty stability (65%), lower securities lending as changed due to counterparty risk and
risk tolerance (59%), desire for greater 'highly important'. counterparty diversification.
levels of indemnification and provider In particular, 66% of the single-
strength/stability (44%), short selling primed hedge funds interviewed were

8 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 8 26/10/2009 11:59


Source: TABB Group

considering a move to a multi-prime
strategy, allowing fast movement of
may appear very different by the time Key figures:
it hits the USD10 billion mark. Adam
assets between service providers.
66% of funds
Sussman, TABB Group head of research,
The sector remains at a crossroads, posited that if new asset increases come
the report concludes. Nearly 80% of
hedge funds have the same or fewer
from new fund launches it could lead to considered multi-prime
opportunities for small prime brokers.
assets under management (AuM),
45% added at least
“If a new crop of hedge fund
leverage remains low, and scrutiny from managers is going to be responsible for
investors and legislators has intensified.
This has had a knock on effect on prime
a renewal of industry assets, it could one extra prime broker
very well be the smaller prime brokers
brokerage. But while AuM is still down that gain in market share,” he said.
from all-time highs, significant net “Then, the challenge will be to hold USD127 billion -
inflows and performance-related asset
increases are expected.
onto those relationships as today’s AuM of hedge funds
Davids become tomorrow’s Goliaths.” Z
The prime brokerage landscape interviewed

Repo returns up quite a lot. At the same time you see the two desks merging together."
the fees coming down for European Responses from the survey were
The September survey from G10 debt." collected from 61 offices of 54 financial
the International Capital Markets Godfried De Vidts, chairman of institutions, mostly banks, including
Association (ICMA)reported good the ICMA’s European Repo Council a number of tri-party agents and
news for the repo market as a chief credited the “inherent stability” of automatic repo trading systems and
sign that the sector is stabilising. the European repo market despite the London-based Wholesale Market
Outstanding repo trades fragmented settlement infrastructure, Brokers’ Association. The survey asked
increased from EUR4,633 million comparing favourably with the uneven for the value of the cash and reverse
to EUR4,868 million from infrastructure in the US market. He repo contracts outstanding as at 10th
December 2008 to the end of June, added that as the European Central June 2009.
a rise of 5.1%. Bank gradually reduces its involvement Undocumented buy/sell backs
Although this figure is down in repo to recapitalise markets, there decreased in volume, indicating
20% against the June 2008 figure, would be an increase in wholesale repo. the greater importance of legal
the results of the influential survey ICMA EUROPEAN
The amount of securities documentation
lending on REPO in the
JUNE of the I 11
show that the wider money lending repo desks also increased, up to 19.1% Lehman Brothers default, increased
freeze and deleveraging activity from a record low of 12.5%. The trader concern around counterparty risk
– quickened by the default of added that this was part of an increased and the implementation of the
Lehman Brothers almost a year ago Counterparty
merging of equity analysis
and fixed(Q1.1)
income Global Master Repurchase Agreement
– is starting to lessen. desks. "There has been a lot of uptick in (GMRA).
Government bond collateral fell Table 2.2 – Counterparty analysis
from 83.6% to 81.2%, close to the
record 81% rate reached in June. June 2009 Dcember 2008 June 2008
The share of government bonds users share users share users share
in a tri-party setup increased, direct 61 52.1% 61 51.6% 61 51.7%
however, to 53%, with the tri- of which tri-party 31 11.1% 31 9.4% 30 10.1%
party market generally increasing voice-brokers 50 19.3% 48 20.2% 46 23.1%
to 11.1% of the market, up from ATS 46 28.5% 48 28.2% 47 25.2%
The The sharp
graph recovery
shows seen
how the in the to execute
methods December
repo2008 was
trades consolidated.
have changed
The increase of corporate share of electronic repo trading in Triparty activity recovered.
bond locates has been visible as little in 12 months. The proportion of automated trading systems
government bond use declines. remained at the level of the increase at the end of last year. other
Table 2.3 – Numbers of participants reporting particular types of business
A trader at RBC Dexia said:
statistics in the survey found that direct bi-lateral trading stood at
"Corporate bond locates have Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09
definitely increased. We've noticed 41.1%; domestic trading rose to 34% from 32% and anonymous trading
ATS 51 56 48 47 48 46
in the last few months it has picked gained fromATS
anonymous 12.7%33
to 14.5%.39 35 33 Source: ICMA
38 33
voice-brokers 54 54 51 46 48 50
tri-party repos 37 45 36 30 31 31
total 73 2009
77 | Global
68 Securities
61 Lending
61 Magazine
61 | 9

GSL06 1-17 final.indd 9 The principal automatic Figure 2.1 – Counterparty 26/10/2009 11:59
trading systems (ATS) operating in analysis

Model citizens Across the Atlantic

Research by Bank of New York Trade association news and comment from
Mellon and Casey Quirk found a rise in either side of the pond.
revenues generated from the intrinsic
value of loans, rather than from cash
Revenue from intrinsic loan value RMA: Michael
usually means a rise in cost for the
borrowers, particularly when the
beneficial owners' portfolio contain
numerous 'hard-to-borrow' securities.
International Capital Framework for
These extra costs may combine, the
Banking Firms,” or “the Principles.” In
report notes, with additonal outlays
the statement, the Treasury “sets forth
based on a change of a prime brokerage
the core principles that should shape
model and balance sheet constraints
a new international capital accord to
"that make pre-borrowing for
better protect the safety and soundness
anticipated loans more difficult".
of individual banking firms and the
The report also highlights the
In my previous columns, I have stability of the global financial system
increase in hard-to-borrow rates
focused on the financial crisis and and economy,” according to its website.
paid by hedge funds since last year.
the ensuing changes to the securities There are eight core principles
At March 2009, 26 stocks on the S&P
lending industry. Now, however, as we focusing on capital sufficiency.
500 were borrowed at hard-to-borrow
continue to see positive signs that the Treasury considers these core principles
rates, compared with five stocks a year
industry is moving toward recovery, “essential to enhance the resiliency
before. This produced the usual effect
I would like to turn to the topic of of the global financial system". Core
of making S&P 500 stocks almost as
regulation. principal 4 focuses on capital charges
expensive as the small-cap S&P 600.
Regulation is one of the major risks for securities finance transactions.
A closer relationship between agents
facing our industry. There are several The implication is that more
and beneficial owners could also cause a
proposals coming from the regulators capital will need to be allocated to
rise in quality, rather than quantity.
designed to address specific issues and securities lending transactions and
"Brokers can no longer commit
reform in the financial markets. current methodologies in the Basel
large portions of their balance sheet to
Many of these regulations could II framework will be revised. The
general collateral borrowing and must
have a significant impact on the future increased capital requirements and
instead focus on the immediate needs
of the securities lending business. We the expense of revising internal risk
of the underlying client. This dynamic
strongly support the regulators in their models could lead to more industry
means less lending overall but also a
efforts to eliminate naked short selling concentration and a change in pricing
heightened focus on the value of specific
and reduce systemic risk. models.
securities in the market on any
Naked short selling has been a thorn Recently, the Securities and
given day."
in the side of our industry for years, as Exchange Commission (SEC), in
The study considered lending in
it has been incorrectly associated with finalising amendments to Regulation
the context of MiFID. 'Intrinsic value'
securities lending. However, it is our SHO, took another step toward its
is in some ways a combination of
hope that regulation focuses on those goal of reducing fails to deliver and
market norms and values, rather than
areas that need improvement and does permanently adopted Rule 204T.
a strict definition, and "in many ways
not attempt to reengineer the aspects According to the SEC, the amendments
is similar to seeking best execution in
of the securities lending business that are intended to help address abusive
an equity trading market but without
worked extremely well and efficiently “naked” short selling in all equity
consolidated rates or prices flashing on
both before, during and after the securities. The SEC is also proposing
a screen". As MiFID demands traders
financial crisis. approaches to restrictions on short
take into account the client's best
One of the most significant selling: a price test that would apply
interest regarding price, cost, and the
proposals is the US Treasury on a market wide and permanent
likelihood of trading settlement, "this
Department’s policy statement, basis (“short sale price test” or “short
may well point to the future of securities
“Principles for Reforming the US and sale price test restriction”) and one
lending". Z

10 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 10 26/10/2009 11:59


that would apply only to a particular

security during severe market declines
in that security (“circuit breaker”).
At our annual Conference on
Securities Lending on October 12-16
in Miami, Florida, RMA will most
likely discuss the Treasury and SEC
proposals. There is also a proposal
from a group of US senators that the
SEC and The Depository Trust &
Clearing Corporation develop a central "I am hugely excited
database of stock loan information and to see the tremendous
require identification of actual shares
to be borrowed to cover a short sale — amount of engagement
a “hard locate” requirement that will with firms, who seem
be discussed. I believe there may be really enthusiastic with
even more developments by the time
what ISLA is doing"
of the conference.
ISLA: Kevin The GMSLA 2009 is up and
“Many clients that
accessible on our website, and we are
have either stopped or currently producing a set of guidance
restricted their lending notes for users. This and an ongoing
workload supporting our member
programs are lending As with any new role, the first
firms, dealing with a host of other
couple of months have been
again, but they are incredibly busy as I try to get on top of initiatives related to tax, operations
doing so with more everything that’s going on. and things like agent lender disclosure
have been keeping me busy.
specific lending and cash So far, I am hugely excited to see the
My assumption is that ISLA will
tremendous amount of engagement
collateral reinvestment with our member firms, who seem carry on functioning similarly to the
guidelines" really enthusiastic with what ISLA is way it has in the past, but something
doing. we are taking a closer look at is the
And in securities lending, there association’s role regarding education.
Michael McAuley, RMA is a lot going on. We have recently We want more people
published the Global Master Securities understanding what securities lending
Lending Agreement 2009, which is all about- from beneficial owners,
RMA is hopeful that regulatory to the regulators, to the media. Whilst
is designed to replace the previous
agencies will work together so that the its early days, and this is still very
version, produced in 2000.
changes made by one regulator do not much at a conceptual stage in terms
Although the agreement was due
shift liability from one set of regulated of how we go about this, I think it
to be updated, we have ensured that
entities to another. As an industry, is a very important thing for a trade
the new version incorporates some
we understand the need to reduce association to foster such education
important changes that derive directly
systemic risk in the market, but we and awareness.
from lessons learned by our members
want to maintain a vibrant securities I also plan to spend time working
over the past 18 months.
lending industry that can continue to more closely with beneficial owners.
We have included what we think
provide liquidity to the marketplace. Z From recent meetings with a number
is an improved default valuation
methodology for loans and collateral of them, some have expressed concerns
Mike McAuley is writing as the about their awareness of risk, and
which is designed to better protect the
Chairman of the Risk Management others believe there should be more
non-defaulting party.
Association's securities lending transparency.
We have also been busy on the
committee. He is also senior managing We have started the process of
regulatory front and have been
director and chief product officer in maintaining a regular dialogue with
involved in several consultation
State Street Corporation’s securities these institutions to try and ensure
exercises including the CESR short
finance division.Z they stay up to date with developments
selling disclosure paper issued in the
summer. in securities lending. Z

2009 | Global Securities Lending Magazine | 11

GSL06 1-17 final.indd 11 26/10/2009 11:59


Geert-Jan Kremer, KAS BANK

The head of treasury at bank’s clients have lost money in financial markets. “We feel that
their securities lending programmes accepting cash as collateral is mostly
the 'pure play' custodian with the bank during the financial a sub-optimal solution. It is not that
KAS BANK talks to Ben crisis. we’re against cash as collateral as
Roberts about the Another quarter of his time is such, but there were no economically
vindicated success of spent on the operational aspects, efficient proposals in that case. We did
a non-cash, principal including exploring new products for not believe that the economics of the
programme and the pros clients. But it does not compromise trade could simply be found in the
his description of the firm as a “pure reinvestment of the cash collateral.
and cons of a central play custody bank”. “Everything we “If a customer asks for a cash
counterparty do is custody related. For instance, we reinvestment possibility, then they can
don’t have our own money market find a provider for that and we will
Geert-Jan Kremer covers a number funds. Some prospective clients in help them implement that solution,
of different areas at KAS BANK as the the past were unhappy that we did but we won’t offer that actively,” he
head of treasury, though he is at the not have our own money market adds.
same time typical of the pride the funds nor reinvest cash. Now that Mr Kremer’s career in Treasury
company has in offering a specific discussion has changed.” began with PVF, the Dutch asset
range of securities services. He is adamant about the cash-free manager that later merged with
He oversees the clients’ business profile of KAS BANK’s lending, and Achmea Global Investors, which
with the bank in the foreign exchange that this view has been vindicated subsequently merged into F&C. In
and money markets, and securities throughout the struggles of the 2000 he moved to Achmea, running
lending – primarily as a non-cash

“If you are a small fund

it will not be worth your
costs setting up a lending
programme yourself. You
need a specialist volume
handling front office
desk to execute lending
successfully - that's what
we offer"

principal lender – is integral. “Acting

as principal entails managing the
risk positions for our customers in
conformity with our arrangement
with them and our position in the
market,” he says.
He adds that around a quarter
of his time is focused on risk
management, and says none of the

12 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 12 26/10/2009 12:00


the Treasury in its main insurance arm office activity, and that is how it is "If you are a small fund
marketed by KAS Bank. “We take the
in the areas of retail, mortgages and
execution of lending very seriously. It
it will not be worth
private banking.
In 2008 he moved to the swiftly- needs very special attention and you your costs setting it
developing KAS BANK. He points need qualified people to execute it, up yourself. You need
so you need considerable size to do it
to the selling of its private banking
a specialised volume-
arm as an example of how it has
retained its focus on custody, along “You can compare it to currency handling front office
with some administration – the latter hedging activities or treasury desk to execute lending
activities in general. If you are a
demonstrated by its purchase of the
small fund it will not be worth your
administration business of Deutsche
Postbank in July. But it is decidedly costs setting it up yourselves. You
not an asset manager: “It is not in our need a specialised volume-handing will see that when executed properly,
genes to be all things to all people.” front office desk to execute lending and executed for its own economic
Mr Kremer has seen the kind of successfully – and that’s what we reasons – and not for other reasons
stock value decreases in the Dutch offer.” such as cash reinvestment returns –
market that have been common He is also in support of a central securities lending will be an interesting
counterparty. The Netherlands was one proposition.”
“We did not believe of the four ‘Euronext’ markets to be He adds that the level of demand
that the economics included in SecFinex’s groundbreaking will be critical to the growth of the
central counterparty, launched in June industry, though he is also positive
of the trade could this year. “We are open to a central about this volume. Whether securities
simply be found in the counterparty because we feel that if lending returns will be as high as pre-
reinvestment of the cash it works along very clear guidelines crisis levels is still to be decided, he
it makes the market operate better, it adds. Z
collateral" will solve a number of counterparty
analysis headaches for us, it can
to other countries. He says that uniform collateral schedules.
discussions with beneficial owners "It also gives a lot of additional
wishing to restrict or stop their lending tools to work with to optimise a risk
activity run along three lines. management of our clients and opens KAS BANK - an overview
Firstly, he says the bank is still up a number of other areas to explore.”
fielding questions about short selling. He adds, however, that a central Specialism: wholesale securities
Secondly, beneficial owners are still counterparty will only be as strong as services
concerned about the perceived risk of its members. “Operationally, a central
lending in comparison to the relatively counterparty must be very strong, Main target clients: Institutional
low returns. it must be a centre of excellence – investors - pension funds,
Both of these perceptions are otherwise it will not work.” insurance companies,
not correct, Mr Kremer believes. However, he also understands the investment funds and asset
“Securities lending is a low-risk critics of a CCP model who would managers - and financial
business as people can see from their rather retain the bi-lateral element institutions (banks and brokers)
own portfolios, during the credit of transactions. “If I have as one
crisis and the returns from all over the counterparty a highly-rated bank Key offerings: Brokers - clearing,
portfolio quite interesting.” that is solid. That would be fine with settlement, sub-custody
Thirdly, he says some beneficial me, and if it defaulted I would still
owners often have had other, more have the collateral. I understand the Value-added services: for
immediate concerns than their discussion about the CCP but I would treasury, risk management and
securities lending activities, which rather have one bilateral triple-A investment management
has led to the indefinite suspension of rated counterparty than a CCP that
some programmes. is built on number of weak market Global custody: 90 markets
As with a number of beneficial participants."
owners and agent lenders at the last Do you think lending and Offices: Amsterdam, London,
GSL Summit in May, Mr Kremer borrowing volumes will increase next Wiesbaden
believes securities lending is a front- year? “Yes I do. A lot of customers

2009 | Global Securities Lending Magazine | 13

GSL06 1-17 final.indd 13 26/10/2009 12:00


Shares for shares

In a future dominated by risk-adjusted programmes, there is a detailed and healthy
debate around equities as collateral for stock loans, finds Anthony Harrington

One of the more esoteric market

changes that the default of Lehman
Brothers might yet bring about is a
shift in the securities lending industry’s
fixation on cash collateral. This hasn’t
happened yet, though a shift to equities
as collateral is now visible in Europe
with additonal signs in the US.
Slow changes might be
understandable given that the
first impulse for many involved -
particularly beneficial owners of
the shares - was to step back from
securities lending. As Cédric Gillerot,
director in Euroclear’s Collateral
Services Product Management
Division, observes, the risk-versus-
return equation seemed to have caused
many to focus intently on the former.
“There is little doubt about
this. The data clearly shows that
from September 2008, volumes in
all the securities lending markets
plummeted,” he says.
While market participants had
some months to ponder the problem,
“As a beneficial owner Gillerot points out that in essence The obvious advantage
people came to three conclusions. The
of a security, our first was a renewed urgency about that equities bring to
experience suggests that making sure that all exposures were the table is the ready
if you were pushing for fully collateralised, particularly in availability of pricing
securities lending.
a bit more than 5% as a The second point was a much more information
haircut you might well careful analysis of the liquidity of the
in a cost effective and efficient way
get it. In fact, up to 7% collateral being taken. People only felt
for both sides of the transaction,
comfortable taking collateral that was
might be achievable" highly liquid - that could be sold in
encompassing the collateral used in the
management of the loan. Ultimately,
the case of default of the counterparty
this mandates the need for highly
Ed Oliver, Data Explorers - and judgements about the liquidity
efficient back-office procedures and
of the collateral became critical. As
Gillerot puts it, “Liquidity of assets
the conclusions drawn across the repo Though the securities lending
became a parameter of the utmost
market, the tri-party OTC market market was already fully collateralised,
with collateral management, and the as was the repo market, the focus fell
The third conclusion was that
securities lending market were similar. on the quality and type of collateral
securities lending had to be achieved
14 | Global Securities Lending Magazine | 2009

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GSL06 1-17 final.indd 15

JPM_SecLend_2i_ad_8.26.indd 1 26/10/2009
8/26/2009 12:00
2:33:57 PM

being taken. equities collateral. In fact, we have the Euroclear provides equities services
“Major lenders started to think capacity to process transactions in over to 27 markets, 18 of which are in
about the respective merits of fixed 400,000 different securities,” he says. Europe, and the service range is being
income, cash and even equities as Gillerot points out that there are extended.
collateral. The US is historically cash a number of proxy measures which It is a 'chicken-and-egg' situation
collateral orientated, but lenders give a very good guide as to how liquid of sorts: dealers will be more relaxed
studied collateral management in the a particular security is at any given about offering equities - and lenders in
repo market where fixed income and moment. taking equities - if there are services to
equities are deemed to be valid types “All these parameters can be make the mark-to-market side work in
of collateral, and are starting to think monitored and manipulated and a fluid and seamless way.
about their use in securities lending,” the impact on the sufficiency of the “What we are seeing a good deal
Gillerot says. collateral assessed. of right now in Europe is borrowers
With liquidity as a fundamental "Clients entering into a consolidating systems to manage their
driving criterion, the obvious collateralised deal using Euroclear cash securities business, with fixed
advantage that equities bring to Bank’s triparty collateral management income and equities being managed
the table is the ready availability of service have complete control over the in combination, and both being used
pricing information, and the fact that assets accepted or pledged, via the use to collateralise the dealer’s exposure
good quality corporate equities can of sophisticated eligibility screening. in the securities lending market or
be turned into cash very easily, in a to borrow cash in the repo market,”
very transparent way. Much the same “Major lenders started Gillerot says.
argument can be made for some fixed to think about the He points out that the risk
income, particularly highly liquid monitoring associated with adding
government bonds.
respective merits of equities to the mix is predicated on
In fact, as Gillerot notes, once fixed income, cash and the idea that both parties will have
lenders start exploring this avenue it equities as collateral" transparent and granular reporting
quickly becomes obvious to them that, which will demonstrate to each of
in a sense, the only really important them that there is the right amount of
feature about the collateral they are Cedric Guillerot, collateral in place at any point in time.
taking is whether or not it is available Euroclear The collateral management service
for efficient, seamless realisation. provider will not make judgements
“The most appropriate questions to about the liquidity position. That is for
ask of a piece of equity collateral are: Is the lender, and also, by implication, the
this the right quality equity? Is it easy For example, a taker of collateral can borrower, to agree.
to sell and do I have enough of it?” restrict or expand the total percentage They will do so using efficient
Of course, the volatility of equities of equities received by sector or proxies for the liquidity of the
can vary from moment to moment, market,” he says. collateral and because these proxies
depending on what is happening in the If the rise of equities as collateral will be agreed in advance, and that
market and what is happening at the is being driven by liquidity issues, it is agreement will be part of the securities
level of the particular issuer. also being driven by the fact that, from lending contract, there will be no room
However, if the collateral is being a borrower’s perspective, major dealers for disagreement between the parties.
marked- to-market and the margin on are in the throes of consolidating their What the collateral manager will do
the collateral is managed in near real fixed income and equities desks. is simply provide the data stream that
time, there should always be sufficient Once this is done, it becomes enables each party to see where they
collateral for the lender’s purposes. essential for the dealer to be able to are with respect to the sufficiency of
Again, as Gillerot notes, where this manage equity and fixed income pools the collateral at any point.
takes us is that it is not the quality from the same desk. “Such dealers are Gillerot points out that in an
of the collateral per se, but rather sitting on large pools of collateral that important way, this post-Lehman
the quality of the processing of the they have to finance and exploit. focus on liquidity has added new
collateral that matters. "We have a very compelling offering criteria to the collateral management
“This is where we definitely see here. Although traditionally known process. “It is our role, as a service
ourselves making an impact. Euroclear as a fixed income house, we have an provider supporting all the collateral
Bank has a fully automated tri-party equities service, EquityReach, that management tasks, to provide the
collateral management service which provides wide access to many domestic parties with tools that will enable them
caters for a variety of fixed income or markets,” he says. to implement pre-agreed parameters

16 | Global Securities Lending Magazine | 2009

GSL06 1-17 final.indd 16 26/10/2009 12:00


between the trading parties,” he says. of “haircut” to be applied to equities go into a pooled programme and
Clearly all of the usual equity being offered as collateral. Lenders will will have to live with the standard
services, such as corporate events be pushing for quite severe haircuts parameters of that programme. If,
management, will also be part of and borrowers for the lightest possible however, as an owner you strike an
the mix. The collateral management discounting. exclusive arrangement where a single
service agreement will define, in However, Oliver argues that given particular borrower gets the exclusive
advance, how corporate events will be that borrowers in Europe would use of the portfolio for a period of
processed. generally like to be able to include time, that will generate a premium
While mandatory events are subject equities in the mix of securities they return of at least 25 basis points to the
to automatic collateral substitutions, in offer as collateral, they will generally lender, Oliver says.
the case of option events, the borrower demonstrate at least a degree of It all comes down to how closely the
will decide whether it will take that flexibility. pension fund as the beneficial owner
particular security back into its own “As the beneficial owner of a wants to be involved in the process.
account and replace it with a similar security, our experience suggests that “Do you just want to get a cheque
eligible stock, so that it can exercise its if you were pushing for, say, a bit more for the use of your assets, or are
option as the beneficial owner in the than 5% as a “haircut” you might you actively looking for trading
most advantageous manner. well get it. In fact up to 7% might be opportunities to maximise returns?
In any case, both the borrowers achievable. If, however, you wanted "Asset managers tend to be much
and the lenders will have previously to be ultra conservative and were to more proactive because they treat
received relevant corporate events “Right now, equities as securities lending as a portfolio
reporting on the securities used as management style of investment and
collateral is definitely will always look to squeeze a bit more
Ed Oliver, global head of consulting a step too far for US out of a trade. They will apply this to
at market data providers Data beneficial owners" equities as much as to anything else,”
Explorers, and Leslie Gaynor, head of he says.
consulting for North America each Leslie Gaynor says that the
have considerable experience in the Leslie Gaynor, Data discussion, under the surface, to
securities lending market globally. Explorers change the US cash collateral model
Oliver says that given that liquidity is has really heated up since the default of
now a major issue for both sides in a Lehman Brothers.
securities lending transaction, equities “People are now much more aware
now make a great deal of sense as part demand 20%, then the probability is of the counterparty risks associated
of the collateral mix. that you would not shift any of your with cash management and with
This is especially true, Oliver argues, securities at all. The borrowers just the investment risk issues, since the
where they are being correlated with would not stand for it.” borrower wants a return on the cash
a lent security that is in the same Oliver says that in his view, we can he/she is putting up,” she says.
currency. expect to see haircuts being much The initial steps in this market
“If you are lending the CAX more proactively used as a tool, as might be a move to take more US
versus the DAX for example, with the use of equities as collateral moves treasuries instead of cash. If the US
both sets of securities denominated forward. does finally start to take equities
in euros, then provided you are “It follows from this that as more as collateral, she says, it is a racing
talking about mainstream equities and more beneficial owners come to certainty that beneficial owners will
within the right parameters, and with the market and show a willingness to apply the biggest haircuts they can get.
appropriate diversification, then the take equities as collateral, there will be “Right now, equities as collateral
case for exploring the use of equities as more competition and borrowers will is definitely a step too far for US
collateral is compelling.” be able to drive down the level of the beneficial owners to get their heads
Borrowers and lenders, he says, will haircut viewed as acceptable by the around.
have to work out between themselves market,” he says. "However, if you are lending
what constitutes an appropriate level However, the additional security equities versus equities on the same
of diversification. For lenders, a diverse offered by a haircut goes back to how index, with no currency risk involved,
basket of ten different company stocks closely the two sides are prepared then you have the same volatility on
would probably make sense in an index to monitor their securities lending both sides of the balance sheet and that
like the FTSE 100. programme. might be a more attractive place for US
Another issue that they will have If you are a pension fund using lenders to begin to add to the collateral
to grapple with is the acceptable level an agent to mark-to-market you will mix,” she concludes. Z

2009 | Global Securities Lending Magazine | 17

GSL06 1-17 final.indd 17 26/10/2009 12:00


Lending is down despite big investment into the economy, writes Kimberley Ferguson.
lending. “The quality of collateral has
As an open economy with become far more important than it
strong foreign trade links, Germany’s used to be. In the past, unsecured bank
market is swiftly returning after one bonds were viewed as the standard
of the most difficult economic times collateral in trades with agent lenders.
experienced in many decades. "Now, covered bonds as well as
To manage the crisis, the Financial significantly over the last two years. government or agency bonds are the
Market Stabilisation fund was set up As of September 2009 the total value norm. Even if unsecured bank bonds
to offer a range of financial support of German equities on loan is down are accepted as collateral, they are
to safeguard the stability of banks, roughly 44% since the same time a subject to an in-depth analysis with
insurance companies, pension funds year ago. regards to their liquidity, ratings and
and other financial institutions There was a seasonal peak in pricing in the secondary market -if one
domiciled in Germany. value on loan in May, but this was exists.”
After the EUR480 billion invested significantly below the levels seen in One source adds: “Borrowers are
in the stabilisation fund, the federal previous years. A German borrower, more likely to collateralise trades
government contributed a further EUR who chose not to be named, explained with their cheapest form of collateral,
90 billion as an attempt to strengthen that “the cost of finance, balance sheet normally assets- non-cash or cash-
internal growth and domestic demand. restrictions, counterparty risk, reduced they are long of. It pays to be flexible,
Germany has also tried to supply and restrictive lending are all as a lender who is more open in their
enhance the resilience of the financial factors that affect liquidity and have collateral profile can receive a broader
system by initiating structural reduced demand”. audience”.
changes regarding regulation, Torten Biesel, global head of Cash collateral remains a viable
transparency and accountability. securities financing at Landesbank option for some lenders. “At LBBW, we
An example of this is the 2009 Baden-Württemberg (LBBW) are definitely still accepting cash,” says
Financial Standard Reform Act confirms that volume has indeed Mr Biesel. “LBBW is not a classic agent
(Bilanzrechtsmodernisierungsgesetz) decreased. “During the banking and or direct lender. We have a combined
which aims to reduce bureaucracy in liquidity crisis the overall lending repo and securities financing desk, so
pension accounting and bring local volume was significantly affected all of the collateral coming in through
GAAP (General Accepted Accounting because some of the direct and agent securities lending is reinvested in our
Principles) standards closer to lenders decreased their lending other trading activities. On the other
International Financial Reporting volume. And whilst it is difficult hand, if we are long of cash, we invest
Standards. to calculate the exact extent of this it in the tri-party market and feel
In securities lending, Germany decrease, it is safe to say that the comfortable doing so.”
experienced the biggest short German banks with greater economic BaFin, Germany’s market regulator,
squeeze of 2008 with Volkswagen troubles were more affected by the extended a ban on the short-selling of
and Porsche shares. In October of changed landscape.” shares in 11 financial sector companies
that year, Volkswagen’s shares more Mr Biesel adds that this decrease until 31st January, 2010.
than doubled in value after Porsche has affected the types of collateral now The ban applies to shares in Aareal
unexpectedly disclosed that by using being accepted in German securities Bank AG, insurer Allianz SE, AMG
derivatives it had increased its stake in
VW from 35 to 74.1%, forcing hedge
Top five companies - percentage of % shares outstanding on loan
funds and proprietary traders to cover
stock outstanding on loan 5.00
short positions by buying stock from a
shrinking pool of shares in free float. Q-Cells Ag 21%
In addition, Germany is one of the 3.00

next venues for SecFinex, the securities Solarworld Ag 18.88

lending platform, to establish a central Bilfinger Berger Ag 18.51% 1.00
counterparty in November 2009.
The volume of securities lending Thyssenkrupp Ag 8.68%
Sept 08

June 09
May 09
Mar 09

Aug 09
Dec 08

July 09
Nov 09

Feb 09
Oct 08

Apr 09

transactions, this has changed

Jan 09

Tui Ag 8.68% Source: Data Explorers

18 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 18 26/10/2009 12:12


Generali Holding AG, Commerzbank

AG, Deutsche Bank AG, Frankfurt
stock exchange operator Deutsche
Boerse AG, Deutsche Postbank AG,
reinsurers Hannover Re AG and
Munich Re AG, Hypo Real Estate Market pressures have not
Holding AG and MLP AG. prevented a gradual growth
However, as Mr Biesel explains: in Mexican securities
“The short selling ban applies to
uncovered short positions. This means lending, finds Kimberley
that one can short a position as long Ferguson.
as the stock is borrowed for settlement
purposes. We believe that the ban will
be lifted towards the end of the year
when the crisis calms down a little
"In Germany, the crisis is no longer “We have seen the
a liquidity crisis but rather a money-
lending crisis. As a result, the need volume of securities
to protect banks from short selling is lending incrasing about
no longer there. Furthermore, since a 25% in the last two
lot of European banks are now partly
government-owned or are receiving years”
help from the governments, the bans Wider economic pressures in Mexico Patrick Avitabile,
are no longer as relevant.” have stunted the growth of the
Just over a year ago there was no securities lending industry. Between Citigroup
securities lending market for corporate April to June, 2009, Mexico’s economy
bonds and unsecured bank bonds. shrank by 10.3%.
Prime brokers had to trade on a The outbreak of swine flu Canadian firms.
commitment basis with their clients; driving tourist numbers down was a Large international banks, such
however, refinancing those assets in contributing factor to this extreme as BBVA (Spain), Banco Santander
the inter-bank market was nearly decrease, as was the global downturn (Spain), HSBC (UK) and Scotiabank
impossible. affecting demand for exports. With (Canada) along with Citibank (US)
“Even the spot market was not approximately 80% of the country’s acquired most of the largest Mexican
functioning properly,” Mr Biesel exports sent to the US, it has been banks and began lending.
reflects. “As of today, the spot market hugely affected by the fall in US In 1995, more foreign banks entered
is once again extremely liquid and consumer spending- particularly in the the market, including ABN Amro,
even the repo market has seen big industrial and services sectors. Fuji and Societe Generale. Tokyo
improvement. For about four to five The US recession is also thought Commercial Bank began participating
months we have been seeing decreasing to be a huge factor in the sharp drop in 1997 and Deutsche Bank in 2000.
haircuts as well as a much broader in the amount of money sent home Despite the industry being over a
range of accepted collateral. Although by migrant workers. Mexico, which decade old, many lenders are only now
there has been no full recovery, the is Latin America’s second largest establishing a presence in the country.
German market is definitely picking up economy, went into recession in the A move in 2005 by Banco De
again.” first quarter of 2009, when it saw GDP Mexico to open up the local markets
The graph is based on the average drop by 8.2% compared with the same to foreign entities and to encourage
of shares out on loan in relation to period in 2008. mortgage companies to start lending
shares outstanding, for 182 German On the securities lending side, gave the market a boost; however this
companies. To meet the criteria to be albeit being slow to get underway, was stilted when ambiguities around
included in this graph, the company Mexico now has an active market. Up tax regulations caused many of these
had to have market capitalisation of until 1994, the only foreign bank in new lenders to pull out of Mexico.
over USD100 million. The spike in operation in Mexico was Citibank, Len Welter, chief technology officer
between April- May reflects dividend before the North American Free of Data Explorers provided the graph
season, suggests Len Welter, chief Trade Agreement (NAFTA) opened on the next page, which represents
technology officer of Data Explorers. Z the securities markets to the US and the average of shares out on loan in

2009 | Global Securities Lending Magazine | 19

GSL06 18-38.indd 19 26/10/2009 12:12


“At the end of last year, market need for securities lending has “Whilst in Mexico
grown. Offshore, we have witnessed there is a bit of flow, in
securities lending was an increase of roughly the same
affected by the global magnitude. comparison with some of
financial crisis, which led “The increase is mainly an the Western markets, it’s
offshoot of additional borrowers not big at all”
to a loss of participation participating in the Mexican market.
of many market makers” We now trade with in excess of a dozen Len Welter,
counterparties, where that number was Data Explorers
Manuel Torres Barajas, two-to-three two years prior.”
BBVA Bancomer Mexico And what about collateral? “In
Mexico, eligible collateral is set out
by the Mexican authorities,” says Mr rules and regulations don’t include
relation to shares outstanding from Barajas. “Whilst corporate bonds are accepting cash as collateral” explains
September 2008 to August 2009. To still being accepted, the global crisis Mr Barajas.
fit the criteria for this graph, market has highlighted that these bonds have In addition, people are becoming
capitalisation of the country had to be lower liquidity than federal bonds. far more cautious in terms of the types
over USD100 million. Therefore, the acceptance of corporate of collateral they accept. “Locally,
In Mexico, this equated to 54 bonds depends on their own liquidity clients lending securities are being
companies, including Telefonos de ratios and credit worthiness. more careful about the collateral
Mexico and Wal-mart de Mexico. Typically, federal bonds have far they will accept, they usually ask for
Mr Welter, who traded securities at higher levels of acceptance in regards government bonds or liquid shares.
Morgan Stanley for ten years before to collateral. And in spite of the For example, in the past they were
joining Data Explorers last year, said: advantages of cash, for example, no more open to receive mutual fund
“Whilst in Mexico there is a bit of haircuts or interest accrual, the current shares,” said Mr Avitabile. Z
flow, in comparison with some of the
western markets, it’s not big at all.
This is reflected in the graph, which
bounces between 40.4 and 40.5%. Mexican wave
This is pretty indicative of not a lot of The Mexican market has seen a steadier rate in the availability of stock for
liquidity in the market”. borrowing. July saw the highest rise in 12 months with a sharp dip to August.
Manuel Torres Barajas, the Separately, at the beginning of that month, the Maxico Bolsa index reached
executive director of treasury and short 27692, up from 23359 after the first week in July.
term interest rates for BBVA Bancomer, Since May the index has seen one of the most impressive rises in world mar-
Mexico, notes that the volume of kets, from 23014 on 4th May to 30881 on 14th October.
securities lending transactions has
decreased over the last two years. “At % shares outstanding on loan
the end of last year, securities lending Source: Data Explorers
was affected by the global crisis, which 5.00
led to a loss of participation of many
market makers. Before this, the daily 4.00
average was MXN50 billion, compared
to MXN35 billion at which it currently 3.00
Patrick Avitabile, managing director
and global securities finance head 1.00
of equity trading at Citi’s Global
Transaction Services in New York, 0
disagrees. “Within Mexico, we have
seen the volumes of securities lending
Sept 08

June 09
May 09
Mar 09

Aug 09
Dec 08

July 09
Nov 09

Feb 09
Oct 08

Apr 09
Jan 09

increasing about 25% in the last

two years,” he says. “The short sells
are increasing, and therefore, the

20 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 20 26/10/2009 12:12


Hedge funds - rising amid

Past models and assumptions as to the workings of funds businesses. I think [the draft proposals
and brokers have changed, finds Ben Roberts. are] just creating a layer of bureaucracy
that’s unnecessary.
Hedge funds have been dealt a mix- “Wouldn’t it be much simpler to
ture of tough luck and tough love in regulate the prime brokers - the top 10
the last two years. prime brokers probably account for
Declines in hedge fund asset values the vast majority of hedge fund assets
have run parallel with much of the hard - rather than regulating 9,000 different
times felt by asset managers worldwide, hedge funds?”
currently around USD1.34 trillion in to- Extra bureaucracy will hit small
tal assets under management, down from funds particularly hard. But at the
USD1.95 trillion, according to Eureka same time hedge funds might accept
Hedge. But their mainstream brethren the extra administration that comes
have not experienced such acute scrutiny from diversifying their spread of assets
from regulators, investors and politicians – both between different brokers and
to add to these losses. in setting up custody accounts. The key
Deleveraging, both in anticipation and is to reduce exposure to any one prime
realisation of market declines, further broker.
reversed the enormous growth that hedge Gavan McGuire, director of Alter-
funds achieved for much of this decade. native Investment Services Sales for
Those who still sought leverage expe- draft proposal for stricter legislation EMEA, Citi, said: “Some of the bigger
rienced a shrinking pool of resources as on alternative funds, released earlier players are looking towards multiple-
fears of counterparty risk prevented such this year, has hung around the neck prime broker relationships to help
funding. Short selling restrictions pre- of the industry. Despite the under- spread counterparty risks and give in-
vented the possible gains from a declin- stood calls for improved parameters vestors more comfort. People are look-
ing market, though this could be argued concerning leverage and liquidity, ing deeper and evaluating the benefits
as a temporary blip in an otherwise open industry practitioners, the industry of the traditional long-only custody
season for short sellers – particularly body – AIMA - and even a handful of model for their unencumbered assets.”
regarding financial stocks. politicians have voiced their concerns This can add operational cost to the
As pressures on leverage and stock as to the weight of regulation on a fund. Hedge fund managers will have
borrowing - the classic offering by prime sector largely blameless sector. to bear in mind, if they have additional
brokers to funds – grew, changes and a Pedro Noronha, managing part- custodian relationships, be it prime
re-evaluation in the relationship between ner at Noster Capital, is particularly brokerage or traditional custody it will
fund and brokers became inevitable. incensed by the proposals, especially add to the underlying costs - but this
The tough love appears in what has as hedge funds largely outperformed may simply be the cost of doing busi-
been termed the ‘institutionalisation’ of global indices. Partly, he says, it is ness in the changing regulatory.
its sector. Greater transparency, more down to erroneous perceptions of the The trend for multi-primes and sepa-
third party administration and a greater sector. “People were looking at hedge rate accounts was played out in recent
emphasis on asset segregation – often funds like they were absolute return. comprehensive research by New York-
safely separated in a custody account – They have to realise there will be based research firm TABB Group. In
have been three examples of the enforced every now and then a one-year event its study of 62 US-based hedge funds,
drive away from its supposed secretive where the industry takes a hit. Unfair “Prime Brokerage 2009: The Hedge
world. The decline in its wealthy private attention is give hedge funds rather Fund Perspective”, 66% of respondents
clientele also spurred the need to widen than banks. that used a single prime broker said
its marketing net to retain investment. “I would say the majority of the in- they were considering a multi-prime
Such changes, some would conclude, dustry operates well within the lever- strategy.
are timely. The European Commission’s age restrictions and operates honest At the same time, the study ex-

2009 | Global Securities Lending Magazine | 21

GSL06 18-38.indd 21 26/10/2009 12:12



“From our perspective we are will- have become used too.

pected more ‘mini primes’ to grow and
ing to work with managers who have “The traditional custody model re-
increase their market share, breaking
potential, of which there are many,” he quires different infrastructure require-
the strangle hold on the market by US
says. “Talented managers need to be ments for hedge funds,” he says.
brokers such as Goldman Sachs and the
nurtured and given time to build out “Hedge funds will need people with
‘bulge bracket’ European players such
their track record and develop their experience of working in a the tra-
as UBS, Credit Suisse and Deutsche
business.” ditional custody process, for a small
Perhaps ironically, a hedge fund that hedge fund with five or six people, it’s
Matt Simon, an analyst at TABB
seeks to lessen its risk and shore up its another resource.” In such changing
Group, told GSL: “There have been a
future by separating some assets into a market dynamics, the measure of a suc-
number of new offerings, particularly
custody account could lose their lustre cessful brokerage could be minimising
from the introducing prime brokers
to prime brokers. Fewer assets on the the perception of change. Noronha says
and the mini-primes, as well as the
broker’s books means fewer assets for stock borrowing costs and availability
reshuffle of client assets.”
the prime broker to rehypothecate. has barely altered in the downturn due
But he added that the idea of ‘multi-
Noronha believes this is too much to to the strength of the broker.
prime’ needed clarity when assessing
ask. “If a hedge fund says: ‘I’ll use you But the ban on short selling did alter
this trend in the industry.
as prime broker, but I’ll use a separate the perception of both the strategy
“Multiple prime meant ‘if you’re
itself and its practitioners. It also meant
a hedge funds and you have many “People were looking at ‘covered’ short selling was conflated
brokers, you’re multi-prime’. That’s not
necessarily true for everyone. Depend- hedge funds like they with ‘naked’ shorting – selling into a
were absolute returns” market without the prior stock bor-
ing on where the fund is located, many
row. “In the US, naked short selling
hedge funds may have multiple funds
and each fund may be located at one Pedro Noronha, was a big thing. I think naked shorting
Noster Capital should be a criminal offence. If you
prime versus another. So the number
don’t have the borrow, you shouldn’t be
of hedge funds who have true ‘multi
able to short.”
prime’ relationships was not that many.
custodian’, you’re basically saying you’re He denies the occasional charge that
The idea of splitting assets within a
not allowing the prime broker to run naked shorting is necessary for market
fund between primes was not as com-
their business as they used to,” he says. makers, such as in the options market.
mon as a lot of people in the industry
“The reason why someone like Gold- “There’s only options in securities you
thought it was.”
man Sachs is a great provider to borrow can short. You cannot buy a put on
Just as hedge funds are re-evaluating
stock is because they’re the leader for a security where there are short sell
their services, prime brokerage is also
prime brokerage. They have a lot of cli- restrictions, as the person who writes
reassessing the counterparty risk – as
ents with a lot of securities with them, the put off to you, they need to hedge
well as the returns – in the relation-
so when you have to borrow certain everyday and short or maybe buy
ships. Smaller, or less successful hedge
securities, it’s easy. depending on the delta of his option,”
funds that have brought in less money
“If you start segregating accounts he says. “If there are no shorts allowed
for the broker are now more likely to be
for fund A, B or C, the broker as a for the security, there won’t be a put
shown the door by providers that must
whole loses part of the attraction of option. It’s that way, not the other way
adhere to the bottom line.
its business model. Either they would around. If the cost-of-borrow is very
This played out in TABB Group’s
have to charge higher fees or charge for high, it’s implied in the price of the
research. Prime brokers, says Simon,
something else. option.”
claim that a lot of hedge funds “‘are
That “something else” could be many Also changed is the ease of identifying
becoming too expensive to have on our
of the additional services provided by stocks to borrow and short. “After 2007
technology platforms and we’d rather
brokers that came for free when money there were many easy shorts where
stay focused on the largest clients.” Me-
from rehypothecation rolled in. These you could make a substantial amount
dium sized funds pose more risk and
include trade settlement, the manage- of money with a pretty high probabil-
might not be profitable.
ment of margin, and payments, as well ity of being right. Now it’s different.
This compares starkly with the boom
as the swift execution of corporate Through my career most of the time
years earlier this decade, when prime
actions where necessary. the short book was an insurance policy
brokers would have the resources to
McGuire at Citi points out that the and it was a drag on performance that
nurture small and start-up hedge funds
custody product is very different from enabled us to smooth the performance
on the back of future growth, McGuire
the traditional prime brokerage opera- and to try and deliver absolute returns,
at Citi notes this is still happening to
tional model that hedge fund managers month in, month out.” Z
an extent.

22 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 22 26/10/2009 12:12

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Operations comment: Pirum

Rupert Perry of as part of an overnight batch, this to call in the returns to the lender by
Pirum Systems straight forward approach is not viable e-mail, fax or telephone call. When the
outlines the for the International market, as the lender receives this request, it has to
required data is simply not available identify the correct trade(s) and book
next generation overnight. Marking international the required returns in their system.
of post-trade securities in Europe (as per ISLA’s best Using real time data feeds, the
automation practice guidance) requires market complete process of calling in returns
participants to use same day closing can be fully automated, happening
- real-time prices for Asian markets and previous within minutes of the borrower
processing. day closing prices for European and booking the return in their own system.
Not many years ago, post trade North American markets. In Europe, Validation logic is applied centrally,
processes in the international securities this generally dictates that marks must before returns even reach the lender, so
lending market were mostly manual be processed early in the afternoon, that any which fail to meet the lender’s
and often very time consuming. Today, once the closing prices for Asia for the pre-defined validation criteria can
many of the more straightforward same day are available. either be rejected immediately or else
operational processes, such as contract Unfortunately, the requirement to held in a queue for manual review.
comparison and billing comparison, process marks in the middle of the A real time version of contract
benefit from extensive automation. This business day creates a new issue relating compare is an essential part of this
allows higher volumes to be processed to timing differences. It is very difficult process, as it automatically determines
with much tighter risk control. to find a consistent time during the the correct translation between specific
But the job of automating all post business day when the timings of each borrower and lender trades in each
trade activity is not yet complete, as party’s internal updates to settlements security, so that when a return is
many other processes are still very of new loans and returns, market prices booked by the borrower it is always
manually intensive and require careful and foreign exchange rates are in synch booked against the correct transaction
coordination and communication with each other. If marks are generated on the lender’s side. This avoids the
between borrower and lender. A couple and processed when the data is not common contract compare breaks
of good examples are the daily mark to in synch, this tends to cause a large that often result from returns being
market and returns processes, but there number of mismatching marks which booked against a different trade in the
are many others too. require further manual investigation/ same security than was intended by the
So, why have these processes generally processing. borrower.
not benefited from automation Using real time feeds to update a set As the industry moves forward, it
already? Whereas contract and billing of proposed marks for both parties is increasingly apparent that further
comparison are based on daily/monthly is a much better approach, as it is automation of post trade processes
data feeds generated by overnight batch more tolerant of the daily variances will increasingly rely on real time
processing, the nature of processes in the timings of settlement updates feeds. It provides both parties with
like marks and returns is that they or problems that can occur with a continuously updating view of the
require much more up-to-date data market data feeds. With real time matching state of the transactions in
to work effectively and this ultimately reconciliation, market participants their respective books and records
requires real time feeds and real can immediately identify differences throughout the business day. Real time
time reconciliations, which are more requiring investigation or more simply, processing also enables any corrections
complex and have not been available if more time is needed for the updates identified on the reconciliations to be
until more recently. to flow through from the underlying entered in source systems and then
Furthermore, to successfully systems. When the marks are ready and fed through to update and correct the
automate marks and returns, you in synch, they are automatically posted reconciliation, ensuring that exceptions
first need to have clean and matching by both parties in their own books and are minimised and STP is maximised.
positions within contract compare, records. Z
as there will otherwise be too Today’s returns process is another About the author: Rupert Perry is a
many exceptions requiring manual good example of a post trade process founding director of Pirum, the leading
processing. It is only within the last few which currently requires considerable provider of post-trade automation
years that most market participants manual effort from both the borrower services to the international securities Look
have got on board with this first and lender to be processed. While lending and repo markets. Services is sa
essential step. borrowers will usually have internal provide include real time processing for For
While automated marks in the US automation to identify when a loan is contract comparison, marks, returns,
or vi
Domestic market are usually processed ready to be returned, they usually need prepay and exposure reconciliation.
24 | Global Securities Lending Magazine | 2009

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Global Securities Lending 2009


Panel: Reinvestment
Taking cash as collateral has divided market opinion and is for some the epiome of the
risk-return evaluation. GSL quizzes the experts.

Virgilio “Bo” Abesamis, III, senior vice president and manager of the Master Trust,
Global Custody, and Securities Lending Group. Bo joined Callan Associates in 1987,
initially working in the Capital Markets Research Group with responsibilities involving
asset/liability modeling, manager structure, benchmark and database reviews, style
analysis, and research.

Sonja Spinner is senior associate at

Mercer Investment Consulting. She has
previously acted as European invest-
ment reporting manager at Canada Life,
as well as senior internal auditor at the

Brian Staunton is managing director, Securities Finance, EMEA, at Citi. He is

responsible for the securities finance business within the EMEA region. Before
re-joining Citigroup in October 2004, Brian worked for Deutsche Börse Group in
London, formerly Clearstream Banking, for seven years as Regional Manager for the
UK, Ireland and Scandinavia. Prior to that, Brian was at Citigroup in London where he
was securities lending sales head in Europe. NB. Additional comment from Steve Beill,
director, securities finance at Citi.

1. For some agent lenders, there has value vs. reinvestment of cash collateral 20% than usual.
been an increased focus on the profits would definitely have an impact. We
that can be derived from the intrinsic believe that this shift away from cash SPINNER: I consider that the
value of the loan itself – rather collateral reinvestment could mean intrinsic valueisofhead
Tony Baldwin loansofshould be the
short term
than returns from cash collateral a 40% to 60% reduction in revenues. interest
driver ofrates andactivity
lending fundingasatopposed
However, we also believe that those Securities
cash yields. Europe.
Many The
of the firm is
reinvestment. How significant do you based out of London and its op-
think this shift will be to overall cash clients with real inventory of intrinsic which have
erations areimpacted
currently beneficial owners
split into four
taking and reinvestment levels? value securities would be paid in agent lending programmes arose
different areas: equity, fixed income,
commensurately and should achieve because the focus
investment banking was
an aggressive
ABESAMIS: The focus on intrinsic better demand spreads of at least 10% to cash reinvestment programme as

26 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 26 26/10/2009 12:12


opposed to prudently managing ABESAMIS: Before any talk of industry faced a situation where they
securities lending programme risks. liquidation or exit strategy, we believe wanted to suspend lending because
Whilst money market yields remain that the prudent approach is to have of the market volatility, but to do so
low it is difficult to make a case those reinvestments be marked to would have incurred a loss on the
for accepting cash collateral as the market to determine “real” valuation cash collateral re-investments. So the
incremental spreads over a non-cash levels and the potential market impact question they ask is: ‘do I liquidate and
programme are not outweighed by the of a forced sale, especially in this take a loss or maintain the positions
additional reinvestment risks. Recent environment until final maturity in the hope they’d
market events have also highlighted the maintain their value?’ I don’t know if
issues associated when collateral pools SPINNER: The use of a constant the investments should be marked to
are shared by multiple lenders. I always dollar net asset valuation (NAV) is market.
steer clients with the risk appetite to common industry practice for cash If they were – perhaps if there was
accept cash collateral to a segregated collateral reinvestment pools. I don’t a shortfall in collateral value – who’s
cash fund. think that there is a requirement to going to post the additional margin? In
amend this when computing revenues a classic mark to market process you’re
STAUNTON: I think it’s important and fee splits. Beneficial owners would, marking the loan and collateral whereby
to reiterate why we take cash. Some however, gain additional transparency you’re taking more collateral if need
brokers prefer to give cash as they’re be. But marking the cash re-investment
long cash, and it must be then re-
“Now the vogue is tri- isn’t a classic mark to market, as you’re
invested to earn a yield. party, and it’s fantastic marking an investment that’s possibly
In addition to the yield the broker lower than the value you bought it
- you can work with the for. So whose responsibility is it to
will want compensation in the form of
a rebate The interest rate earned from tri-party agents and set top up the value? Under the current
the re-investment should always be your risk parameters legal arrangements it is the lenders’
higher than the rebate level, and that responsibility.
around a very finite set of
yield is very much a function of what
re-investments are permitted. categories” 3. Will the last quarter’s improved
The more conservative the re- market conditions have encouraged
investment profile, the lower the Brian Staunton, Citi beneficial owners to stick with the
revenue will be. Our view is that we reinvestment plan – or would this
generally lend assets out which do have be the time to get out on the back of
some form of intrinsic value – whether if mark to market valuations were also potentially smaller losses?
equity or fixed income. We’re not published. Many beneficial owners
‘pumping out’ securities to generate had no transparency regarding the ABESAMIS: Depending on client
performance of commingled cash
cash. There’s generally a level of intrinsic considerations (i.e. liquidity needs,
value in the loan itself. reinvestment pools until agent lenders rebalancing, asset allocation, etc.) and
informed them that the fund could risk assessment, this is the time to assess
BEILL: After the default of Lehman no longer support a constant dollar the investment policies and guidelines
Brothers there was a pull back from NAV and that funds were trading at a governing the reinvestment of cash
cash as a form of collateral. There may considerable discount. collateral. Within that construct,
be lenders that hadn’t really understood This is clearly inappropriate as it would also give a client a way to
all the potential risks and downsides mark to market valuations gradually evaluate the profile of their program
of having cash. That said, we’ve been decreased over the later part of and if needed “clean-up” or employ
through a re-education process with 2007 and 2008 and then decreased a “controlled un-wind or work-out
lenders and now I think lenders are substantially following the collapse of solution” that would bring the program
returning back into cash as a form of Lehman Brothers. into compliance.
collateral. Sharing mark to market valuations
with beneficial owners would have SPINNER: Beneficial owners in
2. At the height of the financial alerted them to the issues facing some lending programmes with losses in
crisis, many beneficial owners did cash reinvestment funds and enabled their cash reinvestment pools are not
not seek to liquidate their cash them to make the decision whether to yet out of the woods. Where losses
reinvestments due to the loss they fund losses and suspend lending earlier have resulted from mark to market
would incur. Should the status of these and at less cost. losses on asset backed securities the
reinvestments be marked-to-market? lack of money market liquidity, and
STAUNTON: Some lenders in the

2009 | Global Securities Lending Magazine | 27

GSL06 18-38.indd 27 26/10/2009 12:12


investor appetite, means that the losses cost offset or (b) securities lending is
can still be substantial. Some owners employed as an alpha generator. As a STAUNTON: That’s a good question,
have decided to fund losses or to take fee/cost offset, the client has to weigh and it is one of education. If you’ve
vertical slices of cash reinvestment the merit of securities lending as a appointed an agent lender for a specific
pools in order to facilitate an exit from front-office or investment management role, that lender should have the
lending. However, I think that it’s fair overlay activity. This could be capability to manage, calculate and
to say the majority, albeit reluctantly, are problematic for those clients because a record risk and provide a very good and
remaining in their lending programme. fee/cost offset approach does not align professional level of cash reinvestment
well with risk taking. as good as any money manager. I think
STAUNTON: A lot of these assets On the other hand, if a client believes there are players who can do that very
are very illiquid and difficult to price. that this is an alpha generator, then well. As a firm we have that capability
If there was a mark-to-market process, this needs to be factored in the risk so we agree with the statement – it is a
would you have sufficient security that budgeting exercise and in what context front office function.
the mark-to-market is pricing that of the asset allocation should it be I would go a step further too: because
investment adequately. In reality, if you carved out. it’s defined as front office it needn’t go to
have an illiquid asset, you don’t know a traditional fund management firm – if
the real value until you sell it; it’s not SPINNER: Cash reinvestment you have the capability in-house it’s a
like index equities. absolutely is a front office activity. good situation.
Beneficial owners choosing securities
BEILL: the sort of products we’re 5. Where might cash be most
talking about that incurred the big mark
“Lenders are effectively
commonly reinvested next year – will
to market losses are in the ABS space. stuck in their lending there be a weight towards short-term
Citi EMEA stopped buying short-based programme as a result investments?
asset-backed commercial paper a long
time before the default of Lehman of inappropriately ABESAMIS: Callan does not have
Brothers. I’ve seen a few reports constructed portfolios a crystal ball on the future. Market
suggesting that liquidity is returning to which have failed to participants in securities lending
the ABS sector, and it’s difficult to say if should understand the risk/reward
it will encourage lenders to pull out or consider an investment and asset/liability issues inherent in
stay. basic: to match assets the transaction. Liquidity risk would
with liabilities” best be mitigated if appropriate short
4. Some call the reinvestment a term investments are given proper
front office activity and an ‘investment Sonja Spinner, Mercer consideration regardless of market
management overlay’. Will this environment.
evolution of cash reinvestment into Consulting
the asset allocation space help the SPINNER: There are considerable
understanding of risk, liquidity and risks associated with running cash
returns? reinvestment plans with duration
lending programmes with cash mis-matches between loans and cash
ABESAMIS: This is a very good reinvestment need to apply the same reinvestment.
question. We believe that a client should due diligence process and monitoring Long term investments are not
assess securities lending from both of managers to cash reinvestment suitable for cash collateral reinvestment
direct lending (i.e. custody, a third party funds that they apply to other manager pools, even if they benefit from interest
agent or principal) and indirect lending mandates. I would encourage all rate resets, as they lock owners into
(i.e. mutual funds, commingled funds, owners lending securities against cash lending programmes in the event of
index funds, etc.) viewpoint. to view their lending programme as a liquidity shortfall. In response to
Those that participate via indirect a cash fund investment, with all the increased investor risk awareness,
lending should take into consideration same risk and return considerations increasing numbers of agent lenders
that seclending is already embedded as any other money market fund are investing maturing assets in
in the asset allocation, especially those investment. I would also encourage all instruments eligible under Rule 2a-7
using index funds as the core exposure beneficial owners lending against cash of the United States Securities and
to asset classes. to reflect whether they really consider Exchange Commission.
In the area of direct lending, the issue that the additional revenues they may The combination of these factors will
is not that simple. Two factors have to receive if they lend against cash really results in weightings towards shorter
be given proper consideration- wherein are sufficient to compensate for the term investments.
(a) securities lending is utilised as a fee/ additional risks.

28 | Global Securities Lending Magazine | 2009

GSL pp0
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GSL06 18-38.indd 29 26/10/2009 12:12

STAUNTON: The bigger shift is going

to be towards secured investments – tri Statistically speaking
party repo, for example.
That gives you the double protection
of counterparty risk and that’s backed Cash reinvestment Reasons given for G
by the securities you’ve taken as losses have by now changing programme: w
collateral with any margin. In the m
been well-documented.
unsecured space, banks have been
getting their funding from the central But the recent study 65% reported a
banks that have pumped so much by RBC Dexia Investor less confidence in
money into economies that they often
do not want to issue in to the market, Services found that the counterparty stability
and except for the three-to-six month issue is still far down
space you won’t see decent returns.
Now the vogue is tri-party, and
the list as a specific 59% cited lower risk
it’s fantastic - you can work with the topic when beneficial tolerance
tri-party agents and set your risk owners across four
parameters around a very finite set of
continents were 44% sought
asked for reasons for greater levels of
6. What regulatory changes or changing their lending indemnification
developments might be influential on
programmes, despite a
the cash reinvestment space?
decline in risk appetite 9% looked to avoid
ABESAMIS: The most significant overall. cash reinvestment
regulatory driver to the speed limit
of cash reinvestment would be the
Source: RBC Dexia Investor Services losses.
fine tuning of SEC Rule 2a-7. This
is currently being evaluated by the
government and the industry in terms “Liquidity risk would
of acceptability of certain types of market losses between 3-5% of their T
securities, maturity considerations,
be best mitigated if portfolios before they were alerted to
credit, issuer limits and liquidity. Once appropriate short-term issues with their programme. a
the dust settles on this important investments are given y
guideline, the industry would have STAUNTON: I think there’s a i
a better sense of the speed limit and
proper consideration, need for greater transparency of cash
have a sense of the potential risk (up regardless of the market reinvestment, reporting to all parties i
or down) if they decide to push the environment” all the investments. What will be a
reinvestment guideline. interesting is what comes out of the SEC w
Bo Abesamis, Callan meeting that took place last month.
I think it’s important to remember
SPINNER: I would welcome
increased scrutiny of commingled cash
Associates that this industry was around USD14 c
reinvestment pools. trillion in available securities in 2008 i
Some agent lenders ran very which have failed to consider an with USD4 trillion on loan - a huge
aggressive cash reinvestment investment basic: the matching of assets amount of liquidity. For the most part
programmes with substantial to liabilities. securities lending worked extremely
allocations to asset backed securities. Moves to force greater transparency well. In that sense we have to put the
Additionally, some “cash funds” can only be welcomed. Additional problems that have arisen around cash
with apparently low weighted average regulation or guidance on the in perspective. Z
maturities were running bar bell differential between a fund market
strategies with a proportion of short to market NAV and constant dollar Next issue panel topic: ‘Regulation’.
dated assets and a rump of assets with NAV that can be permitted before If you would like to be part of the
years to final maturity. investors must be informed that cash next Q+A, contact Ben Roberts (ben.
Lenders are effectively stuck in their reinvestment funds have broken roberts@2i.tv) or James Olweny (james.
lending programme as a result of these constant dollar NAV would also be olweny@2i.tv).
inappropriately constructed portfolios welcome. Many investors had mark to

30 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 30 26/10/2009 12:12 GSL su

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GSL06 18-38.indd ad.indd

GSL subscriptions 31 1 26/10/2009
08/10/2009 12:12

From the trading floor

Jeroen Bakker gives an
insight into the trading
operations of RBC Dexia,
including its plans to de-
velop its agency lending
The global coverage of RBC Dexia’s
securities lending business means that
we’re working with our colleagues
around the world, particularly with
the other trading desks in Sydney
and Toronto –there is information
flow across regions and coordination
Trading is around 50-60% of
my day-to-day job, I am involved “With a CCP, there are transactions, our risk department will
with other projects, qualifying potentially two hundred fully assess the counterparty risk. They
various trade structures and will check what are the outstanding
deal opportunities and product
borrowers behind it - but loans versus the collateral received and
development initiatives Next to this who are they?” calculate the value at risk (VaR).
there is a lot of interaction with other With a CCP, there are potentially
departments such as operations and two hundred borrowers behind it – but
risk. the question is: who are they? What
However, we’ve expanded our would happen if one of them got into
Collateral collateral schedule to accept additional trouble – would it trigger a domino
Our collateral schedule is non-cash, OECD government bonds, German effect whereby the entire CCP goes
and primarily G10 paper. Given and French agencies to meet borrower bust? So if I used a CCP, then as a
events such as the default of Lehman demand. lender with a duty towards my clients
Brothers and the credit crisis, I would Our clients come in many different I would have to say: I would have to
say our non-cash programme has kinds. Some just are interested in just a better understand how to measure my
benefited well compared to a non- monthly cash flow. Some would like to risk.
cash programme. Borrowers ask for see the breakdown of the revenue that
collateral flexibility and the ability to is being generated. In these cases, every From now on
change the collateral based on their month the trading desk will inform At this stage in the year, we have seen
access being either G10, equities, those clients via our technical sales less market activity regarding M&A
corporate bonds or cash. This would department what might be happening and rights issues compared to the first
allocate additional baskets, additional in the US, the Far East and other half of the year which saw a decent
balance or higher fees to those agents regions, which securities are specials, number of rights issues and takeovers.
or principal lenders. and so on. This being said, we are seeing
However, I would say that changing increased amounts of GC month after
the collateral framework is not a CCP month and the trading desks have been
process you want to do overnight. When it comes to trading using a setting up these trades. Our balances
RBC Dexia has a prudent risk central counterparty, I think a key are growing, and not only due to the
management framework and so doing question still needs to be answered: rise in the stock markets. So we’re
the due diligence and making clients where is my risk? Is it with SecFinex, or keeping ourselves busy despite that
comfortable with additional paper or Eurex? It is difficult to see ‘behind’ the it has been more quiet than others’
collateral must be ensured prior to platform. summers. Z
launching a new collateral instrument. With my current bi-lateral

32 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 32 26/10/2009 12:12


“It is important to be
aware of the correlation
between the loans ad
the collateral; especially
the liquidity of all these

Wijgerse securities lending trade and not from Another trend is financing swaps
at Robeco the cash collateral reinvestment where the stock is sold and hedged
opportunity. with a total return equity swap. Some
highlights Obviously non-cash collateral has beneficial owners, who only accepted
the promi- risks too. It is important to be aware cash collateral in the past, are starting
nent changes of the correlation between the loans to accept non-cash collateral.
to lending programmes and the collateral; especially the On the other hand, more
liquidity of all these securities. borrowers are looking to pledge
and the company’s In the weeks following Lehman cash as collateral as some of them
collateral guidelines. Brothers’ default we amended our experienced a lack of non-cash
It has almost been a year since non-cash collateral guidelines. collateral.
the default of Lehman Brothers. Since Firstly, corporate bonds and As the collateral preference from
September 2008 beneficial owners convertible bonds have been borrowers can change from cash to
have reacted differently with regard to restricted because of a lack of non-cash, lenders have to become
market and credit risk. liquidity in these securities. more flexible in accepting both types
Some beneficial owners have made Secondly, collateral margins have of collateral.
small adjustments to their securities been increased because of a high Robeco, for instance, is starting
lending programme, while others have volatility in the market and increased to look at accepting cash collateral
stopped lending altogether. Another counterparty risk. Thirdly, settlement and reinvesting that cash through an
group wanted to pull out but could not risk has been decreased by receiving overnight reverse repo.
do so due to unrealised losses on the pre-paid collateral. And lastly, Whether it is cash or non-cash
cash reinvestment in money market financials were removed. collateral that is being accepted, it is
funds or directly in commercial paper. Currently we are seeing that important that the risk-return profile
As a non-cash collateral taker, borrowers are, once more, pushing is understood and professionally
we have had no issues with regard for more flexible collateral grids. managed.
to unrealised losses related to cash Some lenders are accepting financials It will be interesting to see how
reinvestments. It has been our policy and investment grade corporate beneficial owners will act when they
not to create more leverage by bonds again as collateral. can pull out of the money market
reinvesting. As exchange traded funds (ETF) funds. Will they move to a trading
The rationale is that the income become more and more traded, there is model based on intrinsic value or will
from securities lending must come an increased need to finance these they stop as the risk/return was not
from the intrinsic value of the as well. what they expected it to be? Z

2009 | Global Securities Lending Magazine | 33

GSL06 18-38.indd 33 26/10/2009 12:12


GSL Summit - on the road

Dutch Securities Lending Summit, October
Venue: Krasnapolsky Hotel
Sponsors: Fortis Bank Below: the second panel: (l-r) Sander
Nederlands, Robeco, ING, Baauw, Fortis; Simon Lee, eSecLending
J.P. Morgan, eSecLending. Sonja Spinner, Mercer Consulting;
Rogier Buurman, Robeco

Additional sponsors: 4Sight

Financial Markets Solutions,

The GSL “Lending for Liquidity”

summit in Amsterdam on 8th October
attracted some of the main players in
the Dutch securities lending market
and beyond. Discussion topics of the
day involved whether securities lending
was now a front office activity along
with the risks involved in the market,
he said. Van Roekel revealed that SPF Beheer
but on a micro level one of the most
Jean René Giraud, from EDHEC withdrew from its lending programmes
popular issues was cash reinvestment.
Risk, provided an academic overview after the financial crisis, but that it
Mark Faulkner, founder of Data
of the industry. Giraud criticised the plans to begin the process again next
Explorers, opened with an overview
media’s condemnation of short selling, year – although with more focus on the
of the current state of the industry.
which had been seen to be driving collateral side.
In contrast to some media reports,
down the prices of firms. He said He also agreed with chairman Roy
Faulkner stressed that securities lending
long investors – given their far greater Zimmerhansl’s suggestion that this
is still a profitable enterprise, although
number – were more responsible for pullout was not to do with securities
the credit crunch has led to changes,
the fall in stock prices, and also revealed lending itself, but more because it’s “a
particularly in the attitude towards risk
some of the benefits of short selling. weird old market out there” and he’d
“Short selling is important for the rather be risking nothing.
He described risk as the new “key
portfolio management process on “The people on the floor are
metric” in the industry, something
the one hand,” he said. “But it’s also convinced about the product,” van
which was also agreed upon at the
important for the market itself, in Roekel said in reference to securities
recent roundtable discussions on
terms of liquidity, because it allows for lending, but suggested that the board
securities lending and short selling
increased quality of price discovery.” of directors were not as convinced – so
at the US Securities and Exchange
The first panel comprised of Paul SPF Beheer decided to “not take the
Commission, where Faulkner was in
Wilson from J.P. Morgan, ING Asset chance” of giving securities lending
attendance as an advisor.
Management’s Bert Mekes, Hans van a bad reputation just because of the
“It’s not just about return anymore,
Roekel of SPF Beheer BV and Paul current market.
it’s much more about risk, and I
Wilson from 4sight Financial Markets This volatile and changing market
think this is long overdue. I just hope
Solutions. is also having an impact on the
that collectively the industry and
The panellists discussed if technology sector, 4sight’s Wilson
organisations can keep to that thought
securities lending is now a front-office revealed. “There is a great demand
going forward over the next few years,”
investment. just now for change in the technology

34 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 34 26/10/2009 12:12


industry, and nowhere more so than in to gain access to cash without being Mercer Consulting were the members
the Dutch market, where we support required to sell assets. of the second panel.
agency lenders who are probably Meanwhile, J.P. Morgan’s Paul This group focused on a subject that
amongst our most active clients,” he Wilson suggested that the return of had already been mentioned heavily
said. SPF Beheer to the securities lending – risk. Issues such as collateral choices
“There’s also been an obvious market is indicative of a larger trend. and short selling limitations were on
change in the way that technology has Most of those who had suspended their the agenda, but cash reinvestment
been used since the credit crunch and programmes have now re-entered the seemed to be what everyone wanted to
that’s all about collateral in large neon market, while some bodies which have talk about.
lights. As a vendor our focus became never lent before are now doing so. Cash collateral has received a bad
almost entirely collateral-based about Wilson also mentioned a disparity press of late, but Lee, responding to a
12 months ago.” between the European and US markets question from the audience, explained
Mekes, from ING, suggested that the in terms of governance. He said: “For that it is important to distinguish the
use of cash collateral would allow his the most part we still see in Europe many possible reinvestment options,
firm – which in the past only accepted that the oversight, governance and and the risks involved with each.
non-cash collateral – to better its cash responsibility for securities lending still For instance, he pointed to the
management processes. “Securities very much resides in the operational difference between reinvesting cash
lending is a tool I can use in my cash division of beneficial owners, while collateral in asset-backed securities and
management,” he explained. “It is not substantially in the US, particularly on overnight government repo – the latter
only about earning more money but the asset management side, there has of which may be much the same in risk
also about managing cash better.” been an overnight shift of responsibility terms as taking government debt as
Mekes suggested that firms could to the CIO.” collateral in the first place.
benefit from the extra cash that would Rogier Buurman from Robeco, “It’s something that lenders have
be available through securities lending Sander Bauuw of Fortis, eSecLending’s to be very, very aware of because it
programmes, which would allow them Simon Lee and Sonja Spinner from does make a fundamental difference


Find out
Find outmore:

©2009 SunGard
©2009 SunGard
Trademark Information:
Trademark Information: SunGard,
SunGard, the the SunGard
SunGard logo logo and products listed
and the products listed in
in this
this document
document are
trademarks ororregistered
registered trademarks
trademarks of
SunGard Data
SunGard Data Systems
Systems Inc. or
or its
its subsidiaries
subsidiaries in
in the
U.S. and
of their respective
of respectiveholders.

GSL06 18-38.indd 35 27/10/2009 13:34


to the risk and revenue dynamics of

their programme,” he said. “Lenders
shouldn’t necessarily be dismissing cash
collateral out of hand. Cash collateral
managed in a risk-averse fashion Securities lending forum,
can help significantly in terms of
programme performance.”
This move towards cash collateral
was echoed by Buurman. His firm has
traditionally taken non-cash collateral, market lows.
but Buurman revealed that Robeco Credit Suisse clients’ concern has
is beginning to accept cash collateral been to protect capital, he said, though
“more and more” – but in a risk-averse “one key element will be hedge funds
fashion. meeting their ‘high water mark’,” which
Robeco now accepts cash “not in a is linked to the fees they charge. 9%-
way that has caused other companies 10% of funds are still 30% below their
to have losses or any other type of high water mark, he said.
problems, but in a way that cash Confidence has also been growing
collateral is used as a measure to in the sector recently, he said.
mitigate credit risk and not as an Convertible arbitrage has been the
investment opportunity”. Buurman most successful strategy and strategies
added that the Lehman default required with a short interest have performed
Robeco to undertake a number of very well, though investors are also
changes, including to its collateral looking at longer-term strategies, such
policy. as market neutral. He added that the
However, Sander Baauw suggested Discussions around UCITS fund structure – which has
that further changes are underway for brokerage opportunities, been growing in take up for hedge
the industry as a whole, particularly fund managers seeking a wider pool
given the possible introduction of
regulation and the new-
of investors – is very useful to many
central counterparty (CCP) models found fame of the industry funds, as it gives their end clients
into the sector. “I think that CCP is kept panellists busy in fortnightly liquidity. “If you’re a
going to change this world,” he said. London last month. hedge fund looking at UCITS and can
“Maybe next year and otherwise in reach out to investors, it’s a powerful
two years, and then the risk profile of product. You can reach out and there is
many counterparties will look totally
The securities lending summit
regulatory support and approval.”
in London on 21st September was a
different.” Leverage has been low – since
detailed and energetic overview, and
Sonja Spinner compared the Dutch December the average fund has
given the improved market conditions
securities lending industry and that perhaps been two times leveraged, and
seemed well-timed for a market
of the UK. She described the Dutch this has increased to two-and-a-half.
cautiously expecting better times
market as “very well-educated” and Separately others in the industry said
revealed that many people in the a more telling statistic would be the
Summaries, statistics, anecdotes and
Netherlands decided to suspend their median, rather than mean average.
conjecture from the ‘floor’ all played
programmes after the near-collapse This makes sense: if the overall
their part.
of Bear Stearns in 2008. Her Dutch average is 2.5 yet there are a number of
Rob Mirsky, a partner at Laven
colleagues estimated that 40%-60% funds in London or Cayman around
Partners and leader for the first
of Mercer’s pension fund clients in the six or seven mark, it might say
discussion, opened with a telling figure,
the Netherlands suspended their more to look at those higher-leveraged
that hedge fund assets have declined to
programmes after the events of Bear funds.
USD1.3 trillion from around USD2.6
Stearns, while in the UK clients only Charlotte Wall, managing director
trillion at the start of the crash.
began cancelling after the Lehman at Data Explorers, showed with slides
Robert Maloney at Credit Suisse
collapse. how institutional investors are starting
acknowledged the huge redemptions
However, Spinner did add that to buy again, and Ashley Wilson at
in the sector, and pointed to a brighter
people were coming back to the Barclays Capital pointed out there had
future for the rest of this year as DJ
securities lending market. Z been a drop off in lending activity due
Euro Stoxx 50, Nikkei and other indices
to regulatory requirements, including
have risen by about 55%-60% from
36 | Global Securities Lending Magazine | 2009

GSL06 18-38.indd 36 26/10/2009 12:12


From left: Robert Mirsky, Laven Partners; Charlotte Wall, Data

Explorers; Ashley Wilson, Barclays Capital;
Robert Maloney, Credit Suisse

disclosures. make a decent profit. second month as CEO of ISLA, joked

“The question is: has there been a Does a multi-prime broker strategy that after taking the last 18 months off
transformation in prime brokerage? affect pricing, asked Mirsky. Maloney he returned recently to ask colleagues:
Yes. Investors are taking the lead and said that counterparty risk is key “Has anything interesting happened?”
want more information as to how the and not all market players are equal. He reiterated that anyone getting
prime brokers are working.” He added that brokers would not be into securities lending must be able to
The two key areas for this disclosure understand it, including its regulations.
are how to hold assets and how are “Regulators understand There are regulatory risks, he added,
they being hypothecated, and the a lot but perhaps not and it is important to see where they
prime brokers have had to respond. are. Further, the reaction of regulators
Further, prime brokers have put their all of the nuances of made it seem like they thought short
highest rated entities to face the hedge the benefit of securities selling was a “dodgy practice”, though
funds; US investors have pushed prime lending” there were also encouraging signs
brokers to move to a model more akin recently that regulation is now more
to broker dealers for better protection; coordinated.
and there has been a shift to using Kevin McNulty, ISLA David Little of Rule Financial, the
custodians to hold assets. consultant, said that Corporate Social
He finished by saying that the earning their wage if they went to Responsibility, a self-regulating policy,
“duopoly” of prime brokers would be clients: trade with us, we give the best was a “bit of a failure” as it only existed
broken, with five or six major players price. within Europe.
to populate the landscape in the future. In the second talk, which focused “As politics enters the fray the
Maloney agreed, and said there on the regulatory and tax changes thinking gets very much narrower.” He
was a more “level playing field”, with that affect securities lending, Richard added that liquidity can mean different
some prices offered to end clients – Steele of JP Morgan acknowledged that things. For FSA-regulated firms the UK
such as pension funds – beginning to regulators had to act fast in the midst watchdog frequently means payment
change. He said that pricing is a critical of the global crisis, and some countries liquidity as payments fall due. This
issue regarding the success of brokers saw particularly stringent reactions is different from liquidity regarding
up to this point and for the future. from authorities, notably Spain and assets. “The FSA is trying to bring the
“We believe in holding the line – if Italy. two together and manage across the
we’ve missed the biggest problems it’s However, he added: “Regulators bank – not just cash but how to bring it
because often we believe that people understand a lot but perhaps not all of down for less liquid assets.”
should be paying market premium. the nuances of the benefit of securities Changes ahead for banks,
We’d rather lose market share and lending.” Kevin McNulty, into his spearheaded by the FSA, will include

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daily reporting, stress tests, the Euroclear said that a rule of thumb “It’s all about having information at
active management of liquidity, with had been: “Don’t do anything you people’s desks so they can take action.”
supervisors wanting to see good wouldn’t want to see on the front page BGI’s Stefan Kaiser added that it’s
management. However, this could lead of the Financial Times.” Referring important to have one group in a firm
to a great decline in ‘sequential duty’: to the unprecedented profile of to oversee all risks in a holistic way. The
money used other night for other securities lending, Andrew Dyson at company’s model is based on statistical
collateral. Data Explorers pointed out that stock value-at-risk: the model hasn’t changed
Further, liquidity buffers may loans have even made it onto Radio but the data has. “Liquidity was down
lead to a shortage of collateral, and 2, the BBC channel. He added that on and we had to react to that, and we
there might be a demand from banks a weighted basis lending remained a stopped taking corporate bonds based
to get beneficial owner assets for “vibrant industry”, particularly around on the liquidity.”
collateral purposes. Regulators want dividend season, particularly the latest He added that if trading volumes go
also for banks to charge for liquidity round of company pay-outs. down on a particular security then the
usage. However, he reiterated a point Further, he said there had been a lot firm doesn’t accept that security, and
made in the RMA/ISLA conference of talk about lenders moving into non- that equities vs equities in distressed
in Barcelona, that the FSA is leading cash collateral, such as equities, but this situations has been “the way to go. It
the way internationally, which could has not happened. “Equities had been makes sense to go government bonds
leave the UK out in the cold if they do traditionally a ‘no-no’,” he said, “but we but also the equities route.”
not get sufficient support from other feel with the right haircuts it can be a In the following discussion, on the
regulatory bodies. suspension of lending programmes,
In the afternoon, Tim Smith, senior “The question is: Joyce Martindale of Railpen said that
vice president at SunGard Securities has there been a the fund didn’t accept cash as collateral.
Finance, gave a global market update Specifically, she said there was always a
for the industry. Using slides he showed
transformation in danger that the manager of the cash for
that shares per value levels in fact prime brokerage? Yes. reinvestment could be appointed “by
remained fairly stable. Investors are taking the stealth” by the custodian, which didn’t
He added that historically, securities sit well regarding the accountability to
lending has fiercely divided opinion. As
lead and they want more trustees.
a colourful illustration, he said that in information as to how Hans Van Roekel at SPF Beheer BV
his experience, almost all French asset the prime brokers are in the Netherlands said that the fund
managers were called Bruno. “Bruno A only takes G7 or G10 government
would be for securities lending; Bruno
working.” bonds. He added that there had
B would tolerate it; Bruno C would been also time taken to look into the
hate it”. Ashley Wilson, Barclays collateral schedule, including analysis
He added that the availability of on the high concentration of bonds of
shares remained steady in recent years,
Capital certain countries, including bonds of
though in the US there had been 30-year maturities or longer.
activity concerning a way out for many viable option.” John Poole, panel leader, asked if
lenders for cash collateral programmes. Charles Lowe of Prudential Capital the fund had stopped taking equities,
This has pressurised fees, he said. suggested there was a focus on how and Mr Van Roekel said yes. Rogier
Further, a lot of hedge funds are good risk models were in the crisis. Buurman of Robeco said he took
beginning to negotiate deals, becoming “Lehman Brothers’ default was not equities as collateral and that it had
prime brokers in their own right. predicted. The questions we have to been “extremely liquid to sell when
Sectors for the most expensive shorting ask ourselves is: ‘how good are these Lehman Brothers fell.” He added that
interest included automotive, financial, risk models?’ The jury is out and it’s margins for loans were raised to 115%.
health and telecom. He added – visible something we’re working on.” Sarah Nicholson of Aviva Investors
through another slide, that the shorting Dyson said one of the challenges is said her scheme had also increased
of Citigroup had a significant influence how best to communicate the risks to margins across the board to between
on the level of shorting activity in agent lenders. He said one of the most 110-115%. “It became apparent that
shorting generally. effective methods was to demonstrate credit ratings were not the be-all and
In the next panel – ‘Cash Collateral: how many months’ revenue a company end-all and so we’ve taken to using the
What Does The Future Hold?’ – has at risk. A single view of risk CDS market [in our analysis].” Z
panel leader Olivier Grimonpont of management is no longer sufficient.

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Global Securities Lending 2009


26th Annual RMA conference
flow for the lenders.”
The RMA conference in Miami Blount added that the debate
was a timely event on the back of concerning a central counterparty
the two-day Summit on short selling in the US was timely, particularly
and securities lending by the SEC the regarding the need to clarify certain
previous month. Central counterparty, areas. “Most borrowers want to know
cash collateral, capital requirements who their counterparties are. When
and counterparty risk all found there you have a CCP, your counterparty is
place in discussion amid an industry the CCP, so there’s no visibility on the
visibly increasing in confidence and back end of the trade. That’s a source
open to discuss the answers to market of some concern, even though there
challenges. would be capital efficiencies due to the
Ed Blount, executive director at netting of credit risks.”
the Center for the Study of Financial In the panel, the representative
Mark Evolution, told GSL of the upbeat from the OSFI remarked that there’s
mood from the delegates within a a zero capital charge for a broker
This included equal, related
positive time for the market overall. dealer involved in a CCP structure
interest from the SEC as to the rules
“I think there was a fair amount of - an attractive proposition on the
which influence the attractiveness of
optimism among the attendees. The borrowing side but not for the lenders
cash collateral and its links to capital
reports presented from the panels as the guarantees are those of the
suggested that profitability on a broker dealer. Agents operating with an
The structure of tri-party repo
broader base was improving, although indemnity plan would have to decide
was also discussed – another area that
the handful of extremely profitable whether they or the CCP is to provide
the Federal Reserve, separate to the
trades that have driven lending the indemnity.
conference, is currently examining.
profits over the last few years might James Slater, senior vice president
“There’s a lot of intraday exposure
have disappeared and the market is and head of capital markets at CIBC
in the tri-party repo market that the
returning to a more conventional profit Mellon and a conference co-chair,
Federal Reserve wants to contain. That
model.” said: “I was very impressed, not only
could have a bearing on collateral
Mr Blount moderated the panel with the number of people attending
management for securities lending,”
on regulation (‘Financial market sessions, which were record numbers,
explains Blount.
regulation - What does the future hold but the also the number of senior level
The future profit dynamic was
for us?’) which included representatives people taking in the sessions - both of
also important to the participants,
of the SEC, the New York Federal which speak volumes.
highlights Blount. “Participants of
Reserve Bank and the Canadian Office I thought the quality of the panels
course want to know if they’re going to
of the Superintendent of Financial was very high, bringing great insight
make most of their money on specials,
Institutions (OSFI). This talk included and clarity on some very complex
or if they’re going to be able to live off
feedback as to the considerations that issues. Our industry is at a critical point
the GC trade.
the international community had in its maturation; the timing for this
“To a large extent, that’s going to
concerning how changes in capital conference was excellent as it came at a
be a function of the slope of the yield
requirements would affect the securities time when so many of us trying to get
curve. There’s an expectation among
lending industry. clarity on so many different issues.”
cash managers that short term rates
The audience appeared to triple Vic Chilelli, COO of LocateStock.
will remain low for a while longer, but
from the beginning to the end of the com, which provides transparency and
there’s no telling when those rates will
session, reveals Blount, as “attendees access to the hard-to-borrow market,
go up. When that happens, lenders
in the exhibit areas came to listen to agreed that there was a decent turnout
will have to pay higher rebates to
a discussion with really significant and was a good opportunity both
brokers, putting pressure on their cash
implications for borrowers’ capital to bring people together and as an
managers, especially those with longer
charges, as well as how the industry is industry to be able to react to the SEC’s
durations on the asset side of the cash
being viewed by the regulators”. discussion. Z
pool. That could create negative cash

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Panel: eurOPean seCurities lending

Panel: European Securities Lending

Central counterparty and regulation are among the discussion topics for our panellists
analysing the European market.

Jane Milner is a market Oliver Madden is in Maria Carina is director, Keith Haberlin is head
specialist for securities technical sales, securities product management at of securities lending for
finance at SunGard lending at RBC Dexia. Euroclear. Europe, Middle East and
Africa at Brown Brothers

lending central counterparty, and risk concerns. We also appreciate that

1.The launch of a central counter-
tied closely to that is exchange-traded the multi-lateral netting role of a CCP
party by SecFinex was a water-
securities lending, is a sound one. is of less interest as securities lending
shed for European securities
The challenge for everyone is how it is a one-way market - ie, between the
lending. But some claim that the
will work in practice. To some extent lender and the borrower only. So, it will
additional, anonymous counter-
the industry is still at a formative be necessary to adapt CCP business
parties mean that it is difficult to
stage in this regard. models to accommodate the specific
know where a lender’s risk lies,
The high level benefits are clear and needs of lenders and borrowers. For
that it could be with the CCP.
understood from their use in other fi- example, CCP admission criteria and
What is your interpretation of the
nancial markets; what isn’t clear yet is collateral requirements might need to
use of a central counterparty?
exactly how it can work in a securities be reviewed in order to make CCPs ac-
lending environment, which markets cessible to beneficial owners.
MILNER: There are now multiple
or asset classes will lend themselves
trading platforms on which there is an
more easily to the model, and which HABERLIN: The goals and drivers of
option for trades to be agreed with the
providers will have the depth of the central counterparty are not cur-
central counterparty (CCP) rather than
participation to create the liquidity rently clear to the industry. The benefit
needed. of central counterparty structures in
Where the option to use the CCP
We can though expect the debate other markets is chiefly to mitigate
is selected, the risk of the transaction
to progress quite fast. In this current counterparty risk; however, this risk
is between the lender and the central
environment where regulators are is already managed extremely well by
counterparty, rather than with the
looking at securities lending with the securities lending industry through
ultimate borrower of securities. As
great scrutiny the relative transparen- collateralisation, borrower credit limits,
the central counterparty is a different
cy and well-defined risk management contractual provisions and other risk
construct (shared ownership across
procedures that exchange traded management procedures.
multiple institutions), this results in re-
products and central counterparties Further, beneficial owners receive
duced risk to the lender. Counterparty
offer versus OTC products are attrac- additional protection against counter-
risk is never eliminated. The CCP has
tive attributes of the model. party default risk through indemnifi-
exposure to the borrower and in the
cation from their lending agent. The
event of a default the market exposure
CARINA: We believe that the credit securities lending industry just faced
is ultimately shared by the larger group
risk intermediation function of a the ultimate counterparty failure stress
of participants utilising the CCP.
CCP is useful in the lending world, test when Lehman Brothers defaulted
especially in view of borrower bal- last year, and the procedures set by
MADDEN: The concept of a securities
ance sheet constraints and credit the industry to mitigate counterparty

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Panel: eurOPean seCurities lending

default were proven to work. At BBH, not have to take if they don’t want to.
we feel our clients are very confident lending programmes, the adoption of
in our list of borrowers and how we CARINA: We are seeing continued cash collateral will likely increase.
manage the associated risk. They use of non-cash collateral in securities
would need to be assured that a central lending transactions. The advantage of 3.Some European lenders are
counterparty would not undermine using this type of collateral is that there also resolutely staying with lend-
that confidence level while limiting the are no risks related to cash reinvest- ing on a principal basis. From an
flexibility beneficial owners have come ment. operations perspective, includ-
to expect. The management of securities used ing risk management and client
as collateral can be outsourced to a reporting, how different is this
2.Some lenders in the Euronext triparty agent to ease the securities from acting as an agent?
markets have remained resolute selection and substitution process,
to a non-cash collateral pro- among other administrative burdens. MILNER: The principal and agency
gramme, especially as reinvest- Euroclear provides different tri-party lending models achieve the same result,
ment has been a key concern collateral management service levels that is generation of incremental reve-
of the beneficial owners they to meet the varying needs of nues from lending ‘dormant’ securities,
service. Are there still any appro- clients, specifically allowing lenders to but the risk of the transaction lies in a
priate circumstances for taking focus on market opportunities instead completely different place, depending
cash and chances for this collat- of operational, back-office tasks. on whether the trade is carried out on
eral to grow in the near future? an agency or principal risk basis.
“Moving forward, In an ‘agency’ risk trade the lending
MILNER: The key issues around the success will be judged agreement, and associated risk, is be-
acceptance of cash collateral are to do
with potential additional risks, and the
more as a balanced tween the borrower and the end lender,
with the agent standing in the middle
need for relevant expertise, associated blend of risk against to facilitate the transaction.
with the re-investment of the collateral. reward than was In this type of transaction it is com-
In some instances the beneficial own-
ers/asset managers may outsource this
considered previously ” mon for the lending agent to indemni-
fy the lender against borrower default.
responsibility to their agent lender, or Under this arrangement the collateral
alternatively, where the lender has the Jane Milner, SunGard that the borrower is prepared to give
expertise in-house, they may choose to must comply with the collateral guide-
manage the cash re-investment them- lines of the individual lender.
selves in compliance with their risk Where the lending agent is acting as
guidelines. This ‘unbundling’ of cash HABERLIN: It is important to separate principal, there will be a borrow (or
re-investment may, over time, lead to the acceptance of cash as collateral with series of borrows) carried out to fulfil a
an increased acceptability of cash in the how that cash is reinvested. Accepting corresponding loan.
Euronext markets. cash in itself may be seen by many as In each of these transactions the
the best possible form of collateral as lending agent will be the principal
MADDEN: Cash remains a legitimate it provides the greatest flexibility for counterparty, and therefore the risk on
option for lenders to consider as col- lending opportunities. both sides is with the lending agent,
lateral – but it is just that, an option, However, as we’ve seen, that collateral and collateral requirements on the loan
with its own specific risk-return profile can be compromised if it is reinvested will be according to the agent lenders
that must be clearly appreciated and in strategies and instruments that are restrictions.
understood. not committed to principal preserva- Where ‘agency risk’ lending is per-
Cash is not intrinsically a safer or tion and attempt to generate more formed, the Agency Lending Disclosure
riskier choice as collateral as a secu- aggressive yields than may be appropri- rules mean that the borrower now
rity. The risk involved in cash col- ate for a securities lending programme. needs to know who the end/principal
lateral centres on how conservative or Providing prudent investment guide- lender is, in order to measure the risk
otherwise that cash is reinvested – for lines are created and then monitored to relating to the collateral given. Where
what tenures, in what instruments, on achieve the aims of capital preservation principals are not disclosed in this way
a segregated or pooled basis, etc. If a and liquidity, lenders should continue there is a greater capital implication of
lender accepts cash as collateral their to consider cash as a collateral option. carrying out a stock loan transaction.
cash reinvestment parameters must be As the industry continues to evolve and
very well defined but ultimately cash lenders become increasingly sophisti- MADDEN: A principal model ar-
reinvestment risk is a risk lenders do cated in their management of securities rangement is where the owner of the

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Global Securities Lending 2009

Panel: eurOPean seCurities lending

securities has direct relationships with beneficial owners with all portfolio additional layer of oversight and sup-
borrowers. They may trade exclusively sizes to participate in, and earn incre- port to a beneficial owner’s own proce-
with a single borrower or they could mental returns from securities lending. dures. Perhaps the best example of this
have multiple direct relationships. Custodians, as intermediaries, typi- was the expertise and resources agents
Revenue generation, risk management cally best fulfill these criteria and have were able to deploy in unwinding expo-
and operational responsibilities remain a large pool of lendable assets at the sure to Lehman Brothers. Following the
with the owner of the securities. disposal – although they are not the Lehman Brothers default, we have seen
In an agency model, responsibility for only intermediaries. Specialist non- principal lenders recognise the value in
revenue generation, risk management custodial agents also exist that offer a working with a lending agent and many
and operations is effectively “out- similar service. have shifted into agency programs.
sourced” to an intermediary typically in Whilst these types of intermediar-
return for an agreed percentage of the ies could run their securities lending 4.The ‘perception’ of the industry
gross revenues generated. programs using a “principal model” it has been cited as critical to its
The intermediary facilitates securi- is more common for them to operate growth, and partly this comes
ties lending on behalf of the beneficial agency lending programs. They do so down to how it is viewed and
owner but is not the borrower of the primarily for capital and credit reasons regulated by authorities. How do
securities themselves. and because their business models are you assess the industry’s rela-
Counterparty risk therefore remains such that they are not natural borrow- tionship with the European Com-
between the beneficial owner and the mission and national regulators
borrower and the beneficial owner “Few beneficial owners after the worst of the financial
retains full responsibility for deciding have the critical mass crisis?
which borrowers their securities may inventory size that MILNER: Securities lending, and its
be lent to, against specific parameters.
In turn, the agent has accountability borrowers prefer” relationship to short selling, is probably
to the beneficial owner to undertake under more scrutiny now that it has
ever been in its entire history.
securities lending in accordance with Oliver Madden, RBC Part of the issue for regulators is
the beneficial owner’s risk policies and
lending parameters. Dexia how to be ‘experts’ in all aspects of the
There is nothing in theory to prevent financial markets, and how to avoid
the owner of securities (eg, a UCITS ers of securities other than on behalf of unintended consequences from any
fund, pension fund, or insurance their clients. The agency model allows regulations that they introduce.
company) lending directly to borrow- them to bring together their clients’ The danger of this was well illustrated
ers. In practice though, few do, and for assets and lend them on a pooled basis by the negative impact that recent short
legitimate reasons. Securities lending is – optimising and enhancing returns selling bans demonstrated. Subsequent
a multi-trillion dollar market and few through scale and through the fact analysis on the impact of the bans,
beneficial owners have the critical mass that no one borrower has the strongest highlighted the fact that they had done
inventory size that borrowers prefer. demand for every asset class. more harm than good, particularly in
Securities lending also involves sig- further restricting market liquidity at
nificant operational and infrastructure HABERLIN: The biggest difference be- a time when it was needed the most.
costs – a key consideration in particular tween the principal and agency models It may be that events such as this will
in the current environment where dif- is that in a principal arrangement, ben- mean that regulators recognise the
ficult markets and reduced returns have eficial owners forego additional lines of need for a greater understanding of
resulted in asset managers needing to defense against counterparty risk. securities lending and hopefully this
manage their costs very tightly. While principal lenders will ensure will lead to a more collaborative ap-
Lastly, and possibly most significantly, appropriate collateralisation levels, proach between market participants
securities lending is not the institu- collateral is only one line of defense and regulators.
tional investor’s or beneficial owner’s against a counterparty default.
primary or core focus – managing The role of an agent includes ensur- MADDEN: The industry’s relation-
assets is. ing risk is diversified across a broader ship with regulators wouldn’t have
For these reasons, intermediaries play range of counterparties, and an agent necessarily been impacted because of
a vital role. They have the size, resourc- can shift balances among borrowers the financial crisis but the fact that
es and commitment to make securities should specific concerns arise with a securities lending is being discussed
lending worthwhile and they enable particular borrower. This provides an by regulators globally perhaps more so

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Global Securities Lending 2009

Panel: eurOPean seCurities lending

and how they can best be managed. crisis with their reputations enhanced
than at any recent time has to be seen will be those with strong balance sheets,
The securities lending industry has
as a good thing. who retained open, proactive dialogues
been presented with the opportunity to
Regulators, by definition, have to take with their clients and who are able to
develop a much closer, more transpar-
into account and consider the interests demonstrate track records of robust
ent relationship with international
of many different financial market par- and prudent risk management and
regulators. Through ISLA, RMA and
ticipants so opportunities to have direct controls.
PASLA we need to maintain an effective
dialogues with regulators, such as the
and honest dialogue with global regula-
recent SEC roundtable, are priceless. CARINA: In Europe, success will be
tors, including the European Commis-
It allows the industry to improve its evaluated on the extent to which non-
profile still further and present itself cash collateral has been optimised, and
in a clear, objective and transparent when cash collateral has been used,
5.How will the success of securi-
manner. Ultimately the better informed how the risks relating to cash reinvest-
ties lending by European players
regulators are about the industry the ment have been managed. Hence, we
be assessed in a global perspec-
more appropriate their regulations will believe risk aversion and asset optimi-
tive: will it be based on returns,
be. sation will be the key factors determin-
the scarcity of losses, or some
other means of comparison? ing success.
CARINA: During the crisis, when regu-
lators examined the securities lending HABERLIN: Generally speaking, prior
MILNER: The way in which the suc-
business, they focused on short selling, to the credit crisis, securities lending
cess of European players is measured
having issued short-selling bans in providers were judged using mea-
will vary depending on the reviewer’s
many markets. surements such as utilisation, overall
standpoint. Moving forward, success
Market participants were then returns, and fee splits. The detail of
will be judged as more of a balanced
challenged to ascertain and obey the how risk was managed or how returns
blend of reward against risk than was
rules defined by the various national were being generated was overlooked
considered previously.
regulators, as nearly all of the countries in some cases. Now, the industry has
Comparisons are always difficult to
issued different regulations. ISLA, the turned 180 degrees, and while returns
do, as it is not necessarily clear whether
securities lending market association, are still the primary reason lenders en-
apples are being compared against
took on the central role of distributing gage in securities lending, risk manage-
apples or pears.
information on the different regula- ment has become the top concern for
Due to the complexities involved I
tions, and lobbied different regulators beneficial owners.
do not see there being a simple form
to distinguish between ‘naked’ short The process by which agents are
of measurement in the near future,
sales and those covered by borrow- selected has changed with recent RFPs
however, another outcome from recent
ing securities, for example. Regulators containing more detailed questions
events, the recognition of the need for
are still focusing on securities lending about exactly how each provider man-
greater transparency, can do much
practices a year after the crisis. aged the Lehman Brothers default and
to assist in facilitating performance
measurement. how each provider’s cash collateral
HABERLIN: The regulators now have reinvestment vehicles performed.
a much better understanding of the Beneficial owners are looking more
MADDEN: Unquestionably risk is the
securities lending business, the risks closely into any pending litigation
pre-eminent measure by which securi-
inherent in securities lending, and against their providers. Every provider
ties lending providers are benchmarked
the role securities lending plays in the is now talking about intrinsic value
today. Securities lending is a demand-
broader financial markets. lending and focusing on risk-adjusted
driven product so by definition there is
In many ways, the initial short selling returns.
an element of return generation that is
restrictions and their unintended con- As a result, lenders need to look at
outside the control of lenders.
sequences have helped to shine a light past evidence and how each provider
That is not the case with risk manage-
on the benefits of responsible short performed during the credit crisis in
ment. Lenders have full control over
selling and securities lending. order to fully understand their provid-
how securities lending programmes
At BBH, we have made a concerted er’s philosophy and risk management
are managed, controlled and how risk
effort to engage with regulators to practices. Success will be judged on the
is appropriately mitigated in order to
ensure they receive a balanced perspec- ability to provide programmes which
both ensure no impact to a manager’s
tive on the business and to ensure any are transparent, put the clients’ interest
investment management process or,
future regulations are based upon a first, and which get the balance right
worse still, realise any actual losses.
full understanding of the risks involved between risk and return. Z
The lenders that will come through the

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Global Securities Lending 2009

exChange traded funds

New moves into ETFs

Craig McGlashan explains the popularity of exchange traded funds and their potential
in securities lending in the search for flexible collateral.

There is no doubting the in- Clearly, the securities lending indus-

creasing popularity of exchange- try is beginning to take notice of ETFs
traded funds (ETFs). and their possibilities.
According to a report released in In August this year, 4sight Financial
October by Barclays Global Investors Software announced that it was extend-
(BGI), global ETF assets reached a ing its 4sight Securities Finance (4SF)
record high of USD 891 billion at the software solution to include support
end of August 2009 – 3.9% above the for the borrowing and lending of ETFs.
previous high set in July 2009, and Jason Hayes, the firm’s North Ameri-
10.6% above the figure for April 2008, can sales director, said at the time that
which was a record at the time. the move had been taken to reflect the
Companies like Deutsche Bank, fact that ETFs are becoming “a more
meanwhile, now provide more than prominent feature of the securities
100 ETFs which can track a large lending landscape”.
variety of asset classes, from equities In addition, a number of conferences
to commodities, currencies to hedge possibility of using ETFs as collateral, this year, including the International
funds. The bank announced in April in addition to more traditional forms Securities Lending Association’s work-
that db x-trackers, its ETF platform, such as cash, equities and government shop at the end of September, have
passed EUR 20 billion in assets under discussed the issues involved with using
management. From the borrower ETFs as collateral. These developments
This growth in popularity has meant perspective, any possible came after other events in 2008 that
that more and more traders have ETFs indicated a positive future for ETFs in
on their books, which has led to grow-
new form of collateral securities lending, including ICAP, the
ing numbers of securities borrowers is likely to be seen interdealer broker, announcing that
offering the instruments as collateral. as welcome, as it will it was expanding its i-Sec electronic
This is part of a wider trend, of securities lending platform to include
course – many borrowers in the in-
provide extra flexibility provisions for ETFs and exchange-
dustry report that they are seeking to traded commodities.
diversify the collateral they receive and So what are the advantages of using
move away from cash collateral, given debt. Kaiser works closely with iShares, ETFs as collateral? From the borrower
its perceived poor performance during Barclays’ ETF provider, and says that perspective, any possible new form of
the credit crunch. the use of ETFs as collateral has cre- collateral is likely to be seen as wel-
For instance, at the latest meeting of ated even more opportunities to work come, as it will provide extra flexibility.
the Bank of England’s Securities Lend- closely together. Even those borrowers who are less
ing and Repo Committee in September, However, this increase in use is not active in the ETF field are often likely to
Joyce Martindale from the National just down to BGI trying to encour- be trading ETFs or will have exposure
Association of Pension Funds com- age the use of ETFs in the industry to them at some point.
mented that larger securities lenders as a whole, Kaiser explains. “It’s also For lenders, however, the advantages
were looking at segregated collateral because the brokers that are borrow- are more precise. In standard equities-
pools and revising the collateral they ing from us are increasingly active in as-collateral practice, lenders provide
would accept. iShares so they have a lot of ETFs that a security that is part of one index and
Stefan Kaiser, a business strategist at they want to finance, meaning they take in a security that is part of another.
BGI’s securities lending team, has also want to pledge them as collateral. A lot “Liquidity, volatility and correlation”
seen this trend develop. He explains of the time they approach us and say between these two indices is vital to
that over the past two years his col- they would like to pledge these securi- this process, Kaiser explains, but the
leagues have increasingly looked at the ties as collateral.” correlation between the two securities

44 | Global Securities Lending Magazine | 2009

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Global Securities Lending 2009

exChange traded funds

may not be as strong as the correlation underlying fund to the ETF. obstacles to the increased use of ETFs,
between the indices. Currently, BGI only takes in-specie according to Kaiser. In normal circum-
“But if you take ETFs as collateral the ETFs as collateral, Kaiser says. This stances, borrowers are able to say they
advantage that you have is that, at least again comes down to the issue of will take securities from an index, for
on the collateral side, you get that index transparency. Various studies suggest example the FTSE 100. But in the case
exposure that the ETF represents, so that swap-based ETFs more accurately of ETFs, this is not possible – instead,
from a modelling and risk perspective track indices, but Kaiser believes that each ETF offered as collateral must
they are actually superior,” he says. their structure impacts their ability to be observed on a “case by case basis”,
Additionally, ETFs offer an inherent be used as collateral. which is obviously far more time
diversification, providing reassurance “With physically-replicating ETFs consuming than accepting standard
for those investors who were stung by we know exactly what its structure is. equities.
the credit crunch. “Just because you Other kinds of ETFs are much harder There are also difficulties in under-
have a perfect slice of that index al- to know what is really there once you standing the trading volumes of ETFs,
ready, you’re better off than having just want to liquidate it,” he says. Kaiser adds, which can impact on their
one security as collateral,” Kaiser adds. Additionally, swap-based ETFs intro- liquidity. “The trading volume that you
The liquidity argument also has a see on exchange is not always a good
geographical element. Lenders hold- “Just because you have measure for the true liquidity of trad-
ing collateral made up of – for instance
– Chinese shares would be unable to
a perfect slice of that ing that ETF,” he says.
“For example, if you have a FTSE
liquidate them during late London index already, you’re 100 ETF, and there’s only a few million
trading, as the Chinese market would better off than having pounds of trading during a particular
be closed for the night.
However, collateral could be made up
just one security as day, that doesn’t mean that’s all trading
that you could do. Looking at how
of ETFs tracking a Chinese index but collateral” much was traded of an ETF is not a
listed on a UK-based index – allow- good estimate of what you could trade.”
ing the shares to be liquidated during
working hours.
Stefan Kaiser, BGI The use of ETFs as collateral seems
set to grow in popularity as the instru-
But the world of ETF collateral is not ments themselves become increas-
as simple as whether or not lenders ingly accepted by the financial world –
accept them and borrowers can offer duce counterparty risk, as holders have something that the Barclays report and
them. exposure to the bank which writes the similar studies over the past year have
GSL’s Amsterdam Summit on 8th Oc- swap, although UCITS rules limit this indicated is already happening.
tober saw a large period of discussion exposure to 10% of the fund’s net asset There are obstacles in the way,
on the various types of cash collateral value. whether they are a reluctance among
reinvestment and the pros and cons of Despite these advantages, ETFs investors to alter strategies, regulatory
each, and the ETF sphere is similarly currently take up a very small percent- constraints or a prevailing “wait and
complex. age of total collateral in the securities see” approach.
Broadly speaking, there are two lending market. While this may change However, the fact that borrowers
main types of ETFs: the in-specie (or as the popularity of ETFs in general are always looking for extra flexibility
in-kind) model and the swap-based increases, other changes may be needed could be the clinching factor, at least
model. The in-specie structure sees to boost the market – including regula- when it comes to the first point – a
investors hold a basket of securities tory ones. reluctance to change – especially given
from the index that they seek to track, “There are some regulatory hurdles to the current move to new strategies and
resulting in returns similar to the index the growth of ETFs as collateral,” says away from practices that stung lenders
in general. Kaiser. “ETFs cannot be pledged as col- during the credit crunch.
The swap-based model on the other lateral in jurisdictions, for instance in “A lot of the changes in the securities
hand also requires a basket of securi- Ireland.” This is because of the way the lending industry are borrower-driven,”
ties, but these do not necessarily have
SOURCE: Data Explorers

UCITS rules are interpreted in different says Kaiser. “If borrowers need to fi-
anything to do with the index being countries – in the UK, regulators view nance certain securities then they’ll ask
tracked. ETFs as equities, allowing them to be the lender to take those as collateral. If
Instead, the fund enters an index used as collateral, while other countries the lender sees an opportunity for their
swap agreement with a counterparty consider ETFs to be funds. clients to get additional lending bal-
which ensures the performance of the However, there are more practical ances, they will do that.” Z

2009 | Global Securities Lending Magazine | 45

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46 | Global Securities Lending Magazine | 2009

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Global Securities Lending 2009



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2009 | Global Securities Lending Magazine | 47

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lender PrOfile

Lender Profile - Aviva Investors

Sarah Nicholson, head of the protection of our client so we need
securities finance, talks to to be confident it will stand up to the
GSL. rigours of a counterparty default.

1. What is your fund’s activity 4. How would you assess the

in securities lending? overall contribution of securi-
ties lending to the fund?
Aviva Investors lend on behalf of a
number of underlying insurance and Securities lending is an overlay invest-
pension funds. The UK based activity ment strategy, allowing the fund to
is predominantly non-cash collateral, realise intrinsic value held within assets
capturing the intrinsic value of long they have invested in. It does not drive
holdings, or versus cash collateral, the investment decision or process,
which is re-lent on a collateralised ba- but still provides a low risk perfor-
sis, not re-invested directly in the mar- mance enhancement that shouldn’t be
ket, to capture the liquidity premium. “There are always ignored.
lessons to be learned
2. A recent survey by RBC 5. How do you perceive the
Dexia suggests that beneficial from experiencing events challenges in the communica-
owners are focusing more on such as those over the tion of securities lending’s
risk rather than suspending last 12 months” risks and opportunities?
programmes. Is this the case
with Aviva, and if so, how are There are a number of different aspects
Now clients want to understand risk
these changes affecting the of communication that need to be
models, see outputs and have an op-
securities lending programme addressed.
portunity to question what they mean
of the fund? To me communicating with the
more readily. This level of transpar-
ency and information is exactly what underlying fund owners is the most
Our underlying clients have always important. The liquidity they provide
is needed across the industry: clients
been very engaged in the business and by participation in this activity is fun-
who are engaged in a business activity
fully ware of the potential risks. damental to the markets and yet many
they fully understand and that is within
We have always had a robust risk are not given full transparency to the
their risk appetite and that they are
mitigating framework, but clearly. information they need to make truly
comfortable with.
over the last twelve months we have informed and robust decisions.
reviewed this with our clients, as I am It is a challenge for large agent lenders
3. What is your collateral
sure everyone has. to engage with all their clients fully,
profile, and do you see this
We have looked at how the frame- and a challenge to many of the funds to
work has stood up to the challenge and give the activity sufficient time to really
whether we can strengthen it further. understand the detail.
The UK business is predominantly
There are always lessons to be learned The industry also needs to engage
non-cash, although we do take cash if
from experiencing events such as those with the national press, so that when
there is an opportunity to re-lend on
over the last 12 months or so. short selling or stock lending are
a collateralised basis. The analysis we
The key change for us has been more featured the views are at least informed
undertook post the Lehman default
in the reporting of the business from a and balanced, although this won’t make
enabled us to model how assets classes
risk perspective, more so than funda- for such a good story though so it’s
behaved and their correlations in a real
mental changes to the risk management always going to be an up-hill battle.
default situation, which led to some
of the activity. Historically reporting This role of educating in calmer
tweaks in the profile but nothing very
has been focused on counterparties, times is very much a role that ISLA
significant. In respect to changing in
balances, revenues etc, and the risk can help with, both with the national
the future, we are always open to new
analysis has been more an internal pro- press, regulators and the industry more
opportunities driven by collateral sup-
cess to manage the programme within broadly. Z
ply, but ultimately collateral is there for
the client’s risk appetite.

48 | Global Securities Lending Magazine | 2009

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Bottom line:
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