gsl |

MARKETS
Brazil, Russia
Global
Securities INDUSTRY INSIGHT
Euroclear, Northern Trust
Lending
PROFILE
Tony Venditti, Ashley Wilson

still under
GSL ISSUE 08 Q2 2010

siege?
New regulatory
minefields

Plus: Asia - opening up? Annual Membership

www.gsl.tv GBP 249
ERC Meeting round-up USD 379
EUR 286

GSL08 FINAL.indd 1 12/05/2010 16:33

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 Quick Quarterly View
Repo 105
Chris Poikonen
on Brazil
Tony Venditti
Lend an ear
In my last letter I discussed
regulators’ research into short
selling and securities lending
and I was optimistic that much
of the resulting output was
positive news for the industry.
I also dubbed 2010 “The Year of
Collateral”, but now it seems that
“The Year of Regulation” deserves
equal billing. GSL has so far
hosted four summits in 2010, and
regulation has been an increasingly
hot topic among panellists and
audience members alike.
We have seen a wave of new short
selling restrictions in developed
markets, new guidance for beneficial
owners from the UK Pensions
Regulator and even repo entered the
mainstream media’s parlance with the
publication of a damning report on
the Lehman Brothers bankruptcy.
In this issue GSL looks behind
2 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 2
Ashley Wilson
Godfried de Vidts
the Repo 105 headlines and
takes an in-depth look at the
new US short selling restrictions
– as well as discussing how the
industry can fight back.
But if developed market news
has been less than rosy since our
last issue, various reports from Asia
have caused many to be optimistic.
We look at the short selling and
margin trading trials being set up
in China and provide a detailed
overview of some of the liberalising
developments in the Indian market.
Additionally, some of the
panellists at the recent PASLA
conference provide their summary
on what was deemed by many
attendees to be a great event.
Moving to the southern
hemisphere, we provide a profile
of the Australian market and
look into some exciting new
Igor Marich
on Russian repo
Asian promise
developments taking place in Brazil.
Our increasing focus on repo,
collateral management and liquidity
continues as Godfried de Vidts
provides us with a review of the
recent European Repo Council
meeting. This is a follow up to
Godfried’s excellent industry
summary which appeared in the last
issue of Investor Services Journal.
Finally, the magazine features
two executive profiles, with Tony
Venditti of BMO Capital Markets
talking about his career in securities
lending and his outlook for the
future, and Ashley Wilson of
Barclays Capital outlining his plans
for growing the prime services
division at the British bank.
Look
Z
is sa
Roy Zimmerhansl, Editor-in-Chief
For
or vi
12/05/2010 16:33 Clearstr
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or visit clearstream.com

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12/05/2010 16:33
 coNteNts

Contents
News

6 | News repo & collateral

Top industry stories.
44 | post-erc meeting companies/instituions

gsl | with Godfried de Vidts,

Global
featured in gsl
Securities
people
Lending
ERC chairman
barclays capital 22,24
Editor-in-Chief
10 | executive profile
Tony Venditti, 48 | Natural collateral bmo capital markets 10,11
Roy Zimmerhansl
roy.zimmerhansl@2i.tv BMO Capital Markets with Olivier Grimonpont, central university of finance &
director, head of collateral economics (china) 33
Deputy Editor
still under siege
services at Euroclear clearstream 56,57
Craig McGlashan
craig.mcglashan@2i.tv davis polk & wardwell 12,13
12 | coming up short 50 | russian repolution deutsche bank 26,28
Contributors US short selling restrictions The post-crisis Russian eseclending 28,30
Anthony Harrington repo environment
Cherry Reynard eurex repo 57
Leanne Wang 16 | in lehman's terms euroclear 48
Investigation into Repo 105 conferences
european repo council 44-46
Business Development Manager
Richard Marshall guotai Junam 33
18 | fighting back 54 | gsl summits
richard.marshall@2i.tv katten muchin rosenman
The industry's response report on the GSL Nordic
cornish 13,14
Front Cover and London Summits
Morgan Miller laven partners 13,14
future View micex 50,52
56 | global securities
National stock exchange
GSL is part of Media financing summit
2

22 | securing the future (india) 34,35

Ashley Wilson, Ndc (russia) 50,52
Head of Sales Barclays Capital 58 | beneficial owners
New approach pr 20
Patricia De La Grange international securities
lending & repo summit Northern trust 64
Account Managers 26 | brazil shapes up pasla 36-44
Cicely Lewis The Brazilian market
directory rma 18,20
Eradat Munshi
eastern promise sinolink securities 32
Chief Technology Officer
60 | gsl directory sungard 18
Peter Ainsworth
unicredit 57
Operations Manager 32 | testing time in china
lender profile usc marshall school of
Nicolette Whittaker Margin trading, short selling
business 14
Managing Director
trials in China
64 | Northern trust winfast 33
Jon Hewson

CEO 34 | indian outline

Mark Latham Description of the Indian
market
2i UK, 16-17 Little Portland Street,

“It's like stopping a soldier from

London W1W 8BP, UK
T: +44 (0) 20 7299 7700 36 | pasla & rma
F: +44 (0) 20 7636 6044
Panel summaries from the shooting when the general has given
conference
2i USA, 410 Park Avenue,
15th Floor, New York, NY 10022 the command to go to war. The
T: +1 212 231 8421
F: +1 212 231 8121 regulators are reacting to the public
© 2010 2i Media perception, but this did not happen
All rights reserved.
No part of this publication may be because people were shorting stocks"
reproduced, in whole or in part,
without prior written permission from
the publishers. Who said this?
ISSN 1759-0728 Printed in the UK Find out, page 13

4 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 4 12/05/2010 16:33

GSL08 FINAL.indd 5 12/05/2010 16:33
 News
News Round-up
People Moves
SunGard appointed Chris
Clark as European senior
vice president for its
Astec Analytics business
unit, which specialises in
trading, perfomrmance and
programme management
for the global securities
financing industry.
eSecLending, the securities
lending agent, appointed
Ross Bowman as senior
vice president of client
relationship management,
servicing the firm’s UK
and European based
clients.
Bowman moved from
BNY Mellon, where he
was responsible for the
management of existing
6 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 6
client relationships and
business development
for the securities lending
business across the
European, Middle Eastern
and African regions.
Pat Cestaro left J.P.
Morgan, following a
30-year career in the
securities lending business.
Cestaro was responsible
for building up the prime
brokerage business at Bear
Stearns before the firm was
bought up by J.P. Morgan
in 2008.
Hector Sants, CEO of UK
regulator the Financial
Services Authority (FSA),
is to leave his post in the
summer after three years in
charge of the organisation.
The European Central
Bank (ECB) made a new
appointment as it seeks to
deal with system risk in
the financial sector, with
Mauro Grande taking up
the role of director general
of the Directorate General
Financial Stability.
Sun Microsystems
veteran Masood Jabbar
has become the fifth
independent director
appointed to the board
of Calypso Technology, a
provider of trading, risk
and processing platforms.
Jabbar spent 16 years
at Sun Microsystems,
reaching the level of
executive vice president
of global sales operations
before leaving the firm in
2002.
Top industry stories at deadline.
For daily updates go to www.gsl.tv
The Risk Management
Association (RMA)
appointed Christopher
R Kunkle to the role of
director for securities
lending and market risk,
replacing the retiring
Curtis Knight.
Merlin Securities co-
founder Andy Lando has
returned to the firm in a
senior partner role which
will see him head up
the firm’s new securities
lending group. Lando, a
former managing director
and global head of
securities lending at Banc
of America Securities, was
one of the five founding
members of prime
brokerage services and
technology provider Merlin
in 2004.
LCH.Clearnet Group
appointed a new non-
executive chairman,
Jacques Aigrain. Aigrain
replaces Chris Tupker, who
announced his intention
to step down in September
2009.
Brown Brothers Harriman
(BBH) upped its presence
in Asia following the
appointment of Robert
Lees and Richard Meek
respectively as head of
securities lending trading
and head of securities
lending relationship
management for the Asia
Pacific region. Both men
will move to BBH’s Hong
Kong office, with Lees
reporting to Jeff O’Neill,
global head of securities
lending trading, and Meek
to Elizabeth Seidel, global
head of securities lending
relationship management,
business development
strategy and marketing.
Business and IT
consultancy Rule Financial
appointed Dr Chris Potts
as CEO, a move which the
firm said was part of its
plan for global expansion.
Potts moves from 3i
Infotech, where he was
president and CEO of the
firm’s Western Europe
division. He has also held
high-level roles at Cap
Gemini, Cap Consulting
and Misys Asset
Management.
Amaces appointed former
State Street and Aegon
Asset Management client
manager Tom Robertson
as a director. Robertson’s
most recent role was
at Legal and General
Investment Management,
where he was a client
account manager.
Joe Cassidy will take up
the role of head of prime
brokerage and derivatives
clearing for global rates at
Deutsche Bank in May.
He will report to Fredrik
Gentzel, head of credit
portfolio management and
prime brokerage for global
rates and commodities.
Cassidy moves from
Nomura where he has
held a number of roles,
including global co-head
of prime services, global
COO of prime services,
head of equity strategy
and head of European
corporate strategy
12/05/2010 16:33
GSL08 FINAL.indd 7 12/05/2010 16:33
 News
Richard Newman will join
Deutsche Bank as a senior
risk manager for global
prime finance within the
global markets division,
the bank announced
today. Formerly head of
European prime brokerage
risk management at J.P.
Morgan, Newman – who
takes up his new role
on 4th May – will be
responsible for providing
risk management solutions
to hedge fund clients with
a European focus.
Securities Lending
The Chinese regulator
approved a short selling
and margin trading trial.
British MP Frank Field
criticised custodians over
their securities lending
programmes, after a
pension fund told him
it had been entered into
a programme without
permission.
At the same time, the UK
Pensions Regulator issued
guidance for beneficial
owners.
ISLA approved
amendments to the Global
Master Securities Lending
Agreement 2009.
A Bank of England deputy
governor called securities
lending "absolutely vital"
but called for reforms.
German regulator BaFin
lifted its uncovered short
selling ban.
Northern Trust was sued
by the Public School
Teachers’ Pension &
Retirement Fund of
Chicago and the City
of Atlanta Firefighters’
8 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 8
Pension Plan, over claims
that the bank broke its cash
collateral reinvestment
pledges.
The National Stock
Exchange of India (NSE)
held a special live trading
session on 6th February
2010 for its securities
lending and borrowing
scheme.
The US Securities and
Exchange Commission
introduced new short
selling restrictions.
Former Morgan Stanley
and Banc of America
stock loan trader Salvatore
Zangari was charged by
the US Securities and
Exchange Commission
(SEC) over alleged
kickbacks from Clinton
Management, a Brooklyn-
based loan finder.
State Street succeeded in
dismissing a complaint
from a law firm over
an alleged breach of
“prudence and loyalty”
within its securities lending
programme.
The City of St Petersburg
sued Wachovia Global
Securities Lending,
claiming that the bank
broke the terms of its
securities lending contract
by investing cash collateral
in Lehman Brothers bonds
and failed to act when
the now-defunct bank
appeared to be in trouble.
Citigroup was fined
USD650,000 by the
US Financial Industry
Regulatory Authority
(FINRA) for violations in
its Direct Borrow Program
(DBP).
Repo
The Investment Industry
Association of Canada
(IIAC) selected the
Canadian Derivatives
Clearing Corporation
(CDCC) to develop a
central counterparty for
the Canadian repo market,
in a move welcomed by
the country’s central bank.
Bank of Canada governor
Mark Carney described
the move as “a critical first
step” and cited the effect
of an efficient repo market
in helping the country’s
core markets function
continuously.
A loophole in the UK
Corporation Tax Act 2009
which could allow firms
to avoid paying tax on
manufactured payments
in repo transactions
was closed by the UK
government.
The long-awaited
report into the collapse
of Lehman Brothers
has criticised senior
executives at the firm and
highlighted the large role
of an accounting practice
known at the bank as
“Repo 105”. The report,
written by lawyer Anton
Valukas, outlined how the
bank used Repo 105 to
give its balance sheet a far
healthier appearance than
it warranted, in the run up
to its bankruptcy in 2008.
There was a “strong
recovery” in the European
repo market, the latest
survey from the European
Repo Council (ERC) of
the International Capital
Market Association
found, although the study
included pessimistic news
for the UK economy.
Technology
Investment bank BOCI,
a subsidiary of Bank of
China, implemented
SunGard’s Global One
securities finance solution
to help boost its recently
launched securities lending
business. BOCI will use
the Global One Lender
module to support its
lending business, which
lends Hong Kong and
Chinese stocks listed on
the Hong Kong Stock
Exchange.
Syncova and RiskMetrics
Group announced plans to
launch a risk-based margin
management solution via
the OPTIMA platform for
hedge funds and prime
brokers. The integrated
solution will include
features such as VaR
and client-specific stress
scenario based margining,
what-if scenarios and
combined risk and margin
rule-based portfolio alerts.
LocateStock’s real-time
stock locate platform
Matador was launched on
ConvergEx Group’s order
management system, the
Eze OMSTM.
BNY Mellon enhanced
its Workbench reporting
platform with a new
securities lending
dashboard, aimed at asset
owners and managers.
Clients will now be able
to access data including
earnings, loan values and
credit quality from both
an executive summary and
detailed view point. Z
12/05/2010 16:33
 LCH.Clearnet: the essential link in the chain
In the event of member default, LCH.Clearnet guarantees the management of positions thereby protecting the
financial community against the risk of contagion.
LCH.Clearnet is the leading independent central counterparty group (CCP) in Europe, serving major international
exchanges and platforms. It clears a broad range of asset classes including: securities, exchange traded deriva-
tives, energy, freight, interbank interest rate swaps and euro and sterling denominated bonds and repos.

www.lchclearnet.com

GSL08 FINAL.indd 9 12/05/2010 16:33

 executiVe profile
Tony Venditti,
BMO Capital Markets
Craig McGlashan talks to the
managing director of BMO Capital
Market's securities lending team,
about his past and future
The beginning to Tony Venditti’s
securities lending career may
have been a case of “right place,
right time”, but his rise through
the industry was anything but. A
securities lending operations position
opened up when he was applying for
a job at Mabon Nugent Securities
and, despite having never heard of
the business before, he thoroughly
enjoyed his new position.
He explains: “Six months later I
approached one of the partners at
the firm about a front office move.
He said, ‘I’d much rather you’d be
a bond sales assistant, you’ll have a
great career – this stock loan thing
will be automated in two years and
everyone will be out of a job.’ That
was 1985.”
Rolling on 25 years, manual
securities lending is still here – and
so is Venditti, by way of two stints at
"Our securities lending
business was really able
to self finance itself and
it proved that securities
lending can help
proprietary trading and
index arbitrage"
Paloma Securities, with a number of
years at Nomura in between. Now he
is at BMO Capital Markets, after the
bank took over Paloma Securities in
November 2009.
So what has changed during his
10 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 10
time in the industry?
“When I started, it
was interesting how
many people said
securities lending was
hard to understand – I
thought it was one
of those things that
if you understood
stocks, pricing and
interest rates, it all
made sense, so I
was fascinated how
the smartest people
would always say, ‘I
don’t understand that
part of the business’.
Back in the 1980s it
probably was true, transparency – what people are
but now when you look at pricing doing, how they are doing it, how
and liquidity, it shows probably they book it. However, I’ve never
the biggest change of the past 25 been one to say that the business
years - how integral it is to so many is that opaque, it’s like any other
platforms and companies.” market, it’s about how active you
Venditti is keen to talk about this are.”
history of the industry in terms of
phases, marked by major events.
Venditti counts his achievements
during his second stint at Paloma as
“I think the Asian crisis, where among his best. “When I went back
liquidity really dried up, was the to Paloma it had just lost a lot of its
first elevation of the business, with
securities lending and repo being
front office employees. My challenge
was to take a strong securities
used to protect liquidity. It was no lending platform, with a fair amount
longer just an operational business of counterparties, and expand the
but a funding business. I also think business.
that, with the growth of hedge funds “We used the existing counterparty
in the 1990s, stable access to supply base, the existing operations and
and pricing became much more brought in strong front office people
important. – not only focused on securities
“Now we’re into the transparency lending, but also finance, delta one
phase. I think the credit crisis of trading and later government bond
last year will bring much more repo. We turned it from just a global
12/05/2010 16:33
 executiVe profile

securities lending shop to trading So now

finance repo. Our business really
grew in the three years I was there,
we had a great run and that led us to
BMO.”
He says his time at Nomura
“helped pave a lot of my success”.
Specifically, during the Asian
financial crisis when the bank
was downgraded, “our securities
lending business was really able
to self finance itself and it really
proved that securities lending can
help proprietary trading and index
arbitrage”.
But the move to Paloma allowed
Venditti freedom to take what he had
learned and use it in an environment
where he was able to exert greater
change.
“I touched a lot of businesses at
Nomura. Nomura was very equity-
finance driven and we used all our
collateral quite effectively, and at a
smaller player like Paloma that model
fitted perfectly,” he says. “Also, at
Nomura, I was only on the equity
side so I couldn’t intertwine with
fixed-income products or repo, but
when you’re at a smaller shop you
have more control so it’s easier to
bring on businesses – not really by
product but how you can integrate
them with your client base and
infrastructure.”
that Paloma
Factfile: BMO Capital Markets
is operating
under the BMO
name and Employees: 2,200
stable, what are Clients: Nearly 8 million
Venditti’s plans
Total Assets: USD373 billion
for the business?
“Paloma was 2009 Revenue: USD9.6 billion
never a rated Tier 1 Capital Ratio: 12.24%
counterparty
even though we
had the benefit of BMO’s existing sales and trading
of long-term relationships and businesses,” he says.
transparency in our financials, and So aside from Venditti’s plans for
a credit department that discussed BMO, what of the industry as a
our structure and capital effectively - whole? “I think the industry has a lot
because of this we were lucky enough more room to grow and the market
to have many counterparties treat us making side of securities lending -
as an investment-grade counterparty. where it’s much more active - will
“That being said we always were become more electronic,” he says. “I
looking to do more business - in turn think one of the stumbling blocks as
eventually we needed more credit always is about where the credit will
which led us to BMO. BMO has a go – CCP will have a role, I’m not
very sound name. The institution has sure how it will play out, but I think
been around for a long time and has you will see change there.”
a solid reputation. We look forward to Venditti bet against
using BMO as our credit instead of automation at the beginning of his
Paloma as a hedge fund in hopes of career and it proved fruitful – if he
continuing to expand our business.” is right this time, it certainly proves
However, Venditti feels that the how much the industry has moved on
acquisition will also boost BMO’s since 1985. Z
other offerings. “The one thing that
we’re really hoping is that our global
platforms could help propel some

Luke Seabrook, executive managing director &

head of financial products at BMO Capital Markets,
outlines the reasons behind the Paloma purchase
and BMO's current plans for the business
We felt, given the relative strength of the
Canadian banks through the crisis period, that we had
an opportunity to look for growth and the ability to
expand. It gave us an opportunity to consider areas
where credit rating, stability and so on were important
for businesses and their success.
The securities lending business is one where we
saw an opportunity to look for growth and the ability
to expand. So that’s what led us to spend time with
Paloma and investigate the opportunities around the
acquisition.
At this point we are focusing on operating in all
the jurisdictions that
Paloma was operating in before we expand into any new
jurisdictions. We are three months into the acquisition
now and from our perspective things are going very
well, it’s been a very smooth integration process, and
we are very impressed and very happy with how the
business had been run and continues to be run.
That said we constantly keep an eye on where
market growth is occurring and are always interested in
extending core businesses and as opportunities present
themselves we make sure that we are in a position to
take advantage of them. Z

2010 | Global Securities Lending Magazine | 11

GSL08 FINAL.indd 11 12/05/2010 16:33

 still under siege?
2010 has seen more regulations, lawsuits and
negative press for the securities lending industry

on the next few

pages we explore
some of the major
developments and
how the industry
can fight back

Coming up short
New US rules on short selling have been poorly thought out - and could
spread across the Atlantic, finds Cherry Reynard
The Securities and Exchange
Commission (SEC) has been under
pressure to introduce new rules
on short-selling for some time.
Approximately 4,400 companies
have petitioned the SEC to clamp
down, with industry heavyweights
such as John Mack, chairman of
Morgan Stanley, blaming short-
sellers for perilously driving down
company share prices in 2008. The
new rules have finally emerged. What
impact are they likely to have?
The SEC’s new rules aim to
‘promote market stability and
preserve investor confidence’ by
placing restrictions on selling stock
short if a company is experiencing
significant downward price pressure
on their share price. The ‘alternative
uptick rule’ will restrict short-sellers
from driving down the price of a
stock that has dropped more than
10% in one day. Once this ‘circuit
breaker’ is triggered, holders of the
stock will be first in line and can sell
their shares before any short sellers.
Once the circuit breaker has
been triggered, the rule applies to
short sale orders for the remainder
of the day’s trading, plus that of
the following day. It applies to
all equities listed on a national
securities exchange, whether they
are traded on an exchange or over-
the-counter. Importantly, it offers
no exemption for market-makers.
Also, companies will be required to
have written procedures in place to
prevent the execution or display of
prohibited short-selling transactions.
Robert Colby, deputy director of
trading and markets division at law
firm Davis Polk and Wardwell says:
“It is not a complete prohibition.
It means that a short-seller can’t
execute at the bid price. This means
they can’t chip away at the price
people are willing to buy. If, for
example, a stock is trading at 105-110
and a trader was trying to short-sell
and it triggered the circuit breaker,
they could no longer sell at 105.
They could only say that they were
willing to sell at 106 up to 110 and
wait for people to come to them.”
The SEC is clear in its intent. SEC
Chairman Mary L Schapiro says
that the ruling recognises that short-
selling can have both a beneficial

12 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 12 12/05/2010 16:33


and a harmful impact on the market.
She continues: “It is important for
the Commission and the markets
to have in place a measure that
creates certainty about how trading
restrictions will operate during
periods of stress and volatility.”
There has been considerable
debate as to whether the new rule
will achieve its goal of greater
stability. The Securities Traders’
Association issued a lengthy response
to the SEC’s regulations, suggesting
that they were based on “inadequate
analysis, a lack of empirical data, and
questionable rationale by the SEC”.
It also accuses the SEC of not
being consistent. It says in its letter
to the SEC: “This inadequacy
was noted by SEC Commissioner
Paredes in his opening statement...
there is an insubstantial empirical
basis to support the commission in
adopting the rule, especially in light
of the rigorous economic analysis
that led the SEC to repeal the
‘original’ uptick rule in 2007 after
years of study. The commission bears
the burden to justify its rules. It has
not done so in this instance.” The
regulations were voted through the
SEC on a paper-thin 3-2 majority.
The STA suggests that the new
regulation will not resolve the issue
of manipulative short-selling that it
was designed to address. As such,
it cannot bring about the ‘investor
trust’ as intended. It will also
have significant implementation
costs. Many broker dealers, for
example, will need to upgrade
their computer systems to ensure
that they can distinguish between
short-sellers and those investors
who hold stock and wish to sell.
In particular, the STA requested
that the regulator make an exemption
for options market makers, saying:
“The nature of the derivatives market
is such that market makers must
be able to hedge their positions
easily and cheaply to reduce trading
costs. Failure to do so would
cause a decoupling of prices in the
options markets from the prices
GSL08 FINAL.indd 13
of the underlying instruments.
This would result in reduced
liquidity and wider spreads to the
detriment of individual investors.”
The group believes that the
regulations may be counter-
productive, resulting in less liquidity,
greater volatility, and wider bid-
ask spreads, none of which is
conducive to boosting investor
confidence. Furthermore, a short
sale restriction that makes it more
costly for investors to manage their
risk by hedging can hinder the ability
of companies to raise capital.
With the two sides clearly
delineated, what do industry
participants believe will be the
likely outcome of the regulations?
Jerome Lussan, managing director
“It's like stopping a
soldier from shooting
when the general has
given the command to
go to war. The regulators
are reacting to the public
perception, but this did
not happen because
people were shorting
stocks"
Jerome Lussan,
Laven Partners
of hedge fund consultancy Laven
Partners, says: “This will impact all
international hedgers operating in
US markets. It will limit their ability
to make profits in falling stocks.
That said, it doesn’t kick in until
there has been a 10% drop, which is
relatively rare, but if you sell stock
with small volumes it could happen
a lot faster. Therefore mid and small
cap managers may find themselves
disproportionately affected.”
It has been suggested that
the decision could have a
disproportionate impact in the
2010 | Global Securities Lending Magazine | 13
us short selliNg
equity options world, as market
makers will not be able to hedge
their risk without an exemption.
Lussan believes the market-maker
restrictions could result in a loss
of liquidity. Market-makers receive
no help in trying to hedge their
positions and will therefore be less
inclined to make a market in certain
stocks. Plus, a perfect hedge becomes
more difficult because it cannot be
predicted whether the stock will
be hit by the new regulations.
Edward Black, special counsel at
law firm Katten Muchin Rosenman
Cornish, explained that in the UK,
the disclosure obligations apply
to short sales whether of a stock
or a derivative on it. The new US
restrictions only apply to short sales
of the actual security. The impact of
the restrictions will depend on the
nature of future market movements.
The SEC has said that its approach
“establishes a narrowly-tailored rule
that will target only those securities
that are experiencing significant
intra-day price declines” and that
it believes that addressing short
selling in connection with such
declines in individual securities “will
help address erosion of investor
confidence in our markets generally”.
There is still debate on the likely
impact of the new regulations on
trading. The SEC has suggested that
on an average day approximately 4%
of the market would be hit by the
circuit breaker. This figure would
rise during a more volatile period.
Colby says: “It is difficult to predict
how it is going to affect trading. It
means some people are – in some
cases - not going to be able to hedge
by selling short and it may be at a
time when they most want to hedge.
Overall, it is likely that if someone
thinks the market is falling, they
will have to act immediately. As
such, it will make hedging more
unpredictable.” Lussan agrees that it
will become more difficult to predict
how a stock will fall, adding: “It may
fall 5-6% and then fall very hard.”
Larry Harris, professor of finance
12/05/2010 16:33
 us short selliNg
at the USC Marshall School
of Business, has suggested that
the new rules may prevent the
efficient functioning of markets.
Without short sellers, prices of
deteriorating stocks may be kept
artificially high, leaving investors
potentially paying too high a price.
The SEC’s focus on equities leaves
a huge amount of hedge fund trading
out of scope. Although there has
been pressure to limit the activities of
hedge funds in the market generally,
the SEC seems primarily concerned
with the proper functioning of equity
markets. This is also where much
of the pressure has been coming
from – USA plc has put pressure
on the US government to stop it
shorting its stock. Other hedge fund
activities simply do not generate
the same amount of pressure.
This supports the view of Lussan
and others that the measure is
‘populist’ rather than necessarily to
ensure proper control of markets.
Erik Sirri, who ran the SEC’s
division of trading and markets
during the credit crisis that began
in 2007, has gone on record to
“The US appears to
have displayed more
of a 'something must
be done mentality' in
reimposing a new
price-based test"
Edward Black,
Katten Muchin
Rosenman Cornish
say that commissioners who voted
for curbs when a given stock falls
10% from the prior day’s closing
price did so without proof that
it would improve markets.
Lussan agrees: “What are the rules
trying to achieve? The uptick rule
was rescinded in 2007 and is now
being reintroduced. The SEC has
said that its aim is to protect markets,
14 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 14
but the crash happened because
there was insufficient regulation of
banks. It’s like stopping a soldier
from shooting when the general has
given the command to go to war. The
regulators are reacting to the public
perception, but this did not happen
because people were shorting stocks.”
It is difficult to see how the new
regulations will act to stop additional
market abuse. The SEC had already
introduced changes to tackle
manipulative and naked short selling.
In normal circumstances, if RBS
looks over-valued, the short-sellers
move in and create a temporary fall
in the share price, but then the shorts
go too far and the long investors
come in and scoop up value. Black
suggests that much of the criticism
of short selling should properly
be directed at market abuse; for
example the spreading of negative
rumours to artificially depress prices
accompanied by short selling.
There has often been a ‘creep’
in US legislation across to the
UK. Clearly the new regulations
will affect all European traders
operating in US markets, but could
its impact be more widespread than
that? Lussan says: “The European
Commission has recognised that
hedge funds are not responsible. But
it may creep in because everyone
trades in US markets. America likes
to be the world’s policeman and
tends to take a populist approach.
Black says: “Different regulators
have come at regulating short selling
in different ways. Some regulators
appear to be more suspicious of the
potential for short-selling to be used
for market abuse, while others believe
it is a legitimate technique. The FSA,
for example, takes the latter view. It
has said that while it reserves the right
to introduce emergency short-selling
rules if market conditions warrant
it, the focus of its regulation of short
selling is to require more disclosure
of short-selling positions. CESR
has similarly proposed enhanced
disclosure of short positions. The US
appears to have displayed more of a
“The commission bears
the burden to justify its
rules. It has not done so
in this instance"
Securities Traders'
Association response to
the SEC
‘something must be done mentality’
in reimposing a new price-based test.”
The European exchanges have
similar, though less onerous, trading
restrictions in place. The London
Stock Exchange, for example, has
an automatic suspension period in
place to provide a pause in trading
when stock prices move severely.
It can suspend any stock at its own
discretion if it believes that market
manipulation is taking place.
However, Black says that for the
most part, the US and Europe are
pursuing different regulatory models.
CESR and the FSA are focusing on
public disclosure and the ability to
intervene in an emergency rather
than any generalised restrictions. In
the US FINRA regulated broker-
dealers are obliged to report to
FINRA twice each month all short
interest positions in all customer
and proprietary accounts in NYSE
and other listed securities as well
as OTC securities. That reporting
is on a combined basis and only
global short positions in issuers are
published, not individual positions
held by any broker or customer.
The goal of ‘strengthening public
confidence’ is sufficiently nebulous
to make any real judgement on the
success of the rules difficult. With a
relatively small majority in favour of
the new regulations at the SEC, there
may be room for a re-examination
of the rules on market-makers and
possibly for a full change of heart
if the rules are found to create
additional volatility. Lussan sums up
the view of many when he concludes:
“This is the least bad alternative.
The market was expecting something
and was afraid it could be worse.” Z
12/05/2010 16:33
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GSL08 FINAL.indd 15 12/05/2010 16:33

 repo 105
In Lehman's terms
The fallout from the discovery of "Repo 105" transactions on the books of
Lehman Brothers may have a long way to run, finds Anthony Harrington
When is a repo not a repo? The answer, if you
are Lehman Brothers, is any time you provide 105%
more collateral by way of value than the cash you
are borrowing! Called a Repo 105 transaction, the
deal can legally be classified as a sale rather than as
a straightforward repo arrangement – at least in the
opinion of law firm Linklaters, who advised Lehman.
But let us back up a few steps for the sake of any
readers out there who have not yet digested an article
or two on the subject of the Court Examiner’s 2,200
page report into the Lehman failure. It is important to
bear in mind that Anton Valukas, the Court Examiner,
and chairman of the US law firm Jenner & Block, was
not asked to find guilt, but to explore whether there
were “colourable claims” (actions that might constitute
grounds for litigation) against Lehman officers or
third parties. Whether or not those “colourable
claims” actually result in actions and in parties being
found guilty or liable is a matter for another day and
a different forum, as far as Valukas was concerned.
To the casual observer, which translates roughly
to “anyone not involved in day-to-day repo activity”,
the truly astonishing thing about this “accounting
gimmick” (the term used by some senior Lehman staff
to describe the Repo 105 transactions), is the idea that
any serious minded person could simply pretend that
one half of a repo transaction isn’t there. Consider
the following instance. I give you cash. You give me
collateral. I expect to get my cash back. You expect
to get your collateral back. This is not the same thing
as: I give you cash, you give me assets. In the latter
instance, we have a sale, in the former, a repo deal.
Linklaters has come under tremendous fire for
being so obliging in its opinion. As Valukas pointed
out: “Lehmans conducted its Repo 105 programme
under the aegis of an opinion letter the Linklaters
law firm in London wrote for Lehman Brothers
in Europe, Lehman’s European broker-dealer in
London, under English law.” The UK’s legal regulation
body, the Solicitors Regulation Authority (SRA) is
reported to be considering the Valukas Report and
Linklaters role, which of course, does not mean that
Linklaters was wrong. “We are aware of the report
and we are currently reading it. After, we will decide
whether or not any regulatory action should be
taken,” it said. (See http://www.cityam.com/news-
and-analysis/linklaters-put-alert-over-lehman-help).
The law firm itself has issued a statement to the
16 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 16
following effect: “The Examiner – who did not
contact the firm during his investigations – does
not criticise those opinions or say or suggest that
they were wrong or improper. We have reviewed
the opinions and are not aware of any facts or
circumstances which would justify any criticism.”
To understand Linklater’s confidence in this
matter, one needs a little inside knowledge of exactly
how Repo 105 has played on the street, as it were.
A securities lending source told GSL: “Basically,
I’m sick of all the blather over Repo 105. Everyone
post-Valukas pretends they didn’t do it, but it was
a widespread and commonplace practice and it
had a beneficial impact in that it enabled broker
dealers to address risk on their balance sheets
and to provide more liquidity to the market.”
C
What Linklaters is probably relying on is the concept M
of “true sale” as set out in FAS 140. In brief, a “true Y
sale” rather than a collateralised loan can be deemed CM
to have occurred where the borrower can be said to MY
have “lost control” of their collateral. The question
then is, what constitutes loss of control? The answer
CY
comes down to the way in which normal collateralised
CMY
deals are marked to market. If you collateralise a K
loan in the normal way with 100% collateral, and the
value of your collateral shrinks or grows, the collateral
pool is adjusted to compensate for the movement.
In a Repo 105 transaction mark to market is
suspended until the market movement is violent
enough to move beyond some hurdle, such as 112%.
For the period where mark to market is suspended,
the collateral provider is deemed to have lost
control of their collateral, and this transaction – in
jurisdictions that accept this rule – can be deemed
a “true sale”. The other proviso is that it cannot be
an overnight loan. However, three days or more are
considered “safe”. What was possibly unusual about
Lehman’s case is simply the scale involved and the
fact that the transaction, in the words of some senior
Lehman financial people, “had no substantive basis”
other than to shift debt off the balance sheet.
For the fourth quarter 2007, Lehman deployed
Repo 105 to shift USD38.6 billion of assets off its
books. In Q1 2008 it upped that to USD49.1 billion
and in Q2 2008 it upped it again to USD50.38
billion. In each instance it was good quality assets that
Lehman provided as collateral against the loan and
12/05/2010 16:33
 QuickConnect.pdf 1/12/10 10:57:31 AM

CM

MY

CY

CMY

GSL08 FINAL.indd 17 12/05/2010 16:33

 G11888

fightiNg back

in each instance it treated this as a sale, increasing
the amount of cash on its books and decreasing its
leverage by 1.7 percentage points, 1.9 percentage
points and 1.8 percentage points respectively.
To put this in context, in its own internal risk
management, Lehman regarded a movement of 0.2%
of leverage as significant. In other words, this was
window dressing on a grand scale, unless Lehman’s
finance team can show that the Repo 105 device actually
served some solid purpose other than to window
dress the quarterly accounts. So far, to my knowledge,
no such alternative purpose has materialised.
Of course, it is not only Linklaters who are under
scrutiny in the aftermath of this “wheeze”. Valukas also
flagged up Lehman auditors Ernst & Young, and was
less than happy with the audit firm’s decision to allow
Lehman’s use of the Repo 105 device to pass without
comment. However, Ernst & Young too, are taking the
view that they stand by their 2008 audit and since they
had not yet done the 2009 audit, where’s the problem?
One outcome from all of this, some way down
the line, is likely to be yet another blitz on window
dressing. However, looked at purely from the
standpoint of a potential “case for the defence”,
both Linklaters and Ernst & Young would seem to
have quite a bit of solid ground to work with. Repo
105 was widely used and the securities lending firms
who provided it took detailed legal opinion - not
just from Linklaters - and they were relying on a
well-publicised Financial Accounting Standard. It
will be interesting to see how this one runs. Z

Fighting back
Craig McGlashan gauges opinion on what the industry can do to improve its
image and help ensure regulators are on side
The hits that the securities
lending industry has taken and
continues to take since the onset of
the financial crisis are too numerous
to list here – few jurisdictions have
not felt some sort of pain. But what
can the industry do to fight back?
Curtis Knight, former director for
securities lending and market risk at
the Risk Management Association
(RMA), believes that a global
industry needs global harmonisation
to deal with its problems – and this
includes making sure that regulators’
thinking is in tune with the industry’s
needs.
“Global harmonisation will be
extremely important in making sure
that the correct risk management
tools are being used, that regulators
are working together - and in
conjunction with industry players -
to make sure that the best possible
regulation is being enacted,” he says.
“I can’t see another more
important issue right now. We can't
have situations where one rule in
one jurisdiction conflicts with one in
another jurisdiction.”
This potential disconnect between
the rules governing different regions
can perhaps be most felt by the many
businesses in the industry which run
a global offering, not least in terms of
the technology they deploy, he adds.
Jane Milner, a market specialist
at SunGard Securities Finance,
describes disparate regulations
as a “challenge” for the business.
She adds: “The US is by far the
most regulated market, with 15c3-
3, RegSHO, Rule 402, Agency
Lending Disclosure and the more
recently introduced short sale circuit
breaker. In the rest of the world
the problem is in some ways more
complex in that regulations vary by
jurisdiction. The recent attempt by
CESR to set standard guidelines for
new post-crisis regulation seemed
somewhat undermined by the
German regulator’s variation from
the ‘standards’.”
Interestingly, this problem can be
exacerbated by impacts from other
markets too. “Integration issues
may occur when the regulatory
requirement is not exclusive to the
securities finance market, and data
from a securities finance solution
needs to be consolidated with data
from other systems,” she says. “To
handle this it is important that a
solution has the flexibility to export
data on demand, in a user-definable
format with as little need for IT
development as possible.”
Milner does feel that current
technology standards are able to
meet this challenge. “Typically when
functionality is potentially re-usable,
it would be built in a flexible way to
allow it to be adapted as necessary
to a similar, but somewhat different
requirement.”
However, even if technology will
be able to meet the challenge, the
problem still exists for the industry
of rules being created on an ad hoc
basis, with each country causing
problems for another.
So what of Knight’s call for
harmonisation among the various
industry bodies? Chris Kunkle, who
took on Knight’s role at the RMA,
explains that this process is already
taking place.
“My personal key effort just now
is two-fold; it’s to improve the global
coordination and communication of
the industry associations and their
sub operations, and by that I mean
working with the other bodies.

18 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 18 12/05/2010 16:33

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GSL08 FINAL.indd 19 12/05/2010 16:33

 fightiNg back
“The regulators and IOSCO are
coordinating very well across borders
just now and before they make snap
decisions without a lot of expertise or
a view from the industry, I want us
all to be able to communicate both
the positive and the negative issues.
“ISLA, PASLA and ASLA had
their first joint operations meeting
last December and those things will
go a huge way to helping. RMA is
coming into that now.”
Indeed, an Industry Leaders panel
took place at the recent PASLA
conference, featuring figures from
some of the major institutions (read
the summary on page 42).
However, this effort to work
together is only one half of the
puzzle, according to Kunkle: “We
have a major effort to improve
education for regulators, academics,
beneficial owners and eventually
for the press. We are going through
a serious time and the RMA,
during my last executive committee
participation term, started meeting
with the Fed, the SEC and the OCC
on a periodic basis, and we have a
quarterly meeting with the Federal
Reserve Bank of New York.”
The RMA has developed a series of
modules to help with this education
process and Kunkle believes the
education policy can benefit from the
harmonisation policy: “What I’d like
is to broaden our education modules
so other associations can use these
modules.”
Knight concurs: “An educated
lender is an important piece of the
puzzle. Education means that, going
forward, some of the situations that
have now developed into lawsuits can
be nipped in the bud early.”
However, no one can doubt that
a lawsuit is always bad press for
any industry. But has the securities
lending industry been particularly
poor at presenting itself in the
mainstream media, especially during
the financial crisis? Jessica Johnson,
managing director of New Approach
PR, a specialist communications
agency for the securities finance,
20 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 20
asset management and hedge fund
industry, believes so.
She says: “The error was that
there was no real PR whatsoever!
We are now nearly two years down
the line and just starting to realise
that this industry really needs to
promote what it does and implement
a proper defence mechanism that can
promote proper understanding. For
this reason it would be wrong to say
that the industry was too reactive –
because it did not really react.”
So how would Johnson combat the
negative press that the industry has
received? “I want to implement a PR
effort that represents and defends all
aspects of the industry so that the
wider world sees it in a more positive
“It would be wrong to
say that the industry was
too reactive - because it
did not really react."
Jessica Johnson,
New Approach PR
light. Regulation is also a key aspect
of anything to do with financial
institutions, and it is also on the
agenda of every financial journalist’s
mind this year. I think the securities
finance world does want to work
within a regulated environment, both
at individual and corporate level. If I
am so permitted, I’d like to ensure all
relevant bodies are effectively covered
with regards to how regulatory stories
are handled in the press. I think
that everyone in the industry has a
common goal; to project the business
positively and as a professional and
well regulated environment. I hope
my company can help do that.”
However, Knight is unsure about
how such an operation would work
in practice. “How do we manage
PR? Do we need a face, if you will,
for securities lending? I haven’t
developed a conscious decision on
it either way. You have the RMA,
ISLA, PASLA and so on – my
concern has always been over who
the industry spokesperson takes
the lead from. And how does that
directive get translated to this single
firm or individual so they are saying
something that most people in the
industry will agree with?
“Individually, at times the
institutions involved in the product
have not wanted to promote their
product when things were going
good, because it’s just something they
do as an organisation.
“But then when some negativity
hits, someone feels that there is
a need to manage that flow of
information to the various sources
and that’s where you get this
concern. I personally don’t think
the industry needs a face, and if it
does choose a face then it has to be
pretty well set up as to how that firm
or person gets their cues. If I’m the
RMA, I would want to make sure
that our committee has a strong voice
in whatever edicts come out; my
concern is that if I don’t agree, does
that mean the RMA has to put out a
counter piece?”
Instead, Knight believes good
PR begins at home. “Internally,
the industry players need to make
sure that they have good robust risk
management systems, and for the
most part they do. They need to
make sure that they’re being adhered
to and on the agent lender side
that their clients are educated and
understand the product.”
While various suggestions will
continue to be put forward and
different opinions raised, the need to
work together seems to be the one
area that most participants agree on.
The next opportunity to do that will
be the ISLA conference in Berlin on
22nd to 24th June. GSL will see you
there. Z
Watch Jessica Johnson debate with
Richard Thompson of ISLA and
Northern Trust at the February’s
GSL London Summit at www.gsl.tv/
videos/1052/gsl-london-summit-10-pr-
debate
12/05/2010 16:33
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GSL08 FINAL.indd 21 12/05/2010 16:33

 securiNg the future
Securing the future
Ashley Wilson, the new head of
prime services for EMEA at Barclays
Capital, talks to Craig McGlashan
about his plans for growing the
business
Barclays Capital has had perhaps
more good headlines than most of its
peers of late, with its acquisition of
Lehman Brothers’ US business and
its move into the European equities
space. Another headline has been
the appointment of Ashley Wilson as
head of prime services for EMEA.
Did all the positive news around
Barclays attract Wilson to the job?
“Right now there is a huge amount
of energy, growth and focus within
BarCap. There is a lot of talent
joining the firm, especially because
of the Equity division growth across
EMEA and Asia Pacific and in prime
services. To give you an example the
equity division has hired 750 people
front to-back, across EMEA and Asia
Pacific, over the last 12 to 18 months.
“BarCap is attractive to our clients
- it is a very high credit quality
bank, a UK-centred bank with a
full prime services offering that did
not take any direct bailout funds.”
However, other aspects of the
Barclays offering helped to entice
Wilson. “Historically Barclays was
very strong with fixed-income hedge
funds, due to the fixed-income
nature of the firm. Additionally,
we gained a lot of multi-strategy
funds and this was primarily due
to our cross-asset class margining
capabilities. We were also strong in
the quant space, where participants
look for low-latency direct market
access, i.e. using the bank’s pipes
to access directly to market.
“These were the three areas that we
were always very strong in. Now with
the equity build-out we are seeing a
lot of growth in the equity business
22 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 22
and as a result
we are financing
all asset classes.”
This rare
situation is one
of the main
attractions for
Wilson. “It is a
different model,
you have fixed-
income, futures
and equities all
within prime
brokerage, and
that is rare
because most
prime brokers
only concentrate
purely on
equities and
my background
has always
been equities, are now very focused on the growth
so the move allowed me to gain of the equity platform. It was a
exposure to the other asset classes.” challenge to grow something again
He continues: “Our global repo but also to have this one balance
book is over USD500 billion so that sheet where you have the chance
gives you substantial purchasing to control three different products
power when speaking to agents which I thought was unique.”
from whom you want to source Since moving to Barclays Capital
securities and so on. Of the 310 from Merrill Lynch in September
Eurex members active in interest 2009, Wilson has been quick to
rate derivatives, we are ranked outline his intentions, including
number 2 for traded volume. using his 11 years’ experience on
“We have a very strong fixed- a Morgan Stanley trading desk to
income and futures activity, so we introduce a “more trading-focused
“This renewed focus on risk has meant
that we have had to develop different asset
protection models and as a result of that,
the old adage that prime brokerage is a
commoditised business is definitely broken"
12/05/2010 16:33
GSL08 FINAL.indd 23 12/05/2010 16:34
 securiNg the future
approach” to the British bank.
“There is term specials trading
for instance, where you go long
stock and short futures to create
inventory because of the miss-
pricing between the future and the
stock-borrow value,” he explains.
However, this is not the only
change he hopes to instigate.
“I’d like to have a trading focus,
but I also think you need to build
out the product offering,” he says.
“We’ve just introduced swap-
backed ETFs and we are on the
ETF exchange platform. We are
developing a GCM business.
Currently, our DMA pipes take a
lot of business from non-exchange
members but if we start looking
at clearing the exchange member
business, we need to do GC.”
Wilson’s vision of change is
in keeping with a general trend
being seen in the prime brokerage
industry. Numerous reports have
surfaced of late suggesting that prime
brokerage clients are looking at risk
management and transparency at a
much greater level than in the past,
with terms like “multi-prime” being
used with increasing frequency.
“Hedge funds are definitely
looking at multi-prime, they are
also assessing their current prime
provider in terms of credit quality
and the asset protection solutions
that are on offer,” he says. “This
renewed focus on risk has meant
that we have had to develop different
asset protection models and as a
result of that, the old adage that
prime brokerage is a commoditised
business is definitely broken.
“For instance, at BarCap we
have introduced a US broker/
dealer so our clients can trade
international securities. There
is demand for this because US
investors want SIPC [Securities
Investor Protection Corporation]
protection, which they gain through
exposure to a US broker/dealer.
“Additionally, we are launching
‘Bank Prime’, which allows
clients to transact and face
24 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 24
"We are not seeing a lack of assets coming due
to credit constraints, I think people pull out of the
exclusive arrangement when the returns are not
high enough and dividends are being cancelled
so they put it through an agency lender"
Barclays Bank plc, so it is not an
international offshoot of a big US
parent – you are facing the main
parent entity, the rated entity.”
Other projects in the pipeline for
Barclays’ prime brokerage offering
include gaining a SAS 70 (an
independent audited statement on
the controls within the business)
and an asset sweep solution which
allows clients’ assets to be held
at a third-party custodian.
In terms of sourcing securities
Barclays Capital has an extensive
network of exclusives. “We have
eight centres where we have staff
dedicated to sourcing securities:
London, New York, Hong Kong,
Tokyo, Madrid, Paris, Frankfurt and
Milan,” Wilson explains. “We have
a very large exclusive pool of assets
that we go out and bid for. We go
to the underlying beneficial owner
and enter into an exclusive securities
lending contract with them.”
Despite BarCap’s network of
exclusives sourcing centres, Wilson
does appreciate the importance of
agency lenders to the process.
“It is critical. We pride ourselves
on not recalling hedge funds on a
hard-to-borrow name and to be
able to do that you need a wide
supply of securities and you need
to mix it up - you need to have
some exclusives and have very
good relationships with the agency
lenders. So securities lending is key
to the prime brokerage business.”
Some commentators have
suggested that fewer assets have come
on to the market in the exclusives
model in the wake of the Lehman
default, citing a perceived higher risk
from a beneficial owners’ point of
view, given the lack of diversification.
Is this a trend that Wilson has seen?
“There are two models – the
exclusive model, where you know
the counterparty you are dealing
with, you know its rating, so as an
AA-rated entity we are not seeing
an impact. Then there is the agency
lender route where you diversify
your pool of borrowers, where within
that pool you might have some AA-
rated counterparties but you might
have some single A or some BBB
companies. It’s a securities lending
function, you are lending out equities
versus collateral, and if the borrower
goes into default the equities tend to
fall in value so you unwind the trade.
“We are not seeing a lack of assets
coming due to credit constraints, I
think people pull out of the exclusive
arrangement when the returns are
not high enough and dividends
are being cancelled so they put
it through an agency lender.”
However, what of the future for
Barclays’ prime services offering?
“We mentioned the strong hiring
plan in the equities division; we also
have a very aggressive hiring plan
for prime services in Europe. We
are seeing a lot of talent coming in
and a lot of big names are speaking
to us,” explains Wilson. “In the
European role there are about 150
under me, with around 20 people
hired across sales and traders since
I joined. There is probably around
another 10 people on route.”
He continues: “From the
beginning of the year to now our
European equity balances are up
just under 50%, we have aspirations
of continuing that so we end the
year more than double where we
started, so it’s all positive.”
It seems that, if all goes to plan,
there may yet be more good headlines
for Barclays Capital this year. Z
12/05/2010 16:34
1679 An
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base. With us, you become a long-term partner with one point of contact for all aspects
of the investor value chain, from capital introduction, financing and execution to custody
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your business to increase your performance.

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GSL08 FINAL.indd 25 12/05/2010 16:34

1679 Annons Internship.indd 1 2010-04-12 11.14
 brazil

Brazil
These have been strange times for Brazil’s broker dealers, traders and
securities lending specialists. The market has been on a tear for months and
at the time of writing was still climbing, but the volumes have been thinning
out. As Andre Suaid, managing director at Deutsche Bank’s New York office

shapes explains, investors have grown accustomed to seeing a lot of volume and a
market that was gaining anything from one to three percentage points a day.
Now the upward movement has slowed to 30 to 50 basis points. “While I

up
wouldn’t classify volumes in Brazil as ‘light’ they have normalized to lower
levels than what we saw at the peak, and it may be some time until we see
the hype and the continuous inflows we enjoyed in recent years.” In London,
dealers would shrug and say: “Sell in May and go away,” but there is no such
tradition in Brazil.
On the plus side, and it is a very big plus, Suaid points out that this is the
first presidential election (set for October) where politics has not yet inspired
Anthony Harrington any real market volatility. One of President Lula’s great achievements is that
investigates the his government has created a strong sense that after being spoken of for
complexities and decades as a “coming country” Brazil has now well and truly arrived on the
peculiarities of the world stage, irrespective of the complexion of the next government. Even
Brazilian industry the idea that Lula’s nominated successor, Cabinet chief Dilma Rousseff - a
and finds a 'watch strongly left-leaning candidate with a known penchant for interventionist
policies – might win the elections is not overly distressing the market.
this space' market Of course, Brazil can’t make the running on its own. Like any country it
needs a favourable global economy, particularly since commodity-related
stocks make up anything from 47% to 60% of the country’s index, depending
on how one measures such things. There have been so many hard-to-read
factors swirling around, including the latest bout of jitters over sovereign debt
fears in Europe, that the risk appetite of market participants is having a hard
time getting up a consistent head of steam. As Andre Suaid observes: “If the
market can continue to rally there is a tremendous amount of money in the
money markets right now that would move across into global equities.”
All of this makes for a tremendous desire in the market to engage in
securities lending. Suaid points out that there has been tremendous growth in
the last two years in the local hedge fund community and in the multi market
funds and long/short funds in Brazil. Plus, of course, the high frequency
algorithmic trading funds are now global in their outlook and they all want to
get involved in securities lending in Brazil.
However, and it is a big however, Brazil is a regulated market and all
securities lending has to go through the CBLC [Brazilian Clearing and
Depository Corporation]. “The CBLC has been managing securities lending
for the last 10 to fifteen years and it has a very sophisticated approach. They
look at underlying market risk from a total portfolio level. If you are using the
CBLC for different strategies they will cross margin the risk, but there is no
doubt that it is an approach that works for local players but not for offshore
borrowers,” explains Paul Busby, also a managing director at Deutsche Bank.
For would-be offshore players the fact that the CBLC stands squarely in
the middle of the trade makes it extremely difficult to relate the Brazilian
securities lending model back to the familiar world of securities lending that
beneficial owners and borrowers are comfortable with in Europe and the US.
Basically, to be active in securities lending in Brazil you need to be a broker
and a member of the CBLC. For a US beneficial owner, for example, there is
just no easy way to lend stock in Brazil.
“What you will find is that right now a lot of the natural hedges and
proprietary assets are coming from the domestic market and not the broker
dealers themselves,” Busby says.

26 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 26 12/05/2010 16:34

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 brazil

However, things are on the move. Busby points out that the CBLC has
acknowledged that it wants and needs more foreign participation in Brazil’s
equity markets. It also understands very clearly that a vibrant securities
lending environment would bring a substantial amount of very welcome
liquidity to the market. “This is a culture and a climate that is looking
to adapt to change, and the CBLC is the hub that will shape the future
development of the market. It is far more ready to talk to market participants
and to listen to what is said to it than central depositories in almost all other
emerging markets,” he says.
Suaid says that he was in a meeting recently with officials from the CBLC
where market participants told the CBLC about their concerns over high
exchange fees and high costs. As a result, at the time of writing, the exchange
(BVM &F) was holding a meeting to talk about lowering exchange fees for
high frequency trades. “It is very clear that both the CBLC and the Brazilian
Exchange are willing to be more flexible to attract foreign capital. They are
very responsive to the fact that we and others have a vast array of clients who
in some capacity or another are either actively trading Brazilian equities or
who are looking to get more exposure to Latin America in general and Brazil
in particular. And securities lending has a big role to play in this,” he says.
Chris Poikonen, executive managing director at eSecLending argues that
the role of the CBLC in securities lending in Brazil can be viewed either as
a tremendous risk mitigator, by offering a sophisticated centrally cleared
platform, or as a significant hurdle to having offshore investors participate in
the market. “The clear issue right now is the lack of offshore lending supply
in the Brazilian securities lending market. The activity that is currently taking
place is largely between local market participants,” he says.
“The clear issue Brazil has the second largest exchange in the Americas, and that makes it a
right now is the very big market for overseas borrowers and beneficial owners to find difficult
lack of offshore to access. The CBLC is a wholly owned subsidiary of BOVESPA. It offers
cash, futures and options trading and has all the securities that are eligible for
lending supply in the securities lending transactions. Both BOVESPA and the CBLC are regulated
Brazilian securities by the Brazilian Securities Exchange Commission (the CVM) and the
lending market. National Monetary Council (CMN).
They are responsible for setting the maximum limits for securities lending
The activity that open positions and they regulate the CBLC by ensuring that it is always
is currently taking in a comfortable position with respect to any exposure it is taking on.
place is largely The regulators also define the parameters for what constitutes acceptable
between local collateral for securities lending, typically FRB bonds, and Poikonen points
out that they have a fairly sophisticated algorithm which is used to determine
market participants" the creditworthiness of parties and limits maximum loan balances as a
percentage of the free float in the system. Poikonen too, says that a robust
Chris Poikonen, securities lending system that appeals to offshore participants will help
eSecLending increase the overall liquidity in the market. BOVESPA has a deep market
and many offshore beneficial owners have substantial allocations to the major
index constituents within their emerging markets portfolios. Having them
participate in lending will be key to further progression.
However, Poikonen argues that the central counterparty model should not
be viewed as a bad thing, in and of itself. “If you look around the world there
are central counterparty (CCP) models in many markets, so the fact that
Brazil has a CCP model should be viewed positively,” he says.
Of course, it is a different transaction, in securities lending terms, for a
beneficial owner, since their exposure lies with an exchange, rather than with
a broker-dealer. This means that beneficial owners have to get comfortable
with the exchange as counterparty, and they need to clearly understand how

28 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 28 12/05/2010 16:34

SGSSP
 Philippe Huyghues Des Etages,
SGSS, Securities Lending Group

IN SECURITIES LENDING,
WE STAND BY YOU WITH CUSTOMISED SOLUTIONS
AND SERVICES WITH GLOBAL REACH.

“Clients want to optimise the liquidity of their assets and draw supplementary income from them. They
demand customised solutions and a secure access to the market. On their behalf, we manage the risk/

profitability income ratio according to their specific requirements. Clients benefit from our global reach, regular

reporting and added transparency on their securities lending programme.” Philippe Huyghues Des Etages,
SGSS, Securities Lending Group. Tel.: + 33 1 53 21 68 21

www.sg-securities-services.com

We stand by you

GSL08 FINAL.indd 29 12/05/2010 16:34

SGSSP16_LMA_ISJ_203X267_UK.indd 1 7/04/10 16:15:34
 Doremus

brazil

the exchange model works and what it offers in terms of security. “Some
beneficial owners are not yet that comfortable with taking exposure to an
exchange. However, we believe that the way to promote liquidity in this
market, at least in the short to medium term, is to educate the lenders in the
considerable merits offered by this model,” he says. On the subject of CCPs,
when one looks around, there are considerable efforts going on to set up CCP
models in markets that are currently OTC and bi-lateral, the credit default
swap (CDS) market being an obvious case in point. The whole derivatives
space is under tremendous pressure at present to shift across to a CCP
approach.
At the same time both in the US and in Europe there are initiatives
underway to set up CCP models for securities lending, at exactly the same
time as a number of parties are trying to persuade the Brazilian regulators and
the officials of the CBLC to initiate a more standard approach to securities
lending. It may well be the case that if the CCP approach to securities lending
got off the ground in Europe and the US, it would really help the growth of
securities lending in Brazil. The point, of course, is that there are very different
kinds of CCP models, with very different rules, and what is needed is a model
that will inspire the right degree of confidence in beneficial owners.
The model in Brazil contrasts sharply with the model in Mexico, where
there is an active securities lending market run along US lines, and which
beneficial owners can access via bilateral deals in the usual way. Latin America
is clearly an area of focus for many organisations right now, and Brazil is
undoubtedly the largest and the most interesting. However, it is very much
still a developing market and there is a real buzz in the air right now about
securities lending in Brazil.
One of the big concerns that offshore beneficial owners have about the
Brazilian CCP model is their direct exposure and the fact that collateral is not
held in their own name within the CBLC, If either the CBLC or BOVESPA
President Lula will went down, beneficial owners need to understand what the unwind position
stand down after would be. “This is a pretty obvious question for a beneficial owner. They need
clarity on the issue of how loan transactions would be unwound if the CBLC
the next election, was, for some reason, to become insolvent,” Poikonen says.
having served the However, common sense tells you that when you are talking about one
maximum two terms of the largest exchanges in the Americas defaulting, you are talking about a
fairly remote risk, so of itself, this issue should not be a complete deal breaker.
Picture courtesy of Agência Brasil Besides, there are very significant returns to be earned by beneficial owners
who find a way into this game. “It is safe to say that the levels of return
available on selected stocks are very favourable for beneficial owners, and
early entrants into the market will enjoy above average returns,” he says.
One of the easiest ways of playing this market is via synthetic positions
using derivatives, and many brokers will offer this play. Poikonen says: “One
option is to create a swap and give the performance of the underlying security
to the beneficial owner with some kind of uptick. However, depending on the
kind of entity you are, there could be capital gains tax implications and other
implications that beneficial owners need to be aware of. So beneficial owners
need expert advice before they get into this area.”
Today, however, most securities lending firms would tell you that offshore
participation in Brazilian securities lending is more a wish than a reality.
Poikonen concludes: “Some, as we say, are accessing Brazilian securities
lending via synthetic positions but the problem is that you have direct
principle exposure to the borrowing entity, which would be the dealer. As of
now this is very much a ‘watch this space’ market." Z

30 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 30 12/05/2010 16:34

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GSL08 FINAL.indd 31 12/05/2010 16:34

 chiNa short selliNg

eastern promise?
as developed markets have seen tightened
regulations, some of the new eastern superpowers
have relaxed their rules
over the next few pages we look at some of the region's potential

Testing time in China

Leanne Wang investigates the new short selling and margin trading trial
in China and what it could mean for securities lending in the country
China’s margin trading and
short selling trial programme, with
participation from six securities
brokerages, was launched on
31st March on the Shanghai and
Shenzhen stock exchanges after
four years of preparation.
The margin trading and short
selling trial business, which allows
securities companies to lend stocks
and money to investors, is an
innovative financial mechanism
introduced by the regulators to
diversify China’s capital markets.
According to the guidelines
of CSRC, the net asset value of
qualified securities brokerages
participating in the programme
should be above RMB 5billion in
the recent six months. The first
batch of six securities brokerages
approved by the China Security
Regulatory Commission (CSRC)
are: Guotai Junan Securities, Guosen
Securities, CITIC Securities,
Everbright Securities, Haitong
Securities, and Guangfa Securities.
CITIC Securities, with net asset
value of nearly RMB35 billion by
the end of 2009, will allocate up to
RMB12 billion to margin trading and
security lending business in the next
six months and to RMB20 billion in
the further future. Meanwhile, Guotai
Junan Securities and Everbright
Securities will provide RMB4 billion
and RMB5 billion respectively.
Fan Xiangpeng, an analyst with
Sinolink Securities, estimates that
securities companies would put
30% to 50% of their net asset value
into margin trading business, and
the total funding in the business
of the first batch of six brokerages
would be likely to reach RMB40
billion to RMB60 billion. The
second batch of brokerages, which
will soon get the green light from
regulators, will bring the total
funding up to RMB90 billion.
Taking into account the leverage
role and shorting mechanism of
margin trading and securities
lending, the Chinese regulator
requires securities brokerages, in
the initial pilot period, to stringently
carry out the investor suitability
management system, cautiously
selecting the branches and investors
intending to engage in margin
trading. The suitable investors are
required to possess professional
knowledge, sound financial
resources and risk-taking capacity.
All securities brokerages are
required to conduct a check-up on
account management, entrusted
declaration, and trading monitoring,
and improve internal risk control.
The two exchanges in Shanghai
and Shenzhen are paying close
attention to margin trading and
securities lending trading in the
market to prevent market risks.
The exchanges claim that when

32 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 32 12/05/2010 16:34


a substantial anomaly happens,
they will step in to suspend the
trading of a target stock or all target
securities in order to safeguard the
steady operation of the market.
At the initial stage, securities
brokerages try to prevent risks by
raising the margin and reducing the
leverage. One broker disclosed that
he would require the investor to have
net assets of above RMB1million
to participate the programme.
Liyun Wu, a branch manager of
Everbright Securities, disclosed that
a customer’s application for credit
lower than RMB2million would be
approved by the brokerage’s margin
trading and securities lending
department, and credit higher than
RMB2million would have to be
approved by a higher level body,
namely the margin trading and
securities lending committee.
The margin requirements are also
set relatively high. For instance,
Guotai Junan sets the initial margin
for margin trading at 70% and the
minimum collateral maintenance
ratio for securities lending at 130%.
The broker says: “The reduced
leverage may not be attractive to
investors at the initial stage, but it
reduces risk and guides investors
to trade in a rational manner.”
Privately-held asset management
funds have shown interest in the
programme. The day before the
official launch of the trial programme,
Jiangsu Winfast Investment and
Development, a securities asset
management company, received
a credit limit of RMB28 million
(USD4.1 million) for margin trading
and RMB10 million for short selling
from CITIC Securities - the largest
deal so far. Zewen Wang, general
manager of Winfast, believes the
programme would enhance the
return of their investment in the
blue chips: “At this moment, the
valuation of large blue chips are at
a very low level and the chance for
these stocks to have significantly
GSL08 FINAL.indd 33
better performance is uncertain.
Institutional investors with billions
of asset under management face a
dilemma about what to invest in.
With the tool of margin trading,
we can make more profit when
selling high and buying low.”
However, stock market conditions
have brought concerns to investors
over whether to get involved in
the programme. Macroeconomic
factors, such as RMB appreciation,
interest rate hikes and the extent to
which the government will tighten
its monetary policy and restructure
its economy have been uncertain.
“Though some investors
may bring credit risks,
overall, the programme
will benefit brokerages
in the long run. It also
enhances the liquidity
of the market. If the
market becomes more
active, the trading
volume increase will also
bring more commission
income to brokerages."
Professor Fuling Han,
Central University of
Finance and Economics
Therefore, since the beginning of
the year, the stock market in China
has remained range bound.
This has made some investors shy
away. A fund manager with more than
RMB1 billion under management
comments: “It seems that the market
hasn’t found its direction yet. Many
qualified investors probably haven’t
put all of their money into the market
and therefore the demand for credit
may not be that high at the moment.”
Comparatively speaking, investors
are more interested in margin trading
rather than securities lending. This
2010 | Global Securities Lending Magazine | 33
chiNa short selliNg
can be partially attributed to the
availability of stocks to be lent. At
the time of writing, only 19 stocks
can be lent by CITIC Securities.
To brokerages, margin trading and
securities lending will enhance and
diversify revenue. The six securities
brokerages adopt the same interest
rates. The interest rate for margin
trading is 7.86%, 3% higher than
the six-month bank loan rate,
while the interest rate for securities
lending is 9.86%, 5% higher.
In the past, commission was the
sole revenue sources for securities
brokers exposed to the cyclical risk
of the market. Margin trading and
securities lending allows brokerages
to get more revenue from interest
rate spread and improve the profit
structure of their business model.
“Though some investors may bring
credit risks, overall, the programme
will benefit brokerages in the long
run,” says Professor Fuling Han,
dean of applied finance at the
Central University of Finance and
Economics. “It also enhances the
liquidity of the market. If the market
becomes more active, the trading
volume increase will also bring more
commission income to brokerages.”
However, on the other side of
the coin, the margin trading and
securities lending programme may do
harm to structured products managed
by privately-held asset management
companies. In China, these kinds of
products utilise leverage to provide
6% to 7% of return to customers.
Adding the entrustment fees to
commercial banks and marketing
fees for selling the products, the total
cost for running such structured
products is around 8.5% to 9%,
which is higher than the rate of
margin trading provided by security
brokerages. And the process of
issuing a structured product is more
complicated than applying credit
from brokerages. It may be a trend
that the market share of structured
products will shrink in the future. Z
12/05/2010 16:34
 iNdiaN outliNe
Indian outline
With R Sundararaman, SVP at India's National Stock Exchange
Securities lending in India
began with the “Securities Lending
Scheme”, introduced in 1997 by the
Securities and Exchange Board of
India (SEBI), the Indian securities
regulator. This provided the broad
framework for SLB and went through
multiple iterations. Since December
2007 there have been renewed
efforts in reviving the scheme.
India has very active equities
and equity derivatives markets.
The exchange infrastructure is
one of the most sophisticated and
efficient, globally. The premium
stock exchange of India, NSE, clocks
an average of around 7 million
trades valued at USD4 billion in the
equities market. In the derivatives
market, NSE clocks around 3 million
contracts daily with a notional value
of around USD16 billion. However,
SLB has been the missing link in
India’s vibrant securities market
and to date is not very active.
Structure of SLB in India
SLB in India is not a bilateral
model. It has a centralised
anonymous order book and all the
borrowing and lending is centrally
cleared, settled and guaranteed.
The SLB scheme is facilitated by
the National Securities Clearing
Corporation of India (NSCCL),
the clearing subsidiary of the
National Stock Exchange of India
(NSE), through a screen based
trading system, where NSCCL
acts as a central counterparty
providing settlement guarantee of
the transactions executed in SLB.
NSCCL is a “CCR AAA” clearing
corporation, which indicates
the highest degree of strength
with regard to honouring debt
obligations. The rating is assigned
by CRISIL, India's leading credit
rating agency which counts S&P as
34 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 34
its majority shareholder. NSCCL
in the context of SLB is referred
to as an Approved Intermediary.
SLB contracts are traded on an
order matching platform where
anonymous orders are matched
on price/time priority. All classes
of investors, viz., retail and
institutional investors are permitted
to lend and borrow the approved
securities. The expected lending
fee is quoted as price in the order
driven trading system and the
contract is for a fixed tenure. Only
such of those securities traded in
the equity derivatives segment are
eligible for SLB transactions.
Clearing and settlement
In the current scheme, the first leg
of the SLB transaction is settled on
T+1 day while the return leg is settled
on T+31 day through NSCCL.
The return leg date is undergoing
revision in the new scheme.
For the first leg the obligation of
the borrower is the lending fee and
the lender’s obligation is the securities
agreed to lend. The borrower shall
return the securities at the time of
return leg. The securities settlement
is facilitated by NSCCL through
depositories and the funds settlement
is facilitated through the clearing
banks stipulated by NSCCL. The
return leg date shall change in the
future with the introduction of
contracts of up to 12 months.
Margining mechanism
The borrower is margined based on
the volatility of the scrips borrowed.
The value of securities borrowed
is also collected from the borrower
as margins while delivering the
securities to him. The lender does
not get margined post delivering
the securities lent. Till such time
a nominal margin is charged to
ensure delivery. The margins
can be paid in various forms of
collateral, which typically include
cash, deposit receipts or guarantees
issued by approved banks.
Recent developments
NSCCL launched the current
scheme in April 2008 as per the
regulatory framework provided by
SEBI. Initially, SLB transaction
sessions were permitted only for
one hour with a lending tenure of
seven days. The scheme did not
see significant volumes. Feedback
from the market participants
indicated that the market timings
were too restrictive and the tenure
of SLB was short. The regulations
were amended incorporating this
feedback. NSCCL re-introduced
the scheme in December 2008,
increased the tenure to 30 days,
and aligned trade timings to the
securities segment (9.00 am to 3.30
pm IST). The revised SLB scheme
has fared better than its previous
version. However the volumes are
still not significant as compared
to cash and derivatives markets.
SEBI, after discussions with the
market participants, has revised the
guidelines further providing greater
flexibility. This scheme is currently
under implementation by NSCCL.
The new scheme
The salient features of the new
scheme under implementation are:
• Tenure of SLB transactions
extended up to12 months
from the existing 30 days
• The lender will have a
facility for early recall of securities.
NSCCL on a best-effort basis shall
try to procure the securities for the
lender at market determined rates.
• The borrower will have
a facility of early repayment of
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GSL08 FINAL.indd
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pasla coVerage
securities. NSCCL shall try
to find a borrower for these
securities on a best effort basis
at market determined rates.
Way Ahead
The SLB scheme in India, unlike
many other markets, provides
for a CCP and thus eliminates
counterparty risks significantly.
This is in line with the current
global thinking of moving OTC
products to the exchange platform.
The new scheme may see increased
interest from various categories of
investors. NSE has a very active
single stock futures market. All the
securities permitted in the single
stock futures segment are eligible
securities in the SLB scheme as
well. This shall provide a unique
opportunity for a reverse cost and
carry arbitrage whereby participants
could sell stock, buy stock futures
and borrow securities to deliver
in the cash equity segment.
Foreign Institutional Investors
(FIIs) holding huge portfolios of
securities could earn lending fees by
lending their securities in the SLB
market. FIIs could also short sell in
the cash segment and use SLB to
facilitate their short selling strategies.
Retail participants could now earn
additional income on the securities
lying idle in their depository
accounts. Mutual funds could also
participate and provide the necessary
liquidity to the SLB segment on the
lending as well as borrowing side.
The success of the scheme is
dependant on the liquidity that is
created. But, that is true of every
market. If this succeeds, it shall be
another unique success from India,
next to single stock futures! Z

PASLA & RMA

7th Annual Securities Lending Conference, 2nd-4th March, Hong Kong

Developed Market Update Panel - summary

By Paul York, SSSF managing director, securities
finance, head of Asia Trading at State Street
The last 15 to 20 months have been challenging for
the global SBL industry and Asia has been no different.
Numerous markets have endured a plethora of political
and regulatory intervention within the financial markets
in an attempt to allegedly promote economic stability.
Whether or not these restrictive policy interventions
have actually achieved what they set out to do is certainly
questionable and up for further academic debate.
However, as the worst of the economic downturn
appears now to have abated most of the regulators
during 2009 began a regime of restrictive policy
easing. This has been welcomed by the industry and
hopefully some restoration of normality has ensued.
This panel attempted to not only provide an
informative update relating to what each of the Asian
‘developed’ markets had done in terms of addressing
the financial crisis furore but how their various
policies and decision making processes had in turn
specifically affected each market's SBL industry.
Australia
The Australian regulators in particular have come under
heavy criticism for their distinct lack of communication
and increasing ambiguity in relation to both their
policy and decision making modus operandi.
Many in the industry feel ASIC’s continual extensions
of short selling
restrictions, without
offering clarity
on the situation,
caused many hedge
fund positions to
become untenable.
Funds adopting
market neutral strategies were placed into a position
whereby they were effectively unable to sufficiently
‘hedge’ themselves appropriately as per their
mandates and resulting tracking errors ensued.
As ban after ban was extended these hedge funds
had to make decisions to re-allocate their trades
away from Australia or close down all together.
This, coupled with newly introduced comprehensive
reporting and disclosure requirements, have driven
demand side activity away to more easily traded,
more flexible markets in competing parts of Asia.
This has been substantiated in terms of huge
balance reductions throughout the Australian SBL
market. Borrowers now aggressively utilise their own
long inventory to cover their short positions and as a
consequence the landscape in Australia is such that
borrowers with long index arbitrage positions compete
with traditional agency lending programmes.

36 | Global Securities Lending Magazine | 2010

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South Korea Ordinaries Index through 2007/08, we subsequently

SBL activity has been relatively disappointing over
the last 12 months. The trading and settlement
environment has seen increased monitoring and reporting
requirements and, despite the lifting of the general
short selling ban in June 2009, Korea remains the last
remaining Asian market to have in place a short selling
restriction specifically pertaining to financial stocks.
The effect of this is better illustrated by pointing
out that over 16% of the KOSPI index is directly
related to the financial industry. Despite that, a
healthy lendable universe of supply exists and
downward pressure on rates continues.
Hong Kong
Regulators adopted a far more pro-active and open
policy over the draconian efforts witnessed in Australia
and South Korea. They reached out to the various
industry bodies and not only engaged in debate
but appeared to listen to market participants.
Market forces were allowed to take their natural
course, with regulators knowing that a robust,
legitimate framework had been in place for years,
post the Malaysian foreign exchange crisis.
Some political pressure was still being applied and
tensions were high as stock markets continued to fall
but regulators' ability to allow the markets to transact
naturally gave market participants more comfort.
This in turn drew further allocations into markets
such as Hong Kong and, despite witnessing a significant
drop off in the HSI comparative to the Australian All
witnessed a faster recovery in the HSI accordingly in the
last 12 months and this market continues to flourish.
Japan
The market has seen very limited changes although
short selling rules addressed back in 2008 were
extended to be revaluated again in April 2010.
A prevention order to tackle specifically ‘naked’
short selling was also adopted and further short
selling reporting obligations were imposed.
However, the market has struggled regardless of
regulatory impositions and fund allocations directed
primarily towards Japan have been scarce or limited
in favour of opting for more fruitful and potentially
more rewarding markets elsewhere in Asia.
Summary
Irrespective of the lessons learned as a result of this
substantial economic downturn, the reactions and policy
adoption in various countries around the world have
clearly had an impact on levels of SBL-related activity
and more importantly are likely to affect future activity.
If countries wish to retain a ‘developed’ status, they will
need to promote a market environment that encourages
liquidity, volume and fluidity within its framework.
Arguably, some previously ‘developed’ markets have
failed to live up to these prerequisite standards and no
doubt it will take some time, if at all, for many finance
related product offerings that rely heavily on SBL activity
to come back to their previous peaks as a result. Z

IOSCO Update Panel - Financial Market Regulation

The results of a survey of
international regulators’ views were
presented by Ed Blount, executive
director of The Center for the Study
of Financial Market Evolution in
Washington, D.C. He explained
that regulators believe one of their
greatest failings in the recent credit
crisis was ignoring overall systemic
risk in their concentration on
solvency of individual financial firms.
Regulators are moving quickly
to impose procedural restraints
on firms’ leverage and risk taking,
while adopting a more deliberate,
collaborative pace to redefine
formal regulatory structures.
Blount said that regulators have
mixed views on markets such as
securities lending, which enhance
liquidity while facilitating some
of the most highly-leveraged
strategies of market participants.
Chairman Stephen Po of IOSCO’s
committee on regulation of financial
intermediaries described several
regulatory initiatives which he
believes will change the environment
for securities lending participants.
In particular, he and his fellow
reformers want more consistent
regulatory regimes across markets
and greater transparency to help
monitor changing risk patterns.
Among the lessons of Lehman
Brothers, Po noted that sound
counterparty risk analysis requires
more emphasis on final risk and less
on initial credit ratings. Similarly,
stress tests must place more weight
on tail risk in each scenario.
Rico Leung of IOSCO’s markets
committee reported on the research
being done to set new short sale
rules which are expected to usher
in a new uniform regulatory regime
worldwide. Above all, Leung
said that greater disclosure will
undoubtedly be required of hedge
funds and their service providers.
M. Ramaswami of the Singapore
Stock Exchange described his
objective to create more liquidity
in the market by facilitating
the lending of clearing house
and depository securities.
Tambi Mincer of State
Street Bank closed the panel
by cautioning regulators to
consider new rules carefully, so
as to avoid the negative impact of
unintended consequences. Z

38 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 38 12/05/2010 16:34

GSL08 FINAL.indd 39 12/05/2010 16:34
 pasla coVerage

Fixed-income/Cash reinvestment Panel

Ed Gildar, head of fixed-income financing for
Citi in Asia moderated the panel. He noted that
there was a significant increase in fixed-income
discussions with PASLA attendees, which was
consistent with the increase in activity that he has
seen in the region over the past 12 months.
Other members of the panel, including Simon
Kandel of RBS and Bernard Chin of UBS - both
based in Singapore - had somewhat conflicting
views on the uptick in activity. After some spirited
discussion, a consensus was reached that there
was more focus from the existing participants,
and plenty of exploration from global businesses
looking at possible expansion in the region.
The panellists were positive on the outlook for
local-market financing opportunities, with Korea
being highlighted by several of the panellists as a
market to pay attention to in the coming months.
The recent launching of the “bridge” between ICSDs
and the domestic bond clearinghouse (KSD) have
opened up funding and trading opportunities for the
G
Korean government bond market. Further initiatives
designed to internationalise that market should result
in increasing activity for financing businesses.
Gareth Mitchell, a panellist joining from the London
market where he leads the security lending team for
Citi, commented on the challenging environment
for reinvestment options in the fixed-income
market. He noted that collateral guidelines have
been becoming more restrictive in response to the
financial crisis, resulting in lower spreads across the
board. The other panellists all agreed that spreads
have been tightening in their respective businesses,
with the key question being whether volumes
would pick up sufficiently to offset that trend.
The panel came to a close with a response to
that open question. The panellists were uniformly
optimistic about an increase in volume, but more
divided about the size of the increase. In closing
they agreed that there was cause for optimism in the
fixed-income business in Asia, with an unresolved
question as to the degree of optimism. Z

"The Growing Importance of ETFs" Panel

by Julian Pittam, global head of specialist sales at Data Explorers
Thanks to well-informed and vocal
panel members the subject of ETFs
lead to some diverse and conflicting
views - albeit debated professionally.
It was a game of two halves;
the first being specific to the
ETF market and the second half
detailing how the ETF market
has and will continue to affect
the securities lending market.
Measured by any metric,
the growth in ETFs has been
spectacular over the last decade
with compound annual growth
in AUM of 52%, according to
research from BlackRock iShares.
You name it - AUM, number of
instruments, volumes - they have all
grown to the extent that ETFs are the
fastest growing asset class at present.
The panel did manage to agree on
the point that ‘me too’ type products
launched by new participants
wouldn’t necessarily be successful.
The panel felt strongly that new
entrants would only get paid for
innovation. When asked if the
transference of beta performance
from traditional fund management
to the ETF market would be
replicated when it comes to alpha,
the panel highlighted a few cases
where hedge fund alpha has
already been packaged in the form
of an ETF. If banks can harness
that alpha we may well see the
shift of fees from hedge funds to
banks with ETFs as the vehicle.
No ETF discussion would be
complete without a discussion
around the merits and demerits
of physical versus swap-based
ETFs. Needless to say there are
arguments for and against centred
mainly around counterpart risk.
That said, there was consensus
that there would be an upper limit
of bank-issued ETFs with balance
sheet as the ultimate constraint.
As it relates to the securities
lending market the panel agreed
that ETFs and securities lending are
inextricably linked due to hedging
requirements and the obvious
lending pools created both within
the large institutional ETF providers
and the bank issuers. Although one
banker felt that 50% of their short
requirement was covered by their
ETF long, it should be noted the
banker concerned was referring
specifically to his Asian short
were in many cases a traditional
borrow was not always available.
Conclusions were brief given the
slight over-running of the clock and
were listed as a) the market will
continue to grow in Asia as had been
the case in the US b) new entrants
issuing ‘me too’ products might
be too late c) ETF innovation may
lead to success and d) the securities
lending market is of paramount
importance to the ETF market L
and it’s underlying liquidity. Z c

40 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 40 12/05/2010 16:34 Japan a

 Get a Grip
on the Japanese
Securities Lending Market

Get the up-to-date facts,

trends and opinions
on the Japanese
securities lending industry.

Free places available

for asset managers and
beneficial owners.

Register at
www.gsl.tv/japan

For more information contact

Craig.McGlashan@2i.tv
当日は日本語同時通訳が付きます。
Japanese translation will be available during the event

The Japanese Securities Lending Summit

Presented by
“Lending for Liquidity”

GSL |
Park Hyatt Tokyo Global
Securities
3-7-1-2 Nishi Shinjuku, Shinjuku-Ku Lending
Tokyo
Thursday 3rd June 2010 www.GSL.tv/japan
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Lunch reception Drinks reception

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Japan advert
GSL08 with sponsors.indd
FINAL.indd 41 40 27/04/2010 16:34
12/05/2010 13:12
 pasla coVerage
Industry Leaders Panel
To set the scene for a forward-looking panel discussion,
chairman Mark C Faulkner, founder and head of
innovation at Data Explorers, analysed the data to
determine how the global securities lending industry
had performed during the last three years. The overall
message was that the business remains a substantial
source of revenue for institutional lenders and their
providers (USD20 billion per annum) but that there
are regional variations, with Canada emerging from
the credit crunch in a relatively strong position, whilst
Australia has suffered from a reduction in demand for
securities.
He then highlighted the symbiotic relationship that
the asset management and securities lending industries
enjoy and focused upon the significant opportunities in
both industries emanating from ETFs.
Moving on to risk management, Faulkner then
reviewed an industry initiative to enable cross provider
risk-adjusted return comparisons to be made and
presented the contrasting relative performance of US
pension funds and mutual funds.
Faulkner then cited a recent important Oliver Wyman
report, sponsored by the Managed Funds Association,
entitled “The effects of short-selling public disclosure
regimes on equity markets” which concluded that too
onerous a transparency regime can have a negative
impact upon market efficiencies.
A copy of the presentation is available at the RMA
website on www.rmahq.org
All of the panellists recognised that regulation is the
issue of the day and the big unknown, with their main
challenge being to match their education efforts to the
pace of reform. This will have a significant impact on their
members and the market, observed Michael McAuley,
chairman of the RMA's Committee on Securities
Lending. “The goal of our educational efforts for the
RMA is to try to prevent new regulation from having
unintended consequences that negatively impacts
our market as well as trying to ensure that regulation
focuses on those areas that need improvement.
“We are beginning to see some of the potential
changes. Proposed capital, liquidity and margin rules
will make borrowing, lending and financing much more
expensive and will further reduce the potential revenue
to be earned by participating in the market. This will
drive consolidation among existing members and bring
new types of participants to the market.
“This will cause the reduced revenue to be spread
over a larger group of market participants, borrowers,
lenders, agents, central counterparts and clearing
42 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 42
members. We used to think that our market was
inefficient because of the two-intermediary structure.
If a central counterpart becomes part of our market, it
will be a transaction model that could have five
intermediaries between the end users all taking a piece
of the smaller revenue pie.”
In Canada legal, accountancy, tax and regulatory
issues are at the forefront too. Robert Chuich,
president of CASLA, observed: “Some issues that
currently have attracted CASLA’s attention include the
standardisation of legal agreements and Canadian best
practices especially in regard to contract performance
under difficult circumstances, i.e. events of default, and
incremental focus on various accounting, regulatory
and tax issues specific to the Canadian market.”
He then went on to explain the focus of CASLA’s
efforts. “The velocity and breadth of change
internationally requires that Canada is informed and
unified on the relevant SLA issues. To that end, CASLA
has certainly ramped up more quickly than expected
and we continue to hear from prospective participants
who wish to share their views and perhaps join the
association.
Similar to the other organisations, CASLA strives to
promote awareness while educating stakeholders in a
transparent and collaborative manner, seeking to align
CASLA’s objectives with those of the broader market in
instances where it makes sense to do so and, regarding
broader industry representation, CASLA quite
deliberately promotes a broader scope of participation
and representation in the association from indirect
industry participants.
CASLA believes that the SLA industry will be better
served if alignment is promoted not only laterally across
SLA businesses but also in the context of broader capital
markets and related services to which it is linked.”
Kevin McNulty, ISLA chief executive, then outlined
“the key challenges” for the European securities
lending industry. “Continuing to raise awareness and
understanding of beneficial owners - the industry has
done a good job of developing materials, and lending
agents have worked hard to develop the understanding
of beneficial owners but ensuring that everyone
who needs to know about securities lending does is
challenging. Even the larger and more sophisticated
pension funds are challenged to stay abreast of all
the financial innovation that flows their way and our
business has to compete for trustees and pension
managers’ time.
12/05/2010 16:34 ntEU10
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ntEU1001_ISJmag_8x10.5.indd
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 post-erc coVerage

“At the other extreme the smaller pension funds that
may access securities lending through pooled investment
vehicles don’t necessarily have the resources to spend
time on this. Whilst this is a challenge for the broader
investment management industry, regulators expect to
see us doing what we can to raise and maintain levels of
awareness - ensuring that the people driving regulation
understand our business.
“Financial markets regulators generally understand our
business however the regulatory agenda is being driven
by politicians. Given the headlines that tend to focus on
the problems rather than the successes associated with
our business, it’s easy for politicians, who don’t fully
understand what we do and how it benefits investors, to
focus on securities lending as an area that needs reform.
We need to ensure that any regulatory developments are
measured and appropriate and we need to find ways to
ensure that perceptions of our business are balanced.
“It’s not clear what we should expect, if anything, in
terms of direct regulation change for securities lending.
Transparency though is perhaps the most likely target,
especially given that the Transparency Directive is being
reviewed this year and one regulator in Europe has said
they want securities lending to be in scope. The disclosure
model introduced in the Australian market at the end of
last year will provide us with a useful case study.”
In an upbeat contribution Peter J Martin, chairman
of ASLA, recognised that “the key challenge for the
Australian market is to once again stimulate demand
for securities lending”. He added: “Supply is extremely
healthy but given a combination of a smaller hedge
fund market, restrictive practices limiting order flow
compared to other Asian markets and a bias to long index
positions at borrowers the securities lending market has
not recovered since the short selling ban was lifted in
May 2009.
“One of the aims for 2010 is to push for amendments
to local regulations to boost transaction flow in
the Australian market. One solution would be the
introduction of a “liquidity test” or exemption to the
binding hold requirement for more liquid securities. It
is now 10 months since the short selling ban was lifted
so it is appropriate to review that the application of the
regulations introduced is still in keeping with current
market environment.
“Australia has always had one of the lowest settlement
fail rates of any developed market so we need to operate
on a level playing field as far as application of the
regulations is concerned so Australia is once again seen
as an attractive market for offshore funds to invest in.
“The other initiative for 2010, applicable to all markets
and should see even greater co-operation amongst
associations, is the continued efforts to improve
education on the benefits of securities lending to a
general audience.
Promoting the benefits stock loan brings through
liquidity and supporting efficient financial markets
being the main messages of a variety of channels:
communication with local regulators, engagement with
media, participating in industry round tables, hosting
stock loan tutorials, holding securities lending forums,
continuing to use external PR resource to produce
literature and co-ordinate our media strategy.” Z

Repo - The link to successful regulatory reform

Godfried de Vidts, chairman of the International Capital Market Association
European Repo Council, reports on the council's latest meeting
At the European Repo Council in general; and the reduction in identified some 10 years ago in
(ERC) meeting on March 18th the undocumented transactions all the 15 Giovannini barriers, remain
results of the semi-annual ICMA- provide a good example of where problematic. Today’s regulatory
ERC repo survey (available at financial markets in general need reform being discussed in the EU
GSL.tv) showed a strong recovery to go. Liquidity and collateral Commission DG MARKT European
in the European repo market. An management are very high on Market Infrastructure Legislation
increase of 14.7% on the previous the list of priorities of banks, project should bring an end to the
figure put the baseline figure for the while a more robust clearing fragmentation in the markets and
market size at EUR 5,582 billion. and settlement framework will specifically for the repo market
The other findings of the survey: eventually allow a wider range of allow non-discriminatory access
higher use of central counterparty bonds to be centrally cleared. to CCPs and settlement venues,
clearing (already well established in Solutions to the weaknesses in permitting a better use of resources.
repo); the greater focus on netting the European market infrastructure,

44 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 44 12/05/2010 16:34


The regulatory reforms currently
discussed in the framework of the
G20 will have a profound impact
on the OTC derivatives markets.
What is missing in the debate is
the importance of the secured
market (i.e. repo) to the ultimate
goal of policy makers to reduce
systemic risk. ISDA has recently
produced a white paper entitled
Market Review of OTC Derivative
Bilateral Collateralization Practices.
This document largely validates the
existing framework established by
the ERC over the last 10 years.
Documents like the “Repo Trading
Practice Guidelines of August 2003”
and “Best Practice Guide to Repo
Margining of September 2005”,
linked to the legal framework under
the Global Master Repurchase
Agreement (GMRA), are witness to
continuous efforts in the repo market
to deliver a robust solution for the
product that undoubtedly provided
some stability in the turbulence
around the Lehman default.
At the March 2010 ERC AGM
there was an update on the review of
the GMRA 2000, which was started
immediately after the peak of the
crisis, as some improvements in legal
documentation due to the global
nature of the financial markets had
been identified in the post-mortem.
The aim is to complete the review
currently being undertaken in time
for the commencement of the 2011
legal opinion exercise. The 67 legal
opinions covering today’s legal
needs for users of the GMRA will be
supplemented by the creation of an
annex for credit claims. The expected
collateral shortage caused by today’s
regulatory reforms will - it is hoped
- be mitigated by the credit claims
project, as it will add to the range of
available collateral that may be used
between interbank participants.
The keynote speech at the ERC
AGM from Mattias Levin of DG
MARKT discussed “ongoing
regulatory changes in Europe’s
market infrastructure” and
highlighted the need for a continuous,
GSL08 FINAL.indd 45
open dialogue with policy makers,
regulators and politicians.
The main focus of the policy
makers is to reduce counterparty
risk, through legislation to
ensure safe and sound CCPs and
improvements to the collateralisation
of bilaterally-cleared contracts - in
particularly for OTC derivatives.
In addition the mandatory use
of trade repositories, the Basel
Committee capital revisions, as well
as the MiFID review re pre- and
post-trade transparency all have a
potential impact on the repo market.
The presentation by Andy Sturm,
chairman of the Committee on
Payment and Settlement Systems
(CPSS) Working Group on Repo
Market Infrastructure correctly
identified that additional guidance
for repo market infrastructure
will be needed to enhance the
resilience of the repo markets.
All infrastructure arrangements
used by repo market participants for
clearing and settling repos (including
centralised collateral management
services), irrespective of whether
these services are provided by market
utilities or commercial banks, are
being studied. It is highly likely
2010 | Global Securities Lending Magazine | 45
post-erc coVerage
that two types of guidance will be
produced by the CPSS working
group: either directly relevant for repo
market infrastructures (i.e. what they
should do); or indirectly relevant,
being what infrastructures could do
to support market-wide initiatives.
Directly linked to both
presentations, the ERC highlighted
the need to increase the focus on
European market infrastructure,
where fragmentation caused
by different service providers
within the ‘repo value chain’
continues to obstruct further
development of the market.
In today’s environment where
regulatory reforms are currently
being finalised the ERC believes that
there is a need for deeper market
infrastructure reforms to allow a
true European capital market. The
(mainly) commercial barriers, often
debated in meetings hosted by the
European Commission, can and
should be taken down. It is not too
late yet for the service providers in the
repo markets to deliver, thus avoiding
unnecessary regulatory intrusion
in what should be an innovative
private market infrastructure.
The ERC fully accepts that
strengthening the resilience of the
banking sector cannot be achieved
by the markets only and that some
official legislation/intervention is now
desirable. It is however important
that any changes in the regulatory
framework conserve what has been
achieved so far; and any regulatory
impact should avoid reversal of
the considerable progress made
in the last 10 years, particularly
for the repo markets but also for
the financial markets at large. It is
in this context that the ERC will
respond to the proposals as shown
in the box on the next page.
The reforms currently tabled under
the framework of the G20 correctly
highlight the need for better use
of current market infrastructures,
12/05/2010 16:34
 post-erc coVerage

in particular the use of central
clearing. However, as clearly
demonstrated by the experience in
the repo markets the use of central
clearing can only be successful
for highly liquid instruments.
Even in today’s European repo
market some sovereign bonds
are not accepted by the main
central counterparty providers.
The use of corporate bond
collateral within the framework
of extending central counterparty
clearing has been discussed for
many years but even if further
progress can be made there will
always be a large part of this
market, particularly in the ABS/
MBS securitisation market that will
never be part of this infrastructure.
Therefore, the adequate
development of OTC bilateral
collateralisation should attract
appropriate regulatory scrutiny.
Specifically for the repo market, but
also for the wider OTC derivatives
market, effective credit risk mitigation
will require a comprehensive
and appropriate clearing policy
strategy. The goal should be to
put to use the advantages of the
collateralisation model currently
available for CCPs, in a model that
is comparable for risk mitigation
in the bilateral OTC markets.
Summarising the challenge for the
actors in the secured market place,
the definition from the University
of St Gallen describes the task
ahead: “Collateral & Liquidity
Management is defined as the
optimal management of credit,
collateral, capital and all related
execution, pricing, operational,
documentation and risk management
of a portfolio across all products, all
business models and all locations”.
When the regulatory reforms take
all these elements into consideration,
recognising that the ultimate risk
mitigation tools (cash or collateral)
will come for all products from the
funding desks of financial institutions,
we surely will be on the right track
for an adequate robust framework
benefiting the global economy. Z

ERC's response to proposals

- The FSA consultation paper regarding strengthening capital (Dec 10th, 2009) should exempt CCPs from the P
25% large exposure limit. The ERC believes that failure to adopt such an approach in the treatment of large
exposures to CCPs would undermine the incentive effect that is being pursued.

- The Basel Committee consultative document (Dec 17th, 2009) to introduce a global minimum liquidity stan-
dard as well as the EU’s consultation paper (Feb 26th, 2010) re possible changes to the Capital Requirement
Directive (CRD IV), that cover the liquidity coverage ratio and the net stable funding ratio, will have a significant
impact on funding. The ERC view is that assets accepted as collateral for repos eligible for CCP clearing (by a
•L
CCP that fully conforms with the applicable standards promulgated by CPSS/IOSCO) should be accepted as
“liquid assets”. Availability of such assets through such robust infrastructures provides as good an assurance •A
of liquidity as it is going to be possible to obtain. G
- The Basel Committee consultative proposal (Dec 17th, 2009) to strengthen the resilience of the banking sec- •M
tor introduces a leverage ratio as a supplementary measure to the Basel II risk-based framework. In particular L
this states “netting is not allowed (this applies to both regulatory and accounting netting for derivatives, repo
style transactions and the netting of loans and deposits)” and “repo style transactions are a form of secured
funding and therefore an important source of balance sheet leverage that should be included in the leverage
ratio” (although the “impact of applying regulatory netting rules as an alternative to the no-netting approach”
will be considered), which raises concerns. The ERC is most worried about the disallowance of repo netting.
The ERC’s experience has been that the growth of repo has not been inspired by a desire to boost leverage,
but rather as an important risk management tool, allowing lenders – rather than only having the ability to lend
on an unsecured basis – to mitigate their risk by engaging in secured funding.

- HM Treasury published proposals to strengthen the UK’s ability to deal with any future failure of an invest-
ment bank (Dec 16th, 2009). The question was raised re difficulties that repo market transactions pose for the
insolvency of an investment firm. The ERC responded that the rights of secured creditors need to be respect-
ed as highlighted in the GMRA, which provides a sound legal basis for transactions.

- The Committee on the Global Financial System issued a document (Mar 23rd, 2010) re: “The role of margin
requirements and haircuts in procyclicality”. The ERC is studying this report, as the introduction of prescriptive
measures could disrupt certain ways in which risks are managed. The ERC wishes to ensure that unintended
consequences in the repo markets resulting from such measures are avoided.

C
46 | Global Securities Lending Magazine | 2010

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 Natural collateral
Natural Collateral
By Olivier Grimonpont, director, head of collateral services at Euroclear
The shoots of recovery are starting
to show. New fixed-income issues
are sold successfully and euro
commercial paper maturities are
lengthening. Our capital markets
have started their arduous and
potentially long road to recovery.
That said, we will not be returning
anytime soon to an environment
where, for example, asset-backed
securities account for a large
portion of all collateral in use,
unsecured lending is rife and access
to cheap financing is easy. Bang!
The harsh realities of the financial
crisis have resulted in a seismic
shift in how our capital markets
function. A new breed of firms
is emerging with risk and cost
controls at the front and centre.
Today, counterparties are
examining their trading partners
closely, even concerning themselves
with the liabilities these partners
have towards other firms. Market
participants have become ultra
cautious concerning the assets
they are willing to hold or agree
to take as collateral in financing
transactions. Some have elected
to (temporarily) leave certain
businesses, such as securities
lending, while others remain,
but with convictions about the
need for more direct control
over their own assets and those
they receive as collateral.
As a third-party collateral
management agent, one interesting
trend that we have noticed
recently is that some beneficial
owners are asking their agency
lenders to deposit collateral in
their own direct accounts, rather
than through the agent’s omnibus
account structure. The agent
remains in charge of the financing
transaction on behalf of its client,
48 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 48
but the collateral movements are now
conducted by the triparty service
provider either directly in and out
of the beneficial owner’s nominee
account or by passing it through the
agent’s account. Thus, by having
direct ownership of the collateral, the
beneficial owner mitigates default
risks vis-à-vis the counterparty
and its agent at the same time.
The price is right
Our new capital market environment
means that collateral liquidity
is an absolute essential. Taking
collateral to reduce exposures, of
course, is an important step, but
valuing collateral accurately and
having the ability to liquidate these
holdings at will is equally vital.
In bilateral financing deals,
administrative responsibilities such
as accurately valuing the underlying
securities used as collateral,
establishing and adjusting haircuts and,
when needed, substituting securities
used as collateral is a rigmarole
that most firms see as a burden.
What is more, it eats up valuable
resources. In this new cost-conscious
world, more market practitioners
are looking to their infrastructure
service providers to relieve these
burdens and unlock the powers of
automated collateral management.
Euroclear Bank, as an international
central securities depository managing
around EUR250 billion in collateral
outstanding per day, already supports
clients active in repos, secured loans,
derivatives and securities lending
transactions. Our fully automated
service caters for a variety of fixed
income, equities and hybrid collateral.
Amongst other tasks, we perform
daily mark-to-market valuation
checks to ensure that the transaction
is fully collateralised at all times.
Our pricing is fresh. Because
we settle transactions in over
400,000 securities, we are able
to cross-check and supplement
third-party price feeds with data
derived from our own real-time
transaction settlement process.
This gives us the ability to
frequently and accurately provide
on-demand collateral valuations.
Flexibility is also a service
cornerstone. For example, simply
by defining as such within pre-
arranged collateral eligibility
criteria, collateral takers can
exclude price quotations for
collateral that are older than a
certain period, or completely
rule out prices that have been
formulated according to an
indicative model. Concentration
limits, currency selections,
paper grading, amongst other
criteria, are all respected by
the triparty service provider.
In view of the above, we are
not surprised to see increased
use of equities as collateral.
From a pricing perspective, it
is relatively easy to get current
and accurate equity prices from
an array of credible sources.
Higher quality
In today’s market, lenders are
tightening valuation criteria
and narrowing concentration
limits on the securities they
accept as collateral, thereby
forcing borrowers to supply a
diversified selection of higher
quality securities as collateral.
Furthermore, to extend the use
of collateral even further, collateral
takers may re-use securities
received as collateral from one
deal and pledge them in another
financing operation, thereby gaining
12/05/2010 16:34
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GSL08 FINAL.indd 49 12/05/2010 16:34

 russiaN repolutioN

Natural
Collateral Russian repolution
(continued) Igor Marich, vice president of MICEX and
new profit-generating opportunities.
Alexander Artyukhi, development and client relations
Another trend we are seeing is a director at the NDC outline post-crisis Russian repo
growing appetite for trans-continental
How does the Russian repo market same level as before the crisis.
financing. For example, we are
differ from other major economies?
supporting market participants
Marich: The Russian repo market What did market participants
in Europe and Asia to use the
is unique in comparison to other learn from the crisis?
international and domestic securities
developed markets, in that the Marich: I think the repo market
they hold in Euroclear Bank to
majority of Russian repo market has become even stronger than
finance repos and other transactions
is on exchange. However, it’s not before the crisis, as participants
involving European and major Asia-
real exchange-traded transactions. have been enriched by the
Pacific currencies. More and more
We register repo transactions in experience. They began to use a
Asian firms are using their Japanese
our trading system and provide wider range of instruments in order
government bond (JGB) holdings as
clearing in exchange-traded to manage their risk properly.
collateral for financing purposes with
instruments. We also provide highly Repo with corporate bonds was
Europe-based counterparties. They
sophisticated repo calculations and very developed before the crisis and
are able to pledge JGBs as collateral
that’s why we managed to build up as a result of the many defaults in this
at the end of the Asian business day
a repo market here on MICEX. segment it suffered more than others.
and have full use of these securities
But at the moment it is showing very
at the start of the next business day
Artyukhi: Collateral is not as strong signs of recovery – maybe at
in Asia. Korean government debt
developed as foreign and some the same level or slightly more than
is also growing in use as collateral
local participants would like to trading with government securities.
since Euroclear Bank launched
see it but we are working on this. I don’t see any substantial
a link with the Korean securities
The OTC market for repo is still difference in our repo market now
depository in September 2009.
not developed, but hopefully and before the crisis in terms of
within a year, maximum two, collateral, except in corporate bonds,
What does the future hold? where before the crisis there was a
we can present a couple of new
National central banks and market
products to change this situation. much wider range of instruments
infrastructure service providers
being used. Now, market participants
have been pivotal in guiding
How did the crisis affect the market? are paying much more attention
firms through the worst of the
Marich: It was perhaps affected to quality of collateral. Before the
financial storm. Their “safe haven”
even more so than some other crisis, they had rather deceiving
status kept liquidity flowing.
segments. Some people said impressions that if you trade repo you
Throughout the crisis, there
that the repo market became a are protected from various problems
has been a flight to quality. Low-
trigger for the crisis in Russia and just because you have collateral.
risk, proven service providers,
strengthened its negative effect.
highly liquid and easily valued
Actually it wasn’t a problem of the Did the crisis change the
assets, as well as expert triparty
repo market itself but of market regulatory landscape in Russia?
agents have been in sharp demand.
participants who did not pay enough Marich: Participants have begun
And as expected, central banks
attention to risk management. to sign bilateral agreements with
are currently planning their exit
We now see a substantial recovery counterparties, because another
strategies as liquidity providers. It
in all areas of the repo market. Repo problem during the crisis was the lack
is likely that their collateral criteria
with government securities, which of a legal basis for transactions. Our
will tighten at some point, forcing
is the main cash-driven repo, has exchange rules do not cover all issues
the inter-bank market to resume
reached pre-crisis level, around related to repo trading, especially in
commercial lending activities,
USD2 to USD2.5 billion daily. the case of counterparty default. The
albeit on a fully secured basis.
Repo with equities and repo necessity of some master agreement
Those firms already using neutral
with corporate bonds have risen for repo transactions became obvious
triparty collateral agents can face
and have reached more or less the after the crisis. MICEX changed our
the future with greater certainty. Z

50 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 50 12/05/2010 16:34

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GSL08 FINAL.indd 51 12/05/2010 16:34

 russiaN repolutioN
exchange rules in order to assist our
participants with implementation
of such default rules.
At the beginning of 2010 we
changed our rules on issues
such as manufactured payments,
coupon payments and other
incomes during repo transactions,
in line with legislation changes.
Artyukhi: The process of
legislation change is still ongoing
and I believe that will take a
while to develop. The focus on
repo and securities lending is
very high at the moment.
What is the status of the
MICEX Group CCP?
Marich: The most important thing
we did as a result of the crisis was
introducing central counterparty
repo on 15th February 2010.
This is a very complicated
product both for us and our
participants and requires a lot of
changes for them in their business,
risk management and technologies
– it will take some time to prepare.
So you can say that the service is
launched technically, with MICEX
playing a role as CCP. We foresee
substantial interest from our
participants in this new service.
How advanced is the Russian
securities lending market?
Marich: We are going to develop
our services for securities lending
Alexander Artyukhi
52 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 52
and we have a joint project with
the NDC to develop these services.
The main idea is to ensure our
market participants receive
automated securities lending, and
this became even more important
after launching CCP for outright
trading and repo transactions.
We moved equities market
from 100% refunding and now
we face different levels of risk
and we have to manage this risk
properly. Now market participants
face a necessity to get securities,
for example for fulfilment of
CCP transaction obligations.
That’s why the development of
securities lending is a crucially
important thing for us and I hope
by the end of this year we will
be able to offer our participants
some new opportunities.
Artyukhi: You may find in any
local custodian’s market guide that
securities lending does not exist in
Russia. That is because it does not
exist according to their conception
of that service. To change this
opinion and to fit securities lending
into international standards is a
high priority right now and that
is one development that should
be made in the near future.
NDC is a member of the National
Securities Market Association
which is very heavily involved in
the development of this product.
Together with them we are
highly involved in lobbying the
regulator and negotiations with
other market participants to have
a common understanding of what
the product should look like.
Do you have any new
products in the pipeline?
Artyukhi: The latest product
is a delivery-versus-payment
settlement system with Euroclear
launched in mid-2009, and
we have a similar product with
Clearstream in development which
will hopefully be launched by the
Igor Marich
end of this year. I believe that these
products, which we offer together
with the international settlement
depositories, and the growing
demand on such services show
the integration of NDC into the
global market and the evolution of
the Russian market on the whole.
Is the target of offering tri-party
repo by 2010-2011 still on course?
Artyukhi: It is still on course
to be released by 2011 and I
think the market will take it
up as soon as it is available.
Are regulators keen to see tri-party
repo and securities lending develop?
Artyukhi: They are keen to see
those products on the market and
have been very supportive for
the last year. It is a huge change
of regulators’ priorities – they
are looking for market players’
opinions and they really want to
change something in a good way.
How far is Russia from being
one of the major financial centres?
Artyukhi: Our economy is still
very dependent on commodity
prices. We still cannot call
Russia a developed country
in terms of a financial market,
but we are trying very hard.
We hope that the entire
world will see Russia in a
different way pretty soon. Z
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54 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 54 12/05/2010 16:34 Canada

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 global securities fiNaNciNg summit

The Global Securities

Financing Summit
Luxembourg was host to the Global
Securities Financing Summit on
20th and 21st January 2010, an
event that touched on some of the
major issues facing the industry,
both in Europe and beyond.
Stefan Lepp, head of global
securities finance at the summit’s
organiser Clearstream, had the job
of opening the summit. Speaking
to GSL later, he outlined some of
the major challenges he believes
currently dominate the industry.
“Where have the issues been in
the past? I think the biggest issue we
faced was lack of trust,” he said.
“Given the collapse of some
relevant institutions over the last 24
months, it’s essential to understand
People want to move into more first part of day one began with
that there has been no trust. Why
transparent, stable organisations.” the Central Bank Forum.
was this? People financed certain
He added: “Another issue is the Daniela Russo, director general
things on an uncollateralised basis,
valuation of collateral. I think there of the directorate general payments
and when you do this you face a
has been tremendous progress made and market infrastructure at the
complete loss in the transaction.
in this, but there are still a significant European Central Bank, outlined
“This led to a significant trend
number of securities that are difficult some recent European initiatives,
towards collateralisation. Based on
to price and this is an issue that followed by Jaap Mauritz from De
collateralisation we can identify that
the industry will have to face.” Nederlandsche Bank, who provided
trust is coming back to the industry.
Following Lepp’s speech, the his perspective on these initiatives.
US initiatives were next, with
Lucinda Brickler, senior vice
president and co-head of the
payments policy function for the
credit and payments risk group at
the Federal Reserve Bank of New
York, outlining her thoughts. The
three speakers were then joined
by Michael Schneider from DZ
Bank and Frédéric Mouchel from
JP Morgan for the first panel of
the day, with Russo chairing.
Patrick Artus, chief economist
at Natixis, finished the first half
of day one with a presentation
on UK, US and European banks’
response to the crisis, based on an
analysis of their balance sheets.

56 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 56 12/05/2010 16:34


A Deutsche Börse Group workshop
made up the second half of the day.
Pascal Morosini of Clearstream
provided a presentation on the Global
Liquidity and Risk Management
Hub. Morosini said that the world
has changed since the crisis, with
risk management, asset protection,
central banks and new regulations
key to most people’s concerns.
He said that while there was no
“magic solution for market recovery”,
systems such as the Global Liquidity
and Risk Management Hub could
be “an answer to a more secured
and transparent financial world”.
Next, Clearstream’s Jean-Robert
Wilkin and Tobias Duchscherer of
Eurex Repo provided an update
of GSF products and services.
GSL caught up with Marcel Naas,
managing director of Eurex Repo, to
hear his thoughts on the industry.
“Securities finance has changed
quite dramatically,” he said. “In the
past, it was the financing of securities.
During the crisis, people started
to use these kinds of securities as
collateral in the Eurosystem against
cash from the central Bank. It was
more like a collateralised funding and
that has stayed – more secured money
market facilities are now the driver
rather than the securities finance
that was used before. So therefore
repo transactions diminished a bit
GSL08 FINAL.indd 57
global securities fiNaNciNg summit
point in time. Exactly two years ago
there was a peak in the repo market
– there was an outstanding amount
of around EUR7 trillion, currently
there is around EUR5 trillion.
“Why? We have a push coming from
the unsecured market, we have seen
a decrease in asset prices in general
and we have seen a lot of mergers
and takeovers in the banking sector.”
Next, Paul Mercier, principal
advisor for market operations
at the European Central
Bank, gave a keynote speech
on how the Eurosystem dealt
with the financial crisis.
The final panel of the day, and of
the conference, focused on securities
while other transactions grew.”
lending. Dearlove was joined by Dirk
The theme of day two was
Bruckmann of DWS Investment
Driving Innovation, with Mark
GmbH, Mick Chadwick of Aviva
Dearlove from Barclays Capital
Investors, Mark Newton of Barclays
taking chair duties for the day.
Capital, Jay Schreyer of Deutsche
The first panel discussed the
Bank and Walter Kraushaar of
latest news on repo and liquidity
DekaBank Deutsche Girozentrale.
management and was comprised
The panel focused on both the
of Geert Wijnhoven of ING Bank,
removal of short selling bans in a
Michael Cyrus of Royal Bank
number of markets, but also on
of Scotland, Andreas Biewald
expected new regulations. The
of Commerzbank, Jamie Smith
panellists also touched on the
of Bank of Scotland and Harald
issue of harmonising the various
Bänsch of Unicredit Group.
master agreements used globally,
Bänsch’s colleague Arne Theia,
and mentioned the new joint
head of repo and collateral trading
ISLA/ICGN code on securities
at UniCredit, later caught up with
lending and voting, scheduled
GSL to give his thoughts on some
for completion in June 2010.
of the topics that were discussed.
“We have seen a big push coming
You can see all of the
from the unsecured market and the
interviews at www.GSL.tv Z
repo volume has decreased at this
2010 | Global Securities Lending Magazine | 57
12/05/2010 16:34
 beNeficial owNers' summit

The 16th Annual Beneficial Owners'

International Securities Lending & Repo Summit
February 7th-10th, San Diego
The 2010 version of the annual IMN securities lending mismatches in revenue motivations between lenders and
conference proved to be a valuable forum for industry agents. The panel discussed several specific ideas for fee
professionals to exchange information. arrangements to address those concerns, including:
One of the many interesting topics was the subject of o Standard basis point cash collateral management
a discussion led by Greg Korte, president of Korte & fee coupled with a revised revenue split
Associates Consulting, regarding price negotiations, fee o A tiered fee structure where lenders earn a much
splits and others lending fee arrangements. Agents and higher percentage after base fees are met
their client lenders have always had healthy discussions o A new flat rate pricing scheme for agent lending
on the subject of how to divide up lending earnings. services coupled with adjusting fees on other services to
Renewed interest in the topic is driven by the recent bring total fee levels to a market-supported level
capital losses in cash collateral coupled with much lower o Performance based fee and revenue split
on-loan balances and earnings. arrangement
Chris Doall, head of securities lending client relations
at Northern Trust, weighed in on the discussion, citing The final topic covered by the panel addressed client
several factors that are incorporated into a client’s lending interest in collateral investment indemnification. The
fees. Items including the investments in infrastructure, current issues involved in providing an indemnified
people and technology, external vendor fees and the cost product are the current low spreads available in general
borne for fiduciary risk were discussed. collateral volume lending. Also, the requirement for
The panel fielded a question from a client lender about an indemnified investment to be backed by an agent’s
whether lending fees subsidise custody fees and if so, balance sheet makes the product very expensive.
what is does the future hold for fee levels? Tom Daniels, Alternative solutions could be overnight repurchase
managing director, new business development, BNY agreements backed by treasuries. Both ideas offer an
Mellon, was first to respond indicating that it is largely increased level of protection, but can sacrifice significant
taken for granted in the industry that current custody upside earning potential of the target portfolio.
fee levels are supported by ancillary services such as The session ended with many topics and ideas left to be
lending, performance reporting, compliance and foreign discussed at a future date. Z
exchange business. Korte added that the practice is likely
to continue because of market forces. Recent
custody provider consolidation has produced
stiff pricing competition among the few
remaining players. The fierce bidding process for
new client business acts as a constraint to any
upward pricing pressure.
Keen interest was expressed on the topic
of alternative pricing approaches to securities
lending. Clients are now very sensitive about
their down side liabilities for collateral losses
and may want to stop sharing the upside
income with their agents. Client lenders were
interested in prospects of decoupling collateral
management fees from spread income earned
on the actual lending. The panel seemed united
in its opinion that most agent lenders would be
willing to renegotiate current fee arrangements.
It was also made clear that a client’s overall fee
total would be critical to any new discussions.
Clients expressed concerns about possible

58 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 58 12/05/2010 16:37

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 directory

consulting

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

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

David Little
Head of Securities Finance
david.little@rulefinancial.com
Rule Financial is a leading independent provider of business and IT services www.rulefinancial.com
employing over 270 people in the UK, USA, Spain and Poland. Our Securities
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28 West 44th Street, Suite 808,

New York, NY 10036
+1 212 231 8428

data services

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

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eSecLending is a leading global securities lending agent servicing sophisticated in- Contact:
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Chris Doell
Northern Trust Corporation (Nasdaq: NTRS) is a global leader in delivering innova-
Senior Vice President
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Head of North American Securities
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Lending Client Service
a leader in the industry, operating trading centers throughout the United States, Eu-
+1 312 444 7177
rope, Canada and Asia to take advantage of markets throughout the world 24-hours
Sunil Daswani
a day. Northern Trust’s Securities Lending program is consistently recognized as a
Senior Vice President
top lender; continuously outperforms the RMA’s Aggregate Composite; holds top
Head of International Securities
positions at industry organizations; provides superior relationship management and
Lending Client Service
technology; and maintains a strong 28-year track record.
+44 (0)20 7982 3850

60 | Global Securities Lending Magazine | 2010

GSL08 FINAL.indd 60 12/05/2010 16:37

 knowledge is power
To keep up with the news, developments and comment in your industry, and to
get your voice heard, join GSL market information services. With benefits
including access to GSL's exclusive, timely and cross-market one-day Summits,
daily web tv reports and the quarterly magazine. There has not been a better time
to receive consistent, quality insight into a changing industry.

Membership for one year GBP 249 EUR 283 USD 383

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gsl |
Global
Securities
Lending

GSL provides in-depth

gsl summit |
Global coverage of the securities
Securities borrowing and lending,
Lending
repo and prime brokerage
markets. Regulation,
relationships, infrastructure and new technology are integral aspects the magazine
covers, along with market and personal profiles, statistics and guest writers.

The Securities Lending Industry Awards 2010 hosted by GSL

The
Securities Visit http://gsl.tv/awards for more info
Lending
Industry
Awards
2010 GSL in support of

GSL08 FINAL.indd 61 12/05/2010 16:37

 directory
C: Judith McKelvey
T: +44 (0) 207 043 8319
E: judith.mckelvey@4sight.com wide. 4sight Securities Finance (4SF) is a flexible modular solution that empowers
C: Jason Hayes
T: +1 416 548 7922
E:jason.hayes@4sight.com
C: Peter Sanders
T: +61 (0) 2 90378416
E: peter.sanders@4sight.com fixed-income markets and provides 24 hour continuous operation, inter desk trading,
W: www.4sight.com
A:EquiLend Europe Ltd.
14 Devonshire Square,
London EC2M 4TE
UK
T: 44-207-426-4426
C: Michelle Lindenberger
E: michelle.lindenberger@
equilend.com
A: 17 State Street, 9th Floor
New York, NY, 10004
T: US- +1 212 901 2224
W: www.eurexseclend.com
T: +41 58 854 2066
F: +41 58 854 2455
E: info@eurexseclend.com
Eurex Zurich Ltd.,
Selnaustrasse 30,
Zurich, CH-8021,
Switzerland
T: +44 20 7220 0961
F: +44 20 7220 0977
C: Rupert Perry
E: rupert.perry@pirum.
com
A: Pirum Systems
Limited
4 Eastcheap
London, EC3M 1AE
W: www.pirum.com
Visit SunGard at
www.sungard.com
62 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 62
technology
4sight Financial Software is a leading supplier of innovative software solutions to the
Securities Finance, Settlement & Connectivity markets with offices and clients world-
financial institutions of all sizes, from the smallest direct lender to the global custodian,
broker or intermediary on an agency or principal basis. 4SF contains market leading
functionality that provides greater automation, faster trading, improved risk man-
agement, and enhanced relationships with clients and counterparties. It supports
borrowing, lending, repo, swaps and collateral management across the equity and
a ‘global book’, real-time value dated position keeping and a powerful web reporting
module, allowing full front to back office processing.
EquiLend is a leading provider of trading services for the securities finance industry.
EquiLend facilitates straight-through processing by using a common standards-based
protocol and infrastructure, which automates formerly manual trading processes.
Used by borrowers and lenders throughout the world, the EquiLend platform allows for
greater efficiency and enables firms to scale their business globally. Using EquiLend’s
complete end-to-end services, including pre- and post-trade, reduces the risk of
potential errors. The platform eliminates the need to maintain costly point-to-point
connections while allowing firms to drive down unit costs, allowing firms to expand
business, move into different markets, increase trading volumes, all without additional
spend. This makes the EquiLend platform a cost-efficient choice for all institutions,
regardless of size.
Eurex is one of the largest derivatives exchanges and the leading clearing house in
Europe. Wherever you are located, we provide you with access to the benchmark
futures and options market for European derivatives. Eurex also offers short term fund-
ing products, such as Eurex Repo. Eurex Repo is among the forerunners in provid-
ing integrated trading and clearing for repo transactions. Eurex’s latest innovative
marketplace is called Eurex SecLend. Eurex SecLend. Europe’s leading investment
banks participate as borrowers in the Eurex SecLend marketplace, acting as principal
brokers, dealers and intermediaries. They all benefit from Eurex’s leading state-of-the-
art trading and processing services. For Eurex, service and technology innovation is
not just a buzzword. New trends are being transformed into inventions through the
adoption of advanced trading practices.
Find out more on www.eurexseclend.com.
Pirum provides a full suite of automated reconciliation and straight through processing
(STP) services supporting Operations within the global securities finance industry. The
company’s on-line SBLREX service encompasses daily contract compare, monthly
billing comparison, mark-to-market & exposure processing, pending trade compari-
son, income claims processing and custody reconciliation. Subscribers to Pirum’s
services significantly increase their operational efficiency and reduce their risk by
using Pirum’s solutions, as staff are able to focus on fixing the exceptions instead of
using their time to check and process routine business. These automated processes
are more scalable and risk controlled too, allowing significantly higher volumes to be
managed without corresponding increases in operations headcount.
With annual revenue of USD5 billion, SunGard is a global leader in software
and processing solutions for financial services, higher education and the
public sector. SunGard also helps information-dependent enterprises of all
types to ensure the continuity of their business. SunGard serves more than
25,000 customers in more than 50 countries, including the world’s 50 larg-
est financial services companies.
12/05/2010 16:37
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GSL08 FINAL.indd 63 12/05/2010 16:37


leNder profile
Northern Trust
Northern Trust’s Sunil Daswani, international head of client relations for securities lending
and Amelia Cotton, vice president securities lending talk to GSL
What is your company’s activity in
securities lending?
Northern Trust began lending
securities on behalf of its clients in
1981 and was one of the first banks
to lend securities internationally in
1988.
We aim to provide our clients
with flexible lending options and an
opportunity for optimising returns
for loaned securities.
Today, we actively lend in close to
50 different equity and fixed income
markets worldwide and continually
review and expand into additional
markets to help benefit our clients.
What is your approach and strategy
in deciding the future of securities
lending programmes?
Northern Trust seeks to optimise
returns through a customised
lending programme in the context of
thoughtful risk management.
Our lending philosophy can be
summarised as aiming to enhance the
overall return of clients’ portfolios,
without impacting the underlying
investment strategy of their
investment managers.
The following strategic initiatives
are currently in place for the next few
years:
 Continuing to expand the
types of collateral we accept on
behalf of our clients, providing
increased opportunities for
lending.
 Expanding electronic and
digital trading interfaces with
borrowers, enabling our traders
to focus on trading high-demand
securities with the largest
intrinsic value.
 Enhancing our distribution
network by entering new
markets and expanding our
assets in others.
64 | Global Securities Lending Magazine | 2010
GSL08 FINAL.indd 64
 Enhancing our borrower
exposure risk quantification
framework to prepare for Basel
II.
 Continuing to strengthen
relationships with lenders,
borrowers, regulators, industry
bodies and governmental
authorities worldwide.
It is Northern Trust’s view that
securities lending is an integral
feature of efficiently-performing
global markets and remains here to
stay.
However, we see securities lending
continuing to be an important
component not only for the financial
markets, but also in being among the
range of value-added services from
which clients may benefit.
What is your collateral profile, and
do you see this changing?
Northern Trust offers clients
an array of collateral options and
investment choices for cash collateral
to help meet the needs of our diverse
client base.
We operate a family of collateral
pool options for our clients, including
a Non-Cash Collateral Pool option.
In addition, we offer customised
collateral funds whereby we work
with clients to help meet their
own criteria, their own investment
guidelines and create a customised
investment programme and mix of
risk and return.
With regards to cash re-investment
in the collateral pools, Northern
Trust generally looks to maintain
healthy liquidity levels relative to
overall collateral holdings, invest
in high-quality, short-duration
securities, and seeks to minimise the
impact on clients of forced sales at
deep discounts (e.g. those resulting
Doremu
D
from unpredictable borrower returns
and market events).
Going forward, our collateral
profile will develop through
consultation with clients and in-line
with market developments.
How would you assess the overall
contribution of securities lending
to the funds involved in your
programme?
Through participation in
Northern Trust’s securities lending
programme, clients have the
opportunity to optimise the value of
their portfolios while working within
their individual risk tolerances.
Income gained from lending
securities traditionally offsets a
significant portion of annual trustee
and custodian fees, and our clients
benefit from dealing with a financially
stable, secure and highly-rated leader
in worldwide financial services.
How do you deal with the potential
challenges in communicating
securities lending’s risks and
opportunities?
Throughout this global financial
crisis, a key goal for Northern Trust
has been to ensure that all clients
are treated equitably and that we
proactively respond to their needs.
We feel that effective communication
will continue to involve clear and
regular dialogue between service
providers and clients, in addition to
detailed discussions of the services
being provided.
In addition, regular service reviews
are an important forum through
which Northern Trust seeks to
actively provide clients with detailed
insights, such as how revenue is
generated through the use of various
asset classes, markets, time periods,
and types of collateral. Z
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Superv
Bank S
12/05/2010 16:37
Doremus Deutsche Bank GSL Summit 267x203mm 300335 Proof 04 12-04-2010

Deutsche Bank

Partnering with you to reach

new heights.
We partner closely with our clients to bring integrated
prime brokerage services, agency and principal securities
lending and synthetic equity solutions to both the
beneficial owner community and global hedge fund
industry. Our administrative platform empowers you to
explore new markets and asset classes.

Clients can expect more with Deutsche Bank.

For more information please call us:

Agency Securities Lending
Europe: +44 207 545 2991
Americas: +1 212 250 3356

Principal Securities Lending and Equity Financing

Europe +44 207 547 1614
Americas +1 212 250 8802

www.db.com

This advertisement has been approved and/or communicated by Deutsche Bank AG London (“DB”). DB is authorised under German Banking Law (competent authority: BaFin - Federal Financial
Supervising Authority) and regulated by the Financial Services Authority for the conduct of UK business. Securities and investment banking activities in the United States are performed by Deutsche
Bank Securities Inc., member NYSE, FINRA and SIPC, and its broker-dealer affiliates. Copyright © 2010 Deutsche Bank AG.

GSL08 FINAL.indd 1 12/05/2010 16:37

 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

cibcmellon.com

©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.

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