GSL| Global

Securities
Lending Issue 1

Emerging Markets
In transition
Plus
Technology: A Full Diagnostic
Lending and Borrowing: Climate for Change
Lender Profile: Harold Bimpong, Morley
Anzeige SecLend ISJ 406x267 04.06.2008 10:50 Uhr Seite 1
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EX
EDITORIAL

Lend an ear
“Securities lending is the missing building block for market completeness”
Javier Duclaud, director of operations, Banco de Mexico

Welcome to this launch issue of Global Securities Lending (GSL).

MARKETS We join the market at a very exciting time. RMA and SIFMA held their first Latin American
Asia, Latin America, South Africa Securities Lending conference, regulatory bodies have made decisions some consider rash,
Opes Prime rocked Australia and the RMA celebrate their 25th Anniversary of the ‘original’
INFRASTRUCTURE securities lending conference. There is also the continued knock on effect of the credit crunch
Tri-party collateral management, that still shows no sign of abating with further write downs announced by several large
130/30, Transparency investment banks. However, with all this going on, good and bad, there is so much to write on,
discuss and to read about. From initial “back room” roots, securities borrowing & lending has
become an integral investment function. Originating from the United States in the early 80’s, it
PROFILES has expanded into what is now a 24hr global activity.
Morley, Eurex, Fintuition, Lendex
Within this inaugural issue of GSL Joe Corcos looks at the rapidly expanding Latin American
Editorial: SBL market. The motto across the Brazilian flag “Ordem e Progresso” (Order and Progress)
Joseph Corcos ([email protected]) is particularly relevant as we focus on the progress made in the established capital markets of
Catherine Kemp ([email protected]) Brazil and Mexico and how they have got their houses in order. Additional to this feature in
Ben Roberts ([email protected]) the Emerging Markets section where Ben Roberts speaks about the developments within Asia,
Giles Turner ([email protected]) we also have a lenders view on South Africa penned by Carina Saunders of Sanlam Capital
Markets. Our cover story looks at the advances made in technology with Brian Bollen writing
about the emergence of new systems and platforms ranging from the European based ICAP
Contributors:
iSec to the US focussed Quadriserv. GSL also speaks with John Tabacco founder of LendEX
Brian Bollen,
and Francisco Gonzalez Head of Eurex SecLend on the shape of the market.
Anthony Harrington

Elsewhere we have Giles Turner talking on the never-ending calls for transparency and
Design: Catherine Kemp of GSL looks into the changing world of European Repo. We look forward to
David Copsey your thoughts, comments and feedback on this inaugural issue and any suggestions for future
issues. In the next issue of Global Securities Lending you can look forward to features on the
Operations Manager: US market, Canada, emerging European markets, collateral flexibility, cash reinvestment and
Sue Whittle ([email protected])
much more. GSL aims to provide in depth coverage of securities borrowing & lending, repo
and collateral markets. Investigating and profiling new and developing geographical markets,
examining key industry concerns from transparency to technology and raising important
Publishing Manager: issues effecting the market today.
Monique Labuschagne
([email protected])

Publisher:
Justin Lawson
([email protected])

CEO: Mark Latham

([email protected])

16-17 Little Portland Street,

London W1W 8BP
T: +44 (0) 20 7299 7700
F: +44 (0) 20 7636 6044
© 2008 Investor Intelligence.
All rights reserved.
No part of this publication may be reproduced,
in whole or in part, without prior written permission from
the publishers. ISSN 1755-8700.
Printed in the UK

2 | GSL
 Japanese Textile Stencil, 1900 — Mulberry paper with dye

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of art for future generations or building client relationships that stand the test of time. A full spectrum of global capabilities,
We take our relationship with you very seriously, to help you achieve your business including discretionary, principal
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JPMorgan clients benefit from the expertise of our entire global franchise. Through Disciplined risk management
this holistic approach, we harness innovative technologies and firmwide resources Innovation in product development
to offer clients more choices, greater customization and unmatched flexibility.
Access to resources and expertise of
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Innovation with superior results.

To find out more, log on to jpmorgan.com/securitieslending, or contact:

V
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Western Hemisphere William Smith at 212-623-5664

Europe, Middle East and Africa Michael Fox at 44-207-742-0256
Australia/Japan Stewart Cowan at 61-2-9250-4647
Asia Andrew Cheng at 85-2-2800-1809

The products and services featured above are offered by JPMorgan Chase Bank, N.A., a subsidiary of JPMorgan Chase & Co. JPMorgan Chase Bank, N.A.,
is registered by the FSA for investment business in the United Kingdom. JPMorgan is a marketing name for Worldwide Securities Services businesses of
JPMorgan Chase & Co. and its subsidiaries worldwide. ©2008 JPMorgan Chase & Co. All rights reserved.
DETAILS

Contents
News
6 News updates
8 News analysis
12 Across the Atlantic
60 People moves
64 RMA/ISLA Securities Lending Conference round up

Emerging markets
16 Asia
19 Latin America
22 South Africa

Industry insight
36 Exchange traded funds - Barclays Global Investors
40 Tri-party collateral management
43 European repo
45 130/30 funds - RBC Dexia
47 Transparency
54 Securities lending statistics

Technology
24 Securities lending technology
31 Technology profiles

People
14 Harold Bimpong - head of operations, securities finance, Morley
23 John Tabacco - founder, LendEX
34 Francisco Gonzalez - head of business and product development, Eurex
63 Meet the future - Will Duff Gordon

4 | GSL
Ad Merrill Lynch

5 | GSL
NEWS

Around the World

JPMorgan expands to Lima

New York - eSecLending, an- Retirement System of the Zimmerhansl, head of Securities portfolio. The mandate
nounced the establishment Puerto Rico Electric Power Lending at ICAP. represents JPMorgan’s first
of Securities Finance Global Authority (ERS-PREPA), a alternative investment portfolio
Advisors (SFGA), a registered public pension plan covering London - The Financial Services administration outsourcing
investment advisor, to support more than 18,000 active and Authority (FSA) has said agreement in the UK. JPMorgan
US mutual fund cash collat- retired members. Services that because current market Private Equity Fund Services
eral management for securities include custody, accounting, conditions create increased (PEFS) will provide LPFA with
lending. “As our firm continues compliance monitoring and potential for market abuse a set of comprehensive services
to grow, we remain focused on securities lending for the USD1.5 through short selling during to give greater insight on the
broadening our product and billion fund. “Northern Trust rights issues, they are requiring performance, concentration
capabilities to best service our has proven expertise with the that market participants disclose and risk across the alternative
expanding client base,” says public sector and a strong client significant positions (which investment portion of their
eSecLending’s president, Chris service model that was made they define as exceeding 0.25% assets. The services include cash
Jaynes. evident throughout the selection of the issued shares) to the management, cash flow tracking,
process,” says Otoniel Cruz, market by means of a Regulatory performance measurement and
New York - The Bank of New administrator for ERS-PREPA. Information Service by 3.30pm analytics. There is also a board-
York Mellon has been selected by the following business day. It’s quality reporting capability.
Goldman Sachs and Rabobank London - ICAP has expanded view is that severe volatility
to serve as collateral agent for the range of securities available in the shares of companies Canberra - The completion
the first domestic Korean equity on its electronic securities conducting rights issues is of the mutual recognition
tri-party financing trade. This lending platform i-Sec to potentially damaging not only agreement on securities
is believed to be the first time include exchange-traded funds to the issuers in question but and managed or collective
the tri-party structure has been (ETFs) and exchange-traded also to confidence in the overall investments between Australia
used to complete a Korean commodities (ETCs). This is fairness and quality of the and New Zealand has been
equity financing. This new the first time European ETFs UK market. It is particularly welcomed by the IFSA. IFSA
mandate spotlights a service have been made available on prejudicial to the interests of CEO, Richard Gilbert says:
used extensively by The Bank an electronic lending platform, small investors. The problem is “This is a major step forward
of New York Mellon’s clients bringing together supply and compounded by the length of that will remove unnecessary
outside of Korea to support demand into a single central time taken to complete rights regulatory barriers and lower
the financing of a wide range marketplace. Currently, i-Sec issues. the cost of capital-raising in
of collateralized transactions, facilitates screen-based access both the Australian and New
including stock loans, derivative to securities lending in equities London – JP Morgan has been Zealand markets. Issuers
transactions, and equity and from France, Germany, Italy, selected by the London Pensions will now be allowed to offer
fixed income repos, including The Netherlands, Spain, Fund Authority (LPFA), the interests in managed or
Korean securities. Sweden, Switzerland, the largest local government pension collective investment schemes
United Kingdom and Japan. scheme in London, to provide in both countries, using a single
Puerto Rico - Northern Trust has “This initiative is the result portfolio administration and disclosure document approved
been selected to provide asset of strong demand from the performance reporting for in the country in which it is
servicing for the Employees’ ETF community”, says Roy their alternative investment domiciled.

6 | GSL
NEWS
RUNNING
hEADER

Lima - JPMorgan has in Central and Eastern Europe. market volatility. 63% said their
announced that it will be Clients active in Central and firms have increased spending
providing securities services to Eastern European markets on trading and risk manage-
Cavali, Peru’s central securities with which Euroclear Bank ment technology over the past
depository. The contract is the has created a link to the local 12 months and 57% expect to
latest in a string of wins the central securities depository, increase spending over the next
firm has had in Latin America. will benefit from having a single 12 months.
JPMorgan Securities Company settlement tariff to apply to all
(SC) will be providing custody eligible markets and securities. New York - JPMorgan an-
and asset administration services In addition, safekeeping fees will nounced an agreement with
to Cavali for its portfolio of be determined based on the ag- Shell Asset Management Compa-
global securities. JPMorgan gregated holdings of all Central ny (SAMCo), the asset manage-
also provides services to several and Eastern European domestic ment arm of Royal Dutch Shell,
other central depositories, securities. The model applies to enabling a global provision to
central banks, commercial the Czech Republic, Hungary, service Shell corporate pension
banks, government institutions Poland, Slovakia and Slovenia, and insurance plans with total
and corporations in the Latin and will be extended to other assets in excess of USD70 billion.
America region. “We selected Central and Eastern European With this relationship, JPMorgan
JPMorgan due to its strong countries in the future. The new launches a range of services for
commitment, experience structure results in an average SAMCo and participating Shell
and focus in Latin America. safekeeping fee reduction of pension funds, including fund
JPMorgan’s modern technology 62%. A similar approach was accounting, fund administration
and online reporting as well implemented by Euroclear Bank and certain securities lending
as local language capabilities for Euro-zone markets in 2008. services.
will help us improve operating
efficiencies and allow us to London - Research conducted
capitalize on new opportunities by Sophis has revealed that
in the market,” says Francis the securities finance industry
Stenning, president and CEO expects to increase spending on
of Cavali. In addition to Cavali, trade and risk management tech-
JPMorgan has also recently been nology over the next 12 months.
awarded custody business by volatility on the securities and
CEDEVAL (Central Securities finance market.
Depository of El Salvador). The Sophis study surveyed 100
professionals at the recent Lepus
Brussels - Euroclear Bank is seminar. 69% of respondents
taking a regional approach in said that their trading and risk
helping clients to access local management requirements have
counterparties and securities changed as a result of current

7 | GSL
NEWS ANALySIS

Comment
AIG sails storm as Sullivan walks the plank

of stock and debt in a gambit to protect itself from 107 public pension plans, the revenue
from its increasingly sizable write-downs. But and the profit from securities lending are
investors are probably now wondering if this dramatically inverse to each other. Though
is going to be enough. What is obvious is that in 2006 there was a 466% increase in the rev-
any capital advantage AIG once possessed is enue from securities lending (USD127, 835,
gone – perhaps never to return.
960 up from USD 28,638,177), the profits to
The company’s new CEO Robert
Willumstad has said a turnaround plan is to be made have dropped, from 23.5% in 2004
be announced by September and that no part to 6.6% in 2006. The report summarised that
of the company will be immune to a cull. the figures were linked to the growth in cash
Precisely what the turnaround plan reinvestment revenues – despite this occa-
will consist of is unclear, but there are few sionally meaning higher risk strategies.
options open to AIG besides divestiture and a Since 2004 and 2006 the lending of do-
scramble to keep as many other of its subsid- mestic and international equities rose while
iaries afloat as possible. fixed-income decreased. Of institutions using
It’s not been a good year for New York-based Willumstad is in an unenviable custodians as lenders, 75% were confident
AIG, the world’s largest insurer. position. It will take more than simply a sure that their revenues would increase over the
On 15th June AIG’s CEO, Martin hand to rejuvenate AIG, and it is yet to be next five years compared to 38% of those
Sullivan, was forced to resign after the com- seen whether Willumstad is up to the job.
using agency lenders. Of those who expect a
pany was buffeted by quarter after quarter He takes over from Martin Sullivan who in
decline in revenue, the most common reason
of losses on sub-prime investments. Stock turn took from Maurice ‘Hank’ Greenberg,
the company’s charismatic CEO of 40 years given was a lack of inventory supply. The
prices have fallen steadily and were hovering rise in derivatives such as single stock futures
just above USD30 per share in mid July. The who was forced out after being accused of
securities fraud of major proportions by was also cited as a cause of the expected hit
recent decline in fortunes is startling for a
Eliot Spitzer (client number 9) in 2005. It is to revenues. The survey revealed that many
firm used to announcing sky-high earnings
and rampant growth. now up to Willumstand to reassure investors beneficial asset holders would only invest in
Now the company has said that it by taking major action. He won’t relish the collateral pools which do not contain deriva-
will absorb USD5 billion in losses on its secu- fact that Greenberg is still chief among those tives – so-called “conservative” pools.
rities lending accounts. This is after a dozen investors and has recently verbally eviscerated Interestingly, although only 34% of the
of the company’s insurance units have been AIG’s board and management. Greenberg, institutions used agent lender rather than
hit by USD13 billion in writedowns. AIG had who helped liberate Dachau during WWII, their custodian, the plans of these institutions
previously committed to absorbing USD500 will no doubt have strong views about what was twice the size of those using a custodian
million of the losses, but reality has dictated should happen next.
– USD46.8 billion against USD21.3 bil-
that the outfit must take a heavier financial Meanwhile, rating agency Moody’s
recently downgraded AIG’s credit ratings and lion. However – statistics being statistics – it
blow. acknowledged that this difference is distorted
Three of the insurers under the has continued to judge its outlook negatively.
America’s major banks and mort- by the size of the biggest funds. What cannot
AIG umbrella that have collectively suffered
gage outfits are undergoing a nightmarish be distorted, it seems, is the issue of satisfac-
60% of the write-downs are supervised by
the Texas Department of Insurance, which period at the moment, so sympathy for AIG’s tion: 100% of institutions using agent lenders
said that it was totally unaware that AIG was plight will no doubt be sparse. But many will approved the service; approvals for custody
investing cash collateral from its securities no doubt be paying close attention and will limped over halfway (59%).
lending operation into assets linked to the garner some lessons about not what not to do But custodians and agents do not appear
sub-prime market because the whole thing from the company’s situation. Be more care- to be indispensable. Direct lending – from a
was off balance sheet. Now the department is ful how you invest your sec lending collateral fund to borrowers, with a broker in between
afraid that AIG did not squirrel enough away is probably the first lesson. – is viewed as increasing in the opinion of the
to cover possible losses. institutions. Fifty-three percent of institu-
Now AIG has said that it is to fun-
nel capital into some of its subsidiaries. How Damn lies tions believed a direct lending trend was
emerging; 35% thought intermediaries were
much? “Undisclosed” the company says, a
term which does not bode well. and statistics indispensable and 12% said it depended on
the size of the fund.
Too bad things haven’t gone as AIG
rather presumptively said they would back
in March, when the company predicted that The 2008 Vodia group institutional survey
at worst it would have to absorb losses of threw up interesting figures as to the growing
USD900 million over several years. Back to
importance of cash reinvestment. From its
the drawing the board.
survey of 40 institutional investors and data
In May AIG flogged USD20.3 billion worth

8 | GSL
 Some think
something extra.

We think
customized
securities
lending.

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Thinking New Perspectives.

NEWS ANALySIS

SEC runs the rule over short selling

The emergency SEC order on short selling in July, which places restrictions on the shorting of
shares of certain major financial firms, was another interesting turn of events for the volatility.
The shares of 17 investment banks as well as mortgage companies Fannie Mae and Freddie
Mac were protected by the order from “naked” short selling, where shares aren’t borrowed in
advance of a short sale and which can result in botched deals and market instability. The ruling
was extended on 30th July until 12th August.
It comes at a time when confidence in the stability of the financial system and the future of
the economy is low and swirling rumours about the strength of financial institutions through
naked short sales, which some see as an abusive practice.
It also echoes Financial Services Authority’s (FSA) ruling in June that introduced a disclosure
regime for short selling of companies undergoing a rights issue. Both announcements were
made during steep falls in shares across stock markets, with the authorities keen to protect
vulnerable companies.
The SEC press release cites the events preceding the sale of the Bear Stearns as illustrative
Industry view: of the market impact of rumours, and describes events “during the week of March 10, 2008,
when rumors were spread about liquidity problems at Bear Stearns, and which eroded investor
eSeclending confidence in the firm.” The FSA’s regulation came just after HBOS’s share prices saw a massive
slump.
“If extended, we expect the new SEC policy
regarding short selling to be beneficial for However, while rumours may decrease the value of shares, are rumours the cause of the
the overall securities lending market be- instability in the first place? Shorting, when you bet that a company’s shares will fall in value,
cause there will be an even greater demand may seem like a malicious activity, but it is ultimately a legitimate activity and ensures pricing
to borrow securities by brokers to comply discovery and creates liquidity. Bear Stearns fell because on the verge of bankruptcy, others
with the new rule. Short selling provides
an essential mechanism in the market as it refused to extend it credit or do business with it, because they knew fundamentally that Bear
helps create liquidity and pricing efficiency. had been an overly aggressive investor in mortgage backed securitised products and had lost
This new policy will require brokers to large sums of money.
pre-borrow securities before executing a The SEC already has rules against abusive naked short selling, and when it checked all the
short sale, or otherwise have the securi-
ties available. We also expect that if this financial institutions it identified as vulnerable, only one was deemed affected. The SEC has
directive is extended it will make exclusive said that “unbridled” naked short-selling of financial stocks has “not occurred”, and according
arrangements more valuable. In an to The Economist it has not shown as much concern for car manufacturers where short-sellers
exclusive, a borrower is guaranteed access have been far more active.
to available securities in a portfolio so it is
easy for brokers to demonstrate that they The SEC had taken other actions to secure stability in the market, including charging the
have securities available to borrow.” trader Paul S. Berliner with securities fraud and market manipulation for spreading false
rumours concerning the Blackstone Group’s acquisition of Alliance Data Systems Corp (ADS).
Christopher Jaynes, president The regulator has apparently given out 50 subpoenas. Maybe one of those subpoenas will
uncover market abuse, but apart from one case against Berliner there have been no
other charges.

10 | GSL
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REGULATION

Across the Atlantic

Tred McIntire, RMA Committee on Securities Lending

The securities lending industry has seen solid The list of new securities lending markets demand. Cash reinvestment pools indemni-
earnings over the last twelve months, in large continues to lengthen. Latin America, for fied against principal loss has also generated
part due to significant reinvestment returns example, continues as a promising and yet attention.
resulting from the Federal Reserve rate cuts. largely under-penetrated region. In January, A major challenge in the industry is the
But it was also a year of turbulence in the RMA and the Stock Loan Division of the ongoing discussion surrounding corporate
money markets, which were plagued by credit Securities Industry and Financial Markets governance and proxy voting. RMA, in
and liquidity issues related to subprime mort- Association (SIFMA) co-sponsored the first cooperation with SIFMA, has recently offered
gages and structured investment vehicles, annual conference on Latin American Securi- funding to work on a project with the Center
causing asset write-downs and bank losses. ties Lending. There have since been many for the Study of Financial Market Evolu-
Pension and mutual fund boards are looking follow-up discussions among those who tion (CSFME) that we hope will support the
closer at the investment guidelines for the attended, with a focus on improving the envi- industry’s argument that securities lending
cash collateral pools and are asking questions ronment for securities lending in Brazil. East- does not facilitate inappropriate proxy voting
about borrower exposures, cash collateral ern Europe, Greece, Israel and certain other activity on the part of borrowers.
investment, counterparty credit, fees and markets in Asia have also been encouraged by I am near the end of my term as chairman,
relative performance. Mutual fund boards the potential to earn significant spreads in the although I will still be involved as ex-officio
are also subject to increased scrutiny of their early stages, though often they have less well- committee chairman. It has been a wonderful
securities lending by regulators. developed legal, tax and regulatory regimes, two years and I look forward to a continued
I believe the financial market turmoil and a shortened market development cycle. involvement in securities lending.
underscores the value of credit diversification The industry has seen continued growth
achievable with an agency lending structure, in the hedge fund space and active exten-
where clients have the ability to manage sion products (also known as 130/30 funds)
credit in a more flexible and timely way. continue to contribute incremental short

David Rule, chief executive, ISLA

Falling equity markets have brought the and to enable arbitrage-related activity: for Since the start of the credit crunch in Au-
familiar criticisms of securities lending by example, to go short individual shares versus gust 2007, securities lending volumes have
those who claim that it facilitates short sell- an index-based basket. Third, institutional remained high, providing vital liquidity to
ing which in turn drives equity prices lower. investors lend securities in order to earn the money, bond and equity markets. To
While genuine market manipulation is clearly additional returns at low risk. If they decide take one example, problems in the unsecured
unacceptable, three responses can be made to not to lend they not only miss out on that bank financing markets led banks and securi-
such arguments. First, short selling should return, to the detriment of their investors, but ties dealers to increase their collateralised
have no net long-term effect on share prices. one certain consequence of reduced securities financing, primarily through the government
If short sellers caused a share price to fall lending would be to lower market liquidity. bond repo markets. Especially in Europe, the
below its fair value, other investors would Particularly in current markets, that is the last ability to borrow government bonds against
take the opportunity to buy. Academic re- thing that any investor should want. Part of the collateral of other securities such as
search has shown that placing restrictions on ISLA’s mission is to ensure that policymak- corporate bonds and increasingly equities has
short selling reduces market efficiency, and ers understand the importance of securities been critical to the success of such financing
in particular that share prices may overshoot. financing markets to the health of wider strategies..
Second, far from all lent securities are used financial markets. The ability to borrow se-
to cover directional short sales. Securities are curities underpins the services that securities
also borrowed for many other reasons; for ex- dealers offer their customers and the trading
ample, to avoid settlement failures; by market strategies of dealers, hedge funds and asset
makers in order to provide liquidity to buyers managers.

12 | GSL
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PROFILE

harold Bimpong of Morley

undertook thorough research, surveying a operational one.
number of offerings. “We went through an Bimpong says he would welcome a lot
initial review of available solutions and nar- more automation of the “mundane” tasks.
rowed it down to five which met the Morley Aside from a lot of talk and a few attempts
requirement. Then, having collated detailed to improve automation, he believes this is
business requirements, we went through a yet to materialise. On the ubiquitous subject
detailed RFP process with a scoring matrix in of transparency, he considers that this term
terms of necessity and ‘nice to have’.” can mean different things to different people.
He explains that lenders like Morley rarely “If you mean transparency of the industry
change their systems, so it became imperative then, yes, I support it. There is too little
that this switch was a “flexible and future- understanding of the industry on the outside,
proof solution”. He says 4sight was chosen and this needs to be addressed. More open
Harold Bimpong has an interesting breadth as the system could perform the dual roles reporting of positions and interests would
of experience across the investment market, of incorporating Morley’s current system make a big difference in expelling some of
having worked at many of the major custo- and being flexible enough to change as the the myths, but this needs to encompass the
dian banks. Now head of operations at Mor- business develops. The introduction of 4sight whole market – not just lending. Otherwise it
ley, one of the biggest UK asset managers, he will replace the in-house systems that were will just drive activity into derivatives-based
is into his seventh year in securities finance. developed as satellites around its core system, solutions.” However, he adds that he is not so
He has also fulfilled roles at the International but Bimpong adds that they will continue to convinced about the transparency of pricing,
Securities Lending Association (ISLA), by use various banking systems from custodians, but admits that this may become “probably
co-chairing the best practice group since its along with Bloomberg, Pirum, Sec Finex inevitable”.
inception in 2005 and then co-chair of ISLA and Data Explorer. Sec Finex, he explains, is Bimpong anticipates a greater shift towards
Ops since last year.ww occasionally used by Morley to run auctions structured lending products as a result of
This secondary role, he believes, is comple- as part of BAU, along with ESec Lending. tax harmonisation across the EU. The credit
mentary to his Morley work in keeping “Both bring good functionality to the table crunch will leave a “lasting imprint” and will
in touch with the wider securities lending but didn’t allow us to reach a bigger audience provide different opportunities for those
industry. “It has been very challenging, but we – which we thought they might.” willing to innovate, leading to different op-
try to actively promote improved operational Bimpong explains that maximising return erational risk and challenges. “As with most
efficiency and joined up thinking,” he says. on what is lent is balancing act; it is often things, I expect solutions to develop down-
“This is being achieved via open dialogue case specific and difficult to measure. “We stream from market innovation, so penty of
within the securities lending industry and in always try and get best price and achieve this work to keep ISLA operations busy for years
collaboration with broader market forums, IT through using a broad range of counterpar- to come!”
vendors, CSDs and service providers.” ties,” he says. “However, it is no good getting
This variety is neatly mirrored in Morley’s ‘top dollar’ if operationally you cost the client
securities lending offering. The firm offers money. We therefore put a lot of emphasis on
three types of lending: non-cash collateral, the counterparties’ ability to settle on time,
cash collateral invested in securities structures particularly recalls.” He adds that a suc-
and cash lending with direct reinvestment. cessful technique has been refraining from
Bimpong explains that “our underlying de-coupling the trade relationship from the
clients are relatively conservative” and so the
first two offerings have been used more than
the third. This last offering, he says, is also
We have definitely
the newest, but was a necessary graduation.
“When I joined we didn’t do cash collateral,
developed from a
which is something we had to address. We
have definitely developed from a traditional traditional UK lender
into a much more risk
UK lender into a much more risk analysed
structured trading model.”
In the first quarter of 2008 Morley selected
4sight’s Securities Finance software solu- analysed structured
tion to replace the existing vendor. Bimpong
explains that in making the change the firm trading model

14 | GSL
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EmErgIng mArkEtS

In Bloom
Securities lending in Asia

“The US is a done market for us,” says Francisco Gonzalez, head of business and product
Ben Roberts looks development at Eurex, “we think Asia is not ready, but it is promising.” This shift in focus to the
Far East as a burgeoning hub for securities lending is becoming increasingly prevalent. Though
at a region coming China is a major exception to this area of finance, and each country has its own issues, the
continent overall has made significant inroads into global securities lending – “promising” is
into fruition and the exactly the word.
As traders and securities services companies look east, the Asian countries are looking back
balance of regulation at them as a modus operandi for their securities markets. Devenesan Evanson, chief operating
officer for Bursa Malaysia, says: “Securities lending and borrowing is one of the pre-requisites
and transparency of a developed market, and you want to stay in the direction of a developed market.” But
few of the fastest growing Asian markets – Singapore, Malaysia, Korea, India – are looking to
create a carbon copy of a western market that may be still in the mire of the credit crunch.
Strict regulation, central exchange oversight and margin limits are shot through many of the
economies. Though the Securities and Exchange Board I ndia (SEBI) reintroduced short
selling in May this year, India is still restricted to lending futures and options that are settled
over seven days. It is a cautious environment, but it has steady ambition. In this year’s Budget,
finance minister Palaniappan Chidambaram acknowledged the limits of its market but
proposed a tighter working relationship between government and the Empowered Committee
of State Finance Ministers to create “a truly pan-Indian market for securities that will expand

16 | GSL
 the market base”.
He also declared the government would “take forward the idea of self-regulating organisations
(SRO) for different market participants under regulation”.
Korea, long-established as a leading corporate bond market and with a securities lending
market in its 12th year, is relaxing aspects of its regulation. It has raised the maximum that
foreign investors can borrow from local lenders from KRW10 billion to KRW50 billion. In
a presentation to the PASLA/RMA Securities Lending Conference, Jong-Hyung Lee of the
Korea Depository revealed the huge growth in foreign investment in just a few years. From
56% foreign investment in its stockmarkets in 2005, last year that figure stood at 91%. Trust is
gradually building with external money, and in June it announced its first tri-party financing
equity trade, with Goldman Sachs as the lender, Rabobank as borrower and BNY Mellon as the
collateral manager. “As the local Asian capital markets continue to evolve, we will collaborate
with our clients and industry leaders,” says Art Certosimo, executive vice-president and head of
broker dealer and alternative investment strategy at BNY Mellon. “Broker-dealers and investors
around the world recognise the economic and risk management benefits of the tri-party
structure.”
It is vital for the marketing and appeal of securities lending markets in Asia that the
regulatory structure is not perceived as draconian. Francesco Squillacioti, senior managing
director and Asia-Pacific regional business director for securities finance at State Street, says
that although markets may have variations, there are fundamentals common to all to generate
global interest. “It is difficult to say one is better than another. However, it would be possible
to say that those systems which are transparent, which provide the most streamlined trading
methodology, and fewest restrictions, will tend to be the most efficient and the most ‘user-
friendly’.These systems will serve as a source of market liquidity.”
Evansan reveals that the biggest hindrance to the Malaysian market was supply, making
external interest critical. “I think the borrowing appetite is there but we do not have supply
[of tradeable stocks] within the current onshore model.” He explains that international agent
lenders are hindered when they try to enter Malaysia and must act as a principal lender –
meaning they must buy, and not just market, lenders’ securities. “Our onshore model requires
our lenders to sign on as principal, so the likes of State Street, BGI, cannot lend.”
Bursa Malaysia has attempted to remedy the situation with a new structure of lending. At
the moment foreign traders are not approved by clearing houses, they have to work with local
““The US is a done agent borrowers and lenders (themselves in short supply). Their correspondence flows through
the Bursa Malaysia Securities Clearing (BMSC). But a new system is set to be in place by the
market for us” end of 2008 which allows foreign investors to be approved by clearing houses – another sign of
the developing trust across continents – which will in turn establish a more direct relationship
Francisco Gonzalez, with lenders and borrowers. With more lenders and borrowers entering the market this
alteration will hopefully see trading volumes soar.
Eurex Evansen says that Korea was suggested by the Pan Asian Securities Lending Association
(PASLA) as a successful model for Malaysia. “It has got a very good framework,” he said of
Korea, “it achieves regulatory objective of the requirements of the SLB participants in the
market and I think the feedback [from PASLA] is that it’s a system which can work.”
Squilaciotti believes Malaysia and Inida have come along way in adapting to change: Both
markets, for example, have been working on models for some time. It has been more of a
process of refinement of the models and looking to be able to introduce a model optimal for
each particular circumstances.”
The securities lending market in the Philippines has struck a balance between financial
incentives and firm regulation. Any securities lending deal that complies with the Bureau
Internal Revenue regulations is tax free. Lenders and borrowers must sign up to a Masters
Securities Lending Agreement – called MSLA – to effect a loan but local regulators are

17 | GSL
EmErgIng mArkEtS

continuously updating its rules to retain transparency, particularly with short selling, and
the system is closely monitored by the Securities Exchange Commission. In October 2007,
amended rules stated: “The trading participant, upon receiving an order to short sell or
when short selling for its own account, must indicate the word ‘short’ on the selling order
and throughout all the records pertinent to the sale,” and later “A trading participant who is
engaged in short selling activities is required to maintain ledges, whether manual or electronic
format, to record the full and complete details of short selling transactions.” This is followed
in the wider rules for the Philippines Stock Exchange with “the SBL ledgers shall be subject to
reasonable periodic, special or other examinations”.
Japan, in its tenth year lending securities, has seen a tumultuous anniversary. In the RMA/
PASLA Securities Lending conference, Christopher Antonelli of Lehman Brothers revealed
Express briefing with that the on loan balances for securities lending fell USD50 billion between 2007 and 2008,
Francesco Squillacioti though it remains the biggest securities market in Asia at around USD950 billion (according
to the latest figures from PASLA and Spitalfields Advisors). According to statistics from the
Do you think an established securities
Japan Securities Finance Co., the average level of outstanding margin loans fell from YEN1.339
lending market is a vital, integral part of a
competitive economy today? billion to YEN695.933 million from June 2007 to June 2008, with the trading value falling from
YEN5.51 trillion to YEN4.43 trillion. Trading volumes by face value for the bond market also
Absolutely, State Street believes securities lending
is important to markets in at least two ways. First,
fell dramatically. Antonelli, however emphasised the transparency in the market and the rise in
we believe it is a mechanism that provides essential corporate activity, the continuation of foreign investment along with a wide variety of traded
liquidity to the countries in which it is active. products – from exchange traded funds to real estate investment trusts.
Liquidity is a necessary ingredient for market
efficiency and, thus, is beneficial to the participants
This balance between regulation and creating a liberal enough market will be the key to
in those markets. Second, apart from it being establishing the continent as a whole, many believe. “For markets where securities lending is a
important for an indigenous market, we feel it is new activity - or re-introduced activities - it is important for the long-term viability of those
a way to provide significant risk-adjusted returns
both to institutional investors within those markets
lending models that the regulators are comfortable with how they work,” says Squillacioti.
and to foreign institutions who invest in them. To “Regulators also have, with a view to the longevity of the systems they implement, a need to
the extent investors from the host countries can ensure that their models attract as much interest and use as possible. To do that, they are likely
participate in securities lending, they will be able
to utilise their portfolios of securities and earn
to realise that a balance between the two needs is necessary.”
incremental returns. Francisco Gonzalez agrees, and uses China – which is yet to develop securities lending – as
an example of a need for openness. “China as shown opening up a market and now closed it
Western markets are still dominated by an over-the-
counter culture. Do you think there is any hindrance
down a bit; like they’re afraid the business flow could go away. I think opening and closing is
to foreign investors entering Asian markets that are the difficulty the communities are having and it needs a broader understanding. Asia is not
almost entirely run through central exchanges? Asia, each country is individual ¥but the potential is huge. But they have to open but I think it
Foreign investors should not necessarily view this
will happen.”
structure as a hindrance. State Street supports the
markets that are opening to securities lending and
sees the changes taking place positively. The use of a
central agency does not pose barriers and it is a way
some markets look to embark on securities lending
while gaining comfort with it.

Has State Street had to adapt to the different

nuances (eg, regulation, infrastructure, local
investment ‘culture’) of these different markets, and
how has this been achieved?

State Street has in place a strong due-diligence team

and process. Before we enter any
market we make sure we understand the various
nuances of those countries, from regulatory, tax,
legal, operational and trading perspectives. This is
the case with any market in which we participate—
not just the Asian markets or
other new lending markets. The rules that
are established provide a framework in which
to operate and can also be where the opportunities
lie.

18 | GSL
Two Horse Race
Securites Lending in Latin America

Joseph Corcos examines how lending markets are a success and can be seen to be contributing
liquidity and activity, then other markets such as Argentina, Chile and
Brazil and Mexico remain the Columbia may also take steps to join the party.
At the moment it is only Brazil and Mexico who have shown
dominant players themselves willing, though the sec lending markets in each country
bear little resemblance to each other.
After tinkering with its regulations and processes, Mexico now
When the first Latin American Securities Lending Conference was resembles any of the other 35 or so sec lending markets scattered
held this year, attendance by regional players was slim on the ground. across the globe. However due to its slow start and the fact that it has a
In fact, only Brazil and Mexico were represented. This could be relatively volatile market, the build-up has been slow and there is still a
because the Risk Management Association (RMA) and the Securities lot of room for expansion.
Industry and Financial Markets Association (SIFMA) chose to hold
the conference in January, the month when practically all South Brazil
America is on vacation, but it was probably more to do with the fact On the other hand there is Brazil, boasting highly desirable equities,
that in Latin America, Brazil and Mexico are still the only securities but a sec lending structure which has lenders wringing their hands
lending markets of any note for offshore entities. and tearing out their hair.
While it has become a seldom disputed fact that sec lending is a Deutsche Bank’s head of Americas security lending, Paul Busby,
healthy and indeed necessary practice, the Latin American market calls the Brazilian market ‘problematic’.
continues to lag considerably behind its counterparts in the US and This is because Brazil insists on working on a central counterparty
Europe. The market can be likened to a newborn fawn, new, slightly system, which is not used in other sec lending markets and is severely
unsure, yet gaining in strength and direction with each passing debilitating for foreign entities trying to carry out sec lending in
minute. That the market is underdeveloped is indisputable, but the the country. One of the vagaries of this system is that the central
undeniable growth it is undergoing and potential for opportunity that counterparty, the CBLC, is the party which holds and manages the
it represents for foreign investors are also obvious. collateral for the time of the transaction.
Of Latin America, the RMA’s director of sec lending Curtis Knight Usually in a sec lending transaction the ideal goal would be a
says: “It’s a market that I think the entire industry is expecting to be delivery versus payment situation, or if this is impossible due to time
one of the next growth areas, but like any growth area and any new or currency issues, a lag time of a day or so at most. Indeed, over the
market, particularly in this business, you have to do your homework. last few decades there has been much tinkering with the sec lending
One of the things that you have to do is to make sure that the market in order to mitigate as much risk and exposure as possible.
infrastructure can support the development of a securities lending However, with Brazil’s central counterparty system the lender simply
market.” doesn’t get the collateral at all, in essence circumventing this risk
Both Brazil and Mexico are leading the way in securities lending, mitigation. This is effectively acting as huge boulder in the potentially
and each have relatively robust infrastructure in place. If their sec torrential flow of the Brazilian sec lending stream.

19 | GSL
EmErgIng mArkEtS

For example if a lender wishes to lend their client Brazilian equities, The fact that the structure underlying the securities lending
this is possible, and they can negotiate with the broker as normal. market in Brazil is so flawed is a pity, as appetite around the globe for
When delivery is made to the CBLC, they will then deliver the security Brazilian equities is undeniably large. As part of the rapidly emerging
to the broker, but will consider themselves the counterparty, not the BRIC group of economies that is increasingly driving the world
broker. This is because on delivery of the security, the broker gives markets, Brazil’s desirability has been growing at a rate of knots. The
them the collateral to hold on behalf of the lending bank’s client and country has recently been deemed investment grade by both Fitch and
put it in an account. Thus resulting in the lending bank’s clients entire Standard & Poor’s. This opens up the Brazil’s bonds to investors only
exposure being to the exchange itself. Hardly ideal. allowed to purchase securities from countries with investment grade
As Patrick Avitabile, global head of equity, trading and securities ratings from at least two agencies.
finance at Citigroup makes clear, “Collateral is key. Collateral is the Nick Rudenstine, JP Morgan’s securities lending global product
most critical piece of the securities lending transaction. Not only do head, says: “Brazil is on everybody’s radar these days. Most if not all
you have to have it, and have it in your name, but you also have to of the major lenders are working on the mechanics of how to start
control its movement and maintain it and make sure that the collateral lending in Brazil and all the big broker-dealers do transactions in the
moves with the value of the security that you’ve lent out.” Brazilian market.
Both Taiwan and South Korea used to have a similar structure to “Its very hard to predict how or when growth will come, but
Brazil’s, however both countries recognized the benefit of changing everyone is looking at Brazil as a very attractive market, from
to a more internationally acceptable method and decided to allow an agent-lender perspective it’s just a matter of ironing out the
collateral to be taken offshore. At the Latin American sec lending mechanics.”
conference, representatives of both markets were present and gave Avitabile echoes this, saying: “We have a number of clients that are
lectures demonstrating how very interested in lending their Brazilian equities, they realize there’s a
they achieved heightened expansion though the changes. huge demand to borrow these equities.
Most importantly, though neither market is plain vanilla, “We’ve shown their portfolios to brokers and the brokers are
and both have their various idiosyncrasies, in both markets lighting up when they see them, but the bottom line is convincing the
the broker that the lender makes the loan to is their clients direct investor to lend through the current model. It’s a difficult sell when
counterparty. the rest of the world doesn’t work that way.
“The demand is phenomenal for Brazilian equities. Phenomenal.”
While most find the Brazilian sec lending market hard to operate in There is a ray of hope that it seems that regulators in Brazil are at
because of their central counterparty structure, Frederico Ortega, the least aware of the problematic nature of the country’s sec lending
director of securities lending at Grupo Bursatil Mexicano, says: “Some structure. The presence of a representative from the CBLC at the sec
people like the Brazilian model because they don’t have to do due lending conference earlier this year is surely a sign that the country is
diligence or risk analysis for their counterpart because they only deal open to hearing about and learning from foreign investors.
with the CBLC.” But the fact is the overwhelming majority of foreign Avitabile claims that representatives from his outfit have spoken
lenders find it a difficult market to work in. directly to Brazilian regulators and that when it comes to the need for
change “they definitely are aware”.
Ed Oliver, a senior business consultant at Spitalfields Advisors
Brazil boasts highly desirable says: “It seems that they’re [Brazilian regulators] ready and willing to
present to international players and therefore get in dialogue, and that
equities, but a sec lending can only be a good thing.
“And I’m sure in time they’ll get more comfortable with what
structure which has lenders they’re doing and become more aware of what international best
practice is. Hopefully that will lead them down the route that most
wringing their hands and tearing people would hope they go down.”
In Mexico it is a route they have already gone down. It is here
out their hair where one finds the sec-lending model most similar to that of the
international markets.

20 | GSL
EmErgIng mArkEtS

Mexico Avitabile says that in the last three or four years has also seen a
After a slow start and several stumbles, Mexico now has a model which reduction in spreads, from “as high as 400 basis points”, as contrasted
will support a sec lending market that is rapidly expanding and most to today when “you’re looking at anywhere from 50 to 150 basis
would agree has untapped potential. points, because there’s more supply”.
While the sec lending market in Mexico is well over a decade old, In order for the sec lending market in Mexico to continue to grow
many lenders are only now establishing, or re-establishing a presence however, it must give investors more diversified trading strategies to
in the country. Oliver calls the Mexican market the most “normal” of take advantage of. There must also be continuing efforts to educate
the Latin America sec-lending markets. the investors as to how best to use sec lending and the opportunities it
In 2005 Banco De Mexico decided to open up the local market to gives to investors to diversify their market strategies.
foreign entities and insurance companies to start lending, a move According to Ortega local demand for Mexican securities is
which has given a needed boost to the market. growing, a trend which has been largely overlooked thus
Of the move Knight says: “This type of thing shows the willingness far by foreign players. He also recounts that the participation of
of the regulators to let foreign investors in with some controls. This hedge funds in the Mexican stock exchange has also upped demand
brings you to a more mature state for that product and obviously for Mexican securities. Such exposure can only aid the growth of the
mirrors a little more the market conventions that are in the US and market.
that most people participate in. When you’re looking at those types Mexican investors themselves are also becoming more sophisticated
of funds that participate in securities lending - pension funds, large and sec lending can aid the country’s slowly developing derivatives
mutual funds, those type of guys, the more controllable and the more market. According to Navarro the sec lending market in equities in
understanding and the more options those guys have the more those Mexico is far more mature than the fixed income segment.
guys are willing to lend their securities through their agents.”
Opening up the local market to foreigners was a good move on The fuTure
the part of Mexico’s central bank. Ortega says: “Its great that foreign What the future has in store for the sec lending in Latin America is of
entities that are now allowed to participate locally, because I think they course impossible to tell. Most seem to believe that sec lending will
have a deeper understanding of the market and their participation can continue to grow steadily, and that in the case of Brazil, regulators will
help it grow.” install a structure more amenable to the needs of foreign players.
The Mexican sec lending market is also slowly readjusting after a Whether other countries such as Columbia, Argentina
tax snag. Several years ago many lenders pulled out of Mexico due or Chile will attempt to evolve and open their markets remains
to a greyness surrounding the tax regulations, with a capital market to be seen. At this juncture it is hard to even guess at the size of
gain on securities transactions. There was also vagueness surrounding these markets. Columbia has recently started to make changes to
how sec lending was regarded, with many of the lenders fearful that a its regulations which signal an interest in developing their market,
lending transaction was under the same regulations as a straight buy though Chile still has in place very tough regulations.
or sell. Curtis Knight says: “I think it depends on the type of stock market
Mexican regulators duly cleared up the uncertainty, but this did that country wishes to have. If a country wishes to have an open stock
not precede a rush back into the market by the lenders. Indeed, market with foreign investors adding liquidity and adding capital I
progression has been slow, but is growing. think securities lending goes a long way to doing it because you can
Eduardo Navarro, managing director for markets and securities bring in those offshore investors who can get involved in the local
lending at the brokerage house Acciones and Valores (Accival) market, but that also means giving them opportunities that they are
recounts: “The market is talking about the participants again, talking used to in more developed markets.”
about lending size, mandatory pension funds, mutual funds and now Slow and steady progression seems to be the order of the day for
insurance companies. Latin American sec lending, all the while keeping a weather eye on risk
“They are evaluating what it means to have large positions, to give and the integrity of the regulatory structures on which a healthy sec
them an added return if they lend it to the market, so I think that lending market must be built. If these factors are accounted for, there
the regulation in Mexico is in place, it is basically at international is no reason why Latin America cannot become home of the one of
standards and the point is that the market is developing and we’re the more vibrant and profitable sec lending markets.
betting on it growing.”

21 | GSL
South Africa
A lenders view

Securities lending in South Africa has become an integral part of all financial instruments in South Africa.. In order to load a loan onto
most trading strategies with the majority of the borrowing in South STRATE, a market participant can either be a business partner and
Africa taking place to cover short positions. load the deal themselves or instruct your CSD participant to load the
South Africa has stringent tax laws when it comes to the exemption instruction on your behalf. In addition to the cost benefits of being a
granted for securities lending transactions and borrowing for any business partner, the ability of seeing the loans live on STRATE allows
other reason must be done with caution. you to identify and correct any settlement problems that may occur.
In addition to the tax laws, South African players have to comply To allow more opportunity to short, it is advisable to have a few
with stringent foreign exchange regulations and only authorised lenders with reliable lines of stock on the books. The stocks offered
dealers are allowed to trade with offshore counterparties. This by the lenders depend on the holding of the underlying fund and the
condition makes the contribution of the authorised dealer in our percentage of the fund they are allowed to lend out.
market a vital cog in the securities lending machine. A local lender is Securities lending in South Africa has been subject to criticism with
only allowed to lend stock to an authorised dealer to make it available the main bugbear being that short selling/securities lending pushes
to offshore borrowers and likewise a local borrower is only able to down the price of the instrument/equity involved. While one can
access offshore stock via an authorised dealer. understand this argument, it is undeniable that securities lending
If you operate locally, there is a great choice of lenders. The larger here and abroad adds liquidity to the market – and this can never be
choice makes it easier to stay within risk and credit constraints as the viewed in a negative light.
value of the short positions grow. The securities lending market in South Africa has progressively
Lenders include life insurance companies such as Sanlam, become more transparent and far more competitive over the last
authorised dealers, asset managers, satrix funds and pension funds few years. Margins are continuously under pressure and most of the
managing their own lending. Borrowing from non-pension funds lenders are efficient and professional. The counterparty with the best
seldom occurs because of the tax payable on manufactured dividends. terms will generally secure the deal, as long as you remain within your
Knowledge of the market is gained through experience and it is credit and risk limits.
quite difficult for an outsider to break into the market. Relationships Securities lending systems are not readily available and the choice
are key and most of the existing relationships have been nurtured for is limited - a few market participants use overseas systems that have
a number of years. to be customized to local conditions. Unfortunately the cost of a
There is no electronic trading platform available in South Africa customized system can escalate dramatically with a volatile Rand
for securities lending. Any borrowing and lending is executed which seems to be following the depreciation trend. Some market
via telephone or email. There is currently little interest in trading participants have written their own customized systems giving them
electronically because the majority of the players prefer the personal the flexibility to change the system to cater to their specific needs. The
touch. rest of the market participants use a local system written for the South
South African equities settle electronically through STRATE the African market conditions.
Central Securities Depository (CSD) for the electronic settlement of The collateral requirements of the different lenders are fairly similar.
Cash, money market instruments, government bonds or tradable

August Sander,
equities are all acceptable as collateral. The equities accepted by the
different lenders vary depending on the liquidity of the shares and the
view of the risk division on the counterparty. Corporate bonds are
head of securities lending, currently not accepted as collateral.
South Africa has a thriving securities lending industry that will
Sanlam, looks at the continue to grow well into the future. There will be more competition
leading to more efficiency and ultimately more liquidity in our
securities lending landscape market.

in South Africa

22 | GSL
High Roller John Tabacco, founder of LendEX speaks with
Justin Lawson of GSL about Wall Street,
electronic trading and
I think the infancy stage is going to Theodore Roosevelt
be a short one. While there have
been few willing to take on this
opaque and ominous space due to
it being monopolized by the worlds
largest financial institutions for years,
I think the regulatory focus is rapidly
shifting in the direction of increasing
the demands on the industry to
embrace electronic solutions to
keep pace with the dynamic and
millisecond execution capabilities
of modern day trading systems. I
think the SEC and other regulatory It’s like anything else in life. You don’t
bodies need to continue the good get the order unless you ask for it, you
work they have been focussed on don’t become great unless you believe
recently and keep pushing the major it, and you don’t get succeed by
players to embrace technology to thinking about it. Everybody has great
insure that beneficial owners are ideas only a few execute them. One
getting the best executions on their of the best compliments I ever got is
sec lending, and that investors and from one of my mentors in business
hedge funds are getting a fair and and life, and coincidentally one of
equitable opportunity to access all of the smartest stock loan guys in the
the available liquidity to support their world, Tony Venditti. He said ‘young,
trading needs. up-and-coming guys always ask me
questions on how to be great, and do
Has the recent financial nothing with my advice, you ask the
crisis had any effect on questions then take my feedback, and
companies’ willingness to invest in then go and execute them’. Execution
How did you get involved with technology? and a willingness to work at it even if
the world of securities lending, you fail is my tip. And never let the
describe your early career before I can tell you first hand that since big guys get you down, I often recite
LendEX? I founded my companies in 2005, I the words of Mahatma Gandhi, “First
have been pounding the pavement they laugh at you, then they ignore
I started in learning about the telling all of the biggest institutions you, then you win”.
operations side of securities lending in the world why they need to Be humble, believe you can be
in my college days. my uncle got me embrace technology. But without great, execute your plan, and never
my first Wall Street job in the cashiers the regulatory nudge there was no give up. You may fall down, you may
cage at Shearson Lehman American incentive for institutions to change a get knocked down, and I don’t know
Express. I went to school at night model that was working for decades about publishing, but in the financial
and learned all the intricacies of this and often producing some of the markets you may even get beat down,
unique business from the ground up. largest revenues in the firm. But I but I have this slogan on my desk:
I have worked in every aspect of the must say that yes, the recent crisis’ ‘It is not the critic who counts;
is an auction platform, but they are have certainly produced a heightened
financial markets, and when I formed not the man who points out how the
vastly different than us. We like to degree of due diligence on behalf
tori Equities in 1998 to engage in strong man stumbles, or where the
look at our solution as complimentary of many of the top tier firms. After
the business of assisting small and doer of deeds could have done them
to the e-Sec model as they provide really working hard and being looked
midsize self clearing firms to navigate better. The credit belongs to the man
portfolio auctions, and we provide at as a rebel product for a couple of
the process of starting in house who is actually in the arena, whose
single stock capabilities. While it years, there are many respected and
securities lending desks, I saw the face is marred by dust and sweat and
would be flattering to be compared wise market participants who are very
need for electronic solutions rapidly blood, who strives valiantly; who errs
to e-Sec, considering its success as closely examining all the technology
approaching on the horizon. and comes short again and again;
a market leader and innovator, I don’t offerings out there. We have certainly because there is not effort without
think its fair to try to pigeon hole our become a very interesting commodity
LendEx has recently been error and shortcomings; but who
product in the space that e-Sec is to many of the largest firms out there.
described as ‘the latest addition does actually strive to do the deed;
in. Besides e-Sec, who continues Hopefully we can be a part of the
to the auction platform stable’ so who knows the great enthusiasm, the
to refine the model that started the solution to some of the problems that
as the new colt how would you great devotion, who spends himself
electronic lending era, I don’t see any face the capital markets today.
describe your offering and what are in a worthy cause, who at the best
other players in the US space that in
the USP’s which will make you the knows in the end the triumph of high
any way provide the transparent, open Launching a new securities lending
firm industry favourite? achievement and who at the worst,
source, and dynamic capabilities that publication or a technology solution if he fails, at least fails while daring
LendEx does. could be seen as fairly similar. The
Well, the term stable would suggest greatly, so that his place shall never
a number of different horses, and Many think it is a great idea but few be with those cold and timid souls
Electronic trading is in its infancy will dip their feet in the water. What
as I look at the current US domestic who know neither victory nor defeat.’
within securities lending. Why has are your tips for success?
landscape I don’t see any other
there been little penetration and
providers that in any way have the Theodore Roosevelt (1858 - 1919)
what needs to change for there to 23 | GSL
capabilities of LendEx. e-Seclending
be a greater uptake?
InFRASTRUCTURE

State of the art?

fully-automated, electronic processes. “Other capabilities to the securities lending

Brian Bollen back office technology has moved forward, market,” added Bruce Turner. “The advance
and stock lending is now, finally, moving in of technology combined with a deep
talks about how the the same direction,” says Bruce Turner, chief understanding of equity execution practice
operating officer at Quadriserv, a venture- s in general, has enabled us to do that.”
securities lending backed software provider founded in 2001 to As hedge fund activity and competitive
deliver a range of securities lending solutions dynamics accelerate, stock-loan strategies
industry is improving to hedge fund investors and beneficial and corresponding operational efficiencies
owners. are receiving a renewed look from hedge
its technology This mission is succinctly communicated fund managers eager to gain an advantage
on the Quadriserv website: “Now more than wherever possible. Growth on the demand
ever, small changes are having major effects side of the equation is matched by growth
Anyone who has ever spent any reasonable and new technologies are opening the door in demand on the lending side. “Beneficial
amount of time on a treadmill knows to opportunities that will fundamentally owners see stock lending as a huge source of
what it is like to be literally running to change the way borrowers and lenders return,” he observes. “They want to know the
stand still. Over the past three decades, the interact.” In a break from the unstructured, risks, the returns, and how to enhance returns
financial services industry worldwide has opaque securities lending processes of the without assuming undue additional risk.
experienced a not-dissimilar phenomenon, past, Quadriserv’s new securities lending We show them where the market is.” Prime
as the relentless progression of technology innovations deliver an aggregated view brokers and other market participants have
and execution/trading improvements has of competitive securities lending rates, demonstrated a commitment to adverting
compelled organisations to install the latest centralised liquidity, technology and their daily rates as a means towards attracting
state-of-the-art equipment just to keep up credit. In this way, Quadriserv is optimally new customers.
with market progress and client expectations. positioned to serve the interests of the vast There is, he says, a profound need for
Indeed, the financial services community majority of institutional borrowers and greater understanding of stock lending
is expected to spend USD351.2 billion on lenders, as well as to seamlessly manage – a need exacerbated by the credit crisis
global IT products and services in 2008, or the inherent complexity of the securities that began to erupt in the summer of
a growth rate of 5.1% per annum (source: lending industry – from the nature of the 2007, and is only now beginning to abate.
Celent). actual transaction to the multi-dimensional Quadriserv believes it has a role to play in
Securities lending, however, has lagged relationships between borrowers and lenders. providing that education and enhancing that
behind other related equity execution “Our premise has always been to bring understanding. To that end, Bruce Turner
products and services in transitioning to more speed, efficiency and enhanced adds, “When consumers shop for a loan, they

24 | GSL
 USD10bn, and the interest we are receiving comparisons aren’t really useful as we have
“We would like to from customers suggests we are reaching only just gone through one business year and
a tipping point in terms of sales.” It just you can’t compare one month’s volume to
see 25% to 30% of might be enough to add securities lending another month’s volume due to the cyclical
technology to the ever-expanding list of nature of stock loan. We have been adding
total market share technology “must-haves” for CIOs and firms, traders within firms and markets to
trading professionals just to keep up. the product so of course volumes continue to
being transacted When asked to summarise the main grow.”
driving forces behind the development of Looking beyond the walls of IPAC’s offices
over all the current technology for use in securities lending, Roy in the former Lehman Brothers building
Zimmerhansl, head of electronic securities in London’s Broadgate development, to
electronic platforms lending at ICAP i-Sec, one of the newest view the market more broadly, he adds
electronic securities lending platforms, is as that it remains important to continue
over the next few calm and methodical as anyone in setting introducing higher levels of technology
the scene. “Phase 1 was a drive towards because lenders and investment banks
years,” internal efficiency. Get your own shop in continue to accumulate assets into their
order. The technology focus is on internal programmes at a faster pace than they can
Francisco Gonzalez, books and records and STP processes. Phase distribute the assets. This could have a
2 is to improve reconciliation processes. dilutive impact for lending agents, although
head of Eurex Match your counterparties and focus on that is currently masked by substantial
exceptions. The technology focus is on cash re-investment returns. He cautions,
SecLend reconciliation tools. Phase 3 is to generate though, against accepting unquestioningly
additional revenue with marginal additional the recent suggestion that no more than 5%
have access to a wide array of competitive cost. Making the best of what you’ve got. The of securities lending transactions take place
rate information that is empowering and technology focus is on revenue enhancers: on electronic platforms, if only because it is
facilitates sound decision-making. Similarly, trading platforms. Realistically, most firms impossible to estimate. “I think it unlikely
our aQuas portal aggregates securities – both borrowers and lenders - have more that it would be higher than that, and I don’t
lending data from a number of providers and counterparties than they call efficiently or think it’s possible to set a target for electronic
delivers it directly to our customers through effectively deal with on a daily basis.” platforms to aim for in percentage terms.
an encrypted feed. So while complexity of “ICAP is in the business of electronic “For some firms it could be over 75%, for
the underlying transaction and sophistication trading platforms, with over 30 products others 5% could represent a huge volume.
of the customer is certainly distinct from a traded electronically, up from 20 products a The important thing is that electronic trading
traditional loan, the principle is the same: year ago and representing an estimated 46% should represent a portion of every firm’s
customers receive fast, accurate, confidential, market share within the electronic broking business.”
transparent and diverse rates for securities business. Operating profits generated from “We would like to see 25% to 30% of total
loans they can use as they see fit to optimize electronic trading products represented 32% market share being transacted over all the
their portfolios.” of ICAP’s total in the year ended March 31 current electronic platforms over the next few
Bruce Turner is optimistic about future 2008. The global network represents more years,” says Francisco Gonzalez, head of Eurex
growth in what he argues is an asset class than 6,000 workstations on 2,000 dealing SecLend.
poised for expanded participant involvement. floors across 50 countries. i-Sec has been He chooses to highlight the need to achieve
“It is no longer just a niche; the more able to leverage the existing product range greater speed and accuracy combined with
information you provide, the more people are and infrastructure to offer a state-of-the-art increased volumes to be processed in serving
interested in exploring the possibilities. The product that is delivered to users, typically its clients. In contrast to, for example, a
whole pie is growing.” Sales and customer using existing technology links. Starting from venture capital operation, securities lending
activity suggests Quadriserv is growing with a base of four pilot clients in April 2007, it is largely an “instrumental” business, rather
it: the company has 20 subscribers lined-up now offers 10 markets to the existing user than an end in itself, he elaborates. “It serves
for its aQuas portal, which was officially base of 13 firms, with three more firms in lenders who want to profit from lending
launched only in December, with between various stages of technology roll out. That out stocks, and it serves prime brokers or
two and four times more that figure in has occurred in less than 15 months of in-house trading desks that want to borrow,
the sales pipeline. “Our target is 250-300 operation.” or borrow to relend for their conduit or street
hedge funds with assets from USD500m to “As i-Sec is a new product, baseline

25 | GSL
InFRASTRUCTURE

tax jurisdictions and therefore have different systems accordingly, not just react to client
“We would like to dividend requirements. needs,” Felix Oegerli resumes. “The problem
In terms of control of counterparty is that most vendors are technology experts
see 25% to 30% of exposure, they should be able to restrict who just implementing what their clients are
will be able to execute trades with them, telling them to do. They have no fundamental
total market share without sacrificing the transparency of seeing understanding of the business itself.”
prices from the entire market including Sharon Walker, managing director of
being transacted those firms outside their approved list, and EquiLend in Europe, is quick to point out
they should be able to restrict the range that the 5% estimate, specifically excludes
over all the current of their trading relationships with their activity taking place on the Equilend
counterparties to allow trading in certain platform. “If you include Equilend in the
electronic platforms markets while excluding others. And if either mix, I believe that EquiLend contributes
side is interested in a potential trade, but significantly more than the 5% of the
over the next few wishes to negotiate, it should be able to do so cumulative trading volumes attributed to
quickly and easily. platforms mentioned during the technology
years,” While it is impossible not to admire the panel in Prague, and I would think it
‘build it and they will come’ spirit evidenced difficult for anyone to accurately scale the
Francisco Gonzalez, by the creation of i-Sec, it is equally business.”At EquiLend, Walker summarises
impossible to ignore the suggestion that it the main driving forces behind the ongoing
head of Eurex might be 5-10 years ahead of its time. “It is development of new technology in the
important to consider that market demand industry as being scalability, the need for
SecLend transformation drives the business model efficiency, regulatory change, cost control and
transformation and not vice versa, observes changes in market direction. She says: “You
business,” he elaborates. “For all of them, Felix Oegerli, a member of the executive need to operate in a cost-effective manner,
time is of the essence, but so are risk control, committee at COMIT, a consultancy and and be nimble enough to respond to new
speed of settlement and monitoring. So vendor firm in the area of securities finance market directions. Automation will inevitably
the faster securities lending traders can do and collateral management. “Have they continue; we see huge volumes of trading
things, while maintaining risk control and therefore perhaps overestimated market business across our platform but the industry
transparency, the better we can serve our end growth in this area?” he asks. “Are the build has some significant way to go as there is
users. And technological development is the and run costs justified by the short- to vast potential to grow. In the past two weeks
best way to accomplish this. As a key example: medium-term volumes?” alone we have added two new trading clients,
higher technology is important in regard This doesn’t mean, he stresses, that i-Sec bringing the number to around 50, and our
of a Central Counterparty (CCP). This will does not have a role to play, only that it could pick-up is growing steeper. I think we’re only
make the whole electronic securities lending be several years rather than months before scratching the surface of potential usage.”
process much easier and much faster, and it it can be properly assessed. “I don’t think She reports recent peaks of around 20,000
will bring more players into the electronic that even in five years time you will see the trades a day, with a value between USD20
marketplace. CCP facilities are probably biggest securities lending tickets being traded billion to USD25 billion per day across up to
going to be the next new technological wave electronically,” he adds. “It will happen, but 25 markets. Our most recent statistics show
in electronic securities lending. For potential over a longer timeline than they maybe think. that for the first quarter of 2008, we reported
players in emerging markets, a CCP will open Traders do not change their habits over a an increase of more than 21% in both value
a lot of new doors, while for the providers a short time. and volume of trades executed compared to
list of open issues need to be addressed first. For the large players, it is too costly to the same period in 2007. Since the start 2008,
A true trading platform is beneficial to integrate several platforms to get the full our contract comparison service is up 60%
lenders in a number of ways, argues Roy benefits from them, and they will think twice we record in excess of 1.4 million records per
Zimmerhansl, related to transparency of before linking to different platforms.” At the day and our mark- to- market comparison
pricing, the control of counterparty exposure end of the day, it would seem, it will be a service is up 55% based on the same time
and negotiation. Transparency of pricing Darwinian survival test, and the market will period last year. We are in the process of
will mean that lenders will be able to see decide. The deciding factor on who survives registering in Canada, state by state, starting
the fee levels at which their competitors are could be the answer to the question: who in Ontario, Sharon Walker reports. The
willing to lend, they will see the best price has had the most support from the outset? process should be completed by the end
that borrowers are willing to pay, the system In the meantime, the growing complexity of of this summer. “We are also focussing on
will allow them to select the appropriate the trading environment makes it difficult Asia where we believe we make significant
collateral type, and will be flexible enough to for technology to cope. “The ideal vendor inroads,” she adds.
take account of clients that are from multiple should anticipate market trends and build The increase of business on the Equilend

26 | GSL
RUnnInG HEAdER

27 | GSL
InFRASTRUCTURE

main driving forces behind the ongoing

development of new technology in the In conversation with Jason Hayes, sales AUTOMATIOn: Straight through processing
industry as being scalability, the need for director, North America, 4sight Financial (STP) has also been a main driver for our
Software clients. Whereas securities lending used to
efficiency, regulatory change, cost control and
sit somewhat on the sidelines in terms of
changes in market direction. She says: “You How would you summarise the main technology within the financial landscape,
need to operate in a cost-effective manner, driving forces behind the development of but institutions are now demanding the
and be nimble enough to respond to new technology for use in securities lending? same type of efficiencies and technology
already in use in other areas of the bank.
market directions. Automation will inevitably
CLIEnTS: Our clients in the last 18 months Batch uploads and downloads are being
continue; we see huge volumes of trading have been the driving force behind new replaced with real-time messaging and
business across our platform but the industry technology development. While, as a information being streamed to other
has some significant way to go as there is software house we have our own internal downstream systems through an institution.
drivers for technological upgrades our
vast potential to grow. In the past two weeks
clients have been leading the the technology SCALABILITY: Increased volumes require
alone we have added two new trading clients, charge. The adoption of service providers systems to be scalable. Adding more
bringing the number to around 50, and our like Equilend, Pirum and data Explorers disc space to a server to allow a database
pick-up is growing steeper. I think we’re only has forced our clients to evaluate how to grow is no longer acceptable. Clients
they import and export information. data require that systems can be distributed
scratching the surface of potential usage.”
extraction and interfacing have become and balanced across a number of servers
She reports recent peaks of around 20,000 essential to running a securities lending to improve performance and handle larger
trades a day, with a value between USD20 programme. Flat file extracts to third- volumes, as well as offering better options
billion to USD25 billion per day across up to party systems are no longer acceptable with regards to archiving of data and
as the sole standard. People want direct disaster recovery.
25 markets. Our most recent statistics show
interfaces to other in-house or third-
that for the first quarter of 2008, we reported party systems while expecting complete GLOBALISATIOn: More institutions are
an increase of more than 21% in both value intergration with their core securities lending setting up global lending desks, and as
and volume of trades executed compared to software solution. With this integration has such systems need to be able to be run
also come the automation of processes. from multiple locations across different
the same period in 2007. Since the start 2008,
demands on middle and back offices have timezones.
our contract comparison service is up 60% increased and the need for automation has
we record in excess of 1.4 million records per led to increased efficiency and a shift in
day and our mark- to- market comparison workloads.
service is up 55% based on the same time
period last year. We are in the process of
registering in Canada, state by state, starting
in Ontario, Sharon Walker reports. The experience at the coal face, securities lending “EquiLend’s Trade2O, is a service in the
process should be completed by the end can be a scary place, even with a sympathetic warm/hot stock space allowing traders
of this summer. “We are also focussing on mentor on hand. For anyone new to the to bid/offer on lists sent by lenders or
Asia where we believe we make significant industry, whether as a practitioner or as an demand lists from brokers. We are already
inroads,” she adds. independent observer, it can be a veritable seeing hundreds of orders and executed
The increase of business on the Equilend minefield. One wrong step can destroy all trades passing through this service on a
platform in the meantime comes not confidence and credibility in an instant. One daily basis. One of the unique elements of
just from the growth in client numbers, thing that is important is not to make the this, is its ability to interface directly with
but is also due to a natural tendency for fundamental mistake of mixing technology the proprietary systems providing a fully
different parts of an organisation to begin into a single category, thereby confusing integrated solution.” This replaces the need to
using its services once it has made the apples with oranges. There are books and send out numerous Bloomberg messages with
initial penetration. “Trading services leads records systems such as 4Sight, Global attached lists, making it more efficient than
to contract comparison leads to other One, Martini, Anvil and COMIT. There are Bloomberg’s, but arguably not much, some
services,” she summarises. To be brutally reconciliation platforms, such as Pirum and observers might suggest.
honest, though, part of the message coming EquiLend. There are order matching systems “One electronic market may do simply
from the industry, whether consciously or such as Loannet, auction platforms SecFinex fixed-income while another concentrates on
unconsciously transmitted, is that people and EquiLend and trading platforms iSec, General Collateral (GC) issues, while a third
instinctively recoil from change, preferring to SecFinex and Eurex SecLend, and EquiLend. features international equities, and a fourth
cling to the familiar, to the tried and tested. “We all differ according to the space we fill,” is purely a US-based/concentrated facility,”
This natural conservatism is a hurdle that says Sharon Walker. “Our own philosophy is adds Eurex’s Francisco Gonzalez. “Some
must be overcome if the industry’s broad to provide whatever the market needs, and we platforms are closed to all but large volume
optimism is to be justified. have already released one new trading service users; some are closed to all but their original
To those who have had no hands-on this year [Trade2O] and another is planned. members, except for new members who are

28 | GSL
RUnnInG HEAdER

Ad

29 | GSL
InFRASTRUCTURE

able to pay a rather weighty initial fee. These activity, and has allowed for the growth assets out of the pool and using an auction.”
special features set one apart from the other. of third party lending. Despite recent
So it all depends on what you want to pay for developments with both front end electronic Is the need for greater transparency having an
and what you are looking for the platform trading and more efficient post trade effect on securities lending technology and
to do. This also explains why some users processing there remains significant room how strong is demand for this? “The demand
are signing up to several electronic markets in the market for further automation and for greater transparency in recent years has
and not just one, which is an interesting technological advancements, he says. been fuelled by increased regulatory scrutiny
development, suggesting an instinct for as well as changing views and expectations
eventual consolidation of the marketplace. “Improvements in technology have also of beneficial owners,” continues Chris
Maybe it’s the “let’s not miss the market’s new helped facilitate the use of multiple routes to Jaynes. “As beneficial owners increasingly
idea” sense of play by the current players. If market as agents can manage programmes view securities lending as an investment
something’s going to happen on one market, efficiently and safely regardless of whether function they expect to have better data
no one wants to be left on the sidelines. On they are the custodian or not,” he continues. available to review returns, risk factors, and
the Eurex SecLend market place the traders “Historically, technological linkages between relative performance information to better
are able to trade the entire spectrum of GC custodians and third party firms were less understand and monitor their programmes.
and specials in fixed income and equities on a efficient causing the potential for increased We expect the demand for transparency to
global basis. risks and costs within an operating model. increase in the coming years as Lenders look
“Eurex SecLend’s electronic market and These factors have all changed significantly to ensure an objective, regulatory friendly
has been up and running for two years now) and today, third-party lending competes and auditable programme that can be easily
allows the borrower to look at both equities evenly with custodial programmes from an presented to their management team, board,
(including Exchange Traded Funds) and operational, risk and cost perspective.” and regulators. The increased demand for
fixed-income positions, either singly or as transparency has been one of the factors
part of a basket of securities. We enable “We see a strong future for auctions. The contributing to the growth of auctions in
clients to talk to each other as part of the model continues to gain wider acceptance recent years as the auction process provides
negotiation process via facility. Several amongst the beneficial owner community lenders with transparency and price discovery
borrowers can be dealt with at the same time because it facilitates better price discovery, that is not available in traditional pooled
by a single lender, so the Eurex SecLend chat provides clients with greater control over programmes and allows for objective decision
button provides some of the useful features their programme, and offers guaranteed making on how to best allocate portfolios for
of an auction system without the protracted results that are objective and transparent to lending,” he concludes.
performance that auctions seem to involve. report to boards. We have seen continued
Our breadth of clientele lets borrowers access growth over the past few years with regards to
global securities from lenders who are located the use of auctions in the securities lending
in a wide variety of countries. We also cater industry and we expect that this trend will
to that tier of lenders who may have the much continue. Traditional agents who were
sought after small cap issues which the larger historically opposed to auctions have been
lenders may not have in their portfolios. increasingly supporting this route to market
Eurex SecLend provides an entrée into Eurex based on client demand. It is important
Repo, of course, since one system is based on to note that there remain significant
the other and allows cross-usage. We offer our differences between auctions managed by an
clients the ability to trade both equities and independent provider who does not utilise
fixed-income positions on a securities lending a pool versus those supported by traditional
and borrowing open basis. We also offer agents whose core trading strategy is based
straight-through processing.” on combining specials with general collateral
and influenced by relationships with certain
For Chris Jaynes, President, eSecLending, in preferred borrowers. Traditional agent
recent years technology has made the largest providers have to manage many conflicts with
difference with post-trade processing and their pooled programmes when managing
reconciliation rather than trade execution. auctions on behalf of lenders. They have to
Improvements in electronic messaging, balance the impact to preferred borrower
settlement platforms and reconciliation tools relationships which are traditionally driven
have allowed for increased straight through by general collateral balances in exchange for
processing. The increase in automation allocation of specials and also have to balance
has resulted in an ability to better manage the issue created by deriving premium
increased lending volumes and trading returns for one lender when pulling their

30 | GSL
InFRASTRUCTURE

Technology Review
GSL looks at the solutions offered by securities lending vendors

real-time value dated position

keeping and a powerful web
reporting module, allowing full front
to back office processing. specific modules can be
4sight Securities Finance also licensed independently. The
integrates seamlessly with external modular approach ensures
systems and employs a data that our customers only deploy
model that enables quick and easy functionality as needed.
real time access to your data, with Furthermore, additional or
4sight Financial Software is a FInACE® is the unique fully
the ability to import and export modified functionality can be built
leading supplier of innovative integrated solution that supports
information in any required format. individually for our customers
software solutions to the the future business model within
quickly and at competitive
Securities Finance, Settlement & all Securities Finance and OTC
niche As a company 4sight is costs. With FInACE® business
Connectivity markets with offices derivatives Collateral Management
small enough to be responsive architecture, customers can easily
and clients worldwide. 4sight products. The architecture of
to our clients’ needs but large adapt the platform to the enterprise
Securities Finance is a flexible FInACE® is based on a stable,
enough to offer global support level, which enables the view
modular solution that empowers leading edge technology platform
capabilities through our network of and analysis of all positions and
financial institutions of all sizes, empowering customers to manage
offices, with a wealth of experience exposures across organisational
from the smallest direct lender complex, scalable business critical
implementing multi site global boundaries.
to the global custodian, broker functionality. With flexibility at its
projects for some of the world’s
or intermediary on an agency core, customer-driven extensions
largest financial institutions Main product: FInACE
or principal basis. It supports and modifications can be quickly
Inception: 2004
borrowing, lending, repo, swaps and easily applied to the standard
Main product: 4sight Securities Website: www.comit.sg
and collateral management component set.
Finance (4SF) Major clients: Bank Julius Bär,
across the equity and fixed- All modules are based on the
Inception: 1996 Credit Suisse, dekaBank
income markets and provides 24 position focused horizontal
Website: www.4sight.com
hour continuous operation, inter FInACE® platform. The business
desk trading, a ‘global book’,

income and expense across

open borrows, loans, and swaps;
recall management designed to
leverage ARMS, automated fax,
et al; US domestic Regulation
Anetics is both a service SHO components for short-sale
EquiLend is the leading provider Billing Comparison and delivery, organization providing technology locates complete with a direct
of brokerage solutions for the dividend Claims Comparison, and resources to extend internal staff client-customer web interface and
securities finance industry. Owned Agent Lender disclosure (ALd). The personnel, and an application compliance exception reporting;
by eleven preeminent financial EquiLend platform also supports service provider with a modular Fee/rebate allocation, stock
firms, EquiLend revolutionizes the execution of payment and off-the-shelf tool kit that can borrow/loan/swap against trading
straight-through processing by delivery instructions through the fill in the gaps – providing position (transfer pricing).
using a common standards- dTCC. functionality that may otherwise These modules can be linked
based protocol and infrastructure, be weak or missing in a firms daily to existing infrastructure and
which automates formerly manual niche: Our platform offers end- processing. are designed to run either in the
business processes. Used by to-end solutions for borrowing The Anetics tool kit includes customer’s data centre or as an
borrowers and lenders throughout and lending needs within the components that can manage application service hosted by
the world, the EquiLend platform Securities Finance Marketplace. It inventory through subscriptions Anetics.
creates efficiency and provides is product agnostic and global in to both internal and external
access to additional liquidity. scope, offering compatibility with sources of supply, and for the niche Anetics caters to the small
EquiLend’s end-to-end solutions, all financial products in all countries publishing items available to to mid-size trading desk that
which reduce the risk of potential around the world. lend; Analyse trading positions may not have adequate internal
errors and eliminates the need for available-to-lend, need- resources to develop and support
to maintain costly point-to-point Main product: Securities Finance to-borrow and recommended the tools necessary in today’s
connections, include: Availability, Technology Platform returns and refinancing; Auto- dealing environment. While most
AutoBorrow, Trade2O, EquiLend Inception: 2002 borrow both through popular technology firms offer a monolithic
AuctionPortSM, Contract Website: www.equilend.com hubs and bilaterally with direct front-to-back package for global
Comparison, Mark-to-Market Major clients: Goldman Sachs, counterparts; An automated securities lending, the Anetics
Comparison, Returns, Recalls, deutsche Bank, BnP Paribas blotter for conduit matchbook solution is modular. The customer
Services dealing that links sources of can select just the components
supply with a counterpart’s orders necessary to, say, fill in the gaps.
or needs; Analytics for balancing

31 | GSL
InFRASTRUCTURE

it easier for financial institutions

to maximize the return on their
assets, or balance their short
positions. LendEX is designed to provide
price discovery, enhanced
niche: Eurex SecLend is an revenues, transparency and
Europe’s leading investment electronic market with enhanced benchmarking capabilities to
IOn specializes in flow banks participate as borrowers in and unique trading functionality.
trading technologies offering: all securities lending market
the Eurex SecLend marketplace, It also includes auction, price participants. With LendEX, our
Connectivity to over 100 trading acting as principal broker and discovery and other key features
venues covering rates, credit, members will have real time
intermediaries. Agent lenders and for securities lending and trading opportunities and data to
commodities and FX; Full repo direct lenders provide substantial borrowing transactions. Eurex
and securities finance solutions evaluate their lending revenues
availability in global fixed income SecLend supports trading desks to and utilization rates.
(Anvil) leveraged by both buy and equity names. They benefit handle the mass GC flow business
and sell side institutions; Real- LendEX requires no change
from Eurex’ leading state-of- as well as “hard-to-borrow” in our members’ current
time cross-asset pricing and the-art trading and processing specials market. Fixed Income
risk management; High-speed procedures other than adding
services. Eurex SecLend is and Equity representatives prefer one additional approved
framework for implementing playing a pioneering role in the Eurex SecLend’s global securities
customised algo trading counterparty. to execute
SLB market’s development. By universe. transactions on LendEX,
strategies; Fully-distributed delivering efficiency across the
component-based, open and members need to establish a
deal chain and providing innovative Main product: -Eurex SecLend & securities lending relationship
scalable technology platform solutions to the needs of all Eurex repo
Anvil forms a core part of the with The Alaska USA Trust
SLB market participants, Eurex Inception: 2005 & 1999 Company, a wholly owned
IOn e-trading systems portfolio. SecLend helps volumes to grow Website: www.eurexchange.com
Unlike any other repo and subsidiary of the Alaska USA
for the benefit of all its clients. Major clients: Julius Baer, Federal Credit Union. AUTC acts
securities finance system, Anvil Eurex SecLend provides a fully HypoVereinsbank, Fortis Bank n.V.,
has been designed by traders for as principal in all transactions
integrated electronic marketplace and stands between borrowers
traders, allowing faster execution, for fixed income and equity lending
more efficiency and greater and lenders acting as a credit
and borrowing. It offers a real- intermediary thus maintaining
trading volumes. Anvil enables time trading, settlement and loan
high levels of trading automation, the anonymity of the exchange.
management environment, which
so traders can concentrate on is supported by a wide range of
doing what they do best: trading. niche: There are several
automated post-trade services. It electronic solutions emerging
provides high-volume transactions but LendEX is the only full
niche: High level of automation processing at low cost, making
features, tight integration with service securities lending
electronic trading venues, marketplace that provides
freedom to have a high degree real time, single stock trading
of customisation where required, and market data. We provide
provision of dedicated technical complete back office operational
consultants and support support. From execution until
personnel when required, ability the loan is closed, we do all
Over 40 financial institutions use
to trade repo and securities maintenance on the transaction
SecFinex, including a wide cross-
lending in one system, more including but not limited to mark
section of lenders, borrowers and
advanced technology than the to market adjustments, rate
intermediaries.
competition, componentised changes, recalls and returns.
approach. niche: SecFinex is an exchange,
SecFinex provides an efficient, Main product: LendEX
impartial and transparent web operating in the SBL marketplace. Inception: 4/30/2008
Main product: Anvil It allows participants to trade in
Inception: late 1990s based platform that enables Website: www.anetics.com
market professionals to arrange three different ways:
Website: www.iontrading.com 1. Order Market: Pre-trade
securities lending and borrowing
transactions. SecFinex delivers anonymity
value to participants by improving 2. Private Market – name give up
access to securities and finance prior to trading
via a central marketplace, by 3. Auctions
using state of the art technology
that provides participants access Main product: SecFinex
to a screen-based, price driven Inception: 2001
market place with bids and offers
posted on a firm to trade basis.

32 | GSL
InFRASTRUCTURE

for securities loans, daily and

historical market data, analytics
and synthetic trading products.

Quadriserv brings new niche: The Aquas portal provides

perspectives to the securities lenders and borrowers (brokers, i-SunGard’s Martini is a proven,
lending market by directly hedge funds, 130/30 funds) of scalable software solution
connecting securities lenders equities a unique window into the that provides integrated
and borrowers in innovative securities lending markets. The global trading and positions
ways. Our products and services Aquas portal aggregates historical management for all aspects
deliver market data, transaction, and indicative securities lending of securities finance. Martini
technology and credit solutions data from a number of providers provides a comprehensive
that allow end users to be better and delivers it directly to our front and middle office solution
informed and better equipped to customers through an encrypted that meets the demands for
succeed in the securities lending feed. Our data provides actionable rapid response times and
markets. Our cornerstone equity securities lending rates broad product coverage. The
product, the Aquas portal is a which allow our clients to uncover global trading desks of major
secure, interactive, web-based the intrinsic value of their long investment banks, broker-
application where borrowers positions and the true cost to dealers and hedge funds rely
and lenders of securities get a borrow on Martini as their worldwide
single view into the securities securities finance trading
lending markets. The Aquas Main product: Aquas portal platform for global repo and
portal provides its users with Inception: december 2007 international stock loan.
fast, accurate, confidential, Website: www.quadriserv.com Martini is fully real-time, multi-
transparent and diverse rates currency and multi-legal entity.
Traders enjoy a fast, easy-to-
use screen providing entry,
inquiry and worldwide position
availability segmented by
transparency of screen based
transaction type, currency and
trading on i-Sec, the visibility of
other attributes.
market depth and the power of
negotiating tools on the system
niche: The strength of Martini
i-Sec enables traders active help firms gain optimal terms for
lies in its real-time global
in securities finance to borrow their transactions.
positions management and
or lend equities via a screen- i-Sec builds on the client base and
trade capture functionality.
based electronic platform infrastructure already in place for
Fundamental to its design is
that combines the leading a wide range of ICAP Electronic
the ability to show an individual
order matching system with Broking (IEB) products. This
trader a tailored view of the
a high-speed, high capacity results in proven quick and easy
positional data that they are
communications network. rollout and implementation of the
responsible for, while at the
i-Sec currently facilitates IEB product range including i-Sec.
same time reflecting their trades
securities lending activity across within the firm wide book and
nine global equity markets with niche: The leading edge securities
entity structure. This truly
additional special niches in lending trading platform – it is the
allows the global book to be
European ETFs and depositary newest platform on the market
managed in real-time from any
Receipts. new markets are with the most flexibility and can
location around the world. The
added quickly and easily based be customised to each individual
scalability and volumes handling
on user demand. trader’s specific preferences
capabilities of Martini set it aside
Through i-Sec both borrowers from its competitors. Martini also
and lenders can easily broadcast Main product: i-Sec
provides an access point to the
their search for securities or Inception: April 2007
broader Sungard community
enhance their distribution of Website: www.icap.com of securities finance customers
available portfolio to a wide and integration with an
range of interested parties. The extensive network of solutions
and services (including Global
One and Loanet) specifically
designed to address this niche
market area.

Main product: SunGard Martini

Inception: 1997
Website: www.sungard.com/
martini/

33 | GSL
nEXT ISSUE

Francisco Gonzalez the head of business and product development at Eurex SecLend

MARkETS UndER THE MICROSCOPE who earlier this year hired Paul Larkin, Francisco Gonzalez the head of
of Scotia Capital to head up its newly business and product development
Eastern Europe – Ben Roberts created securities lending desk in at Eurex SecLend discusses his role
discusses the pros and cons of Europe’s toronto. and the evolving industry of servicing
new and developing SBL markets; securities
Czech Republic, Hungary and Poland. IndUSTRY InSIGHT
Is it all plain sailing or are they a million Lender Profile – One of the leading
miles apart from what the established Asian Repo Update – GSL investigates American West Coast pension funds
markets are used to? the current trends in the Asian Repo speaks to GSL about their involvement
market. How does it compare with the in the industry, their first auction, and
USA – With this year being the 25th European landscape? how the credit crunch has affected the
Anniversary of the original securities market.
lending conference organised by the Collateral Flexibility – Anthony
RMA GSL’s Joe Corcos takes a look at Harrington speaks about the changing 3rd Quarter Moves – GSL looks at the
the worlds most developed SBL market demands within the world of collateral, tactical substitutions taken by many.
and what the current trends are. the increased cost of borrowing cash Where are they now? Read more to find
and the higher demand for non-cash out.
Canada – Over the last few years collateral.
Canada has seen a flurry of regulation
changes. Catherine kemp takes a look PEOPLE COnFEREnCES And
at the Canadian market, speaking with BOnUS dISTRIBUTIOn
Td Securities, CIBC Mellon, RBC dexia CEO Profile – Giles Turner speaks with
and Scotia Capital to get a full local Brian Lamb, head of EquiLend about 14 – 17 Oct, RMA Securities Lending
flavour and some of the new entrants their products, new technologies and Conference, 25th Anniversary, San
to the market like Macquarie Bank, the market at large. Antonio, Texas, USA

34 | GSL
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GSL 16-35.indd 35 6/8/08 16:56:57

inFrastructure

Flexible, transparent, and value adding

ETF lending
Securities lending plays an increasingly Overall, securities lending provides drivers and different revenue opportunities
important role in the world’s capital markets numerous benefits to market participants, for individual ETFs. An example of how it
as investors and investment strategies including improved liquidity in the securities works at iShares, BGI’s ETF arm, is each
become more sophisticated. Today, the and derivatives markets, the ability for ETF holder can decide whether or not to
securities lending industry is a very large, investors to express negative views as well as lend their units, and any lending revenue
over the counter and well regulated market positive ones, and affording market makers gained will accrue directly to that investor
with over EUR14 trillion of lendable assets an efficient two-way pricing mechanism. (after any revenue sharing with a lending
available, with an average of EUR3 trillion Within unit trust or mutual funds, agent). The amount of revenue earned from
assets on loan daily. this activity accrues benefits to all fund lending the ETF unit alone can particularly,
The practice of lending assets, already a shareholders, as revenues from securities or in some cases completely, offset the cost
common activity in unit trusts and mutual lending are usually reflected in the net asset of holding the ETF position. This unique
funds, has also reached exchange traded value. Lending revenue generated by BGI ability further increases the attractiveness
funds (ETFs). on behalf of iShares funds is split 50/50 of ETFs as investment products, by adding
According to Marc Knowles, head of between the fund and BGI. value beyond the flexibility, cost efficiency
product management for iShares, the ETF The largest demand for borrowing now and high degree of transparency that ETFs
arm of Barclays Global Investors, an ETF comes from deliberate trading strategies. already offer. Unlike mutual funds, all ETFs
investor can unlock further potential in The securities lending business supports have their portfolio composition updated
these funds by combining the benefits of the many of these strategies by providing shares and disclosed daily.
revenues generated from securities lending to cover transactions where the seller is not The lending of ETF units is a growing
within the fund with revenues from lending in possession of the shares. Normally, the component of the securities lending market.
the ETF unit itself. broker-dealers or prime brokers identify Market data compiled by Performance
demand and act as intermediary to facilitate Explorer, an independent aggregator and
loans for internal or external end users. vendor of securities lending pricing and
Lending ETFs is Prime brokers also regularly borrow volume information, indicates there was
securities to hedge exposure caused by an average of EUR22 billion of ETF units
a growing the creation of derivatives instruments. on loan daily in the first half of 2007, with
This borrowing demand is usually satisfied approximately 15% growth in on loan
component through lending agents, who aggregate balances during this period. Shorting ETFs
lendable supply from asset owners and may allow fund managers to efficiently
of the securities negotiate prices on behalf of lending clients. execute complex trading strategies at an
Custodian banks, investment managers, and index level; similarly, borrowing ETFs can
lending market, third party lending specialists all serve as also be a competitive hedging solution
lending agents. compared to using futures or OTC
explains The difference between unit trusts or derivatives. From an operational perspective,
mutual funds and ETFs is that in ETFs, lending ETF units is an easy and simple
Marc Knowles, securities lending can occur in two ways. process, as they trade and settle like equities,
Firstly, investors can earn revenue by the and should fit into a standard securities
head of product lending of the constituents inside the fund lending programme.
similar to unit trusts or mutual funds. As one of the largest institutional money
management at Secondly, uniquely to ETFs, investors can managers in the world, and as investment
lend the units of ETFs themselves to earn manager for the iShares ETFs, BGI is well
iShares an additional revenue stream. Equity, bond, placed to act as lending agent. BGI has
commodity or property ETF units can all delivered significant additional returns for
be lent, although there are different demand investors from the combination of lending

36 | GSL
inFrastructure

Marc Knowles -
ishares head of
product management

within the fund and lending of units. All Lending returns inside iShares ETFs
iShares holders benefit from lending within
fund, but only holders who actively lent their ishares etFs Fiscal Year 2004 2005 2006 2007
iShares benefited from this component of ishares Msci turkey 31-Oct 114.6
lending return. ishares DJ euro stOXX 50 31-Oct 19.4 25.3 26.8. 28.6
ETFs are powerful investment solutions. iShares FTSEurofirst 80 28-Feb 25.1 33.8 25.4
In addition to their ease of use and precise ishares Ftse/Xinhua china 25 28-Feb 3.2 25.1
market exposure, these instruments also ishares DJ euro stOXX Midcap 28-Feb 2.8 15
enable complex investment strategies beyond ishares DJ euro stOXX select Dividend 28-Feb 14.6
traditional allocations. ishares DJ euro stOXX smallcap 28-Feb 5.1 12.8
Within the ETF, securities lending returns IShares FTSEurofirst 100 28-Feb 24.7 14.1 12
depend on constituents and tax domicile of ishares DJ stOXX 50 31-Oct 13.8 22.3 17.9 9.7
the fund. Needless to say, both lending inside ishares Msci eastern europe 28-Feb 8.7
ETFs and lending of ETFs units are only ishares s&P 500 28-Feb 5.8 6.2 8.4
possible where there is sufficient depth in the ishares Ftse ePra/Macquarie Global infrastructure 31-Oct 6.7
ETF market. ishares Ftse/ePra european Property index Fund 28-Feb 3
Lending the constituents of an ishares Msci Japan 28-Feb 2.1
iShare benefits all holders as returns are ishares DJ euro stOXX Growth 28-Feb 1.5
incorporated in the fund NAV. Unique to ishares £ corporate Bond 28-Feb 0.5 0.5 1.4
ETFs, an additional income stream can be ishares ˆ corporate Bond 28-Feb 14 2.8 1.2
unlocked through the lending of ETF units ishares Msci emerging Markets 28-Feb 0.9
themselves. As both revenue streams inside ishares Msci World 28-Feb 0.3
and outside of ETFs are subject to supply ishares Ftse 100 28-Feb 0.1 0.2 0
and demand dynamics, securities lending ishares Ftse 250 28-Feb 0
revenues are not guaranteed. As the world’s
largest manager of ETFs, BGI is uniquely Table 2: Lending returns inside iShares ETFs and from lending the ETF units
positioned to identify attractive lending
opportunities in the market that may be ETFs TER Total revenue Excess Return
available to a custodian or a third party IShares Russell 2000 Index Fund (US) 20 8 108 116 96
lending agent. iShares FTSE 250 40 - 93 93 53
iShares DJ Euro STOXX 50 35 29 25 54 19
IShares MSCI Emerging Markets (US) 74 7 103 110 36

37 | GSL
inFrastructure

Tri-party collateral
management gets subtle
Collateral management

In these cash strapped times, with no one really sure when the credit crunch will end,
liquidity continues to be a problem across a wide range of sectors. At first glance, this looks
like a situation made in heaven for the major tri-party collateral agents as more and more
organisations, from banks to broker dealers look to their securities holdings as a way of
raising much needed liquidity. However, there are storm clouds louring even here, at least
in the traditional rep business, which still accounts for some 75% of the global tri-party
collateral marketplace.
Repo, or repurchase agreements, to give them their Sunday title, are in essence cash
Anthony advances given by a lender against a basket of securities offered as collateral by the borrower.
The origins of tri-party collateral management lay, as Pascal Morosini, head of Tri-party
Harrington sheds Collateral at Clearstream explains, in the way the basket of securities being offered to lenders
became more and more diverse at the start of the 1990s.
some light on how This diversity and complexity in turn created an opportunity for third party agents to step
in and offer an independent collateral management service. That service has since developed
an increasingly on well beyond repo, but this is where the story begins. 1992, for example, was the year that
Clearstream launched its introductory repo collateral management offering.
popular format is “There was a growing demand in Europe at that time by the industry for a way of
exchanging multiple assets in little pieces and in differing currencies, all as part of
coping with changing a single repo transaction in a single currency,” Morosini says.
This complexity was far too tedious for bi-party transactions. A lender of cash would have
times to invest in very substantial middle office systems if it wanted to offer this kind of cash-for-
securities deal to a wide range of counter parties with vastly different securities portfolios.
At the same time, borrowers wanted to maximise the collateral value of their securities
portfolios and they were really keen – and still are – to push the mix of acceptable securities
to the limit. Again, from their standpoint, having to sit down time after time with individual
lenders and thrash out bi-party agreements on what was and what was not acceptable
collateral for each specific loan (with many loans being of very short duration, overnight or
for a week, for example) was massively inefficient.
So the stage was set for tri-party agents to bring deep systems skills to this market,
automating the whole process of proffering and accepting baskets of securities, and
managing all the administration and settlement aspects of this.
The ability to maintain an eligibility list for a client and check automatically all securities
in the proffered basket against that list, is a major added value service that the tri-party agent
brings to the process. The agent will also mark to market the securities in the bundle and a
third, very important service these days is the ability to offer the borrower the limited right
of substitution of the pledged securities.
What this last point means is that provided the client has other securities in their
portfolio, they can still deal in the pledged securities if, for example, the market moves in
their favour. The system will then automatically allocate an equivalent value of other eligible
securities to the basket.
“It is clear from all this that the cash provider delegates a great deal of responsibility to
the tri-party agent. At the same time, the agent provides the borrower with tremendous
flexibility through the power of limited substitution,” he says. For an organisation that wants
to raise finance against a portfolio, the tri-party set up has tremendous advantages. For the

38 | GSL
Global SECURITIES LENDING 22/07/08 12:34 Page 1

Do you have

an eye
for value?

You can now use and re-use collateral with

full and immediate substitution capabilities.

Our reduced tariffs also mean the lowest

prices ever. Use your eye for value and get
so much more for so much less.

Triparty services for securities collateral.

High on value, low on cost.

© 2008 Euroclear Bank SA/NV, 1 Boulevard du Roi Albert II , 1210 Brussels, Belgium,
RPM Brussels number 0429 875 591 [email protected]
inFrastructure

lender, in a repo arrangement the securities are marked in the name of the lender, so their
hold for the period the securities are in their hands, is absolute. At the same time they know
they are going to get their cash back plus interest as soon as the time period for the loan
expires.
“For private bankers, central bankers and all those lender organisations who have not
invested very substantial sums in their own sophisticated repo technology, using a tri-party
house brings huge advantages,” he says. From the cash lender’s perspective, this is so much
better than a time period deposit without a guarantee. They have the securities in their name
and the whole back office function required to run this kind of deal is easily outsourced to the
tri-party agent.
In 2005 Clearstream launched an initiative with a central counter party (CCP) Eurex
Clearing called Eurex Repo. According to Morosini, this moves the whole tri-party function
on to a new level. “Now, if you want to deal you do not call the other party and arrange to set
up the transaction through a tri-party agent. Now you go to an electronic trading system.
Olivier de schaetzen - euroclear, This is a new game for tri-party agents. In the ordinary course of events, broker-dealers, for
director, collateral services example, hate standardised baskets because they want to have the most open profile possible,
to derive full value from as much of their portfolio as possible. As the agent, the tri-party
provider has no power to constrain the “basket” in any way. Now, however, by standardising
on ECB eligible paper, and moreover, by allowing borrowers anonymity through the medium
of the trading platform (the lender does not need to know the borrower since they can rest
with confidence on the ECB basket they are getting as collateral), the tri-party agent has
created a very desirable mechanism for both lender and borrower. Your counterparty, in effect,
is the CCP, Eurex Clearing, and you can trade with confidence.
Morosini says,“Tri-party arrangements where, there are only two players plus the agent can
be much more aggressive because the lender can tweak the eligibility criteria based on their
assessment of the borrower. However, the advantage of the Eurex Repo arrangement is that
banks who are highly risk adverse will lend because of the special nature of the platform”.
He also makes the important point that German banks who are lending through Eurex
Repo and receiving the ECB basket of securities, can now pledge those bonds direct to the
Bundesbank. “The more liquidity managers and risk managers in lending organisations
understand the benefits of this product, the more we will see tremendous growth in
demand,” Morosini says. Clearstream launched this service for international customers in
October 2007, right in the middle of the credit crunch. It has added seven new international
counterparties to the “club” and there are now EUR42 billion of collateralised loans, up from
EUR17 billion twelve months ago.
So where then, is the “dark cloud” and the doom and gloom for tri-party collateral? It
lurks in the obvious fact that the more risk averse people get, the less tolerant they get about
the quality of the collateral they will accept. at Euroclear, which manages around EUR350
billion of triparty dealing for its clients, reckons that Euroclear saw what he calls “a gentle
tightening” of the eligibility profile for securities from lenders through 2007 and then a more
sharply defined tightening through 2008.
“We are now seeing a more thorough review of the basket by the collateral taker. The
quality of the assets has increased greatly, from a well diversified portfolio of AAA corporate
securities and government bonds, to the point where the proportion of government bonds
demanded is well in excess of the proportion of other credit products,” de Schaetzen says.
Risk managers, he says, have been really exercised on the theme of the collateral being
taken. It has to be sufficiently liquid to be sold instantly should the counterparty default.
“Before Bear Sterns, there was much less concern about the possibility of a major player
defaulting, after Bear Sterns the status of the counterparty is uppermost in everyone’s mind,”
he says.
Although the spread of tri-party deals covers the full spectrum of the money market
dealmaking, about 75% of all the business done is still short end business, ranging from one
day to one week, and one week to one month. However a growing proportion of the repo

40 | GSL
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inFrastructure

Another game for the business done by Euroclear is now being done on an open ended basis, which means that the
cash taker can stop the transaction on call. De Schaetzen points out that this is a measure of
tri-party collateral the fact that people are feeling less comfortable about going into transactions.
While tri-party repo still takes the lions share of the deal, the main tri-party collateral
managers is the fact management organisations, such as Clearstream, Euroclear and Bank of New York Mellon,
are working with their clients to see how they can use the collateral to service many different
that the European types of transaction.
“While repo remains the main focus, we see other collateralised transactions, particularly
firms can pledge in the securities lending business, where one asset is exchanged against a basket of other
assets,” he says. This kind of deal is typically used to implement a collateral upgrade, with
collateral to get the borrower borrowing GC securities as against corporate bonds. This is a particularly
interesting game for pension fund managers, for example, who will be long on government
dollar liquidity in the securities as part of their liability matching exercise. The fund manager can lend out his/her
government bonds without losing them, in return for an interest payment and will have solid
US from the Federal collateral in corporate bonds in return. The borrower in turn gets more government bonds
to put into his “basket” of collateral which satisfies his lender’s increased eligibility criteria.
Reserve There is no doubt that the proportion of securities on loan by pension funds has increased
dramatically.
Another game for the tri-party collateral manager is the fact that European firms can
pledge collateral to get dollar liquidity in the US from the Federal Reserve. Still another
option is tri-party services for secured loans covered by securities collateral.
De Schaetzen points out that Euroclear also helps its customers fulfil their collateral
obligations to CCPs. A trading counterparty could be asked to fulfil margin requirements
during the course of their margin based trading activity, and if Euroclear and the CCP
have mutual clients who are looking for management help on the moving of collateral to
support margin calls, that is all grist to the mill for Euroclear. It can manage the collateral
movement and report on the outcome to both parties. “The clearing house will indicate to us
the acceptable basket of securities for margin requirements and will set the exposure amount,
and we will cover the margin on that throughout the life of the exposure, since we have a full
view of our client’s securities portfolio holdings,” de Schaetzen says.
A more recent addition is collateral management for derivatives exposure. Euroclear
has a relatively new product called DerivManager, which will calculate the exposures of
two counterparties to a range of derivatives trades, and can post the collateral against the
exposure for those derivatives trades.
“The key point to understand is that we are now well beyond just tri-party repo. This is
now the era of tri party collateral management, with clients wanting to optimise the use of
their securities in more and more types of transactions,” he says.
That is driving the expansion of the tri-party service to other types of deals. As de
Schaetzen points out, from a borrower’s perspective, you want to have all your assets pooled
with one agent, since that helps you to leverage a wider pool of assets across a greater range
of transaction types.
From the standpoint of cash lenders offering term money, they have seen their lines of
credit shrinking significantly through the credit crunch. So banks who are long on cash
are looking for alternative ways of securing their term money investments, which boosts
tri-party collateral management. In parallel to this, de Schaetzen says, the rise of electronic
basket trading, such as the Clearnet system or the LCH.Clearnet Sterling GC product.
This latter, launched in March last year, allows Sterling money market participants to trade
Sterling against a basket of UK government bond collateral. It was aimed at banks active
in the Sterling markets and had strong take up from a wide range of banks using it to fund
their Sterling positions.
De Schaetzen is confident that the tri-party format has a long and bright future ahead of
it, despite the squeeze on eligibility profiles.

42 | GSL
inFrastructure

reinventing repo
European repo

Catherine Kemp loan. The majority of repos are conducted However as the ICMA figures testify, it
within the real repo market. They include is not the real repo market that is being
explores to what specials and general collateral (GC) repos utilised, but a new transfigured version
and primarily focus on financing a dealer’s of the repo as Marcel Naas managing
extent the credit securities inventories. The majority of bond director of Eurex Repo explains: “Since
and government securities lending and the credit crunch we have seen a shift in
crunch has affected borrowing is conducted via repo. the behaviour of our clients. Before it was
The ICMA figures refer to the real repo a real repo market, a security driven repo
the European repo market. The drop in volumes, reported in market, which means you do the financing
the first quarter of this year, demonstrate of specific securities.
market how much the real repo market has been “What happened with the crisis is
affected by the credit crunch. Primarily the that people within the bank were really
drop in value of triple-A rated Mortgage driven by managing the liquidity of the
Backed Securities (MBS) and Asset bank, essentially to secure the bank. There
The European repurchase agreements Backed Securities (ABS) have taken an was a lack of trust in the market, banks
(repo) market has changed dramatically enormous amount of liquidity out of the questioned whether it was safe to lend
since the beginning of the credit crunch. market. Secondly, the lack of trust between money to other banks and so the banks
Between 2001 and June 2007 - ICMA banks who are not sure which counterparty started to move into the secured money
figures on total value of repos and reverse is exposed to the crisis, has meant that the market, which is a cash driven market. This
repos outstanding on the books of unsecured lending market has dried up is a dramatic change of view and means the
participating institutions grew every six and banks now have to find other ways of banks had internal discussions about the
months, year on year from EUR 1,863 raising cash and managing liquidity. Repos repo desks having to give their collaterals
billion to EUR6, 775 billion. have become a vehicle for raising cash as in order to secure the cash driven market.
The strength of the European bond Bart Vandeldren senior repo trader at KBC It is now the same structure, but instead of
markets, the stability of the Euro and the Bank confirms: “All banks suddenly want trading securities banks are trading cash.
ICMA’s standardisation document for to use collateral to make cash, to produce It’s just turning the whole thing round and
repo transactions – the Global Master cash. If you look at the unsecured funding looking at it in different way.”
Repurchase Agreement, all contributed market at the moment it is much more Also the credit crunch has meant that
to its steady development. However in expensive than the repo market, which is market participants look at ratings and
December 2007 the figures dropped, why repo is becoming more popular. the quality of securities in a different
falling from EUR6, 775 billion to “All banks are opening up their drawers way. In the past collateral classes were
EUR6,382 billion. Not only did it fall to find paper for repos. The repo is also
lower than it had been the previous six attractive because it is very low risk. There
months, but lower than the previous year. is a Global Master Repurchase Agreement
However as market commentators will in place that makes the margins on a
testify, this by no means indicates that the daily bases. So if the collateral value
market has stopped growing. fluctuates on a daily bases they have to
Repos involve one party selling give additional collateral to make the
securities to another – using a transfer of loan secured again. As a result a lender’s
cash as collateral. The seller then agrees exposure is close to between 99-100%
to repurchase the same or equivalent of the collateral value. If the bank goes
securities at an agreed date in the future. bankrupt they have the majority of the
Its economic effect is that of a secured value secured.”

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inFrastructure

loan secure as the market fluctuates, and result of the drop in value of MBSs and
they mean that a bank is never trading ABSs. But in contrast to their competitors
against a bank they are always trading they revived within eight weeks. This
against a central counterparty. The use of incredible turn around is related to their
CCP and ECB eligible securities means unique service, which in partnership with
that customers are much more likely to Euro GC Pooling provides centralised,
take other forms of securities as collateral. automated and flexible liquidity
Another factor is that banks started to management and simultaneous CCP
change the way that they managed their anonymity and security. Suddenly banks
liquidity a few years before the credit needed not only a central counterparty to
crunch began as Stefan Lepp confirms: feel secure in their trades, but also needed a
“Originally you had a treasury department service which would enable them to make
that managed their own liquidity pool, the most use of their resources. Since then
a repo desk that managed theirs’, and an this combined service has seen increasing
equity desk that managed theirs’. A few volumes, and since January 2008 they have
years ago the banks began to realise that had both competitors and new clients
this was not very efficient because it meant asking for consultation.
Stephan Lepp -
clearstream executive board member that they didn’t have optimal use of the While this may seem an advert for
collateral. More and more banks started Eurex Repo’s success, it also demonstrates
to pool together the liquidity of these that the credit crunch was a catalyst for a
different departments. They also started change that was already on the way. The
ratings towards new standards, and one to centralise external liquidity pools. So banks’ needs changed not only in response
of those is the European Central Bank for example, a bank is using investment to the fact that the unsecured lending
(ECB) quality. EBC eligible collateral has bank x for one set of activities, and bank z market had dried up and they needed to
ensured that securities have been given a for another – which is very inefficient. If I utilise all their resources in the search for
new quality approval, as Bart Vandeldren have exposure with bank x, and bank z is cash, but in the long term they needed
explains: “There is a big focus on ECB managing my collateral then in order to adequate automated and low risk systems
eligible collateral because the inter bank make the trade it is necessary to transfer for trading and collateral management.
market has basically gone dead. the securities from one bank to another, And with the Basel II accord on the
“Banks don’t trust each other any more. this means I miss the trade and I’m short horizon, which will ask banks to ensure
The ECB has criteria regarding the types and need to go to the market to buy that the capital requirements for unsecured
of securities it will take, it doesn’t have money. Very inefficient. Banks started lending are much higher, the need will be
to just be bonds, as long as you fit that to think about having one centralised reinforced.
criteria you are secure. So people prefer to liquidity provider, that’s where our product
give paper to the ECB and get cash from came in.”
the ECB, because your risk is a central These centralised pools of liquidity
bank and therefore close to zero, while ensure that when the credit crunch hit
with a commercial bank or investment many banks were already structured in
bank you always have the risk that it will a way which would allow them to re-
disappear one day or another.” orientate their repo desks towards the
Other technological, regulatory and secured lending market. Products like
infrastructural developments have also Clearstream’s liquidity management that
driven this dramatic shift of focus. For automate the management of exposure,
example the rise of tri-party repo in provide the ability to quickly re-use
Europe and the availability of services collateral in real time and so on, were
like Euro GC Pooling, BNY, JP Morgan, available to enable banks when the need
which offer the advantages of central arose to garner all their assets in the search
counter party (CCP), and which provide for cash liquidity.
anonymous and secure trading are essential At the beginning of the credit crunch
in a market of counterparts who don’t Eurex Repo saw a drop in business of
trust each other. CCPs manage collateral, approximately EUR 40 billion in August
ensuring for example that enough and September 2007, which they attribute
collateral is always provided to make the to the loss of liquidity in the market as a

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inFrastructure

institutional grade
operations attract investment
Investment opportunity

ConvergenCe of traditional and absolute-return portfolio management

A common theme in the institutional asset management industry over the last ten years
has been the blurring of distinctions between traditional and alternative portfolio strategies.
Until recently the two approaches appeared to be very different animals with unique
clientele and differing operational needs. We have observed these divisions dissolve and
now asset managers freely leverage components of both traditional and alternative methods
when developing their products – witness for example the growth of 130/30 funds as a
middle ground between long and short equity exposures.
These 130/30 funds are often dismissed in hedge fund circles as ‘lite’ versions of absolute
return strategies, but the industry should rightly note the intrinsic value offered to the
institutional investor in these funds: the stability of a traditional manager – all of the
operational solidity implied by a long track record and an established backoffice – combined
with the promise of additional alpha derived from the portfolio construction.
In addition to delivering consistent performance, we now commonly see alternative
managers forced to critically review their operations and consider whether their fund
platform meets the expectation of an institutional investor – specifically in the areas of
operational resilience, valuation transparency and oversight functions. Without a steadfast
backoffice operation, institutional mandates can be delayed or entirely jeopardized – a
reflection of the importance investors now place on a fund’s operations in mitigating risk.

Custodians as partners in mitigating Counterparty risk

RBC Dexia’s Where traditional managers have leveraged custodians to securely hold and service assets in
segregated accounts and thereby have offered additional protection to the fund’s unitholders,
Brad Taylor alternative managers have built relationships with deposit-taking institutions that co-mingle
their own assets with those of their clients.
explores The events of this past March have brought into sharp relief the counterparty credit
risks that alternative managers take on when operating their strategies in this way and as a
convergence, response, alternative fund managers are again considering the function of an independent
custodian and how they might leverage a custodial provider to isolate counterparty risk. In
counterparty risk, response, custodial providers have developed solutions for asset managers such as middle
office collateral management and tri-party repo capabilities.
and how to enhance In the case of middle office collateral management, the custodial provider manages the
valuation and lodging of collateral between the fund and the prime broker(s) – ensuring
portfolio returns. that only an appropriate amount of assets are delivered to the prime broker to secure the
transaction.
Tri-party repo offers a greater degree of safeguard for the fund – in this instance the
custodial bank provides an escrow function for collateral between the fund and the prime
broker, holding the collateral independently of either party and ensuring that both parties
interests are protected in the event of a default.

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 A custodian may also provide trustee services to the fund, wherein the trustee maintains
Engaging a controls with respect to the safety of the assets. This additional responsibility places the
custodian in a fiduciary role and gives institutional investors an added measure of security
custodian to provide when making an investment.

the array of services an industrial grade operation negates operational risk

Institutions require operational transparency including clear details on documented front-
to the fund gives to-back operational practices and oversight. The requirement for portfolio transparency
places importance on a fund manager to present opaque and unbiased reporting of portfolio
the asset manager holdings. Recent best practices documents have suggested this function is best provider
by an independent provider with clearly documented and auditable valuation controls.
the time to focus on To provide the widest possible instrument coverage, the valuation agent should be able
to demonstrate systems and processes regarding the valuation of illiquid and structured
portfolio construction portfolio positions as a constituent part of the daily and monthly NAV.

and optimizati on Consolidation benefits

The holistic custodial model means one set of processes, one set of controls, and one service.
This enhances risk management as all of the client’s activity – exposures, concentrations,
and diversification – can all be tracked and validated through a single point. The result is
a beginning to end service proposition that starts with a partnership at the front office
with the client and runs into a middle office oversight function through into a back
office support function – and the custodian is the logical choice to provide it. Custodial
banks have also expanded to include portfolio valuation services as a natural extension of
providing asset custody to institutions. In recent years, a number of other products have
become commonplace in the custodial service offering which include securities lending
and borrowing, wherein the custodian lends the portfolio’s assets as a source of revenue and
lends securities to the portfolio to support short selling or the use of leverage.
Other ancillary services that contribute to maximum operational efficiency are
shareholder services and distribution support. Shareholder services include registrar and
transfer agency, cash management, fee processing, dedicated quality assurance, e-business
facilities, investor communication (distributor and shareholder) and reporting. Distribution
support for asset managers encompass order processing and confirmation, corporate action
management, trailer fee calculation, asset allocation, custody and account management
support, settlement and compliance monitoring.
Engaging a custodian to provide the array of services to the fund gives the asset manager
the time to focus on portfolio construction and optimization, while continuing to receive
the highest level of quality and support from the service provider.

enhanCe portfolio returns

The increase in leverage and shorting by the asset management community will impact
the market for the foreseeable future,
Leveraging their position as holder of assets for a wide array of asset managers, custodians
typically operate sizable securities lending programs. Portfolio managers may elect to engage
custodians directly as an alternative source of securities borrowing to support short selling.
Managers who engage securities lenders directly will find large, stable sources of supply that
can be accessed in a cost efficient manner.
Alternative funds will find in custodial banks a willing and capable provider of servicing
that offers the scalability and stability to support increasing institutional investment while
reducing the operational footprint required. The injection of institutional capital into
alternative strategies is transforming the industry and making managers operate in different
ways – custodial banks such as RBC Dexia stand at the ready to support managers who are
making this transition.

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infraSTruCTure

Can’t see the

fees from the trees
Transparency in Securities Lending

Most people have, from time to time, broken and Securities Lending, published at the by their custodian. Only 21% reported
down their phone bill in order to find out beginning of 2008, stated that 56% of bundled pricing and of those ‘just a few’
how on earth they managed to spend so institutions surveyed reported frustration drew attention to any level of opacity in the
much in one month. According to new with understanding what custodians are billing process. Asset managers seem either
research, few pension fund managers are charging for in regards to the bundled service be too committed and bespoke to ask for
even able to break down what custodians offered by custodians. bundled services, and any worry concerning
are charging them for in regards to their Understandably, custodians were not transparency is either deemed unimportant,
cash management and securities lending impressed. An unnamed spokes-person or at least trivial compared to other problems
bill. A Vodia Group Survey, Institutional from a well-known US custodian called it: “a asset managers are facing at present.
Investors on Custody, Cash Management confusing statement.” If you only dealt with Josh Galper, Managing Principal of Vodia
asset managers rather than pension plans, Group and joint-author of the surveys,
this claim on transparency, or the lack of it, explains: “We’ve found pension plans and the
Are custodial fees may well seem puzzling. This depends on institutional investors we have spoken with
those surveyed, rather than the problem of to be very much less sophisticated in their
as transparent as price transparency. understanding of the cost of their securities
Vodia Group interviewed over 40 leading and lending relationship than we found asset
previously thought? public, private and non-profit funds managers to be.”
managing over USD1.3 trillion in assets. The Although institutional investors may have
Giles Turner to both original survey was followed up with another less understanding, this hasn’t stopped them
in May 2008. Here, the survey focused on the realising that they may be on the wrong end
the believers and the asset management community, and of those of the deal concerning their fees for custody
surveyed, 79% of the managers said that they and bundled services. According to the
heretics paid separately for each service provided January Vodia survey: “The central culprit in

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infraSTruCTure

“There might be institutional dissatisfaction with custodian is Regarding the bundling of services,
the bundling of services combined with the Burlingham sees it as a case of
clarity initially opacity of pricing. Appreciated by some for choice, rather than anything more nefarious.
its simplicity, this approach has increasingly “Reasons behind bundling is
negotiated into the pushed away asset holders, particularly the usually client preference. And in some cases it
largest funds.” The results of the survey can be to do with the way
contract, but then showed that 77% of respondents that used the fund manager arranges custody on behalf
their custodian for securities lending and of an underlying client. It can
when a bill comes cash management stated that their custodial make a difference for fee arrangements they
services was bundled with no explicit price have in place, i.e. they can
it is not necessarily transparency. pass some changes through to some funds
Obviously, custodians do not agree, and but not others. This might be along the
all broken out so looking at transparency in regards to fees in lines of reducing custody fees in return for a
general, custodians have faith in their mode dpreferential fee split.
a lay person can of operations. Suzanne Lee, senior managing To us commercially, it is all the same number
director and head of account management in at the end of the day, the
understand.” State Street’s securities finance business, states difference is just how it is carved up.”
that: “From a State Street perspective that This argument around fee transparency is
we do provide that transparency as part of hardly novel, nor confined to the standard
our renegotiations for all services. Securities institutional investor landscape. Turning
John Galper lending is highly transparent from a fee to the relationship between hedge funds
revenue generation standpoint in terms of we and prime brokers, it has been notoriously
Managing Principal provide information, fee splits or obviously difficult for hedge funds to establish exactly
identify the revenue is reported on a monthly what they are paying for. More importantly,
of Vodia Group basis.” when the hedge fund’s assets are used by
Wayne Burlingham, Global Head of the prime broker to generate returns, this
Securities Lending & Clearing Services, usually takes place outside the knowledge of
HSBC Securities Services, puts forward a the underlying hedge fund. The worrying
similar statement: “Certainly from factor here is that the difference in client
an HSBC point of view, it’s absolutely sophistication between a hedge fund
transparent. The clients know manager and a pension fund manager is
exactly what they are paying for in terms of usually significant. If hedge funds are being
custodyies and all the kept in the dark regarding their fee packages,
lending-fee arrangements are fully what hope does the unsophisticated investor
documented. in that agreement. There is have?
certainly no sneaky “back door”. One of the However it is important not to box
most common conversation the discussion into a simple case of good
questions is that if the client participates versus evil. Galper explains: “I don’t think
in a lending programme then what there the custodians are trying to mislead the
is generally a discounts may available on client. I think that unless you have a
custody or other fees? certain sophistication and understanding,

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infraSTruCTure

the pricing is not always fully clear. There lending, who we are lending to, the types of are being made today are not always fully
might be clarity initially negotiated into the collateral we accept, where we are investing understood, at least when the bill comes.
contract, but then when a bill comes it is not cash collateral. They want to fully understand Even the asset managers surveyed by
necessarily all broken out so a lay person can their risk profile.” Vodia Group admitted that the bill was hard
understand.” This is not to say that the risk factor is the to understand and it took them time to break
One might be tempted to wonder what most important element in the securities it down.
a lay person is doing in charge of a pension lending industry. Like any financial industry, It is without doubt that greater
fund, but that doesn’t hide the obligation returns take a higher precedence than any transparency is in everyone’s interest.
of the custodian to do it’s best to clear the ‘philosophy’ or ‘risk appreciation’, and as Hopefully it wont take a lawsuit to enforce
murky waters of fee transparency. There is transparency increases margins begin to greater transparency, rather market forces
also the case of fee opacity causing a domino fall. This also results in an increase in those should induce change. Custodians are
effect because if custodial fees are not fully searching for the next opportunity. Peter battling against agent lenders and they need
understood on the pension plan side, they Economou Executive Vice President Head of to prove that their services are worthwhile.
may not be reported correctly. As a result, Securities Finance, State Street, explains: “I With investor confidence at fragile levels,
not only do you start a discussion concerning think as transparency comes into this market custodians certainly don’t want to be seen
who is losing out, but also regarding who what we are clearly seeing is from our client biting one of the more profitable hands that
is truly benefiting? Do the funds within base is they are becoming more comfortable feed them.
the pension plan get a better custody deal expanding their programme faster than
than they really ought to? Likewise in they normally would. This is because
asset management, are fund corporations they are getting educated, they are getting
benefiting at the expense of investors? knowledgeable, and they are getting data
It is unsurprising therefore to hear showing how much return can be expected
rumours of some significant lawsuits being and how much incremental risk is associated
formulated in the US, brought by pension with expending into a new region or product.
funds and their class action lawyers against In the future revenues will increase for
retirement plan administrators who have beneficial owners because they will become
inaccurately managed their custodial and more comfortable with their portfolios.”
securities lending relationships leading to a Becoming increasingly comfortable
loss of revenue for investors. with your own securities lending portfolio
Now is the time for increased scrutiny can only come about through increased
into fees and transparency as everyone from transparency, something that is difficult
administrators to investors look for ways to enforce externally. It is obvious that
to decrease overheads and avoid the legal custodians are going to say that they are
consequences brought by angry investors. doing everything by the book, and it is hard
Suzanne Lee explains: “What we have seen to argue that they are deliberately trying to
over the last ten months is a true shift confuse anyone for their own advantage.
from clients who were very focused on To argue such a point would not be to the
revenue generation to those looking at risk benefit of anyone. However it remains
management. We have seen our customers the case that no matter how comfortable
become very resolute on truly understanding beneficial owners may become in the future,
an appreciating the programme, where we are the securities lending agreements that

49 | GSL
 entering the fray
Traditional asset Managers in the Securities Lending
Market by alexander Tallett, research analyst, Vodia Group
For the first time, traditional asset managers preference one client portfolio over another. investment boards. Asset managers also think
are becoming both large-scale borrowers and While beneficial for asset managers with large that securities lending transparency is good
lenders of securities. Their long/short assets long inventories, a widespread adoption will for business; we found 69% also believe that
are growing rapidly as leveraged strategies be- make inventory much scarcer for hedge funds transparency will lead them to
come institutionalized and 130/30 continues and the prime brokers who serve them. greater revenues .
to win away mandates from traditional long Traditional asset managers are thinking We expect asset managers to grow
only strategies. As lenders, asset managers to take inventory off the table for other increasingly sophisticated in the securities
continue to be a primary source for securities reasons as well. Concerns over corporate lending market. Currently many firms
loans alongside pension plans and similar governance and the risks inherent in are divided into long only and alternative
institutions. New dynamics are changing how collateral management returns have caused management divisions, sometimes with
asset managers see securities loans however, some managers to pull back. Specifically, different operations teams. In time these
forcing them to rethink their lending strate- many asset managers we spoke with were groups will appreciate that by leveraging a
gies. The end result will be higher borrowing pulling back on general collateral lending, as common asset – securities for lending or
costs for other borrowers, notably indepen- they no longer believed the risks to be worth borrowing – they will lower their costs and
dent hedge funds. the reward. A number of asset managers increase their funds’ performance. While the
Leveraged assets are on the rise industry- reported simply cutting out general collateral end game is still a long way off, an overall
wide and with them market demand for bor- lending and focusing on specials to generate shortage of supply will act as a catalyst to
rowing securities. Vodia Group recently spoke revenue. Drawing a weighted average from development in the securities lending market.
to 32 asset managers with USUSD16.6 trillion our interview sample, we found that asset Other market factors, such as electronic
in assets, or 27% of the assets of the top 300 managers will increase their publicly available trading markets, prime brokers and hedge
firms. These managers currently have roughly securities lending inventory by only 0.4% funds, will see equivalent benefits and
3% of AUM in hedge fund strategies. While over the next four years. struggles as asset managers make their mark.
still a small percent, this figure is up from With less of an emphasis on returns from
nearly nothing just a few years ago. Based on collateral management, the rebate rates of
feedback from these managers and a similar specials take on a new importance. This
study of pension plans we conducted, we suggests that supply for specials will remain
project that leveraged assets will grow from healthy if not necessarily growing, while
USD2.65 trillion today to USD4.58 trillion supply for general collateral securities may
over the next four years, a growth of 73%. be negatively impacted. We expect increased
Concurrently, we see asset managers demand on this relatively flat supply to make
looking to feed their growing demand for borrowing more expensive across the board.
borrows by sourcing from their internal These same forces fostering tighter supply
assets. By lending to themselves, asset will also push the securities lending market
managers can improve returns for both the towards greater transparency. Traditional
lending and borrowing fund and effectively asset managers naturally seek transparency
eliminate counterparty risk. A neutral in all of their trading operations; this is part
third party will still set the rate so as not to of a culture of cost analysis and reporting to

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running header

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infraSTruCTure

Jane Milner, global Product Marketing Manager, SunGard

Securities Finance, talks about enhancing profitability
through an integrated securities lending solution
The securities lending market is expected increases in volume and business expansion. incorporated within a securities lending
to continue to grow by 5% in the US and The danger with automation of isolated solution. Having these challenges addressed
10% in Europe according to a recent report parts of the process is that a bottleneck is by dwisparate, non-integrated systems can
by Towergroup. In this expanding market simply moved further down in the processing bring its own set of issues, and possibly
the need to improve efficiency and drive cycle, or even worse, a new bottleneck is result in moving bottlenecks to other stages
down costs is never far from the mind introduced within the trade management within the business process. Close integration
of the business manager. International lifecycle. Ideally, a solution needs to cater between disparate systems is needed to fully
securities lending is an area in which there for straight-through processing (STP) reap the benefits of improved efficiency of
is still considerable scope for efficiency from order entry, through each stage of the process and support scalability, while helping
improvement as it is one of the last areas to trade lifecycle, to maintenance of a firm’s to control risk and cost.
have fully embraced automated processing. core books and records. Integration in its An integrated solution can become an
The lack of automation, evident in front, simplest form eliminates the repetition of enormous asset for managing an institution’s
middle and back office activities, is largely tasks on multiple systems. It also gives greater own record-keeping commitments as
due to the variable nature of the trades sophistication and synchronization to a total well as trading activity with other market
and the lack of market standards in the solution. participants, while eliminating the repetition
operational lifecycle. This is particularly Tthe International markets STP has been of tasks on multiple systems. However,
true in international lending (as opposed to focused around areas such as electronic anyone who has been involved with
US Domestic lending), as the cross market settlement, but there is still great scope for integration of systems, whether manual or IT
complexities make automation even more further integration to improve efficiency in related, knows that the devil is in the detail.
challenging. many more of the front, middle and back What sometimes appears on the surface
While securities lending volumes and office processes. to be a relatively simple task can build in
values continue to grow, there is the danger The benefits of automation are not only complexity as the scope and subtleties of each
that revenue increases can be outstripped by appreciated by those managing the labour- system become apparent.
increases in cost, resulting in a compression intensive back office tasks, but also by the Up until now, securities lending has often
in overall profitability. Empirical evidence traders in the front office. Securities financing existed in isolation in relation to many other
suggests that there are still countless is no longer a ‘service’ to other trading departments within financial institutions.
efficiencies that could be realised to hold functions, and securities finance traders need However, institutions are increasingly
down costs. This involves two distinct areas to become more proactive and opportunistic realising the benefits of enterprise-wide
for improvement; enhanced processing in their approach. To be more efficient, this efficiency and improved workflow gained
and integration of IT solutions within an requires more sophisticated decision support by a consistent approach to technology and
organization, and also increased efficiency tools for price discovery, visibility of market systems. One clear premise that arises from
of communication between counterparties volumes and trends, and a clear awareness this realisation is that the more integration
during the many lifecycle events that occur. of consolidated borrow requirements and there is between systems, the greater the
With a securities lending trade duration, securities availability. benefits these systems can offer. The most
ranging anywhere from one day to weeks, With the front office equipped with more effective integration therefore can be achieved
months or years before a trade is complete, sophisticated tools to gain efficiencies and with a total solution sourced from a single
maximizing efficiency is clearly of paramount increase business, the back office must keep supplier.
importance. pace and maintain high levels of service. Not
Technology has already assisted by putting only is back office automation required to
into place a collection of small, distinct manage this activity, but it must be carried
innovations, such as order routing and out ever more efficiently and cost effectively.
contract compare. But what will lead to real High volumes present significant challenges
transformation and greater profitability in in manually intensive processes. Increased
the industry is the closer integration to allow automatwion of efficient business processing
the entire process to be managed end-to-end. and increased STP is a fundamental
Not only will this deliver reduced costs and requirement rather than a ‘nice to have’.
increased efficiencies, it will also build in There are many potential efficiencies
the scalability required to support ongoing that can be driven from the functionality

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ProfiLeS

Lender Vox Pop

deutsche Bank’s Jane Karczewski, director, head of
supply sales Europe and global prime finance asks
asset managers and pension funds how the sub-prime
crisis has affected them
“The Fund Industry has become increasingly competitive over the last decade, and even more so in the current
market environment. As a result Pension Funds and their Asset Managers have been overlaying additional Portfolio
Enhancement Products on top of their standard investment allocation (Outperformance Certificates, Swaps, Securities
Lending, Repo, Cash re-invest products). Are you active in this arena? Have you changed your risk criteria over the
last year in light of the sub-prime crisis (e.g. accepting Non Cash collatereal for Securities Lending, re-evaluating your
trading counterparts etc)? How has the last year affected the funds performance overall?”

JerrY mAY cAsH, securities Lending officer At frAnk vAn der kAnt, Pggm investments August sAnder, HeAd of securities Lending,
oHio PubLic emPLoYees retirement sYstem sAnLAm investment mAnAgement

“Ohio PERS is active in securities lending “PGGM is an asset manager based in the “Sanlam Investment Management conducts
and cash reinvestment products. We have Netherlands. Our largest client is the Pension securities lending on behalf of clients whose
not changed any formal policies or guidelines Fund Zorg en Welzijn (PFZW) with roughly € mandates specifically provides for the
at this point in the credit cycle. In practice, 87 bln. of assets. At the heart of PGGM’s beta utilization of their assets for lending, in order
we have been at a heightened state of alert, if management lies the Sophisticated Matching to enhance performance (or reduce costs)
you will, regarding our exposures, and cash Approach (SMA), an in-house developed of the specific fund. In the past 12 months
reinvestment risk. We monitor all of these beta management style for the management we have reviewed our collateral criteria in
issues very closely, and have been cautiously of PGGM’s total liquid beta exposure. The response to market conditions, specifically
watching the markets, as I’m sure most objective is to deliver the targeted return on the with reference to different types of collateral
market participants have. Performance over aggregated liquid beta portfolio at low costs and the spread of assets accepted. The South
the last year has continued to be relatively and remain flexible enough to accommodate African banking sector (who are the main
strong in our securities lending programs. portfolio rebalances. This all within very counterparties and issuers of collateral in
This is due, in part, to the structure of our tight risk limits. Portfolio Enhancement South Africa) has however not been seriously
program, as well as the increased demand to Products are frequently used; eg securities affected from a ratings perspective as they have
borrow some asset types.” lending Government bonds and equity only had very limited (if any) exposure to the sub-
are accepted as non-cash collateral. These prime or similar type of investments. Despite
collateral guidelines have remained the same the negative sentiment on world markets,
for the last three years. As a result of the the activity in the South African securities
collateral guidelines the effects of the sub- lending markets have to a large degree been
prime crises did not have a negative impact on maintained, resulting in returns from this area
the revenues from securities lending.” not being affected to the same extent as was
expected.”

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Stats LENDABLE ON LOAN ON LOAN vs TOTAL ON TOTAL ON
Below is the risk Manage-
ASSET vs CASH NON-CASH LOAN ($m) LOAN (%) ment association Securities
($m)* COLLAT- COLLATERAL Lending Composite - aver-
ERAL ($m) ($m)
ages for the first Quarter of
2008.
north american Treasuries/Bonds $1,918,074 $546,708 $85,522 $632,230 33%
Lendable assets refer to the
uS Treasuries/uST Strips $512,581 $316,996 $67,755 $384,751 75%
value of loanable securi-
uS agencies $180,837 $75,140 $9,250 $84,390 47% ties. on loan versus cash
uS Mortgage Backed Securities $186,822 $45,284 $1,019 $46,303 25% collateral refers to the value
uS Corporate Bonds $1,014,888 $108,249 $5,006 $113,256 11% of secuirties on loan in return
for cash.
Canadian Bonds (gov’t & Corporates) $22,945 $1,038 $2,492 $3,530 15%
on loan versus non-cash
colelrateral refers to the
north american equities $2,695,899 $274,235 $13,556 $287,791 11% value of securities on loan.
uS equities (includes adr’s) $2,637,800 $269,034 $11,565 $280,599 11% The 1st Qtr. 2008 table was
Canadian equities $58,100 $5,201 $1,991 $7,192 12% produced by data explorers.

european equities $1,175,178 $47,834 $65,675 $113,509 10%

french equities $153,032 $17,146 $6,667 $23,813 16%
german equities $148,351 $8,405 $8,553 $16,959 11%
italian equities $55,114 $3,412 $3,400 $6,812 12%
uK equities $398,886 $2,328 $18,126 $20,454 5%
Scandinavian equities $90,990 $5,361 $4,928 $10,289 11%
all other european equities $328,804 $11,181 $24,001 $35,182 11%

Pacific Rim Equities (Includes Australia) $496,669 $28,146 $40,360 $68,506 14%
Japanese equities $264,015 $12,060 $15,034 $27,094 11%
hong Kong equities $75,350 $4,302 $7,477 $11,779 16% * Lendable assets are reported
australia $112,329 $10,241 $12,008 $22,249 20% as aggregate assets without
all other Pac-rim equities $62,975 $1,542 $5,841 $7,384 12% consideration for client or bank
imposed guidelines (e.g. credit
all other equities (not Previously Listed) $98,366 $13,477 $4,768 $18,245 19% limits and percentage and/or
Total equities (aggregate Total) $4,466,112 $363,692 $124,359 $488,052 11% dollar loan volume caps).

euro denominated Sovereign Bonds $263,452 $66,455 $39,243 $105,698 40% The Survey reflects data provided
french Sovereign Bonds $60,664 $16,938 $9,078 $26,016 43% by the following institutions:
german Sovereign Bonds $81,988 $25,996 $9,922 $35,918 44%
italian Sovereign Bonds $42,188 $5,278 $5,065 $10,343 25% aig global investment Corp
Spanish Sovereign Bonds $12,991 $3,295 $2,695 $5,990 46% Brown Brothers harriman & Co.
all other euro denominated Sovereign Bonds $65,622 $14,947 $12,483 $27,430 42% Citibank n.a.
(not previously listed) Comerica Bank
Credit Suisse
uK gilts frost national Bank
emerging Market eurobonds(latin america & eastern $118,207 $16,872 $43,328 $60,200 51% goldman Sachs agency Lending
europe) $32,080 $4,793 $398 $5,191 16% M&i global Securities Lending
eurobonds $385,995 $18,575 $37,348 $55,922 14% Mellon financial Corp.
all other Sovereign Bonds † $55,61 $8,025 $9,768 $17,793 32% The northern Trust Company
Total Bonds (aggregate Total, incl uS) $2,773,424 $661,428 $215,606 $877,034 32% union Bank of California, n.a.
The Vanguard group, inc.
ToTaLS $7,239,536 $1,023,120 $339,966 $1,365,086 19% Wachovia global Securities Lending
average number of Lending Markets Wells fargo institutional investments
17

54 | GSL
 From the first quarter of 2007 to the
Total equities on loan versus cash and non-cash collateral first Quarter of 2008 total Equities
on loan verses cash collateral went
down, and total equities on loan
600 553,675
versus non-cash collateral went up.

500 466,720
Curtis Knight of the rMa: “The
450,325
432,456
reason for the shift is more u.S.
400 363,692
lenders and clients are taking more
Total equities on loan versus different types of non-cash collateral
300 cash collateral USD MM have gone down due to low investment rates and
in some cases an unwillingness to
200
143,803
124,359
assume the reinvestment risk of
71,769 90,299 cash. as clients get concerned for
100
76,908 Total equities on loan versus non-cash where to invest cash to achieve
collateral USD MM have gone up. return rates that would require
0
1Q.2007 2Q.2007 3Q.2007 4Q.2007 1Q.2008 additional risk, it is easier to take
non-cash and negotiate a straight
fee.”
Percentage break down of equities on loan Percentage break down of equities on loan
versus non-cash collateral in 1st Quarter 2007 versus non-cash collateral in 1st Quarter 2008 from 1st Quarter 2007 until 1st
Quarter 2008 equities on loan
versus non-cash collateral went up
from uSdMM 71, 769 to uSdMM
124, 359. however, n. american
Bonds on loan went down 6%
and n. american equities on loan
went down 3%, where as equities
from the rest of the world went up.
european equities on loan went up
2%, Pacific-Rim including Australia
on loan went up 19% and all other
equities (not previously listed) which
refers to: global depository receipts,
North American Bonds: 48% North American Bonds: 42% international depository receipts,
other depository receipts, Bermuda
north american equities: 9% north american equities: 6% equity, Brazil equity, Mexico equity,
israel equity, South african equity,
european equities: 29% european equities: 31% other equity and exchange traded
funds, have gone up from 0% to
Pacific Rim (includes Australia): 14% Pacific Rim (includes Australia): 19%
2% which actually amounts to a
all other equities(not-previously listed): 0% all other equities(not-previously listed): 2% difference of uSd 273 million to uSd
4,768 million. This means that while
non-cash collateral is the preferred
Percentage break down of equities on Percentage break down of equities on choice, and uS bonds and equities
loan versus cash collateral in 1st Quarter 2007 loan versus cash collateral in 1st Quarter 2008 are still the major equity type to be
lent since the credit crunch other
types of collateral are becoming
more desirable.

from the 1st Quarter 2007 until

1st Quarter 2008 equities on loan
versus cash collateral went down
from uSdMM 450, 325 to uSdMM
363, 692. n.american Bonds on
loan went up 5%, n. equities went
up 1%, and all other equities (not
previously listed) also went up 1%.
Where as the rest of the world went
North American Bonds: 56% North American Bonds: 61% down, european equities 4% and
Pacific-Rim (Including Australia)
North American Equities: 31 % north american equities: 30% 1%. The north american Bonds and
equities rise may be correlated with
European Equities: 9% european equities: 5% the decline in their use for non-
cash collateral. Whereas the rise in
Pacific Rim (includes Australia): 4% Pacific Rim (includes Australia): 3%
all other equities (not previously
listed) in both graphs may refer to
All Other Equities(not-previously listed): 0% all other equities(not-previously listed): 1%
the general expansion of securities
lending into new regions.

55 | GSL
InfrasTrucTure

The downturn & lending

Fintuition director Michael Eisenbeis outlines why information
and knowledge are crucial in the current climate

What will the future look like? the relationship between the returns & the
Slowing economic growth and the insatiable risks of these transactions. And as we all
need for liquidity has been triggering the know the devil is in the details – We have de-
Fed’s policy of lowering interest rates but it scribed in the following two simple examples
seems as if this time is over. Bernanke could how a small mistake can corner you in these
not be in a worse position. The Fed now has volatile markets:
to fight inflation and at the same time sta- Using the wrong day-count convention
bilise the deeply disturbed financial markets trading with a foreign counterparty it will
which means that the liquidity drain will stay probably delay the settlement.
and asset values should face more write- Marking to market every month or week can
downs at least until next year. prove also lethal as collaterals fluctuate and
the longer the time between each time you
Time warp to the 1970s Custodian banks the winners mark to market you are more exposed to risk.
With the economy expected to further slow Global custody banks have experienced un-
dramatically and inflation numbers worse precedented growth in their securities lend- Hedge funds = Your clients
than they’ve been in more than two decades, ing business in the past year thanks partly to Wouldn’t you like to know with whom you
we could very well experience a time warp the global credit crunch. The explosion in are doing business with?? Of course you
back to the days of polyester shirts, when spi- revenues can be put down to the impact of should! Understanding what are the motiva-
raling inflation joined forces with economic the credit crisis, which has pushed up collat- tions, strategies and needs of the different
stagnation - slow to no growth, combined eral reinvestment returns. This anomaly has market players (hedge funds, trading desks,
with rising unemployment - to create the not only affected returns but also the inher- asset managers) is key to improve your prod-
portmanteau word economists still use ent risk profiles have changed significantly. ucts and processes and to maximise your fee
today: Stagflation. On top, we have learnt from clients that some income.
banks have earnt the best margins lending
Status quo cash internally. New experts = Fresh courses
Oil and other basic commodities (ie. gold, FinTuition offers a variety of courses cov- Many of our courses face significant up-
wheat) prices are surging to new heights ering today’s challenges: grades reflecting the current market condi-
with double digit growth rates. At the same tions and the need for practical relevant edu-
time the growth picture is just as bleak. Some
Collateral management cation. We have also expanded our trainer
economists are predicting anemic growth
As relatively safe investments can turn sour, pool with Jens Ebinger, Head of Short Term
for 2008, and a growing number of experts
are even predicting a recession, now that custodians face new challenges in client Products Structuring and Sales at Dekabank,
consumers have been weakened from the relationships. Is my counterparty engaged Grant Saunders, Head of Short Term Prod-
housing bubble and the credit crunch that re- in Alt-A or leveraged loans? Do my assump- ucts Trading at Dekabank, and Alex Krunic
sulted from the subprime-loan crisis. Sectors tions concerning the probability of default of Citigroup.
like automotives, airlines or retail which are differ from the rating or models?
sensitive to oil prices, consumer confidence
and – due to high leverage – to interest rates Securities Lending
are facing fresh downgrades by analysts.
Understanding the mechanics of a securities
loan is both basic knowledge and challenging
at the same time as you have to understand

56 | GSL
InfrasTrucTure

fintuition Training
Global collateral Management
15-16 October 2008 – London
Trainer: Alex Krunic /Kathleen Tyson-Quah
This course explains the rationale and current best-practice functioning of
collateral management programmes for financial institutions. It is designed to build up
a sufficient level of expertise to give attendees a good grasp of the legal, technical,
process and economic issues and drivers affecting the profession. It is therefore
suited to individuals who are either starting up a collateral management function or
seeking to improve their unit’s capability to add value to the front and middle offices
through adoption of more efficient collateral management processing.

International securities Lending

9-10 September 2008 – London
7-8 October 2008 – New York
18-19 September – Hong Kong
Trainer: Walter Kraushaar / Jens Ebinger
This course explains the mechanics of securities lending as well as the
motivations of the various market players. The focus is on how the economic benefits
of securities ownership are retained even as legal title is transferred. Lending and
collateral options are outlined and assessed. We then examine the borrowers
perspective and the trading strategies that drive securities lending. Why borrowers
reward lenders for collateral flexibility will become clear. Following a review of the
risks incurred in a securities lending programme, and the protection offered by good
documentation, the course explains the different routes to the lending market and
provides a comparative review of the main electronic securities lending exchanges
and their impact on the industry.

Bond financing (rePO)

12-13 November 2008 – London
Trainer: Paul Carroll
This course provides a comprehensive overview of the fixed income repo
product. You will be introduced to the economic motivations of market players and
learn the main trading structures, delivery methods, risk elements and
documentation. As part of a small group, you will employ alternative trading
structures in an extensive case study using SunGard’s Personal Martini trading
software. You will gain an understanding of the role of the repo desk as the ‘hub’ of
the fixed income trading floor. You will learn what factors drive demand to borrow
specific securities and create ‘specials’ in the market through a review of the main
bond trading strategies.
PrOfILe

Back to basics
Wachovia Global Securities Lendings newly appointed chief investment officer,
Kevin O’Connor, explains why remaining true to traditional lending principles
can be the most ‘cutting edge’ approach a provider can take in an ever-changing
environment

This July, Wachovia Global Securities Lending the reinvestment side, have enabled our cli- when it involves incremental risk to a client’s
(WGSL) welcomes a new chief investment ents to achieve higher-than-market returns”, profile.” CEO Gary Rupert agrees. “In his time
officer, Kevin O’Connor, to its executive suite. he says. at WGSL, Terry was truly a client fiduciary,”
O’Connor brings credentials and experience WGSL chief executive officer Gary Rupert, he says.
that position him well for success in his new familiar with O’Connor’s style having
role. Prior to his appointment, O’Connor worked with him for over 18 years, believes Crow, who served as WGSL CIO from 1995
served as chief lending officer for WGSL, O’Connor’s appointment is in the best inter- to 2008, recalls how since the 1990s, ex-
focusing on portfolio management and trad- est of the firm and its clients. “Our philoso- tended periods of low interest rates, declining
ing for the firm’s securities lending division. phy of separate account management, strong spreads and a backdrop of overall benign
While some new arrivals to such a critical fundamental credit analysis and conservative credit risk lulled investors into taking on
and visible leadership position might be investing have been the backbone of WGSL, more risk in the pursuit of stellar returns.
inclined to cite a litany of intended changes and with Kevin as CIO, that will not change,” “This was also true in the securities lending
among their goals, O’Connor sets a markedly he says. industry,” he says, as “cutting edge” became
different tone, emphasizing instead what he a euphemism for taking on unnecessary
wouldn’t change. Giving Credit Where it is Due: risk. “The current credit and liquidity crisis
Terry CrowO’Connor is quick to credit his will re-emphasize the need for strong risk
“At the outset, it is vital that we maintain predecessor, Terry Crow, for forging the firm’s management.”
and enhance the program we have,” he says. prudent lending and reinvestment philoso-
“What has helped make our lending program phy.
so successful? Extracting the intrinsic value of WGSL’s policy of proceeding with caution
the securities loan per se. Emphasizing risk- “Terry was relentless in conveying the im- in new lending markets is a prime example.
avoidance rather than risk-taking.” portance of keeping it short,” says O’Connor, While accessing new markets is important,
referring to the firm’s continuing preference “in order to fully exploit opportunities
WGSL continues to enjoy a level of client for maintaining a low-duration/short-matu- you need a full understanding of the risks
loyalty virtually unmatched in the finan- rity emphasis on the reinvestment side of the involved, whether they’re around settlement
cial services industry today, while the firm lending equation. expropriation, collateral or regulations,” says
consistently earns high marks in industry- Recent market events support the wisdom of O’Connor. The first mover into uncharted
wide surveys, particularly in regard to its this approach. “The idea that you could gain lending territory, he says, may not be afforded
risk-management capabilities. In a time when extra yield by going further out on the curve the advantage that a lender who proceeds
words like “innovation” and “thought leader- was not something Terry believed to be in the with caution gains. “We’re comfortable not
ship” are sometimes tossed around aimlessly, best interest of our clients, regardless of what being the first to move into untested mar-
O’Connor’s vision for the firm implies an the competition was doing,” says O’Connor. kets,” he says.
underlying conviction that a conservative “The importance of this belief is under- Today’s CIO: A New Paradigm
approach to lending may be the most revolu- scored by recent events,” he says, referring to Most market participants would agree with
tionary one of all. the fallout of the 2007 sub-prime mortgage CEO Gary Rupert, who believes the global
“Tried-and-true principles, such as a sepa- crisis. “Terry always believed that lending is markets have changed dramatically since June
rate-account management philosophy and a about incremental returns for our clients, and 2007.
high-credit/low interest-rate risk approach on delivering that outperformance is best only

58 | GSL
PrOfILe

“A global financial de-leveraging has begun Growth Through product specialization are trends born of the
to take place,” comments Rupert. “Against the Flexibility, Adaptability third-party lending arena, where he believes
backdrop of this historic shift, our long-term O’Connor’s vision offers ample room for client-focused innovation thrives.
philosophy of fundamental credit analysis, growth around the firm’s high-credit, low- O’Connor also credits third-party providers
matched with prudent, conservative invest- duration and short-maturity philosophy. with helping guide securities lending at-large
ments, has clearly benefited WGSL clients.” First, customization remains one of WGSL’s to become more of an asset-management
In light of market developments, Crow most effective competitive tools, an ability than “custody-offshoot” business.
believes today’s lending CIO faces increased that in turn supports another of O’Connor’s Much like liquidity, adaptability is para-
responsibility. “The CIO has always had to goals as CIO: to expand the firm’s supply by mount, a capability that O’Connor says drives
guard against landmines,” he states. “But bringing new clients on board. WGSL’s enviable client loyalty. “Clients value
recent times demand stronger, more sophis- “Our ability to customize solutions appeals our ability to deliver a customized solution
ticated credit-assessment skills in light of to prospective clients, and the subsequent in a market where economies of scale are
rapidly changing conditions.” infusion of new clients into our program becoming more the focus. This translates into
strengthens our portfolio of lendable assets,” our speed and agility in responding to clients’
Counterparty Risk: A New Frontier he explains. requests, and our penchant for ensuring that
Among the myriad changes that the liquidity Next, while each lending transaction is forti- all of our team professionals are at our clients’
crunch has brought about is a change in how fied by the strong capital base and deep well disposal. “In an environment where acces-
a lending participants should view counter- of expertise WGSL leverages through its par- sibility and personal attention are becoming
party risk, says O’Connor. While lenders must ent, Wachovia Bank, N.A., O’Connor believes scarce, perhaps this is the most cutting-edge
be willing to accept a certain degree of coun- greater internal teamwork will strengthen this approach of all.”
terparty exposure, the nature of due diligence advantage.
has changed. “Whether a style preference or my interpreta-
“You have to amplify due diligence in regard tion of the strong ethical culture I inherit, I
to counterparties, getting the right levels of intend to heavily promote and reward a true
collateralization and stepping up protections,” team approach,” he says. “I want the profes-
he says. And, diversification is critical. “You sionals on our team to know they have direct
have to make sure your risks are not tied to access to me and can directly impact our
just one or two counterparties. results.”
At the same time, O’Connor reminds clients Similarly, while WGSL has traditionally
that counterparty risk is unavoidable. “It’s a espoused a separate-account approach as a
necessary facet of this business,” he says, “that path to superior performance and transpar-
shouldn’t be shied away from, but rather, ef- ency, the firm recognizes the value in offering
fectively corralled through collateral manage- a commingled vehicle. “We can offer either a
ment and diversification.” separate-account structure or a commingled
vehicle, which can be managed internally or
externally through strategic partnership ar-
rangements,” says O’Connor.
O’Connor believes that customization and

59 | GSL
PeOPLe

roster moves
July

SunGard ASTEC Analytics has

hired Tim Smith as director for
North America, who formerly
worked for Data Explorers.
Smith worked for Ax Investment
Managers before joining Data
Explorers.

Brown Brothers Harriman has

bolstered its sec-lending team
with a round of hirings. Jeffrey the Europen head of prime equity execution where he will
O’Neill has been hired as a Simon Fallon has been hired brokerage consultancy at Bear be under the auspices of John
senior vice president and head of by CIBC Mellon. Fallon will Stearns, before which he was at Stracquadanio.
global trading for sec-lending. bolster the outfit’s sec-lending Lehman Brothers.
Thomas Poppey has also team and will work under Rob AIG appoints chairman Robert
been brought in as a senior Chiuch, executive trader and June B. Willumstad to the additional
vice president and head of head of trading. Previously position of CEO. Willumstad
relationship managment for the Fallon worked for the National ABN Amro’s head of sales and succeeds Martin J. Sullivan, who
Americas. Bank of Canada where he was in marketing, global securities is leaving AIG and its Board of
Andrew Pettit has left equity finance. finance, Chris Clark, has left the Directors. The Board has also
Deutchse Bank, where he was company. named Stephen F. Bollenbach as
head of securities lending Jonathan Morris has been hired its lead independent director.
business developement. He will as chief operating officer by Data Dan Lacey has been hired by
be senior vice president and head Explorer. Morris was previously JP Morgan where he will work eSecLending appoints Peter
of global business developement with Thomson Reuters, whichi on the outfit’s SBL and Delta Bassler as managing director
for sec-lending. he joined from Pearson, where One tax-driven strategies. Lacey of Business Development.
In addition Daniel McGuiggin he was head of product and will replace Nathan Winstone
has left State Street, where he was technology management for and will be working under the
head of the international lending FT.com. Data Explorers has also supervision of Lee Olley.
desk in Boston, and has joined hired Christopher Holmes as
BBH as vice president and head sales director. Jasper Dikker Hupkes has been
of US trading for sec-lending. hired by Fortis to work in the
John Hitchon of Deutsche Bank company’s Global Securities
Erin Callan has been hired by is relocating from New York back Financing Group.
Credit Suisse as its managing to London, where he previously
director and head of global lived for three years while he Sadat Mannan has been hired by
hedge fund business. Callan built DB’s prime brokerage Barclays Capital as the outfit’s
moves from Lehman Brothers operation. new head of equity finance
where she was chief financial in prime services for Europe.
officer. In her new role Callan Geoff Pullen is to join BNP He replaces James Day, who
will join the Investment Bank Paribas’ Business Developement, has been made director in
Geoff Pullen
Management Committee and Alternative Funds outfit.
the Global Client Steering Prior to the move, Pullen was
Committee.

60 | GSL
PeOPLe

ING boosts desks globally. In Mike Lambert moves to 4sight Sunil Daswani moves internally
New York, Patrick McDonald, Financial Software from within Northern Trust and
joins as VP and Head of Credit SunGard Consulting Services to has been appointed head of
Repo. formerly of ABN Amro. be responsible for consultancy to client sales and relationship
Mark Keefe as Global Head existing and new 4sight clients. management for securities
of Global Securities Finance lending in Europe Middle East
Technology. Moving over from Bear Stearns hires David Rabaut and Africa (EMEA) and Asia
Deutsche Bank. to its European Securities Pacific (APAC). Previously
Jim McDonald joined as a VP Lending and Synthetics team Daswani was regional manager
on the New York Credit Repo arriving from Natixis in Paris. for securities lending in Asia.
desk. Jennifer Saraiva was hired George Trapp named as
as a VP and US Equity Lending US based broker-dealer, Merlin regional manager for securities
& Repo Sales trader. Erin Securities hires Ian Isaacs as lending in Asia at Northern
John Hitchon Jennings was hired as a VP and a senior partner, Director of Trust succeeding Daswani.
Equity Derivative saleswoman. Research, and member of the
Additionally Justin Dowey as Executive Committee. Isaacs has Citi’s Lawrence Komo has been
Bassler will be responsible for a VP and CFD trader, moving previously spent eight years with named chairman of PASLA.
developing new business with over from Lehman Brothers. UBS as senior vice president.
eSecLending’s institutional Yumi Baldeon was hired as Matthew Harrison, founder of
investor target market an associate and client service BNY Mellon Asset Servicing has the Martini trading platform
throughout North America. representative on the CFD desk, appointed two new securities moves to the securities finance
Bassler joins eSecLending from reporting to Alison Scott. lending staff in London. practice at Rule Financial.
Dresdner Kleinwort’s Agency And in internally in Brussels Sean Greaves previously with
Securities Lending business Frederic Rober joined the tri- Citigroup joins as a product BNP Paribas hires Graeme Perry
where he was the director party repo team, reporting to specialist focused on securities as global head of agency lending.
of Marketing and Client Marc Seidemann. lending sales initiatives, while Perry joined from Banco
Management. Clare Bromiley-Carmen, Santander. In his new role he
RBC Dexia Investor Services has formerly of Royal Bank of will report to Sarah Fotsch,
May moved Susan Pike into a newly- Scotland, joins the client service global head of liquidity services.
created role as Global Head, team.
Northern Trust hires Douglas Market Products & Services. Anthony Duggan, head of
Gee as UK and Irish Pension Her previous role was serving as hedge fund and flow trading,
Fund Sales Manager in the Global Head, Securities Lending. HSBC resigns. Duggan arrived
asset servicing group’s business at HSBC from Dresdner where
development team, based in Michael Madaio, managing his last position was head of US
London. Mr Gee joins from director, responsible for domestic equity finance trading
Morse Group plc where he was a securities lending in the US
Business Development Manager leaves UBS.
for five years having previously
worked at Computacenter Plc April
and BMC Software Inc.
Paul Wilson joins 4sight
Charlotte Wall and Philippe Financial Software following
Lopategui depart Morgan positions at ION Trading and
Stanley Anvil Software and will be
responsible for pre-sales.
sunil Daswani

61 | GSL
PrOfILe

Meet the future...Will Duff Gordon

How did you get into the If you were nominated
world of securities lending? employee of the year how
By chance. I filled the shoes would you celebrate?
of a lady on maternity leave for Take a holiday and go
a company then working in a windsurfing in Tarifa.
Georgian house in Spitalfields.
The boss - Mark Faulkner - laid
I hear you are relocating
out some exciting plans on a
white board in his kitchen and it to New York, what attracts
has been exciting since. you most about this move?
The chance to succeed where so
If you could change one many British bands have failed!
thing in the world of We have a great chance to be the
definitive source of short interest
securities lending what
intelligence in the biggest stock
would it be?
market in the world. There are
I would put all sec lending
not many places better to work
conferences on roof terraces
than London, but New York is a
rather than in underground,
very exciting place. Some skiing
airless hotel ‘ballrooms’.
in the winter will be on the
agenda, most definitely.
What aspect of your
current position do you find If you could teach Hugh
the most interesting? Grant one thing what would
The chance to move the business it be?
forward in such a variety of How to do the pole vault. It may
ways - from specifying new be the only thing I can do that
enhancements to the products, he can’t!
to pitching for new business, to
raising our profile through the
media, to closing new business. Where will Will be in five
The travelling is a privilege also. years time?
Running a race horse owning
Who are your role models? operation more successful than
Jose Mourinho is up there in the one I do at the moment.
the sporting arena. His belief
that success is his by right is Give us a prediction about
infectious. To go from being
the shape of the industry in
a translator in the back room
the years to come.
at Barcelona to winning the
It will become more streamlined,
European Cup and Premiership
with fewer players and greater
whilst having the worlds media
transparency. It may perhaps
hanging on his every word -
even have an exchange.
what a feat! Michael Heseltine
is a model success story. From
humble beginnings he became My favourite location for a
Deputy Prime Minister and conference would be the
when he left politics was able
Cayman Islands, what’s
to step back into the publishing
yours and why?
business he founded before his
Somewhere near my office.
career in politics.
There would be less travelling
involved and therefore a smaller
carbon footprint.

63 | GSL
PrOfILes

czech please
This year’s rMa/IsLa securities Lending conference explored in detail an industry
at a crossroads. GSL’s Ben Roberts attended.

head of global asset allocation and alternative

investments at JP Morgan. The ambitious
question in the presentation title – ‘Where
Will Capital Go?’ – was tackled with a varied,
colourful and detailed set of slides. “There is
a 50/50 chance with recession,” he observed,
“at the moment we’re sitting in the middle
and we don’t know which way it will go.”
He demonstrated the familiar trends where
two-thirds into a recession by tracking the
movement of the S&P 500 (including the
point in which “you can smell the recovery”),
and the effect on the European market
structure caused by these “blow ups”. He also
provided an overview of the massive leverage
of securitisation, the rise of repo among
hedge funds and where, in essence, “the whole
world became a big banking system outside
GsL’s Justin Lawson chats with eurex’s regulation”.
Bethany Harlock

The 17th Annual RMA/ISLA Securities detailed analysis of principal ‘types’. This talk
Lending conference took place in the in particular was a welcome assessment of
beautiful gothic backdrop of Prague. The the ubiquitous themes of the credit crunch:
setting was particularly appropriate given transparency, risk reduction, and the altered
the detailed discussion of the region along relationships along the lending chain.
with further eastern European markets on Securities lending’s most prominent
the second day, moderated by Robert Barnes borrowers, hedge funds, were included in
of UBS. This talk included an assessment of a discussion of the Hedge Fund Working
Greece in terms of regulation, technology Group (HFWG), arbiters of the informal
and infrastructure by Anastassis T. ‘Comply or Explain’ best practice doctrine.
Gabrialides of the Hellenic Capital Markets On Thursday, strategies for fund managers
Commission. were discussed, including the key
Each talk produced a stimulating diversity considerations they must undertake for
of subject, opinion and outlook at a critical borrowing securities. The panel – moderated
stage for the securities lending industry and by Nick Rudenstine of JP Morgan – also
financial markets generally. A discussion touched upon the effect of new regulation for
on Basel II touched upon the varying those servicing asset portfolios.
calculation methods to determine the One of the most remarkable presentations conference attendees relax at the Deutsche
principals’ exposures in trading, along with a came from Jan Loeys, managing director and Bank party

64 | GSL
 Japanese Textile Stencil, 1900 — Mulberry paper with dye

The Art of Relationships

At JPMorgan, we invest in what’s really important—whether protecting priceless works JPMORGAN SECURITIES LENDING

of art for future generations or building client relationships that stand the test of time. A full spectrum of global capabilities,
We take our relationship with you very seriously, to help you achieve your business including discretionary, principal
and directed lending, as well as
goals, enhance efficiency and mitigate risk. auctions and exclusives

When you’re passionate about your business, the right relationship is essential. Financial strength

JPMorgan clients benefit from the expertise of our entire global franchise. Through Disciplined risk management
this holistic approach, we harness innovative technologies and firmwide resources Innovation in product development
to offer clients more choices, greater customization and unmatched flexibility.
Access to resources and expertise of
a leading financial services franchise
Innovation with superior results.

To find out more, log on to jpmorgan.com/securitieslending, or contact:

V
V

Western Hemisphere William Smith at 212-623-5664

Europe, Middle East and Africa Michael Fox at 44-207-742-0256
Australia/Japan Stewart Cowan at 61-2-9250-4647
Asia Andrew Cheng at 85-2-2800-1809

The products and services featured above are offered by JPMorgan Chase Bank, N.A., a subsidiary of JPMorgan Chase & Co. JPMorgan Chase Bank, N.A.,
is registered by the FSA for investment business in the United Kingdom. JPMorgan is a marketing name for Worldwide Securities Services businesses of
JPMorgan Chase & Co. and its subsidiaries worldwide. ©2008 JPMorgan Chase & Co. All rights reserved.
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