Securities Lending Handbook 2011

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Handbook 2011
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Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
The Securities Lending Landscape

The financial crisis of the last two left their programmes return,
but in some cases have even attracted new
years may have changed securities business. Daswani has seen a similar story
lending irrevocably, finds Craig at Northern Trust, which has doubled the
McGlashan, but some of the size of its client servicing team, although
the exact look of the programmes has
lessons being learned could result in in many cases changed. He explains:
a better, more transparent industry “Some lenders have increased parameters
on their lending activities, changing the
Securities lending has rather predictably risk/return balance, while others have
come under fire since the financial crisis, focused on the ‘intrinsic value’ of lending,
with a number of headlines about beneficial whether by lending more in lucrative
owners leaving their programmes and markets or asset classes or reviewing the
in some cases suing their providers, different asset classes available to lend.”
and of course the various concerns that Guy Knepper, head of securities lending
have been raised about short selling. in CACEIS Group’s dealing room, has seen
However, as is the case with the poor a similar situation. “I would say we never
distinction made by the mainstream press had a problem as our client base was quite
between uncovered or “naked” short contained when the crisis emerged,” he
selling and covered shorting, the picture says. “We actually witnessed the situation
around the current state of the securities where more clients joined us during the
lending market is not so simple. crisis. The existing clients asked us to give
“As we are coming out of this crisis, we them a bit more detail about collateral
see very positive indicators that we are policy and management, the mark-to-
looking at being able to move forward,” market techniques and so on, and we gave
says Sunil Daswani, head of sales and them comfort as our collateral parameters
relationship management at Northern are quite conservative – we only take cash
Trust. “But it is very important as we and government bonds as collateral.”
do move forward to look at what has Most of the lawsuits which have arisen as
happened over the last two years and a result of the crisis have revolved around
learn from the experience. I think, most the reinvestment of cash collateral – in
importantly, you look at securities lending mortgage-backed securities for instance –
as a business and the first thing is that it is rather than the actual practice of securities
actually a major driver of market liquidity.” lending. Indeed, one of the major topics
Indeed, many lenders have not only that has arisen at the regular securities
seen beneficial owners who had lending summit held this year by
previously Global Securities Lending
2

magazine has been that regulators have
been putting securities lending under close
scrutiny. One such example is the State of
New York Insurance Department, which
in January issued guidance to insurer
members suggesting that less than 5% of
total assets should be available to lend.
However, many attendees at the summits
made clear their concerns that the business
has been put under scrutiny when in fact it
is the area of cash collateral reinvestment
that should be looked at more closely.
In addition, many lenders have already
allowed their beneficial owners to
have flexibility around various factors
within their programmes, without any
prompting from the regulatory side.
“The degree of investment risk that you “We actually witnessed the
take on will depend on the customisation situation where more clients
of the programme that you set up and
hopefully the ability of an agent, should you joined us during the crisis”
use one, to be able to set that up accordingly Guy Knepper, CACEIS
to what you want,” explains Daswani.
Another major factor that brought trades and they will do it,” he says. “We have
securities lending to the front of many witnessed some situations where heavily
people’s minds were the issues that arose shorted stocks were in client portfolios
around short selling during the financial and we approached them and they told
crisis, with many blaming the practice us, ‘No I do not want to feed that short’.
for driving down banks’ balance sheets So they still have that flexibility to refuse
and putting them out of business. Has some positions that we offer them.”
this concern rubbed off on beneficial Like all areas of the financial services
owners, who may not want their stock industry, securities lending was affected
used to fuel such an industry? Perhaps, by the crisis and the overall picture may
Knepper suggests, but the flexibility look quite different when the dust has
that can be introduced to programmes finally settled. But many of the stories
can alleviate any of these concerns. that have appeared around the industry
“Case-by-case lenders who view a in the mainstream press have been
certain trade as being a very directional debunked, and indeed a large number
short on some securities, of course of industry participants are looking
they have the right to refuse some to the future with optimism. n
3
Contents
Features
Beneficial Owner & Pension Fund
Securities Lending
Handbook 2011 2 The Securities Lending Landscape
Craig McGlashan examines how the last two years have shaped
securities lending
Risk Return
6 Owning the Benefits

ISJ Investor
Chris Hitchen CEO of Railway Pensions Trustee Company, provides his

Services
Journal
GSL
Global
Securities
Lending
view on the benefits of securities lending

GBP 10
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Supplement editor: 8 Experts’ Panel: The Dash for Cash

Brian Bollen
(brian.bollen@2i.tv) Cash collateral reinvestment has been one of the major talking points
Reporter: in securities lending since the financial crisis.
Craig McGlashan
(craig.mcglashan@2i.tv) 12 Short of Demand
Head of sales: Short selling, a key source of demand for securities lending, has come
Trish Jane Holst
(Trish.holst@2i.tv) under scrutiny from regulators across the globe - here we look at
Account manager: the actions taken by the US Securities and Exchange Commission
Eradat Munshi
(eradat.munshi@2i.tv) 16 Exchange-traded funds
CTO: Now more than 10 years old, are beginning to offer a new source of
Peter Ainsworth
(peter.ainsworth@2i.tv) supply for the securities lending and borrowing industry
Manging director:
20 Collateral Management, Efficiency and Optimisation
Jon Hewson How technology can play a role in ensuring efficient and
(jon.hewson@2i.tv)
optimised collateral management, with SunGard
Publisher:
Mark Latham
(mark.latham@2i.tv)
22 The Securities Lending Industry Awards 2010
Round-up of the 2010 Awards and the ceremony at the Dorchester,
2i Media
London in July
One Angel Wharf
Eagle Wharf Road
24 GSL Summits Road Report
London N1 7ER
T: +44 (0) 20 7183 8470 26 Beneficial Owners’ Guide to Securities Lending
F: +44 (0) 20 7250 0350
W: www.ISJ.tv in association with Data Explorers
© 2010 2i Media 40 Market Leader Profiles
All rights reserved.
No part of this publication may An alphabetical directory of the best pactitioners:
be reproduced, in whole or in
part, without prior written BBH, CITI, Comit, Deutsche Bank, eSecLending, ING, JP Morgan, RBC
permission from the publishers.
ISSN 1744-151X. Dexia, SecFinex, State Street, Sungard
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Owning the Benefits
Pension Funds: Owning the Benefits

The CEO of Railway Pensions than we have from short sellers.”
The Railways Pension did not stop its
Trustee Company, Chris securities lending programme during
Hitchen, provides his view on the the recent turmoil. Hitchen puts this
benefits of securities lending down to good management. “At this
fund, we were always very particular
Chris Hitchen, chief executive of pensions about the way we treated collateral and
administrator rpmi and the Railway very particular about the indemnities we
Pensions Trustee Company, considers received, but that was probably not true
the attractions of securities lending more generally across the industry.
from a beneficial owner’s perspective “We have thought quite carefully about
For a man who confesses that the first relating collateral to the assets. If we were
time he really heard of securities lending accepting a type of collateral that would
was in connection with the infamous not function in line with what we had
Robert Maxwell and his Mirror Group lent out then we would ask for a higher
pension fund revelations in the early haircut. That has meant that we have lent
1990s, Chris Hitchen has a surprisingly a lot less stock than we could have done,
warm attitude towards the borrowing but we felt that was fine because it was
and lending of stock by pension funds. the risk that was most important to us.”
But Hitchen is exceptionally qualified to
talk about the subject. As chief executive Pension thoughts
of pensions administrator rpmi and the In his role as NAPF chairman Hitchen
Railways Pensions Trustee Company, was able to hear the concerns and
which runs the industry-wide pension thoughts of the UK pensions industry.
arrangement for the UK’s railways, Hitchen So how has its view on securities
is at the forefront of the UK pensions sector. lending changed given recent events?
There was also the small task of being “Securities lending has always been taken
chairman of the National Association seriously. It has never been a big money
of Pension Funds (a role he no longer spinner, but it was a nice source of income
fills) during the financial crisis. Despite and if nothing else it helped offset some
the negative press that securities of the custody and other costs,” he says.
lending received, he told the OPDU “It would be wrong to say that people
Annual Conference in January 2009: are thinking about securities lending more
“Don’t abandon your securities lending than they are about the level of markets
programmes. Having stock to lend and because we have had such a rollercoaster
borrow is crucial for efficient markets.” ride in that arena. But people are much
Does he still stand by this statement? more tuned in generally now to the fact
“Yes,” he answers. “I have always been of that you can lose money – it is not just
the view that securities lending is highly about the return on the money, it is about
beneficial to institutions because what the return of the money sometimes.
we want is liquid markets, which cannot “There has been a flight to quality in
happen without the lending of stock. We every respect and I think that has resulted
probably have more to fear from illiquid in people dusting off their securities lending
markets and inadequate price discovery agreements and looking at what their
6
Owning the Benefits

safeguards are, in a way that they might
not previously have worried about.”
Hitchen thinks that some of the
funds that ceased lending did so “on
ideological grounds”. He explains:
“They worried that they were lending
to hedge funds, for example, who
were just going to sell the stock short
and force prices down. We found
little evidence that that was really
happening inside the market.”
In addition, he says that pension
funds have a long view and any short
term affect on a price “should not
bother us too much” and if a premium
can be obtained for lending the stock
Portfolios are increasingly not filled with
then “that fits with our longer term horizon”.
real stocks, or are seen through the lens
of some vehicle such as the hedge fund,
Two cheers for hedge funds
making it harder to lend the stock because
Hitchen also reveals that not standing
you do not have the direct line of ownership.
by his statement at the OPDU conference
We are getting increasingly complicated
would be “hypocritical” – given that “we
fund management arrangements and
do invest with hedge funds as part of our
that makes lending harder to organise.
wider portfolio”. Hitchen explains that the
“Even in the long-only space we now have
fund chose hedge fund investment because it
more specialist equity managers and fewer
“delivered higher returns than cash generally
large, low-transactional portfolios, and that
but had much lower volatility than equities”.
means that there are more parts moving
A report from US consultancy firm
and it is harder to be sure that a particular
Agecroft Partners released at the start
stock is going to be in one place and that it
of 2010 suggested that pension funds
is going to stay there over the timeframe that
will increase the allocation of their
makes it possible for someone to borrow it.
asset base to hedge funds from 2.5%
On a more positive note, Hitchen sees
to 15% over the next decade – does
opportunity for lenders in a new trend
Hitchen see this as a possibility?
developing in the pension fund space.
“We are increasingly using hedge funds
“Over the next few years interest-rate and
in a more targeted way, treating them not
inflation swaps will increasingly be used
just as an asset class. We are using them
by pension funds to try to match out their
within our main equity portfolio as a way of
liabilities and there must be some scope
managing the assets. When we are looking
for lenders to get involved in actually
for alpha generation we won’t necessarily
helping those swaps to be packaged. I
only appoint long-only managers - we might
think that is going to be a growing area.”
appoint hedge fund managers and then use
However, he warns: “Trends take a long
a future to complete the market exposure.”
time in pension funds – things do not
However, this diversification of investment
happen overnight. We could be talking
strategy has potential pitfalls for the pension
about these issues in much the same
fund’s lending programme, Hitchen suggests.
way in three years time, I expect.” n
“It makes securities lending harder to do.
7
The Dash for Cash
Experts’ Panel: For some agent lenders, there has been

an increased focus on profits derived
from the intrinsic value of the loan
The Dash for Cash itself, rather than returns from cash
collateral reinvestment. How significant
is this shift?
Cash collateral reinvestment has been one VIRGILIO ‘BO’ ABESAMIS: The focus
of the major talking points in securities on intrinsic value vs. reinvestment of
cash collateral would definitely have an
lending since the financial crisis. impact.
We believe this shift away from cash
collateral reinvestment could mean a 40%
What are the experts’ views? to 60% reduction in revenues. However,
we also believe that those clients with
real inventory of intrinsic value securities
would be paid commensurately and
should achieve better demand spreads of
Virgilio ‘Bo’ Abesamis III, at least 10% to 20%.
senior vice president and SONJA SPINNER: The intrinsic value
manager of the Master Trust, of loans should be the driver of lending
Global Custody, and activity as opposed to cash yields.
Many of the issues which have
Securities Lending Group
impacted beneficial owners in agent
lending programmes arose because
the focus was on an aggressive cash
reinvestment programme as opposed to
prudently managing securities lending
Sonja Spinner, programme risks.
senior associate at Whilst money market yields remain
low it is difficult to make a case
Mercer Investment
for accepting cash collateral as the
Consulting incremental spreads over a non-cash
programme are not outweighed by the
additional reinvestment risks.
Recent market events have also
highlighted the issues associated when
collateral pools are shared by multiple
lenders. I always steer clients with the
Brian Staunton, risk appetite to accept cash collateral to a
managing director, Securities segregated cash fund.
Finance, EMEA, at Citi At the height of the financial crisis,
many beneficial owners did not seek to
liquidate their cash reinvestments due
to the loss they would incur. Should the
status of these reinvestments be marked
8
The Dash for Cash
to market? post the additional margin? In a classic mark

ABESAMIS: Before any talk of liquidation to market process you’re marking the loan
or exit strategy, we believe that the prudent and collateral whereby you’re taking more
approach is to have those reinvestments collateral if need be. But marking the cash
be marked to market to determine ‘real’ re-investment isn’t a classic mark to market,
valuation levels and the potential market as you’re marking an investment that’s
impact of a forced sale. possibly lower than the value you bought it
for. So whose responsibility is it to top up the
SPINNER: The use of a constant dollar value? Under the current legal arrangements
net asset valuation (NAV) is common it is the lenders’ responsibility.
industry practice for cash collateral
reinvestment pools. I don’t think that Some call reinvestment a front office
there is a requirement to amend this activity or an ‘investment management
when computing revenues and fee splits. overlay’. Will this evolution of cash
Beneficial owners would, however, gain reinvestment aid understanding of risk,
additional transparency if mark to market liquidity and returns?
valuations were also published. Many ABESAMIS: This is a very good question. We
beneficial owners had no transparency believe that a client should assess securities
regarding the performance of commingled lending from both direct lending (i.e.
cash reinvestment pools until agent lenders custody, a third-party agent or principal)
informed them the fund could no longer and indirect lending (i.e. mutual funds,
support a constant dollar NAV and funds commingled funds, index funds, etc.)
were trading at a considerable discount. viewpoint.
This is clearly inappropriate as mark Those that participate via indirect
to market valuations gradually decreased lending should take into consideration that
over the later part of 2007 and 2008 and seclending is already embedded in the asset
then decreased substantially following the allocation, especially those using index funds
collapse of Lehman Brothers. as the core exposure to asset classes.
Sharing mark to market valuations with In the area of direct lending, the issue is
beneficial owners would have alerted them not that simple. Two factors have to be given
to the issues facing some cash reinvestment proper consideration- wherein (a) securities
funds and enabled them to make the lending is utilised as a fee/cost offset or (b)
decision whether to fund losses and suspend securities lending is employed as an alpha
lending earlier and at less cost. generator. As a fee/cost offset, the client has
BRIAN STAUNTON: Some lenders in the to weigh the merit of securities lending as
industry faced a situation where they wanted a front-office or investment management
to suspend lending because of market overlay activity. This could be problematic
volatility, but to do so would have incurred a for those clients because a fee/cost offset
loss on the cash collateral re-investments. So approach does not align well with risk
the question they ask is: ‘do I liquidate and taking.
take a loss or maintain the positions until On the other hand, if a client believes that
final maturity in the hope they’d maintain this is an alpha generator, then this needs
their value?’ I don’t know if the investments to be factored in the risk budgeting exercise
should be marked to market. and in what context of the asset allocation
If they were – perhaps if there was a should it be carved out.
shortfall in collateral value – who’s going to SPINNER: Cash reinvestment absolutely
9
The Dash for Cash
is a front office activity. Beneficial owners STAUNTON: That’s a good question, and it
choosing securities lending programmes is one of education. If you’ve appointed an
with cash reinvestment need to apply the agent lender for a specific role, that lender
same due diligence process and monitoring should have the capability to manage,
of managers to cash reinvestment funds calculate and record risk and provide a
that they apply to other manager mandates. very good and professional level of cash
I would encourage all owners lending reinvestment as good as any money manager.
securities against cash to view their lending I think there are players who can do that very
programme as a cash fund investment, with well. As a firm we have that capability so we
all the same risk and return considerations as agree with the statement – it is a front office
any other money market fund investment. I function.
would also encourage all beneficial owners I would go a step further too: because
lending against cash to reflect whether they it’s defined as front office it needn’t go to
really consider that the additional revenues a traditional fund
On loan versus cashmanagement
collateral ($m) firm – if
they may receive if they lend against cash you have the capability in-house it’s a good
$1,000,000
really are sufficient to compensate for the situation.

$900,000 n
additional risks. $800,000
$700,000
The graphs below show the slight decline in the use of cash$600,000
collateral over the past year. Figures are for
Q209 and Q210 and come courtesy of the Risk Management Association. 2009 Cash
$500,000 2009 Non-cash
2010 Cash
Key figures: 2009 Total securities on loan ($m) $400,000
Equities: $518,070 2010 Non-cash
$300,000 Bonds: $705,533

$200,000 Total: $1,223,603
2010 Total securities on loan ($m) $100,000
Equities: $485,647
Bonds: $665,930
$0
Total: Equities $1,151,578
Bonds Totals
ateral ($m) Securities on loan ($m) As % of total on loan

cash collateral as % of total on loan
On loan versus cash collateral ($m)
$1,000,000 100%
$900,000 90%
$800,000 80%
$700,000 70%
$600,000 60%
2009 Cash 2009 Cash
$500,000 50%
2009 Non-cash 2009 Non-cash
2010 Cash 2010 Cash
$400,000 40%
$300,000 30%
$200,000 20%
$100,000 10%
2009 Cash
$0 0%
Equities Bonds Totals
2009 Non-cash
Equities Bonds Totals
cash collateral as % of total on loan

2009 Cash 2010 Cash
100%
90%
10
80% 2010 Cash
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Short of Demand?
Short of Demand?
Short selling, a key source of demand for securities lending, has come
under scrutiny from regulators across the globe - here we look at the
actions taken by the US Securities and Exchange Commission
It is probably not essential for beneficial Importantly, it offers no exemption for
owners to understand the details of short- market-makers. Also, companies will be
selling. But it could well help them in required to have written procedures in
making a decision on whether to facilitate place to prevent the execution or display
the practice by lending the stock that of prohibited short-selling transactions.
enables short-sellers to go about their Not a complete prohibition
business. And to understand just why Robert Colby, deputy director of trading
this often controversial practice attracts and markets division at law firm Davis Polk
such attention in difficult markets. and Wardwell says: “It is not a complete
The Securities and Exchange Commission prohibition. It means that a short-seller can’t
(SEC) has been under pressure to introduce execute at the bid price. This means they
new rules on short-selling for some can’t chip away at the price people are willing
time. Approximately 4,400 companies to buy. If, for example, a stock is trading at
have petitioned the SEC to clamp down, 105-110 and a trader was trying to short-
with industry heavyweights such as John sell and it triggered the circuit breaker, they
Mack, chairman of Morgan Stanley, could no longer sell at 105. They could only
blaming short-sellers for perilously say that they were willing to sell at 106 up to
driving down company share prices in 110 and wait for people to come to them.”
2008. The new rules have finally emerged. The SEC is clear in its intent. SEC
What impact are they likely to have? chairman Mary L Schapiro says that the
The SEC’s new rules aim to ‘promote ruling recognises that short-selling can have
market stability and preserve investor both a beneficial and a harmful impact on
confidence’ by placing restrictions on selling the market. She continues: “It is important
stock short if a company is experiencing for the Commission and the markets to have
significant downward price pressure on in place a measure that creates certainty
their share price. The ‘alternative uptick about how trading restrictions will operate
rule’ will restrict short-sellers from driving during periods of stress and volatility.”
down the price of a stock that has dropped There has been considerable debate as
more than 10% in one day. Once this to whether the new rule will achieve its
‘circuit breaker’ is triggered, holders of goal of greater stability. The Securities
the stock will be first in line and can sell Traders’ Association issued a lengthy
their shares before any short sellers. response to the SEC’s regulations, suggesting
Once the circuit breaker has been that they were based on “inadequate
triggered, the rule applies to short sale analysis, a lack of empirical data, and
orders for the remainder of the day’s questionable rationale by the SEC”.
trading, plus that of the following day. It It also accuses the SEC of not being
applies to all equities listed on a national consistent. It says in its letter to the SEC:
securities exchange, whether they are “This inadequacy was noted by SEC
traded on an exchange or over-the-counter. Commissioner Paredes in his opening
12
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Short of Demand?
statement... there is an insubstantial “This will impact all international hedgers
empirical basis to support the commission operating in US markets. It will limit their
in adopting the rule, especially in light ability to make profits in falling stocks.
of the rigorous economic analysis that That said, it doesn’t kick in until there has
led the SEC to repeal the ‘original’ uptick been a 10% drop, which is relatively rare,
rule in 2007 after years of study. The but if you sell stock with small volumes
commission bears the burden to justify its it could happen a lot faster. Therefore
rules. It has not done so in this instance.” mid and small cap managers may find
The regulations were voted through the themselves disproportionately affected.”
SEC on a paper-thin 3-2 majority. It is difficult to see how the new
The STA suggests that the new regulation regulations will act to stop additional market
will not resolve the issue of manipulative abuse. The SEC had already introduced
short-selling that it was designed to address. changes to tackle manipulative and naked
As such, it cannot bring about the ‘investor short selling. In normal circumstances, if
trust’ as intended. It will also have significant RBS looks over-valued, the short-sellers
implementation costs. Many broker dealers, move in and create a temporary fall in the
for example, will need to upgrade their share price, but then the shorts go too far
computer systems to ensure that they can and the long investors come in and scoop
distinguish between short-sellers and those up value. Black suggests that much of the
investors who hold stock and wish to sell.
“It is important for the Commission
Exemption sought and the markets to have in
In particular, the STA requested that the
regulator make an exemption for options place a measure that creates
market makers, saying: “The nature of certainty about how trading
the derivatives market is such that market restrictions will operate during
makers must be able to hedge their positions
easily and cheaply to reduce trading costs. periods of stress and volatility”
Failure to do so would cause a decoupling of
prices in the options markets from the prices
Mary L Schapiro, SEC chairman
of the underlying instruments. This would criticism of short selling should properly be
result in reduced liquidity and wider spreads directed at market abuse; for example the
to the detriment of individual investors.” spreading of negative rumours to artificially
The group believes that the regulations depress prices accompanied by short selling.
may be counter-productive, resulting The goal of ‘strengthening public
in less liquidity, greater volatility, and confidence’ is sufficiently nebulous to
wider bid-ask spreads, none of which is make any real judgement on the success of
conducive to boosting investor confidence. the rules difficult. With a relatively small
Furthermore, a short sale restriction majority in favour of the new regulations
that makes it more costly for investors to at the SEC, there may be room for a re-
manage their risk by hedging can hinder examination of the rules on market-makers
the ability of companies to raise capital. and possibly for a full change of heart if the
With the two sides clearly delineated, rules are found to create additional volatility.
what do industry participants believe will Lussan sums up the view of many when he
be the likely outcome of the regulations? concludes: “This is the least bad alternative.
Jerome Lussan, managing director of hedge The market was expecting something
fund consultancy Laven Partners, says: and was afraid it could be worse.” n
14
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Exchange-traded funds
Exchange-traded funds, now more than 10 years old, are beginning to offer
a new source of supply for the securities lending and borrowing industry
Exchange-Traded Funds, better known the underlying, because when you go in
as ETFs, celebrate their 10th anniversary the market and buy and sell underlying
in Europe this year. The product has found securities, you’ve got tracking error,
its way from the U.S. into Europe and has execution risk - many problems from
seen impressive growth in virtually every buying those underlying securities.
category: assets managed, funds offered, These ETFs seek to replicate market
traded volumes as well as the number of performance by holding a basket of
issuers, exchanges and user groups involved. securities along with a swap agreement with
Exchange traded funds are low-cost, a third party – often a brokerage – which
tax-efficient investment vehicles that will agree to pay the performance of the
passively track indexes and can be traded index. It is the that ETF holds an exposure
like shares. The fund, which may contain to the market: if the market goes up under
assets such as stocks or bonds, trade at the swap contract, the swap company pays
approximately the same price as the net the ETF company the performance; if it
asset value of its underlying assets. goes down, the ETF pays the swap company.
They are similar to traditional mutual They still have total market exposure,
funds in giving investors an undivided but one had the underlying securities as
Within the securities lending world, the basic premise is that

you have to buy the underlying securities and lend them out.
interest in a pool of securities. However, assets and one has the swap as the asset.
ETFs do not sell or redeem individual Given the chance of default of the third
shares at net asset value. Instead, financial party, there is a greater concern around
institutions purchase and redeem ETF shares counterparty risk for swap-backed ETFs,
directly from the ETF in the form of units. although UCITS ruling limits this loss to
An in-specie ETF will buy up the 10% of the value of the ETF. The advantage
underlying securities in an index. A of doing a swap back is you get the absolute
company writing an ETF on the FTSE performance of the underlying market.
will go into the market and buy all the The investment bank, which has provided
underlying components of the FTSE shares. a swap has to hedge itself, has written out
These shares are ring-fenced into separate the performance of the FTSE, for example.
accounts, meaning that there is no risk of To hedge itself, the bank would go and
default from a counterparty. Further, there buy all the underlying components of
is full disclosure of the fund’s holdings. that market in the same way that a bank
Within the securities lending world, has bought the underlying securities.
the basic premise is that you have to buy Further, investors can actually buy an
the underlying securities and lend them ETF that gives you the short exposure
out. There is some difficulty in buying to an underlying index. So in the case
16
of a FTSE ETF short, if the FTSE goes There are two ways to lend with ETFs: the
down, the ETF increases in value. So underlying shares themselves, or the units.
to do that, the investment bank has to Owners of a unit may lend it themselves,
right short performance swap to the ETF. giving direct potential profit to the owner.
It’s already got the stock, because it’s In Europe, currently over $200bn is
already written a long exposure because invested in ETFs, and an increasing number
it’s already holding the inventory. of issuers and investors are asking for
So, within the swap it can charge a stock options on those underlyings, adds Ralf
loan fee, and charge 100% of the dividend. Huesmann, who works in the Product
It’s like shorting itself but is instead Development Department of Eurex in
‘netting off ’. If you are writing the exposure London, focussing on index products. To
of a 150 million long position and $100 meet market needs, Eurex Exchange,one
million short position, to hedge that of the world’s leading derivatives
position all you have to do is buy $50 exchanges, has extended its ETF segment
million worth of securities - that’s the by launching new options. In May 2010,
difference between the two. But in the three options on ETFs by Deutsche Bank
swap, you are charging one dividend rate were launched, more precisely on the
on the whole $150 million long, and on db x-trackers MSCI Emerging Markets,
the short you are charging a different MSCI Europe and MSCI World.
rate on the whole $100 million short. Only a few weeks later, Eurex added
17
options on seven ETFs listed by Source, it on the index itself and then struggle to
focussing on their STOXX Europe get the hedging right. ETF options could
600 Optimised sector ETFs. It is very therefore pave the way for exchanges to
likely that further options on ETFs will cover more markets with liquid options.
follow soon, also on other issuers. In return, the ETF issuers, who often act
ETFs provide investors with an as liquidity providers, can expect positive
opportunity to trade broader indexes in effects on the assets under management.
just one single trade, similar to trading A look into the U.S. market reveals the
shares. Before ETFs were made available potential of ETF options. For the first
to the market, indexes were tradable either time, the number of ETF options being
via basket trades (with more transactions traded on eight different U.S. option
involved), index swaps and structured exchanges exceeded one billion in 2008. It
products (including counterparty risk) is interesting to see that the growing use of
or futures (for which a margin account ETF options has no negative influence on
is necessary). Against this backdrop it the corresponding cash-settled options on
becomes clear why the emergence of ETFs the same underlying. In fact, the opposite
substantially facilitated index trading. is the case: cash-settled options have
With the growing amount of money flourished after ETF options on the same
invested in ETFs and the increased trading underlyings had been listed in parallel.
It is interesting to see that the growing use of ETF options has

no negative influence on the corresponding cash-settled options
on the same underlying. In fact, the opposite is the case
activity, institutional investors have started The product can either be traded based
to look for a safe and sound way to trade on the permanently generated quotes shown
optionality on those ETFs. Eurex’s options on the Eurex screen, or by contacting the
on ETFs cover expiries up to two years. Market Makers directly: Deutsche Bank is
In the past, the only liquid, exchange- the market maker for the options on db
traded equity index products in Europe were x-trackers ETFs, whereas the banks behind
cash-settled options on the relevant national the Source consortium (Goldman Sachs,
benchmark indexes like DAX, SMI or FTSE Morgan Stanley, BoA Merrill Lynch, Nomura
100 or the most important benchmark index and JP Morgan) are the liquidity providers
for the Eurozone, the EURO STOXX 50. for the options on Source ETFs, with
For other underlying indexes like MSCI Nomura acting as on-screen market maker.
World or MSCI Emerging Markets, it is Elsewhere, BNY Mellon Asset Servicing
more difficult to find liquidity providers, is laying claim to being the first service
as those indexes cover different time zones, provider to support short positions in an
currencies and exchanges. Options on ETFs ETF. The claim came after it was selected
could show a way out of this dilemma. As the to provide ETF services, custody, fund
ETF itself is already traded and quoted on accounting and fund administration for the
Xetra, the leading ETF platform in Europe, Mars Hill Global Relative Value ETF, which
by a number of market makers, it is easier it describes as the first actively managed ETF
to trade options on that particular ETF to pursue a long-short equity strategy. n
(and use the ETF as the hedge), than doing
18
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securities lending solutions
to meet your changing needs
When challenging markets put pressure on investment returns, it’s important to

work with a proven lending agent that understands your business. As one of the
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For more information, visit www.statestreet.com/securitiesfinance.
State Street Global Markets is the investment research and trading arm of
State Street Corporation (NYSE: STT), one of the world’s leading providers
of financial services to institutional investors.
©2010 State Street Corporation 10-SGM04640710

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20
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The Securities Lending Industry Awards
The
Securities
Lending
Industry
Awards
2010 GSL
This year saw the inaugural Securities Year. Several other firms also received “highly
Lending Industry Awards take place. commended” certificates.
The Awards differ from the usual format by The culmination of the Awards was the
inviting those who work within the industry Ceremonial Dinner, held on 1st July at the
to vote for the winners, ensuring the Awards Dorchester London.
are “for the industry, by the industry”. The event was held in support of Wooden
Deutsche Bank was the big winner on the Spoon, the Children's Charity of Rugby,
night, scooping three awards, including Best and featured an auction hosted by BBC
Equity Trading Capability – Multi-location Sport's Ian Robertson (pictured below), who
Borrower. entertained the audience with his showbiz
Other success stories included eSecLending, anecdotes.
UBS, Barclays Capital and Nomura, which A full list of winners can be found on the
each picked up two awards. next page.
The remaining prizes were shared between For full listings, including highly
11 firms with one a piece, including SunGard commended firms in each category, please
which was named Technology Provider of the visit www.GSL.tv/Awards
22
The Securities Lending Industry Awards
Award Winner
Overall Awards
Multi Location Lender eSecLending
Single Location Lender UBS
Multi Location Borrower Barclays Capital

Single Location Borrower Nomura
Technology Provider of Year SunGard

Equity Trading
Multi-location Lender eSecLending
Single Location Lender CIBC Mellon
Multi Location Borrower Deutsche Bank Global Prime Finance

Single Location Borrower Goldman Sachs
Fixed Income Trading
Multi-location Lender State Street
Single Location Lender Deutsche Bank Agency Lending
Multi Location Borrower Morgan Stanley

Single Location Borrower UniCredit
Global Market Knowledge
Lender Citibank
Borrower HSBC
Operations
Multi-location Lender Northern Trust
Single Location Lender UBS
Multi Location Borrower ING

Single Location Borrower Barclays Capital
Up & Coming Firms
Lender Deutsche Bank Agency Lending
Borrower Nomura
Technology Pirum Systems
23
Securities Lending Summits
GSL Summit |
Global
Securities
Lending
The Global Securities Lending Summits

have continued apace in 2010, following on
from their successful introduction in 2009.
Unlike many of the beneficial owner-
focused events on the securities lending
calendar, GSL Summits last for just one
afternoon, with the focus on relevant,
concise content, followed by networking
sessions.
So far in 2010, GSL has visited Stockholm,
London, Frankfurt, Paris, New York, Tokyo
and Toronto. There are seven more events
planned for the rest of the year (see below).
Topics and discussion points have
varied dramatically over the course of
the sessions, but recurring themes have
included, of course, regulation, but also a
significant strand has been that benefical
owners have returned to their securities
lending programmes, albeit wiser and more
educated - something that the Summits help
to enhance.
Full coverage of all of the summits is

available online at www.GSL.tv/Videos n
Upcoming Summits Location Date

GSL Asia Pacific Securities Lending Summit Hong Kong, China 16th September 2010
GSL Dutch Securities Lending Summit Amsterdam, Netherlands 7th October 2010
GSL Swiss Securities Lending Summit Zurich, Switzerland 21st October 2010
GSL London Securities Lending Summit London, UK 28th October 2010
GSL Boston Securities Lending Summit Boston, USA 4th November 2010
GSL Middle East Securities Lending Summit Doha, Qatar 10th November 2010
GSL Luxembourg Securities Lending Summit Luxembourg 2nd December 2010
For more details please contact Craig.McGlashan@2i.tv
24
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Beneficial Owners’ Guide to Securities Lending
Part One commonplace that in association with

What is securities securities are borrowed
lending? and then sold or on-lent.

Securities lending is a There are some
long-established practice consequences arising from
that plays an important role this clarification:
in today’s capital markets
by providing liquidity 1.Absolute title over both are made against collateral
that reduces the cost of the securities on loan and in order to protect the
trading and promotes the collateral received lender against the possible
price discovery in rising passes between the default of the borrower.
as well as falling markets. parties. This collateral can be cash,
The resultant increase 2.The economic benefits or other securities or other
in efficiency benefits the associated with ownership assets
market as a whole - from – e.g. dividends, coupons
the securities dealers and etc. – are “manufactured” (a) Transactions
end investors through to back to the lender, collateralised with other
the corporate issuers that meaning that the borrower securities or assets
depend on efficient, liquid is entitled to these benefits
markets to raise additional as owner of the securities Non-cash collateral would
capital. but is under a contractual typically be drawn from the
obligation to make following collateral types:
The Legal Framework equivalent payments to the Government Bonds: OECD
lender. debt, or restricted to G7,
Definitions 3.A lender of equities G20, etc
In some ways, the term surrenders its rights of Corporate Bonds: Typically
“securities lending” ownership, e.g. voting. a minimum credit rating
is misleading and Should the lender wish Convertible Bonds: Usually
factually incorrect. From to vote on securities on matched to the securities
a legal perspective in loan, it has the contractual being lent
many jurisdictions, the right to recall equivalent Equities: Of specified
transaction commonly securities from the Indices
referred to as “securities borrower. Letters of Credit: From
lending” is, in fact... 4.Appropriate banks of a specified credit
documentation of lending quality
“a transfer of title of ensures that securities Certificates of Deposit:
securities linked to the lending transactions do Drawn on institutions of a
subsequent reacquisition not incur taxes that would specified credit quality
of equivalent securities by negate any financial Warrants: Atypical, but
means of an agreement.” benefit. usually matched
Other money market
Such transactions are Different types of securities instruments
collateralized and the loan transaction
“rental fee” charged, along The eligible collateral will
with all other aspects As a by-product of be agreed between the
of the transaction, are being “appropriately parties, as will other key
dealt with under the documented”, and as factors including:
terms agreed between a result of prudent risk Notional limits: The
the parties. It is entirely management, securities absolute value of any
possible and very loans in today’s markets asset to be accepted as
collateral that the fees remain largely the attractions of repo and
Initial margin: The margin static but that borrowers swaps is the transactional
required at the outset of a are more prepared to deal certainty on offer from a
transaction with a flexible lender and counterpart
Maintenance margin: The therefore balances and Certainty: There are
minimum margin level to overall revenue rise. trading and arbitrage
be maintained throughout opportunities, the
the transaction The agreement on a fee profitability of which
Concentration limits: is reached between the revolves around the
The maximum percentage parties and would typically making of specific
of any issue to be take into account the decisions. If a lender can
acceptable, e.g. less than following factors: - guarantee a certain course
5% of daily traded volume of action, this may mean it
The maximum percentage Demand and supply: The can negotiate a higher fee
of collateral pool that can less of a security available,
be taken against the same other things being equal, Fees vary from security to
issuer, i.e. the cumulative the higher the fee a lender security and over time.
effect where collateral in can obtain
the form of letters of credit, Collateral flexibility: See (b) Transactions
CD, equity, bond and above – the cost to a collateralised with cash
convertible may be issued borrower of giving different Cash collateral is, and
by the same firm types of collateral varies has been for many
In a large number of significantly, so that they years, an integral part
securities lending might be more willing to of the securities lending
transactions, collateral is pay a higher fee if the business, particularly
held by a Tri Party Agent. lender is more flexible in the United States.
This specialist agent Dividend issues: The The lines between two
(typically a large custodian size of the manufactured distinct activities -
bank or International dividend required to Securities lending and
Central Securities compensate the lender Cash reinvestment - have
Depository) will receive for the post-tax dividend become blurred; and
only eligible collateral from payment that it would have to many US investment
the borrower and hold it received had it not lent the institutions securities
in a segregated account security: Different lenders lending is virtually
to the order of the lender. have varying tax liabilities synonymous with cash
The Tri Party Agent will on income from securities; reinvestment. This is
mark this collateral to the lower the manufactured much less the case
market, with information dividend required by the outside the United States
distributed to both lender lender, the higher the fee it but consolidation of the
and borrower. Typically the can negotiate custody business and
borrower pays a fee to the The term of a transaction: the important role of US
Tri Party agent. Securities lending custodian banks in the
transactions can be open market means that this
There is debate within the to recalls or fixed for a practice is becoming more
industry as to whether specified term; there prevalent internationally.
lenders that are flexible is much debate about
in the range of non-cash whether there should be a The importance of this
collateral they are willing premium paid or a discount point lies in the very
to receive are rewarded for certainty. If a lender different risk profiles
with correspondingly can guarantee a recall-free of these increasingly
higher fees. Some argue loan then a premium will intertwined activities.
that they are, others claim be forthcoming. One of Crucially, cash
27
reinvestment is not usually lenders are overwhelmingly underlying securities

covered by an indemnity – taking cash as collateral lending agreement.
insurance from the lending whilst other jurisdictions Unfortunately it is still
agent that provides some have a predilection for typical for these guidelines
protection in the event of a non-cash collateral. to be bespoke and lack
counterpart default. It can any specific risk language.
be argued that this creates The relative scale and This situation is changing
a conflict of interest for importance of the US in light of client and
the cash manager – they lending community brings provider experiences
earn fees but do not share the overall percentage of related to the liquidity crisis
the direct financial risk collateral taken as cash up prompted by the Credit
of this activity. They do, to 59.5%. These statistics Crunch. The adoption of
however, run considerable owe a great deal to historic a more risk management
reputational and tax legislation and inertia orientated approach is
commercial risk if they do but have served the non to be welcomed and
not manage this potential US lenders well in during encouraged. Some typical
conflict. the credit crunch when guidelines might be as
some money market funds follows:
Cash reinvestment was lost money.
traditionally dominated Conservative
by unitized funds that Table 1.1 Use of Cash as Overnight G7
pooled the collateral for Collateral (02 April 2010) Government Bond repo
ease of management and fund
to achieve the various Maximum effective
Domicile of % of collateral
economies of scale lender taken as cash
duration of 1 day, or any
available in money market term agreements are a
investment. However, US 96.7 small proportion
segregated accounts with Canada 13.24 Floating-rate notes
client specific risk profiles and derivatives are not
are now becoming much Luxembourg 16.24 permissible
more common. UK 15.44 Restricted to overnight
repo agreements
Note that the securities All Lenders 58.13
lending loan term (i.e. Quite Conservative
time to maturity) will Source: Data Explorers AAA rated Government
determine the benchmark Bond repo fund
rate that is to be paid on The revenue generated Maximum average
the cash. Most loans can from cash-collateralised maturity of 90 days
be recalled at any time, securities lending Maximum remaining
so the cash will generally transactions is derived maturity of any
have an overnight rate in a different manner instrument is 13 months
benchmark. It is common from that in a non-cash
for the interest to be transaction. It is made from Quite Flexible
physically settled monthly. the difference or “spread” Maximum effective
between interest rates that duration of 90 days
Below we provide an are paid and received by Maximum remaining
example of relative the lender. effective maturity of 2 - 3
importance of cash and years
non-cash to different fiscal Reinvestment guidelines Floating-rate notes and
locations and as you can are typically documented eligible derivatives are
see the US domiciled in the appendix of the permissible
28
Credit quality: Short-term to borrow securities and they offer to owners of

ratings: A1/P1, long-term securities lending is an securities portfolios,
ratings: A-/A3 or better important tool in a variety while third-party lenders
of capital market functions. specialise in providing
Flexible In the next chapter we will securities lending services.
Maximum effective focus in more depth on the
duration of 90 days structure of the market and Owners and agents “split”
Maximum remaining the different routes that revenues from securities
effective maturity of 5 supply can follow through lending at commercial
years it. rates. The split will be
Floating-rate notes and determined by many
eligible derivatives are Part Two factors including the
permissible Lenders and service level and provision
Credit quality: Short-term intermediaries by the agent of any risk
ratings: A1/P1, long-term mitigation, such as an
ratings: A-/A3 or better The securities lending indemnity. Securities
market involves various lending is often part of a
Some securities lending specialist intermediaries much bigger relationship
agents offer bespoke which take principal and/ and therefore the split
reinvestment guidelines or agency roles. These negotiation can become
whilst others offer intermediaries separate part of a bundled approach
reinvestment pools. the underlying owners of to the pricing of a wide
securities – typically large range of services.
Other transaction types pension or other funds,
and insurance companies (a) Asset managers
Securities lending is – from the eventual It can be argued that
part of a larger set of borrowers of securities, securities lending is an
interlinked securities whose usual motivations asset management activity
financing markets. These are described later. – a point that is easily
transactions are often understood considering
used as alternative ways of Intermediaries the reinvestment of cash
achieving similar economic 1. Agent intermediaries collateral. Particularly in
outcomes, although the Securities lending is Europe, where custodian
legal form and accounting increasingly becoming banks were perhaps
and tax treatments a volume business and slower to take up the
can differ. The other the economies of scale opportunity to lend than
transactions include: offered by agents that pool in the United States,
Sale and repurchase together the securities many asset managers
agreements (“Repos”) of different clients run significant securities
Swaps enable smaller owners lending operations.
Buy/sell backs of assets to participate
in the market. The costs What was once a low-
Conclusion associated with running an profile, back-office activity
The scale and significance efficient securities lending is now a front-office
of the securities lending operation are beyond growth area for many
industry should now be many smaller funds for asset managers. The
apparent to the reader. It is which this is a peripheral relationship that the asset
important to note that this activity. Asset managers managers have with their
is not purely a business and custodian banks have underlying clients puts
that drives short selling – added securities lending them in a strong position to
there are many reasons to the other services participate.
29
providers it is a loss- the three categories are

(b) Custodian banks making activity. However, blurred. Many firms would
The history of securities it enables the custodians be in all three.
lending is inextricably to provide a range of
linked with the custodian additional services to In recent years securities
banks. Once they their client base. These lending markets have been
recognised the potential to include foreign exchange, liberalised to a significant
act as agent intermediaries trade execution, securities extent so that there is little
and began marketing the lending and fund general restriction on who
service to their customers, accounting. can borrow and who can
they were able to mobilise lend securities.
large pools of securities (c) Third-party agents
that were available for Advances in technology Lending can, in principle,
lending. This in turn and operational efficiency take place directly between
spurred the growth of the have made it possible to beneficial owners and
market. separate the administration the eventual borrowers.
of securities lending from But typically a number of
Most large custodians the provision of basic layers of intermediary are
have added securities custody services, and a involved. What value do
lending to their core number of specialist third- the intermediaries add?
custody businesses. party agency lenders have
Their advantages established themselves as A beneficial owner may
include: the existing an alternative to custodian well be an insurance
banking relationship with banks. company or a pension
their customers; their scheme while the ultimate
investment in technology Their market share is borrower could be a
and global coverage of currently growing from hedge fund. Institutions
markets, arising from their a relatively small base. will often be reluctant to
custody businesses; the Their focus on securities take on credit exposures
ability to pool assets from lending and their ability to to borrowers that are not
many smaller underlying deploy new technology well recognised, regulated
funds, insulating borrowers without reference to legacy or who do not have a good
from the administrative systems can give them credit rating. This would
inconvenience of dealing flexibility. exclude most hedge funds.
with many small funds and In these circumstances,
providing borrowers with 2. Principal intermediaries the principal intermediary
protection from recalls; and (often acting as prime
experience in developing There are three broad broker) performs a credit
as well as developed categories of principal intermediation service in
markets. intermediary: taking a principal position
Broker Dealers between the lending
Being banks, they also Specialist intermediaries institution and the hedge
have the capability to Prime brokers fund.
provide indemnities and
manage cash collateral In contrast to the agent A further role of the
efficiently – two critical intermediaries, they can intermediaries is to take
factors for many underlying assume principal risk, on liquidity risk. Typically
clients. offer credit intermediation they will borrow from
and take positions in the institutions on an open
Custody is so competitive securities that they borrow. basis – giving them
a business that for many Distinctions between the option to recall the
30
underlying securities if positions is complete. This prime brokerage operation

they want to sell them or can require a significant (the business of servicing
for other reasons – whilst technological investment. the broad requirements
lending to clients on a term Other ways of mitigating of hedge funds and other
basis, giving them certainty ‘recall risk’ include alternative investment
that they will be able to arrangements to borrow managers). This can bring
cover their short positions. securities from affiliated significant efficiency and
investment management cost benefits. Typically
In many cases, as well as firms, where regulations within broker dealers the
serving the needs of their permit, and bidding for fixed income and equity
own propriety traders, exclusive (and certain) divisions duplicate their
principal intermediaries access to securities from lending and financing
provide a service to the other lenders. activities.
market in matching the
supply of beneficial owners On the demand side, (b) Specialist intermediaries
that have large stable intermediaries have Historically, regulatory
portfolios with those that historically been controls on participation
have a high borrowing dependent upon hedge in stock lending markets
requirement. They also funds or proprietary meant that globally there
distribute securities to a traders that make trading were many intermediaries.
wider range of borrowers decisions. But a growing Some specialised in
than underlying lenders, number of securities intermediating between
which may not have lending businesses within stock lenders and market
the resources to deal investment banks have makers in particular,
with a large number of either developed “trading” e.g. UK Stock Exchange
counterparts. capabilities within their Money Brokers (“SEMB”).
lending or financing With the deregulation of
These activities leave departments, or entered stock lending markets,
principal intermediaries into joint ventures with these niches have almost
exposed to liquidity risk other departments or all disappeared.
if lenders recall securities even in some cases their
that have been on lent to hedge fund customers. Some of the specialists are
borrowers on a term basis. The rationale behind this now part of larger financial
One way to mitigate this trend is that the financing organisations. Others
risk is to use in-house component of certain have moved to parent
inventory where available. trading strategies is so companies that have
For example, proprietary significant that without the allowed them to expand
trading positions can loan there is no trade. the range of their activities
be a stable source of into proprietary trading.
lending supply if the long (a) Broker dealers
position is associated with Broker dealers borrow (c) Prime brokers
a long-term derivatives securities for a wide range Prime brokers serve the
transaction. Efficient of reasons: needs of hedge funds
inventory management Market making and other ‘alternative’
is seen as critical and To support proprietary investment managers. The
many securities lending trading business was once viewed
desks act as central On behalf of clients simply as the provision
clearers of inventory of six distinct services,
within their organisations, Many broker dealers although many others such
only borrowing externally combine their securities as capital introduction,
when netting of in-house lending activities with their risk management, fund
31
accounting and start up has entered into with the A cautious approach to
assistance have now been hedge funds, for example, counterpart selection
added: to cover short positions. (AAA only) and restrictive
But it is internalised within collateral guidelines (G7
Services provided by prime the prime broker and less Bonds) will limit lending
brokers obvious to the client. volumes.

• Profitable activities Beneficial owners 2. Portfolio characteristics
• Part of the cost of
being in business Those beneficial owners (a) Size
• Securities lending with securities portfolios Other things being equal,
• Clearance of sufficient size to borrowers prefer large
• Leverage of financing make securities lending portfolios.
provision worthwhile include: (b) Holdings size
• Custody • Pension funds Loan transactions generally
• Trade execution • Insurance and exceed $250,000. Lesser
• Reporting assurance cos holdings are of limited
• Mutual funds/unit appeal to direct borrowers.
Securities lending is one trusts Holdings of under
of the central components • Endowments $250,000 are probably
of a successful prime best deployed through an
brokerage operation, with When considering whether agency programme, where
its scale depending on the and how to lend securities, they can be pooled with
strategies of the hedge beneficial owners need other inventories.
funds for which the prime first to consider the
broker acts. Two strategies characteristics of their (c) Investment strategy
that are heavily reliant organisations and portfolio. Active investment
on securities borrowing strategies increase the
are long/short equity and 1. Organisation likelihood of recalls,
convertible bond arbitrage. characteristics making them less attractive
than passive portfolios.
The cost associated with (a) Management motivation
the establishment of a Some owners lend (d) Diversification
full service prime broker securities solely to offset Borrowers want portfolios
is steep and recognised custody and administrative where they need liquidity.
providers have a significant costs. Others are seeking A global portfolio offers
advantage. Some of the more significant revenue. the greatest chance of
newer entrants have been generating a fit. That said,
using total return swaps, (b) Technology investment there are markets that are
contracts for difference Lenders vary in their particularly in demand
and other derivative willingness to invest in from time to time and there
transaction types to technological infrastructure are certain borrowers that
offer what has become to support securities have a geographic or asset
known as “synthetic lending. class focus.
prime brokerage”. Again
securities lending remains (c) Credit risk appetite (e) Tax jurisdiction and
a key component of the The securities lending position
service as the prime broker market consists of Borrowers are responsible
will still need to borrow organisations with a wide for “making good”
securities in order to hedge range of credit quality any benefits of share
the derivatives positions it and collateral capabilities. ownership (excluding
32
voting rights) as if the option for a beneficial portfolio will require and
securities had not owner, especially a new who will provide it.
been lent. They must one. They will already have
“manufacture” (i.e. pay) made a major decision in (e) Selecting one principal
the economic value of selecting an appropriate borrower
dividends to the lender. An custodian. This route also Many borrowers effectively
institution’s tax position poses few barriers to act as wholesale
compared to that of getting started quickly. intermediaries and
other possible lenders is have developed global
therefore an important (c) Appointing a third-party franchises using their
consideration. If the cost of specialist as agent expertise and capital
manufacturing dividends or A beneficial owner who has to generate spreads
coupons to a lender is low decided to outsource may between two principals
then its assets will be in decide it does not want to that remain unknown
greater demand. use the supplier’s asset to one another. These
manager(s) or custodian(s), principal intermediaries
(f) Inventory attractiveness and instead appoint a are sometimes separately
“Hot” securities are third-party specialist. This incorporated organisations,
those in high demand route may mean getting but, more frequently,
whilst general collateral to know and understand are parts of larger
or general collateral a new provider prior banks, broker-dealers
securities are those that to getting started. The or investment banking
are commonly available. opportunity cost of any groups. Acting as principal
Needless to say, the delay needs to be factored allows these intermediaries
“hotter” the portfolio, the into the decision. to deal with organisations
higher the returns from that the typical beneficial
lending it. (d) Auctioning a portfolio to owner may choose to
borrowers avoid for credit reasons
Having examined the Borrowers bid for a e.g. hedge funds.
organisation and portfolio lender’s portfolio by
characteristics of the offering guaranteed (f) Lending directly to
beneficial owner, we must returns in exchange for proprietary principals
now consider the various gaining exclusive access. Sometimes after a period
possible routes to market. There are several different of activity in the lending
permutations of this market using one of the
The possible routes to the auctioning route: above options, a beneficial
securities lending market Do-it-yourself auctions owner that is large enough
Assisted auctions in its own right, may wish
(a) Using an asset manager Agent assistance to explore the possibility
as agent Consultancy assistance of establishing a business
A beneficial owner may Specialist “auctioneer” “in house”, lending directly
find that the asset manager assistance to a selection of principal
they have chosen, already borrowers that are the end-
operates a securities This is not a new users of their securities.
lending programme. This phenomenon but one that The proprietary borrowers
route poses few barriers to has gained a higher profile include broker-dealers,
getting started quickly. in recent years. A key issue market makers and hedge
for the beneficial owner funds. Some have global
(b) Using a custodian as considering this option borrowing needs while
agent is the level of operational others are more regionally
This is the least demanding support that the auctioned focused.
33
depressed the demand to

(g) Choosing some borrow securities leading Reasons to borrow
combination of the above to:
Just as there is no single A depressed equity Borrowers, when acting
or correct lending method, securities lending market as principals, have no
so the options outlined meaning: obligation to tell lenders
above are not mutually Fewer trading or their agents why they
exclusive. Deciding not opportunities are borrowing securities.
to lend one portfolio does Less demand In fact they may well not
not preclude lending to Fewer “specials” know themselves as they
another; similarly, lending Issuer concern about the may be on-lending the
in one country does not role of securities lending, securities to proprietary
necessitate lending in all. such as traders or hedge funds
Choosing a wholesale Whether it is linked in that do not share their
intermediary that happens any way to the decline in trading strategies openly.
to be a custodian in the value of a company’s Some prime brokers are
the United States and shares? deliberately vague when
Canada does not mean Whether securities lending borrowing securities as
that a lender cannot lend should be discouraged? they wish to protect their
Asian assets through a How many times does underlying hedge fund
third-party specialist and an issuer discussing a customer’s trading strategy
European assets directly specific corporate event and motivation.
to a panel of proprietary stop to consider the
borrowers. impact that the issuance This chapter explains
of a convertible bond or some of the more common
Part Three the adoption of a dividend reasons behind the
The borrowing motivation reinvestment plan might borrowing of securities.
have upon lending of their In general, these can be
One of the central shares? grouped into: (1) borrowing
questions commonly to cover a short position
asked by issuers and There is a significant (settlement coverage,
investors alike is “Why amount of information naked shorting, market
does the borrower borrow available on the “long” making, arbitrage trading);
my securities?”. Before side of the market and (2) borrowing as part of
considering this point let correspondingly little on a financing transaction
us examine why issuers the “short” side. Securities motivated by the desire
might care. lending activity is not to lend cash; and (3)
synonymous with short borrowing to transfer
Issuers selling. But it is often, ownership temporarily
If securities were not although not always, used to the advantage of both
issued, they could not be to finance short sales (see lender and borrower
lent. Behind this simple below) and might be a (tax arbitrage, dividend
tautology lies an important reasonable and practical reinvestment plan
point. When Initial Public proxy for the scale of arbitrage).
Offerings are frequent short selling activity in the
and corporate merger absence of full short sale Borrowing to cover short
and acquisition activity is disclosure. It is therefore positions
high, the securities lending natural that issuers would
business benefits. In the want to understand how (a) Settlement coverage
early 2000s, the fall in and why their securities are Historically, settlement
the level of such activity traded. coverage has played a
34
significant part in the Naked shorting is a loan available would have

development of the high-risk strategy. to buy that security back to
securities lending market. Although some funds flatten its book.
Going back a decade or specialise in taking short
so, most securities lending positions in the shares of (d) Arbitrage trading
businesses were located companies they judge to Securities are often
in the back offices of their be overvalued, the number borrowed to cover a short
organisations and were of funds relying on naked position in one security
not properly recognised shorting is relatively small that has been taken to
as businesses in their own and probably declining. hedge a long position
right. Particularly for less in another as part of an
liquid securities – such (c) Market making “arbitrage” strategy. Some
as corporate bonds and Market makers play a of the more common
equities with a limit free central role in the provision arbitrage transactions that
float – settlement coverage of two-way price liquidity involve securities lending
remains a large part of the in many securities markets are described below.
demand to borrow. around the world. They
need to be able to borrow (i) Convertible bond
The ability to borrow securities in order to arbitrage
to avoid settlement settle “buy orders” from Convertible bond
failure is vital to ensure customers and to make arbitrage involves buying
efficient settlement and tight, two-way prices. a convertible bond and
has encouraged many simultaneously selling the
securities depositories into The ability to make underlying equity short
the automated lending markets in illiquid small- and borrowing the shares
business. This means that capitalisation securities to cover the short position
they remunerate customers is sometimes hampered (see Box 3). Leverage can
for making their securities by a lack of access to be deployed to increase
available to be lent by the borrowing and some of the return in this type of
depository automatically the specialists in these transaction. Prime brokers
in order to avert any less liquid securities are particularly keen on
settlement failures. have put in place special hedge funds that engage in
arrangements to enable convertible bond arbitrage
(b) Naked shorting them to gain access to as they offer scope for
Naked shorting can be securities. These include several revenue sources:
defined as borrowing guaranteed exclusive bids Securities lending
securities in order to sell with securities lenders. revenues
them in the expectation Provision of leverage
that they can be bought The character of borrowing Execution of the
back at a lower price is typically short term for convertible bond
in order to return them an unknown period of Execution of the equity
to the lender. Naked time. The need to know Worked example of
shorting is a directional that a loan is available convertible bond
strategy, speculating tends to mean that the arbitrage
that prices will fall, rather level of communication
than a part of a wider between market makers Long side
trading strategy, usually and the securities lending 5% XYZ Limited
involving a corresponding business has to be highly convertible bond
long position in a related automated. A market Maturing in one year at
security. maker that goes short and US$1,000
then finds that there is no Exchangeable into 100
35

non-dividend-paying these return dynamics: Components of Return
shares (ii) Pairs trading or
Stock currently trading at relative value “arbitrage”
No change in share price
US$10 per share This in an investment
Interest payments on $50.00 strategy that seeks
Short side $1,000 convertible bond to identify two
A short position of 50 (5%) companies with similar
underlying shares at $10 Interest earned on $500 $7.50 characteristics whose
per share short sale proceeds (1.5%) equity securities are
currently trading at a
Pricing inefficiencies
Fees paid to lender of ($1.50) price relationship that
shares (0.25% per annum)
between these two related is out of line with their
securities can create Net cash flow $56.00 historical trading range.
arbitrage opportunities Annual return 5.60% The strategy entails
whether the underlying buying the apparently
share price rises or falls. In 25% rise in share price
undervalued security
general, however, the trade while selling the
will be more profitable if Gain on convertible bond $250.00 apparently overvalued
the implied volatility of the security short, borrowing
share price rises, increasing
Loss on shorted stock (50 ($125.00) the latter security to
shares @ $2.50/share)
the value of the call cover the short position.
option embedded in the
convertible bond. Interest from convertible $50.00 Focusing on securities
bond in the same sector or
Unless the issuer defaults, Interest earned on short $7.50 industry should normally
convertible bonds can only sale proceeds reduce the risks in this
fall in value as low as their strategy.
“investment value” – what Fees paid to lender of ($1.50)
shares
the same company bond (iii) Index arbitrage
would be worth if it were Net trading gains and cash $181.00 In this context,
not convertible. In this flow arbitrage refers to the
case, the investment value Annual return 18.10% simultaneous purchase
is assumed to be US$920. and sale of the same
25% fall in share price commodity or stock in
Bondholders can purchase two different markets in
protection against issuer Loss on convertible bond ($80.00) order to profit from price
default using credit default (only falling as low as discrepancies between
“investment value”)
swaps but this element the markets.
of the transaction is not Gain on shorted stock (50 $125.00
covered in this example. To shares @ $2.50/share) In the stock market, an
keep the example simple, arbitrage opportunity
Interest from convertible $50.00
it is also assumed that the bond arises when the same
convertible trades with a security trades at
“delta” of one to the stock Interest earned on short $7.50 different prices in
(i.e. that the prices of the sale proceeds different markets. In such
convertible bond and the Fees paid to lender of ($1.50) a situation, investors
share change at the same shares buy the security in one
rate.) market at a lower price
Net cash flow $101.00 and sell it in another for
A transaction such as the Annual return 10.10% more, capitalising on the
one above would have difference. However,
36

such an opportunity theoretical actual cost to borrow for a fixed term
vanishes quickly as and the futures price is is also an advantage.
investors rush in to take called the basis. It is this
advantage of the price difference that creates an The best sources of
difference. arbitrage opportunity. securities to support this
type of transaction are
The same principle can be When FC > IC + (RF-D) a passive index tracking
applied to index futures. trader can profit by taking funds incorporated in
Being a derivative product, the following action: countries that have high
index futures derive their Buying a portfolio which is rates of withholding tax.
value from the securities identical to the index value
that constitute the index. Selling index futures Once established, the
At the same time, the value When FC < IC + (RF-D) a stock index arbitrage can
of index futures is linked trader can profit by taking generate profits should the
to the stock index value the following action: price of the index and the
through the opportunity Going short (selling) a underlying securities move
cost of funds (borrowing/ portfolio which is identical up or down. The arbitrage
lending cost) required to to the index value opportunity is often short-
play the market. Buying index futures lived as positions are taken
and the price adjusts.
Stock index arbitrage It is here that securities As these transactions
involves buying or selling lending plays its role. The normally have thin margins,
a basket of stocks and, ability of a borrower to they are often executed in
conversely, selling or source a complete portfolio large sizes.
buying futures when of all the stocks in an
mispricing appears to index, properly weighted, (e) Financing
be taking place. that will accurately track
the performance of the As broker dealers build
(iv) When is an arbitrage index is a big advantage. derivative prime brokerage
possible? Incomplete indices or and customer margin
Where the current index unbalanced indices open business, they hold an
futures price (FC) is not up the possibility of increasing inventory of
equal to the index value tracking errors occurring securities that requires
(IC) plus the difference whereby the performance financing.
between the risk free of the short cash portfolio
interest (RF) and dividends deviates from that of the This type of activity is high
(D) obtainable over the life index. volume and takes place
of the contract. between two counterparts
The ability to borrow that have the following
Or whenever the following securities that have a coincidence of wants:
is not true FC = IC + (RF- cheaper manufactured One has cash that they
D). dividend obligation is would like to invest on a
an advantage too. One secured basis and pick up
Whenever the actual of the problem areas is yield
futures price moves away when a component (or The other has inventory
from the above calculated components) of the index that needs to be financed
value, i.e. when FC > IC + is in high demand (“trading
(RF-D) or F < IC + (RF-D), special”) and the cost of In the case of bonds,
arbitrage opportunities borrowing rises, thereby the typical financing
exist. The difference reducing the profitability of transaction is a repo
between the current the transaction. The ability or buy/sell back. But
37

for equities, securities manufactured dividend, weightings may have to
lending and equity repo or a higher manufactured choose to take the cash
transactions are used. dividend than the post- option and forgo the
tax dividend they would opportunity to take the
Tri Party agents are often normally receive (quoted discounted reinvestment
involved in this type of as an “all-in rate”). opportunity.
financing transaction
as they can reduce For example, an offshore One way that they can
operational costs for the lender that would normally share in the potential
cash lender and they have receive 75% of a German profitability of this
the settlement capabilities dividend and incur 25% opportunity is to lend
the cash borrower needs withholding tax (with no securities to borrowers
to substitute securities possibility to reclaim) that then take the
collateral as their inventory could lend the security to following action:
changes. a borrower that, in turn, - Borrow as many
could sell it to a German guaranteed cash shares
(f) Temporary transfers of investor who was able to as possible, as cheaply as
ownership obtain a tax credit rather possible
than incur withholding - Tender the borrowed
(i) Tax arbitrage tax. If the offshore lender securities to receive the
Tax driven trading is an claimed the 95% of the new discounted shares
example of securities dividend that it would - Sell the new shares
lending as a means of otherwise have received, to realise the “profit”
exchange. it would be making a between the discounted
significant pick-up (20% share price and the market
Markets that have of the dividend yield), price
historically provided the whilst the borrower might - Return the shares and
largest opportunities for make a spread of between manufacture the cash
tax arbitrage include those 95% and whatever the dividend to the lender. n
with significant tax credits German investor was
that are not available to bidding. The terms of
all investors – examples these trades vary widely This section is an edited
include Italy, Germany and and rates are calculated extract from ‘An Introduction
to Securities Lending’ by
France. accordingly.
Mark C Faulkner, Data
Explorers. It has been
The different tax (ii) Dividend reinvestment prepared with permission.
positions of investors plan arbitrage The original publication of
around the world have ‘An Introduction to Securities
opened up opportunities Many issuers of securities Lending’ was commissioned
for borrowers to use create an arbitrage by the International Securities
securities lending opportunity when they Lending Association, the
Association of Corporate
transactions, in effect, offer shareholders Treasurers, the British
to exchange assets the choice of taking a Bankers Association, the
temporarily for the mutual dividend or reinvesting in London Investment Banking
benefit of purchaser, additional securities at a Association, the London
borrower and lender. The discounted level. Stock Exchange and the
lender’s reward comes in Securities Lending and Repo
one of two ways: either Income or index tracking Committeee of the Bank of
England.
a higher fee for lending funds that cannot deviate
if they require a lower from recognised securities
38
Structuring securities lending
transactions that combine optimised
intrinsic value with conservative
collateral parameters has been
the foundation of our program
Performance. Trust. Expertise. si nce i ncept ion.
BBH Global Securities Lending With excellent client referenceability,
compelling economics, and no
collateral impairment, BBH has
proven that our philosophy delivers
both outstanding performance and
robu s t r i sk m a n agem ent .
WWW.BBH.COM/SECURITIESLENDING
Contact us to learn more about what makes the BBH program unique: Custody
Asia: Richard Meek +852 3756 1686 richard.meek@bbh.com Accounting
Europe: Keith Haberlin +44 (0) 207 614 2165 keith.haberlin@bbh.com Administration
US: Andrew Pettit +1 617 772 6553 andrew.pettit@bbh.com Transfer Agency
Securities Lending
Foreign Exchange
Brokerage
Fund Distribution
©2010 Brown Brothers Harriman & Co.
This information is targeted at Professional Clients and Eligible Counterparties only. Outsourcing
Company Profile
Christine Donovan is
a managing director
within BBH’s Investor
Services Division.
She founded BBH’s

in-house Securities
Lending Program in
Brown Brothers Harriman 1999 and continues to
oversee the business
globally today.
A global leader with close to 200 years of our clients’ long term best interests.
experience, Brown Brothers Harriman is a • History of no losses, liquidity restrictions
privately-held financial services firm that or collateral impairment.
helps many of the world’s most sophisticated • 100% client referenceability.
institutional investors achieve their inter-
national business objectives. BBH Global EXPERTISE: BBH Global Securities Lending
Securities Lending leverages our firm’s is run by a management team with over 20
resources to achieve customized solutions years of diversified experience navigating a
and optimized performance for every client, variety of market conditions.
providing third party and custodial lending • Consistent management team has been
services via traditional agency and agency structuring transactions that combine
exclusive arrangements. optimized intrinsic value with conservative
collateral parameters since our program’s
PERFORMANCE: BBH works with our inception.
clients to achieve superior securities lending • Dedicated traders in North America, Eu-
returns both in absolute financial and risk rope, and Asia have diversified backgrounds,
adjusted terms. with experience in agency lending, broker/
• Customized trading solutions encompass- dealer financing and hedge fund trading.
ing a broad range of inputs, including invest- • Dedicated tax, regulatory, legal and risk
ment strategy, performance goals and risk management resources provide expertise
tolerance. across global markets, client domiciles and
• Continuous portfolio analysis designed to entity types.
recommend the optimal trading strategy or
route to market, based on market conditions
and client goals.
• Flexible and prudent collateral offerings Key Contacts:
which support an intrinsic value strategy.
Asia: Richard Meek, +852.3756.1686
TRUST: BBH has proven that our philoso-
phy of partnership and client protection EMEA: Keith Haberlin, +44(0)207.614.2165
delivers both outstanding performance and
robust risk management. US: Andrew Pettit, +1.617.772.6553
• Independent, privately-held structure al-
lows us to maintain an unwavering focus on
40
Company Profile
Citi
Clients around the world turn to Citi® high net worth and separately managed
Investor Services, for a range of securities accounts.
finance capabilities that few organizations To learn how we can design a securities
can match. Our solutions include agency finance program that meets your needs,
and principal programs in either a custody please contact:
or non-custody capacity as well as prime
brokerage, collateral management, and Citi’s Securities Finance global product team
liquidity management solutions. Through a
coordinated global approach and securities Americas, Laurie Zeppieri
lending trading capability strategically laurie.zeppieri@citi.com
available in New York, London, Hong Kong
Melbourne and Toronto, we provide 24-hour Asia, Lawrence Komo
coverage to help our clients maximize their lawrence.komo@citi.com
portfolios’ use.
EMEA, Brian Staunton
We can fulfill the borrowing requirements brian.staunton@citi.com
of over 100 top banks, broker-dealers and
other financial institutions worldwide. Our
on-the-ground presence in the 38 markets
where we lend securities is second to none
and we can help you stay current with local
market changes.
While maximizing yield is important, our

priority is to preserve lender principal while
maintaining liquidity, and you can rest
assured that we will work with you to find
the appropriate risk/reward balance.
In addition to securities finance, Citi® Timothy Douglas, Managing Director,

Investor Services includes local and global Global Head, Securities Finance,
custody, mutual fund and alternative Global Transaction Services,
investment solutions as well as investment Citi’s Institutional Clients Group
administration services for institutional,
41
Company Profile
Comit
COMIT has been servicing the finance Product description:

industry for more than 30 years with profes-
sional IT services across the whole value FINACE currently is the only fully integrated
chain. Key areas of expertise include strategic solution which supports current and future
consulting, implementation of core bank- business models within the area of Securities
ing solutions, namely Avaloq and Finnova, Lending, Repo, Synthetic Finance and OTC
application management and IT infrastruc- Derivatives Collateral Management. The ar-
ture services. The design, development and chitecture of FINACE is based on a scalable,
integration of highly specialized solutions leading edge technology platform, which was
and products for the Securities Finance and developed with performance and robustness
Collateral & Risk Management market has as the focus of design. With flexibility at its
also become a core competence. COMIT is core, customer-driven extensions and modi-
an independent subsidiary of Swisscom IT fications can be quickly and easily applied to
Services, therefore a member of the Swiss- the standard component set.
com group. COMIT currently employs
700 IT and business specialists at various
locations in Europe and Asia/Pacific. Main
offices are Zurich (headquarters), Geneva,
Frankfurt, Munich, Vienna, Luxembourg
and Singapore.

42
Company Profile
Deutsche Bank
Direct Securities Services
Deutsche Bank’s Global Transaction Banking

division, offers its clients access to a grow-
ing domestic custody and clearing network
which currently covers more than 30 securi-
ties markets globally. We are dedicated to
providing cross-border custody services,
fund administration, securities clearing and
agency securities lending consistently in all
markets to exceptional standards as part
of our commitment to support our clients’
success.
Through offices in London, New York and

Frankfurt, Deutsche Bank’s Agency Secu- Contact:
rities Lending team operates one of the
world’s largest non-custodial agency securi- Tim Smollen
ties lending programs offering institutional Deutsche Bank
clients a comprehensive and efficient service Managing Director, Global Head of Agency
for generating additional return on their Securities Lending
fixed income and equity portfolios in a low Tel: +1 212 250 4611
risk environment. Email: tim.smollen@db.com
Deutsche Bank has been recognized in www.tss.db.com

Global Custodian’s Securities Lending tss.info@db.com
Survey 2010 achieving “Top-rated” status
in a number of categories. It was also the
highest scoring regional provider in Europe,
the highest scoring provider in the Multi-
Provider category and obtained 34 Best in
Class awards.
43
Company Profile
Key Locations:
Boston
175 Federal Street, 11th Floor
eSecLending Boston, MA 02110
United States of America
+1 617 204 4500
With 10 years of experience, eSecLending is
a full-service global securities lending agent London
providing customized securities lending 10 King William Street, 1st Floor
solutions for sophisticated institutional London, EC4N 7TW
investors worldwide. The company’s United Kingdom
approach has introduced investment +44 (0) 20 7469 6000
management practices to the securities
lending industry, offering beneficial owners Sydney
an alternative to the custodial lending 19-29 Martin Place, Level 56
model. Their philosophy is focused on Sydney, NSW 2000
providing clients with complete program Australia
customization, optimal intrinsic returns, +61 (0) 2 9220 3610
high touch client service and comprehensive
risk management. Their differentiated
process combines agency exclusives and
discretionary routes to market to achieve Key Contacts:
best execution while providing clients with
greater transparency and control, allowing Christopher Jaynes
them to more effectively monitor and Co-Chief Executive Officer
mitigate risks. cjaynes@eseclending.com
+1 617 204 4500
Karen O’Connor
Co-Chief Executive Officer
koconnor@eseclending.com
+1 617 204 4500
www.eseclending.com
44
Company Profile
ING Financial Markets Global Securities Finance
When it comes to understanding client needs

Founded in 1997, the Global Securi- and providing innovative financing solu-
ties Finance Business (GSF) within ING tions, ING’s GSF group is second to none.
Commercial Banking, has in recent years GSF’s client-focused business philosophy has
enjoyed exceptional growth in both securi- been, and will always be, the main driver in
ties finance product offerings and in signing new product development and innovation.
top tier institutional and hedge fund clients. With specialized coverage in Equity Lend-
GSF’s strong growth can be traced to ING ing and Repo, Fixed Income Repo, Synthetic
Group’s: dominant credit position, large Portfolio Solutions, Portfolio Enhancement
global footprint, and client-focused business Services, and Linear Equity Derivatives, GSF
philosophy. has the ability to create unique, multi-asset,
financing structures for each and every cli-
ING Bank is a solid financial entity with ent.
an A+ credit rating and a proven abil-
ity to manage risk while shepherding its
clients through the most difficult of market
conditions. In a similar fashion, ING’s GSF
Business uses its robust balance sheet and
market position to provide solid guidance
and sound financial solutions to our clients
when they need us most.
ING Group’s large global footprint (with

offices in 50 countries) has enabled the
GSF business to attain a position of market
leadership in providing our clients with
access to developed and emerging equity
and fixed income markets around the world.
With offices in New York, London, Amster-
dam, Brussels, Moscow and Singapore, all
linked together with a globally integrated
trading system, GSF traders can provide real
time access and pricing to global financing
markets at all times.
45
Company Profile
J.P. Morgan
J.P. Morgan Worldwide Securities Services The firm’s global banking and asset servic-
(WSS) is a premier securities servicing ing franchise provides clients with one stop
provider that helps institutional investors, access to world markets, knowledgeable risk
alternative asset managers, broker dealers management and investment support, and
and equity issuers optimize efficiency, miti- best-in-class operations.
gate risk and enhance revenue. A division of
J.P. Morgan Chase Bank, N.A. (NYSE: JPM),
WSS leverages the firm’s unparalleled scale,
leading technology and deep industry exper- Key Locations & Contacts:
tise to service investments around the world.
It has $15.3 trillion in assets under custody Americas:
and $6.5 trillion in funds under adminis- William Smith
tration. For more information, go to www. at william.z.smith@jpmchase.com
jpmorgan.com/visit/wss. or + 1 212 552 8075
J.P. Morgan helps institutions enhance their Europe, Middle East and Africa:
portfolio performance, increase efficiency Paul Wilson
and mitigate risk through customized secu- at paul.uk.wilson@jpmorgan.com
rity lending programmes. J.P. Morgan offers or + 44 207 7420249
clients separate managed cash collateral
accounts, tailoring each account to a client’s Asia:
unique risk profile, investment needs and Andrew Cheng
collateral guidelines, and empowering clients at andrew.cheng@jpmorgan.com
with full account transparency and control. or + 852 2800 1809 x 21809
As a premier agent lender, we offer full-ser-
vice capabilities: J.P. Morgan as agent, client Australia and Japan:
directed, auctions and exclusives, designed Stewart Cowan
to meet the risk and reward needs of our at stewart.t.cowan@jpmorgan.com
sophisticated client base. or + 61-2 92504647
46
Company Profile
RBC Dexia Investor Services
As one of the top 10 agent lenders in the

world, RBC Dexia Investor Services of-
fers proven expertise, responsiveness and a
singular focus on the needs of our securities
lending clients. RBC Dexia’s securities lend-
ing program is structured and managed with
one clear objective – to realise the securities Equally owned by RBC and Dexia, the com-
lending potential in our clients’ portfolios pany ranks among the world’s top 10 global
while remaining within their risk tolerance custodians with USD 2.5 trillion in client
framework. We offer the distribution capa- assets under administration.
bility of our global infrastructure combined
with a focused and flexible program de- rbcdexia.com
signed to earn our clients additional returns.
For more information on our securities
RBC Dexia’s securities lending program is lending services, please contact:
supported by one fully integrated trading
platform, providing clients with access to a Blair McPherson
distribution network that covers 27 mar- Director, Technical Sales, Global Products,
kets worldwide. And our custodial lending Europe & Middle East
program was ranked number one in Europe 44 (0) 20 7029 7812
overall in Global Investor’s beneficial owners’ blair.mcpherson@rbcdexia.com
survey for 2010.
RBC Dexia offers a complete range of inves-

tor services to institutions worldwide. Our
unique offshore and onshore solutions, com-
bined with the expertise of our 5,300 profes-
sionals in 16 markets, help clients grow their
business and sustain enhanced performance
through efficiency improvements and robust
risk management practices.
47
Company Profile
SecFinex • Private Market (bilateral and negotiated

execution)
Securities finance professionals in major • Auction Market (lenders invite borrowers
financial institutions in Europe use SecFinex to participate on a ‘best bid’ basis).
to electronically source and deliver value
in the securities finance market. In 2007 Advantages received by trading via a CCP
NYSE Euronext became the majority include:
shareholder of SecFinex. NYSE Euronext
and SecFinex’s combined commitment is a • elimination of multi-entity counterparty
proven testimony to its focus on innovation risk
in electronic market places that will benefit • reduction of capital required to support
the securities lending market. stock loan transactions
• reduction of administration costs
Central counterparty service associated with multiple credit agreements
• the improvement of operational
In 2009, SecFinex was the first company efficiencies.
to introduce centrally cleared services in
the Securities Borrowing & Lending (SBL) SecFinex’s user friendly browser-based
industry. interface allows easy access to market
information without costly and time
The SecFinex central counterparty (“CCP”) consuming IT integration.
service covering equity markets in Belgium,
France, The Netherlands and Portugal, Reliable, resilient, and scalable – our
was introduced in Q2 2009, utilizing LCH. system is designed to handle increased
Clearnet, as the central clearer. In Q4 trade volumes, easily add markets, make
2009, centrally cleared equity markets was enhancements and is fully redundant.
introduced in Austria, Denmark, Finland,
Germany, Norway, Sweden and Switzerland, In the field of European equity finance,
utilizing SIX x-clear as the central clearer. SecFinex strives to be a leading force for
Similar services will be extended to continuing market innovation.
additional markets in the near future, with
the UK equity markets schedule for Q4 2010. For more information, visit www.secfinex.
com or email sales@secfinex.com
SecFinex offers three trading options:
To speak to a member of our team, please
• CCP & Bilateral Order Market (anonymous dial +44 (0) 20 7748 6146
centrally cleared and pre-trade anonymous
trading) SecFinex is Authorized and Regulated by the
Financial Services Authority
48
Company Profile
For more information visit:

State Street www.statestreet.com/securitiesfinance
Securities Finance Or please contact:
When challenging markets put pressure Christopher Holzwarth

on investment returns, it’s important to Senior Managing Director
work with a proven lending agent that State Street Securities Finance
understands your business. As one of the 20 Churchill Place
world’s most experienced lending agents Canary Wharf
providing both custodial and third-party London
lending, State Street offers the individualised E14 5HJ
service, client-facing technology and
commitment to transparency you’re looking +44 (0) 20 3395 7628
for. cwholzwarth@statestreet.com
Whatever the market conditions, our

dedicated team can help you optimise The State Street Advantage
opportunities without compromising our With $19.0 trillion in assets under custody
conservative approach to risk or your need and administration, and $1.9 trillion in
for flexibility. By leveraging a consultative assets under management,* State Street is a
approach and our extensive local market leading financial services provider serving
expertise, we will work with you to develop some of the world’s most sophisticated
a customised lending programme based on institutions. We offer a flexible suite of
the parameters you specify. services that spans the investment spectrum,
including investment management, research
This flexibility is underpinned by our and trading, and investment servicing. With
investment in people, technology, product operations in 25 countries serving clients
development and multiple distribution in more than 100 geographic markets,
routes to market, including exclusives our global reach, expertise, and unique
and auctions. Our team of more than 365 combination of consistency and innovation
professionals serves close to 450 clients help clients manage uncertainty, act on
worldwide from 12 regional offices that growth opportunities and enhance the value
include trading desks in London, Boston, of their services.
Hong Kong, Sydney, Tokyo and Toronto,
maintaining approximately $2.3 trillion in *As of March 31, 2010
lendable assets and more than $400 billion
in assets on loan.
49
Company Profile
SunGard
SunGard Securities Finance Asia-Pacific:

0065 6227 6400
SunGard provides a comprehensive suite CMIBsecfin.asia@sungard.com
of securities finance solutions: from
trade initiation through to final return; www.sungard.com/securitiesfinance
including order routing, trading, position
management, operations, accounting, About SunGard
settlement, transaction analytics and SunGard is one of the worlds leading
benchmarking and trade automation software and IT services companies.
services. With over 20 years experience SunGard serves more than 25,000 customers
SunGard has a global linked community of in more than 70 countries. SunGard provides
securities finance users. 17 out of the world’s software and processing solutions for
top 20 banks use one or more products from financial services, higher education and the
SunGard’s suite of solutions for Securities public sector. SunGard also provides disaster
Finance. SunGard’s securities finance recovery services, managed IT services,
solution suite includes Apex, Astec Analytics, information availability consulting services
Global One, Loanet, and Martini. and business continuity management
software. With annual revenue exceeding
For more information, please visit: $5 billion, SunGard is ranked 435 on the
www.sungard.com/securitiesfinance Fortune 500 and is the largest privately held
business software and services company on
Contact Details: the Forbes list of private businesses. Based
on information compiled by Datamonitor*,
Americas: SunGard is the third largest provider of
001 646 445 1000 business applications software after Oracle
CMIBsecfin.us@sungard.com and SAP. For more information, please visit
www.sungard.com
Europe, Middle East and Africa:
0044 20 8081 2000 *January 2009 Technology Vendors Financial
CMIBsecfin.emea@sungard.com Database Tracker
http://www.datamonitor.com
50
Market-driven forces. Investor-driven solutions.
To more effectively manage your firm’s business in quickly evolving markets requires
uncommon insight and on-the-ground expertise.
At Citi, we’ll partner with you to design solutions that deliver efficiencies, transparency
and help mitigate risk — whether you’re entering new markets, launching new strategies or
introducing new instruments. And our modular approach, robust operational support and
unmatched global presence provide you with a rare combination of flexibility and scale.
That’s why firms worldwide partner with Citi. And that’s why Citi never sleeps.
Please contact Patrick Curtin at 212-816-3832 and patrick.curtin@citi.com or visit us at

www.transactionservices.citi.com.
Citi® Investor Services

securities finance
fund services
custody
© 2010 Citibank, N.A. All rights reserved. Arc Design, Citi and Arc Design and Citi Never Sleeps are
trademarks and service marks of Citigroup Inc., used and registered throughout the world.
ready for your future needs
The state-of-the-art IT solution for:

· Securities Lending
· Repo
· Synthetic Finance
· OTC Derivatives Collateral Management
Finace is currently the only fully integrated solution which supports the future business models within the
area of Securities Finance and Collateral Management. The architecture of Finace is based on a stable,
leading edge technology platform which was developed with performance and robustness as the focus of
design. With flexibility at its core, customer-driven extensions and modifications can be quickly and easily
applied to the standard component set.
COMIT AG, Pflanzschulstrasse 7, CH–8004 Zürich, Phone +41 (0)44 298 92 00

info@comit.ch, www.finacesolution.com

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Beneficial Owner & Pension Fund

The state-of-the-art IT solution for:

The Securities Lending Landscape

The Securities Lending Landscape

The Securities Lending Landscape

6 Owning the Benefits

Chris Hitchen CEO of Railway Pensions Trustee Company, provides his

view on the benefits of securities lending

Supplement editor: 8 Experts’ Panel: The Dash for Cash

ISLA partners with FinTuition

Owning the Benefits

Pension Funds: Owning the Benefits

Owning the Benefits

The Dash for Cash

Experts’ Panel: For some agent lenders, there has been

The Dash for Cash

to market? post the additional margin? In a classic mark

The Dash for Cash

really are sufficient to compensate for the situation.

$300,000 Bonds: $705,533

ateral ($m) Securities on loan ($m) As % of total on loan

cash collateral as % of total on loan

For all your Securities Finance needs

Rely on our Strength. Take Control

• One-stop access to comprehensive financing and outsourcing 18 Best in Class Awards

To learn more, visit us at jpmorgan.com/securitieslending or contact:

eSecLending delivers to institutional investors

Within the securities lending world, the basic premise is that

It is interesting to see that the growing use of ETF options has

When challenging markets put pressure on investment returns, it’s important to

For more information, visit www.statestreet.com/securitiesfinance.

©2010 State Street Corporation 10-SGM04640710

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Our clients benefit from increased processing efficiency,

The Securities Lending Industry Awards

The Securities Lending Industry Awards

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Securities Lending Summits

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Full coverage of all of the summits is

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Where do I find a financial institution Best Fixed Income Trading Capability,

Beneficial Owners’ Guide to Securities Lending

Part One commonplace that in association with

Beneficial Owners’ Guide to Securities Lending

Beneficial Owners’ Guide to Securities Lending

reinvestment is not usually lenders are overwhelmingly underlying securities

Beneficial Owners’ Guide to Securities Lending

Credit quality: Short-term to borrow securities and they offer to owners of

Beneficial Owners’ Guide to Securities Lending

providers it is a loss- the three categories are

Beneficial Owners’ Guide to Securities Lending

underlying securities if positions is complete. This prime brokerage operation

Beneficial Owners’ Guide to Securities Lending

Beneficial Owners’ Guide to Securities Lending

Beneficial Owners’ Guide to Securities Lending

depressed the demand to

Beneficial Owners’ Guide to Securities Lending

significant part in the Naked shorting is a loan available would have