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GSL|
Asia, Nordics
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Securities INDUSTRY INSIGHT
Interactive Data, books and records,
Lending collateral management
PROFILES
Pirum Systems, Hermes, Lionhart
GSL ISSUE 03
Counterparties
Risks and resolutions
GBP 50
Plus:
USD 85 Short selling regulation
EUR 60
Changing world of prime brokerage
Securities lending in China
Raising the Bar
eSecLending is raising the bar
in securities lending by providing
lenders with
s High-touch client service
s Comprehensive risk management
s Customized programs
s Optimal risk-adjusted returns
As a leading securities lending agent, we take
a consultative, highly customized approach
when it comes to structuring lending
programs for our clients. Unlike traditional
models, where many lenders’ portfolios are
grouped together and their securities wait
to be borrowed on a best efforts basis, we
utilize a competitive auction to determine
the optimal route to market for their assets.
Based upon results from the auction, we
manage clients’ portfolios either through
exclusive arrangements for specific portfolio United States +1.617.204.4500
Europe +44 (0) 207.469.6000
segments or on a discretionary basis, where info@eseclending.com
securities are lent individually. www.eseclending.com
David Rule,
ISLA 11
$
% %
%
%
3 "$
%& ' $ ()$ % % &
"
CONTENTS
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News
33 | Asia Companies
6 | News China embraces sec lending,
Top industry stories Brian Bollen reports on Aite 31
the impact of short selling APG 6
8 | News analysis Asset Control 7
regulations on Asia
Watson Wyatt causes a stir BNY Mellon 6,7,39
and Standard Bank makes a 36 | Borrower Profile: Carne Global 19
change Lionhart CalPERS 28
heads give their view from Neill Ebers about value of Credit Suisse 19
Natixis
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Top industry stories at deadline. For more recent updates go to www.isj.tv/securities-lending
investment community’s ratings, end of day prices and trading and activity by
need for a benchmark for US corporate actions. currently unregulated
commercial paper. entities such as hedge funds.
Market Infrastructure A task force will work to
London - BNY Mellon Asset eliminate gaps in various
Servicing has launched its London - The International regulatory approaches to
new Trustee Board Reporting Securities Lending Association naked short selling, including
solution. This advanced (ISLA) published a statement delivery requirements and
reporting package combines of market guidance on billing disclosure of short positions.
asset liability matching comparison in the securities It will also look at how to
information and advanced lending market. The minimise adverse impacts on
analytics alongside more statement recommends that legitimate securities lending,
traditional core performance monthly billing statements hedging and other types of
and historic risk reporting should be communicated transactions that are critical
to assist trustee boards and using automated to capital formation and to
investment committees in reconciliation tools where reducing market volatility.
evaluating the progress of possible. Statements should The Task Force will be chaired
their investment programmes. be received by the second by the Securities and Futures
business day of each month Commission of Hong Kong.
San Francisco - Conifer and cleared by the tenth
Securities is now offering business day where possible. Luxembourg - Eurex Clearing
prime brokerage services In the event of a discrepancy, AG and Clearstream Banking
to hedge funds including partial payments should be Luxembourg S.A. announced
financing, securities lending, made for the undisputed that they will introduce a
asset custody and daily portion of the bill. Best central counterparty service
account reporting. Conifer practice is for no billing to be (CCP) for securities lending
is a provider of business and outstanding at the end of a in Q2 2009. Eurex Clearing
operations solutions to asset month. will act as the clearinghouse
managers and institutional for Clearstream's widely used
investors, and is offering these Zurich - SecFinex Limited, strategic securities lending
new prime brokerage services a NYSE Euronext Company program ASLplus.
through J.P. Morgan's Broker and the leading European
Dealer Services business. electronic trading platform New York - Quadriserv, Inc.
for equity finance, and SIX is working with the Options
New York - Asset Control, a x-clear AG, the Central Clearing Corporation
financial data management Counterparty (CCP) (“OCC”) on an agreement
solutions provider, and licensed Swiss bank, to operate a centralised
announced that eSecLending, announced that they have securities lending platform.
a full-service securities signed an agreement to The OCC would provide
lending agent, has chosen launch CCP services for stock clearinghouse services
Asset Control's AC Plus borrowing and lending across for all securities lending
financial and reference the SecFinex Order Market transactions submitted
data management software multilateral trading facility through Quadriserv’s AQS™
following a rigorous search for key European markets. securities lending platform,
and selection process. bringing market structure,
eSecLending will use AC Plus Madrid - The International transparency and efficiency
to support the company's Organisation of Securities to borrowers and lenders of
efforts to further increase Commission's (IOSCO) securities. AQS will operate
automation in their securities Technical Committee has a centralised securities
lending programs which rely created three task forces to lending platform for domestic
on complete and accurate deal with regulation for equities. =
securities data including short selling, derivatives
NEWS ANALYSIS
News Analysis
having short selling restrictions, though industry is now more risky than it was
A new Standard? further enquiries by beneficial owners before without explaining why.
have continued nevertheless. “People Roy Zimmerhansl of Zimmerhansl
What is Standard Bank up to? Llewelyn are very focused on the dynamics of Consulting Services, said:
Ford, head of securities lending and securities lending and understanding “What is lacking is any kind of
futures at the Cape Town-based risk.” substance about what they think is
custodian, has given a few hints He adds that Standard Bank's policy a potential issue. Do they think the
concerning a new model for its of only dealing in cash collateral was a market has changed, do they think there
securities lending operation. “We are cautious but timely policy in risk-averse, is some new experience as a result of
looking at a new system to have in place cash-hungry market circumstances. Lehman where the legal agreements
within the next 12 months connected “You can see the benefits of that in haven't performed as proposed, or that
with India,” he said, regarding the terms of cash flow where the issue for the controls and risk procedures or
challenges of South African securities clients becomes, ‘what risks are there of the liquidation of the collateral hasn't
lending. broker default’.” However, there is some worked well? ”
Aside from these plans, the room for government bonds. “Fixed David Rule, CEO of ISLA said:
challenges to South African securities income we can leverage on our clients “The headline: Securities lending
lending are very similar to other places. behalf and make a return on that.” = loses it's shine, was not merited by the
Ford states: “Up until June this year report's substance. It just reiterates what
there has been significant growth, often has always been the case, which is that
as much as 35% growth year on year. beneficial owners need to understand
But recently we have seen the total the risks they are taking. The headline
loan position drop of between 30-40%, seems to be designed to scare lenders.
along with a sell off in bond portfolios.” Some risks have been crystallised, and
He added that many clients have we have had a counterparty default,
been re-evaluating their securities but as they say very few people who
lending set-up and the bank has fielded were lending securities to Lehman have
“a lot of enquiries”. One ongoing ended up with losses because of the way
sticking point seems to be the fact that that the industry manages risk. ”
cash collateral must be in South African News Analysis Another crucial aspect of the report
Rand, a volatile currency. “The volatility that concerned Zimmerhansl was the
does affect things a bit, particularly Watson Riot recommendation to accept government
offshore borrowers who would like to bonds as safe collateral. “The big
trade in a more stable currency.” The November 2008 Watson Wyatt challenge in a default is to make sure
Standard Bank has a few countries report: Securities Lending Loses It's that you can liquidate collateral,” he
in its sights to develop securities Shine, has caused controversy. It says, “ensure you have enough money to
lending: Nigeria and Kenya. The advises pension funds to ‘suspend buy back the stocks you've loaned out.
Central Bank of Nigeria invited Ford securities lending activity if they are Ideally you want assets that track each
to talk about securities lending amid a in any doubt about their lending other so that if the value of the stock
wider summit about inflation targets. guidelines and arrangements’ and you have on loan goes up or down, so
Botswana is also a potential next step. identifies counterparty, collateral does your collateral. Treasury bonds
“It is open to securities lending in terms and indemnification risk as the main are therefore not necessarily the safest
of liquidity and a higher number of areas of concern. It also says that collateral. Frankly I don't think Watson
stocks listed there,” said Ford. “We’re 'by and large' the securities lending Wyatt has the expertise to give advice on
looking at dual listings and countries industry coped well with the Lehman this subject.”
with strong operations.” Brothers default but that the default In response to questions put to
Mark Kerns, global head of Investor demonstrated the risks within securities them about these issues, a Watson
Services at the bank, said: “Nigeria lending. Although it acknowledges that Wyatt spokesperson said: "We accept
is a target, although, while there agents were able to re-purchase most there have always been risks and we
is rationale for a securities lending clients’ assets within two days of the have always made sure our clients are
program the Central Bank has not yet Lehman Brothers default. conscious of these risks. However, the
introduced it.” In some ways the report is difficult losses suffered in some programmes this
For the bank’s home market, he said: to argue with – if the risks outweigh the year do make it sensible for asset owners
“The trading volume has not been too rewards, perhaps lenders should stop to rethink the cost benefit trade off of
bad given the volatility.” Kerns adds that lending. What is controversial is that these programmes." =
South Africa has benefited from not many think the report infers that the
#ETQUUVJG#VNCPVKE
Trade association figureheads from either side of
the Atlantic update GSL on their activities
over the last few months.
4WRGTV2GTT[
Rupert Perry, co-founder of Pirum Systems, talks to Catherine Kemp about automation and the quest
for better lender-borrower communication.
As dot.com boomed in 1999, Rupert group working outside of the banks to army in the back office to do so,” he
Perry and Jeff Armstrong were inspired develop systems that would enable the says.
by Hotmail to co-found Pirum banks to link together. The billing comparison system takes
Systems, a leader in the automation of An attractive aspect of securities information from both counterparties
post-trade securities finance. lending is that it is not completely on a monthly basis and compares the
“It was the first time we had seen vanilla, says Perry, nor as straight- bill with what the counterpart expects
that a complex application can be forward as a buy transaction or a sell to pay. The system compares the trades
delivered through a web browser,” transaction. This is where much of the daily and highlights exactly where the
says Perry, who was working with job satisfaction resides. “The whole discrepancy lies between the bill and
Armstrong at UBS on the automation lifecycle is a lot more complicated than what people are expecting to pay. This
of its securities lending department. people seem to realise - it’s a challenge means that the bill is paid or received
“At that time there was really no to get all of the processes fully on a more timely basis, and improves
automation to speak of between banks, automated. Our services are designed the relationship with the counterparty.
only internalautomation. We felt that to make operational procedures much They also take the data in most
there was an opportunity to link banks more efficient, controlled, automated, formats, which reduces development
together and make processing more less volume sensitive, and generally so costs.
efficient using the web. The aim of the that they work much better.” “Without this automation,” says
company is to automate all post-trade Contract comparison and billing Perry, “one side will send the bill to the
processes, making them more efficient comparison are Pirum’s two original other on paper. If it’s a big relationship
and more controlled. Funnily enough, with thousands of trades the bill
most of the ideas that we had back ³#U[QWIGVOQTGCPF may run to hundreds and sometimes
then have since been done either by us thousands, of pages and at the end of
or others.” OQTGVTCPUCEVKQPU it there is a grand total line. The first
Rupert Perry graduated with a EQOKPIVJTQWIJKVIGVU thing they do is look at that total and
degree in computer science in the early JCTFGTVQNKPMVJKPIUWR hope and pray that the number is close
1990s. He became an accountant at to what they were expecting on their
Ernst and Young. He entered securities [QWPGGFCWVQOCVKQP own system. If it isn’t close, they then
lending when he moved to SG KPRNCEGVQOCPCIGVJG have to work out why, which is like
Warburg, now UBS, setting-up Global ITQYVJKPXQNWOGU looking for the proverbial needle in the
One, the transaction software now haystack.”
owned by SunGard. services. Both were designed with Perry says client inform him
“When I started at SG Warburg, greater speed and operational clarity in that the bills paid first are from
back in the early days when Global mind, as well as an essentially paperless counterparties that they reconcile with
One first went in, it wasn’t connected future. automatically. “All the more difficult
to any other systems at all,” he recalls. The contract comparison extracts manually reconciled bills get put to
“Everything was double-keyed and information from clients books and the back of the queue, which causes
there were a lot of problems, which records system daily and compares friction with the counterparty.”
very much affected volumes. "You can it with the counterparty’s records to The firm is also now providing billing
get to a certain level without putting highlight possible discrepancies. on an Excel spreadsheet, he adds,
the automation in place and then, “Without this system, people have making it easy for the recipient
thereafter, it reaches a point where tended to send a faxed report of the to search and filter the bill as required.
manual procedures don’t work any outstanding positions to the other A couple of years ago Pirum
more. As you get more and more side, and somebody has then had to brought out the marks and exposure
transactions coming through, go through it by hand, ticking all the service, which was the first exposure
you need the automation in place details off. This takes a long time and reconciliation system with a real
to manage the growth in volumes." means people don’t do it nearly so time reconciliation capability. All
The vision for Pirum came from often, certainly not on a daily basis, transactions between the lender
realising the necessity of having an IT because they would need an entire and borrower that contribute to the
exposure or that need to be marked to system and enter a return, so that industry recovers and volumes start to
market, are compared and prioritised both sides then instruct the custodian rise again, you have the right platform
by those causing the biggest problems, to return the stock. As with contract in place so that you can grow the
or biggest differences in price. comparison, the system is looking for volume in a controlled manner.
Non-cash collateral is a classic example parity in the instructions between the “What can happen is that volumes
of this, he says. The exposure in this counterparties." get very high – people get behind in
case is on the collateral side, where The evolution of the industry is very dealing with the exceptions because
fixed income securities are often much tied up with volume, as with they are trying to cope with the
used. He says traders commonly run any market, he says. “Back in the early enormous volume of transactions
into problems with the static data, days there was very little volume by that are going through, so by using
where they are unaware they are comparison to what there is now. automation and getting all the
not calculating the accrued interest This is the first time, certainly in processes as automated and controlled
correctly as some data is missing. “They my experience in the industry, that as possible, it provides the platform for
are getting a price coming in from the volumes are actually shrinking.” the industry to grow the volume to the
vendor every day, a clean price - but People are going to have to decide next level. If you are a very small player,
in order to use it for valuation process whether they are going to be a market that doesn’t have enough volume to
they have to convert it into a dirty participant for the long term, Perry justify the investment in technology, it’s
price, which means adding on the believes, and technology will be going to be difficult to stay in.”
accrued interest,” he explains. The International Securities
“This is the accrued interest since Lending Association (ISLA) and the
the last coupon was paid. If they
³2GQRNGCTGIQKPIVQ Risk Management Association (RMA)
don’t have the right coupon rate and JCXGVQFGEKFGYJGVJGT in the US have both produced best
payment date set up for that coupon VJG[CTGIQKPIVQDG practice papers saying that automated
they won’t calculate the accrued operational tools are recommended
interest, to date correctly and the
COCTMGVRCTVKEKRCPV as best practice. This is used as a
system will undervalue the collateral as HQTVJGNQPIVGTO benchmark between borrowers
a result." CPFVGEJPQNQI[YKNN and lenders as to whether they are
Other problems include prices fed operating in accordance with best
through at 10 times the valuation, or
DGKPVGITCNVQVJGKT practice.
the accrued interest is missing, or only FGEKUKQP “Some lenders now tell us that
one party is updating their price each they view this as an important
day, or data is present but it is based integral to their decision. “For people consideration, and will direct more
on an old security. Corporate actions, to continue to play in the market business to those who have automated
he adds, have also caused problems. going forward they are going to need platforms in place,” he says. “What I’m
“If you haven’t got the time to find to use all of the different technology seeing is that there are people in two
these sorts of issues they come back to platforms, both pre and post trade, so camps: there are those that are sure
bite you later because you valuation they can make their business processes they are going to be in the industry
will be wrong, and that effects your as efficient and controlled as possible - long term and if they aren’t already
view on what your exposure is to the particularly around operational risk." using a tool they are being pushed very
counterparty,” he says. “The right “In current conditions it is essential hard by counterparties; on the other
automation gives you confidence that that you have confidence in your books side there are others who are looking at
your data is accurate and complete and records, and in order to do that the turmoil going on, and putting any
and that you’ve got everything re- you need efficient, automated, straight- technology initiatives on hold to wait
collateralised on a daily basis.” through processing, with tools that and see what will happen.” =
The newest service to be rolled out help you understand any exceptions
focuses on a better automation of you’ve got, why they are there. They
borrowers communicating the stock get identified quickly and easily so that
they would like to return. Currently your operational staff can investigate
borrowers produce a report saying them.
what securities they want to return “Automation means that you are
and the lender has to relate the much more scalable and that you can
corresponding transactions in their grow your volumes. So that when the
%QWPVGTRCTVKGU
US lawsuits and portfolio re-evaluations have redefined securities lending in the last quarter. But how
will the market take to central counterparties to minimise trading risk? Ben Roberts reports.
Securities lending’s move out from lending programme. The disputes surrounding counterparty risk to
its back-office origins has connected highlighted for some the need for make the traditional side project of
the industry with many of the greater clarity in the responsibilities of asset lending more dangerous than
major themes of the credit crunch. bank and pension fund trustee. In the it was worth. “From the lenders
Counterparty risk, the fear that wake of the case, numerous pension perspective they weren’t netting a lot
disrupted inter-bank lending and funds pulled their securities lending of money; it was typically used as a
exploded credit default swaps market, operations. way to offset trust and custody fees
has found its place within lending and In parallel with these cases, and bring those from a cash outlay
borrowing just as it had done in out- plans have developed on both sides stand point to zero.”
and-out trading. of the Atlantic to create central “The original problems that
Amid wider regulatory upheavals, counterparties for securities lending. cropped up late 2007, early 2008, had
securities lending participants and On 9th October Quadriserv, the to do with the fact that some of the
technology vendors across continents technology provider, announced it collateral being offered, while rated
have taken a long hard look at the is to create a centralised securities very highly, contained some of the
roulette of bi-lateral agreements and lending platform with the Options mortgage securities that caused the
responded in different ways. In the Clearing Corporation (OCC). The trouble. With the declining value this
US, this has occasionally ended in a OCC would provide clearinghouse would lead to calls for more collateral
legal dispute. In September 2008 the services for all securities lending being added and, of course, if you’re
University of Washington, Seattle transactions submitted through a distressed participant, you may not
filed a lawsuit against Northern Trust Quadriserv’s AQS™ securities lending have the collateral to put up.”
on the back of losses incurred from platform. In Europe, SecFinex, the Greenwich Associates recently
its securities lending program and online market for securities lending, undertook detailed research into the
the refusal by the custodian to fully is leading the development of three concerns of pension fund boards. In a
compensate. central counterparty using different survey of 141 institutional investors,
Then on 21 October, the BP clearing houses. 92 had tightened investment criteria,
Corp. North America Savings Plan Dev Clifford, principal at 43 made changes to their lending
Investment Oversight Committee Connecticut-based Greenwich programs, and six had cancelled
filed a lawsuit against the same bank Associates, says doubts around the lending altogether. Clifford expects
after incurring losses resulting from credit worthiness of collateral and many more pension funds to at least
investments linked to its securities cash reinvestment have joined fears review their lending programs.
He highlights the danger in blurring debate.” product is AAA, Aa1, then it’s less risky.
the division between a custodian Abesamis, who heads the team for But is the transparency correct? In an
and a trustees’ responsibility, and securities lending advice at Callan, environment where there is a liquidity
says securities lending is now taken reports an increase in client enquiries crisis I think everybody realises now
more seriously whereas the potential as to the risks attached to lending and that the triple-A rating may not
risks may have been overlooked borrowing. “It’s very tough to take necessarily mean it’s less risky.”
before. “There have always been the emotional argument when the Ahmed Maudarbocus, equity
some questions about the fairness expectation is that securities lending trading and financing, Paris head of
or adequacy of the split with the should be relatively safe. The intent securities lending trading at BNP
trust and custody bank that run the really is to look at this is a rational, Paribas, says the upshot of compiled
programmes,” he says. “I wouldn’t logical manner.” risk and greater lender awareness
say they got a ‘free ride’ but probably Abesamis cites counterparty and will inevitably cause the market to
not far from that, at least from a risk reinvestment risks of quite startling cautiously retract. “The only thing you
standpoint. I think with the issues that complexity, with a lack of transparency can do is be more careful in the market
arose… you need to step back and underlying much of the confusion. and be more careful as to which
take a look at this and ask yourself ‘is it “Securities lending could be in any part counterparty you’re taking your risk.”
worth the risk?’” of in investor’s portfolio: it could be in For the last four months, SecFinex
That some may have considered index funds, in mutual fund holdings, has made its intentions public to
securities lending as ‘free’ is echoed by or in a custody-based programme establish a central counterparty for
Bo Abesamis, senior vice president and
manager of the Master Trust, Global ³6JGTG¶UDGGPSWGUVKQPUCDQWVVJGHCKTPGUUQT
Custody, and Securities Lending
Group, at San Francisco-based advisers CFGSWCE[QHVJGURNKVYKVJVJGVTWUV
Callan Associates. “What has happened CPFEWUVQF[DCPM´
here in the US, and all over the world
is, complacency. Because some have &GX%NKHHQTFRTKPEKRCNCV)TGGPYKEJ#UUQEKCVGU
classified securities lending income as
‘free lunch’ – it has masked the other or the cash funds. So there’s a lot of European stocks. It has undertaken
side of the equation, which is ‘there’s a confusion and frustration.” In this a tentative, staggered approach using
risk attached to this lunch’,” he says. way, a client may not be aware they are different clearing houses for the stocks
Mark Faulkner, managing engaged in securities lending indirectly of different groups of countries.
director of Data Explorers, the stock if part of the portfolio is invested in At the Sibos conference in Vienna,
lending analyst, is incredulous that funds that lend securities. The result the firm announced a link-up with
any lender or adviser involved in is greater dimensions of complexity LCH.Clearnet to develop a central
securities lending could ignore the with a further challenge to risk counterparty for stocks on companies
risks. According to the firm’s data, the management. from the Euronext market: France, the
industry, even post global deleveraging, Abesamis adds that many Netherlands, Portugal and Belgium.
is generating annualised income in pension plan sponsors know who is Francois Cadario, director of
excess of USD14.6 billion a year. “This borrowing their securities, and says business development at LCH.
income is not risk free. There’s no there are potentially two forms of Clearnet SA, explains that a central
such thing as a free lunch – if it seems counterparty risk. The first instance counterparty would nullify the default
too good to be true then it probably is in the solvency of those borrowing of a borrower by guaranteeing delivery,
is. In the US, the vast majority of the the securities. The second is in the effectively taking on the counterparty
collateral taken is cash and currently reinvestment of the cash collateral, risk. “The risk of default and the
an average of 98% of the US lender’s where “there is a counterparty to exposure of credit risk for members
revenue comes from reinvestment the issuer of the short-term debt are so tight the benefit of effectively
rather than the intrinsic securities instrument”. The ratings assigned by having a position of a clearing house
lending rental. Not all programmes are the much-maligned agencies such and the guarantee provided up to the
configured this way and some lenders as Standard and Poor’s and Moody’s final delivery is effectively something
are lending stock for nothing (or even to certain investment products also more than attractive for the large set of
at a loss) to hold on to the cash they compounds the doubts surrounding big players,” he says.
have. The process by which collateral this latter form of counterparty risk, Then on 25th November 2008,
is reinvested is still a central part of the he adds. “If a rating agency says a SecFinex announced a link up with SIX
Others focus on
fixing them
Services include:
R Contract Comparison Contact us for further information:
R Billing Comparison +44 20 7220 0960
info@pirum.com
R Billing Delivery
www.pirum.com
R Mark to Market Processing
R Exposure Reconciliation
R Automated Returns Processing
R Income Claims Processing
R Custody Reconciliation
x-clear, the Swiss central counterparty, pretty small, and the market share is is a big issue. The realisation there is
for an identical securities lending pretty insignificant. In this bilateral would you be able to look into every
exchange, this time for the Swiss, world people prefer to use relationships portion of the off-balance sheet items
Austrian, German and Norwegian, and the electronic platforms have that are in the books of a counterparty.
Danish, Swedish and Finnish markets. carved out a very small market That’s one thing. Because of what’s
A third link-up is planned which will share. So we think the move to credit happening in the industry I’m pretty
create a CCP for a third set of markets, implications and the move to CCP will sure transparency would evolve and
including the UK. redefine the market.” regulators would probably inflict
Much seems to be riding on the Some believe the introduction of a requirements for people to disclose. If
success of these central counterparties. CCP is timely. Ahmed Maudarbocus that’s the case, a central counterparty
Robert Reynolds, global head of at BNP Paribas says after the collapse might make sense.”
sales at SecFinex, says the majority of Lehman Brothers, a central However, he warns that you can
of its shares had been bought by counterparty is a “step in the right only create a central counterparty when
parent company NYSE Euronext direction. One year ago or two no-one everybody agrees to the same rules of
in anticipation of these new would have thought it useful; now it’s disclosure, and says he would actually
developments. “I think it would be fair definitely something which can be very prefer to have a concentration of risk
to say that NYSE Euronext’s interest in interesting.” in one place. “But would that achieve
SecFinex was because we were looking Others have reservations. Patrick it in totality? In the US, especially with
to introduce a central counterparty, Hannon of M&I Global Securities the large institutional investors, the big
or hoped to do so, for the securities Lending believes that although a corporate funds, the pension funds,
lending markets.” central counterparty would nullify the endowments, they normally have
SecFinex has two existing major the default risk of the borrower, their own risk modelling that they
platforms. One is a private, bilateral a beneficial owner would still be undertake. It will have to match up
market where the borrower and the with those risk-modelling parameters.”
lender know each other and negotiate ³6JKUKPEQOGKUPQVTKUM One influential factor to the success
trades as if via the telephone or HTGG6JGTG¶UPQUWEJ of the CCPs is if agent lenders are
Bloomberg. The second is an order willing to part with cash to be part
market, with a bid/offer details market VJKPICUCHTGGNWPEJ´ of the operation. Mark Faulkner says
showing best bid and best offer depth /CTM(CWNMPGT the involvement of sufficient agent
of book. The latter, says Reynolds, lenders capable of becoming active
is “pre-trade anonymous” but with &CVC'ZRNQTGTU trading members is uncertain in the
post-trade name disclosure - it is this context of a market already nearing its
platform method that will form the monetary, information technology and
securities lending CCP to create “a real exposed to the potential default of the psychological resource limits. “Capital
price-driven marketplace”. CCP trade members. Dev Clifford at is the scarcest commodity – whether
The model will contain trade Greenwich Associates believes the idea agent lenders will want to step forward
members for the transactions through would simply concentrate risk, adding, and become principles is still to be
SecFinex, and clearing members for “As we’ve seen, there is no limit to the determined,” he says. My concern is
the LCH.Clearnet side. The CCP size of an institution that can get into that there is so much going on already
will guarantee to cover the default serious issues.” that despite this being the right time to
of a clearing member, and a clearing Chris Taylor, head of securities consider this – the market may not be
member will sign an agreement with finance in Europe at State Street, says a capable of doing so.”
a trade member to clear their trades CCP will only really benefit broker-to- Amid diverse views, there is a
and provide capital cover in the case of broker stock loans. An agent lender will common interpretation is that the
a trade member defaulting. Francois not only have to buy into becoming a traditional agent lender model will
Cadario says if a clearing member and trade member but will be restricted to not be revolutionised tomorrow by
a trade member default at the same receiving cash collateral. central counterparty. Chris Taylor says
time, they will be treated as distinct Bo Abesamis is more welcoming to State Street will remain outside the
cases to minimise market impact. the idea, in theory. “To have a central CCP and continue to receive a variety
Reynolds adds that he has been counterparty, the idea is very noble. But of collateral. Mark Faulkner also sees
surprised there is no existing central at the end of the day we still need to potential limits to the CCP initiative
counterparty for securities lending. make information, we need to quantify unless agents can be involved – “the
“The electronic platforms that service and often quantifying the level of risks, agent lender is deeply embedded in
the securities lending markets are quantifying what’s really underneath, market structure,” he says.=
2TKOG6KOG
The relationship between prime brokers and hedge funds has become increasingly volatile. Giles
Turner looks at who the costs are being passed to, and how this affects short selling.
Hedge fund mangers focus on short triple-A rated custodians. At present, broken the faith of any fund to reply
term decisions. It is not surprising Goldman Sachs and Morgan Stanley’s on the old broker-dealer model. Today,
that these same managers cannot counterparty risk has been reduced the multi-prime model is prevalent
make up their mind regarding their because of capital injections from the as a result of the need to the need to
prime brokers. After the fall of Bear US government. And if counterparty difuse counterparty risk. The ‘one-stop’
Stearns, prime brokerage was a two- risk was the sole reason for worry, shop for prime brokerage has been
horse race, with Goldman Sachs and broken.
Morgan Stanley accounting for 70% ³*GFIGHWPFUCTGIQKPI According to John Donohoe, CEO of
of the market. The collapse of Lehman VQEQPVTCEVVJCVKU Carne Global, an independent adviser
Brothers spread market confusion to the global hedge fund, mutual
and soon other players were picking DG[QPFCFQWDV´ fund management and private wealth
up brokerage business from nervous ,QJP&QPQJQG%'1QH industries: “Between September and
funds. Credit Suisse and Deutsche %CTPG)NQDCN October, managers have been setting
Bank have been substantial winners, up multiple brokerage arrangements.
along with BarCap, with its acquisition then Credit Suisse and Deutsche Instead of the two dominate players we
of Lehman’s US operations. Bank should be the industry’s major have four or five major players. A lot of
Initially, hedge funds were chopping winners, as no company named after managers have also focused on the fact
and changing prime brokers due its country of origin will be allowed to that their securities might be better off
to counterparty risk, and avoided go under. But the collapse of Lehman at a traditional custodian, rather than a
traditional prime brokers for the safer Brothers and Bear Stearns in 2008 has prime broker.”
Custodians, some with less volatile their broker to use their assets for
balance sheets and credit lines reypothacation, the prime broker
straight to government coffers, are will suffer a major loss of traditional
seen as safer bets than the straight revenue, and need to make a return in
forward prime brokers. At present, some form or other. Caution comes
these brokers have a lot to lose. A with a price, and can make some
significant amount has be earned on strategies uneconomical. This outcome
the back of providing financing for will highlight to managers and hence
certain types of structure using high to investors the constituents of their
levels of leverage. This financing has brokerage relationship and the real
decreased due to the contraction of costs versus risks being taken.
the prime brokers balance sheets, but Whatever path investors end up
as conclusions are drawn about the taking, there will be a cost. Donohue
scale of de-leveraging, it is important explains: “The future of the prime
to remember that the typical long- broker is tied into the future of the
short fund wasn’t over-leveraged to hedge fund industry. There is increased
the hilt. Certain arbitrage strategies cost in terms of operations, as a multi-
had high levels of gross leverage, and broker model is more expensive to run,
as financing changes, so will the these you need more staff, you need more
types of investment structure. But systems and you need more controls,”
if the instruments change, will the he says. “But also in terms of costs in
model change? running the actual strategy, if you take
Donohoe continues: “A major away the methods prime brokers use to
factor for prime brokerage is generate revenue, then there will be a
custodianship. It is a very hard to direct passing on of cost. This in turn
say what the model will be going will have a direct effect on the account
forward. There is a fine balance size a prime broker can take on.”
between diversification of counter- By wishing for safer prime brokers,
party risk versus operational risk, hedge funds will be forced to focus on ³#OCLQTHCEVQTHQT
so the more prime brokers you their own expenditure. Performance RTKOGDTQMGTCIGKU
have, you end up with a much more fees and management fees have
complex operating environment, already reduced. According to Norval EWUVQFKCPUJKR6JGTGKU
and the risk of mistakes and losses Loftus, senior investment manager C¿PGDCNCPEGDGVYGGP
increases.” at Ansbacher: “A lot of hedge fund
A major debate is building around managers are going to be working for FKXGTUK¿ECVKQPQH
the practice of reypothocation. This next to nothing next year.” EQWPVGTRCTV[TKUMXGTUWU
practice, where client’s collateral If this continues, there will be
is used by their own prime broker an event horizon concerning the QRGTCVKQPCNTKUMUQVJG
to finance deals, can cause major viable size of a hedge fund manager. OQTGRTKOGDTQMGTU[QW
problems when a prime broker Imposing the multi-broker model on
goes under. In mid-September, it top of already pressured hedge funds JCXG[QWGPFWRYKVJ
became clear that USD22 billion will increase cost and increase the COWEJOQTGEQORNGZ
of the USD40 billion held by viable economic size of a hedge fund.
Lehman’s European arm had been The trading ability and sustainability QRGTCVKPIGPXKTQPOGPV
rehypothocated. Much like the of small hedge funds will come under CPFVJGTKUMQHOKUVCMGU
queues that trailed around Northern question. With investors demanding
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see if they can extract their collateral. will be forced to turn smaller hedge
This time, they are hedge fund funds away as the revenue generated
managers, not UK pensioners. will simply not be sustainable.
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Ironically, the more cautious “Hedge funds are going to contract, %CTPG)NQDCN
the clients are with their prime that is beyond doubt,” states Donohue.
brokers, the more prime brokers “The only question is if it goes back to
will be forced to pass the cost back where we were three years ago, where
to the client. If funds refuse to allow the focus was on managers with a
good relative performance. However offset by pension funds continuing the not what it said on the tin, but there
the reality is that the breakdown of ban in order to protect the stability of were lots of added options that almost
beta from alpha is still at large and the brokers share price. This may be became more important to them.” =
is still in demand from institutions. an attempt to protect the portfolios
Consolidation may be a factor but of the pension funds, however it will
there will always be a demand for good be difficult to know when the pension
quality alpha managers. What may funds should stop their self-enforced
happen is that these managers may ban, as many prime brokers will
become more institutionalised, and become increasingly desperate for
the top managers will increase their revenue generated by short selling.
segment of the hedge fund pie.” Perhaps people are over-reacting. As
Whether the eventual model is Mark Higgins, Vice President, Global
one of various prime brokers or a Collateral Management, Bank of New
blend of traditional prime brokers York Mellon, states: “The short selling
and custodians, the players ability to issue is not such an obvious issue as we
leverage hedge funds has decreased. all thought at the beginning.” What is
As a result, the amount of collateral inevitable is that prime brokers have
required for leverage has increased, changed beyond recognition. They will
and leverage per asset has decreased. no longer be able to offer a multitude of
Certain types of assets, such as add-ons to their prime broker package,
convertibles, have seen a dramatic and hedge funds are now talking
change from a high to low level of to AAA-rated custodians regarding
debt-to-equity, dramatically impacting ring-fencing accounts and avoiding
hedge fund strategy. the problems of reypothocation. As Marianne C. Brown, president and CEO
This passing of costs between the Higgins succinctly states: “What the of Omgeo on hedge funds, on the future
prime broker and hedge funds has prime brokers grew up to become was of prime brokerage
been exacerbated by the short selling
bans. A consistent source of revenue Historically pillars of safety for hedge It will certainly be important to
for brokers, the ban on short selling fund managers, the reliability and watch how the prime broker space
will “impact the profitability of the viability of service providers has evolves in the year ahead. Will we
prime brokers,” according to Andrew recently come into question. Managers see a shift away from bank-owned
Shrimpton, a partner with hedge fund can no longer feel completely primes to more of a custodian or
consultants Kinetic Partners. This does confident that their service providers outsourcing model? Surely the trend
not help the evaluation of balance offer absolute safety. The bankruptcy of diversifying risk across multiple
sheets and the decision on who will of Lehman Brothers revealed a new primes will continue to grow, as hedge
bear the brunt of the cost. Goldman type of risk for hedge funds, who funds simply cannot afford to put all
Sachs has been shedding hedge fund now have to worry about the viability of their golden eggs in one basket.
clients rather than pass on the costs in and the balance sheet of their prime Fund administration is not without
an attempt to gain efficiency. brokers. its challenges either, given that
There is a silver lining to the short Those managers stuck with assets two of the top prime brokers had
selling ban. The California Public frozen in Lehman’s bankruptcy established strong franchises in fund
Employees Retirement System proceeding have learned this lesson administration, this new “viability
(CALPERS) has reportedly banned the hard way. Fortunately, the risk” has to be considered with the
the lending of shares of Goldman average hedge fund employs two or choice of an administrator as well
Sachs and Morgan Stanley in attempt three prime brokers, either to access Highly public fund failures, which
to stem the instability of these liquidity or asset classes or to protect were blamed on negligence of the
companies. CALPERS has also sent their “intellectual property.” This fund’s administrator, also show that
a letter to 60 fellow pension funds practice made moving assets and risk exists in outsourcer and service
urging a similar tactic. switching prime brokers easier in the provider relationships. Monitoring
In an unusual symbiotic situation, run-up to Bear Stearns’ and Lehman and managing this risk should be a
the revenue prime brokers may have Brothers’ collapses. part of every hedge fund managers’
earned from short selling has been daily operations. =
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LENDER PROFILE
6JGNQPIKPXGUVQT
Paul Lee, a director at Hermes Equity Ownership Services (EOS), talks to Catherine Kemp about the
thought behind what stock to lend.
will recall that it was that week that the
1. What is Hermes’ relationship with greater disclosure on the short selling
securities lending? of financial stocks came in because the
regulators were, frankly, very scared by
Hermes is a fund manager wholly what was going on in the market.
owned by the BT Pension Scheme
(BTPS), the largest scheme in the UK. 3. So how did Hermes react?
We look on the world through the
eyes of the pension fund trustees and Prior to the big noise on HBOS and
as long-term owners of companies the disclosure rules, we put HBOS and
and have always taken the view that Bradford and Bingley onto our stock
lending was a nice income to have, but lending ‘stop list’ - an actively managed
not the be-all and end-all. list of stocks that should not be lent.
Hermes used to have its own stock We added another 15 odd financial
lending team but closed the desk stocks to the list, just prior to the
about a year ago largely because it had regulators taking their dramatic step of
become a completely scale game. We banning short selling.
outsourced the lending but retained In October we added Spanish stocks
various powers over those assets, not to that list, because for whatever
least voting and also influence over reason the Spanish regulators had
lending. not installed any ban on short selling
This is partly in cases of a key vote and it looked like those companies
but also because we have concerns were being exposed. The Hermes
about the value of shares when rights Equity Ownership Service (EOS),
issues are happening. We take the view maintain the list on an active bases,
that borrowers short selling the shares
could have a very long-term effect on ³6JG¿PCPEKCNOCTMGVU
the health and future of the companies YQWNFDGCITGCV
2. So you don’t want the value of the FGCNOQTGGH¿EKGPV
shares you own to potentially be HQTVJGWPFGTN[KPI
undermined by short selling?
QYPGTUKHVJGTGYGTG
Exactly. Short selling in normal OQTG9CTTGP$WHHGVU
markets is a way of attaining the
right price and maintaining market CTQWPF´
efficiency. In some markets it goes
beyond that. Certainly in the markets identifying problem issues. We have
that we have seen recently it’s looked about a dozen pension fund clients
like short selling was undermining internationally with whom we share
individual companies. Particularly if that stock lending stop list.
you have a rights issue and the selling
pushes the share price to within the 4. There is a view that banning
range of the rights issue price, then short selling has not supported the
you’ve got a very real problem. prices of the stocks of those financial
We actually saw this happening companies and has made the market
with HBOS over the summer. They more volatile?
mounted a rights issue and the share
price got severely squeezed. And you
It’s a pretty blunt instrument isn’t it? In more responsible and therefore making then that’s wholly appropriate. If you
a sense you wouldn’t need to ban short sure that the industry can continue just hire them and give them free
selling if all long-term owners acted in into the future and doesn’t get tarred reign then that’s a very dangerous
a responsible way. I’m not sure that a with some very black brushes. thing particularly for the long-term
ban on short selling would have been beneficiaries. Just as lending, though
necessary if they all actively managed 7. So you still lend stock, but not the wholly appropriate, can have some
their lending policies in the way that 50 on the list? risks at the margins, you need to
we have. manage those risks
Actually BTPS took a decision in
5. The responsibility lies with the October to cease lending altogether 10. Like cash reinvestment risk?
beneficial owners? until January, when they will Didn’t the risk really lay with
reconsider at the same time as the FSA beneficial owner reinvesting their
I can’t see that responsibility sitting reconsiders their short selling ban. cash in asset-backed securities, like
anywhere else. One of the problems is AIG?
that a lot of the beneficial owners don’t 8. The difference between the
actually recognise lending for what it long and short-term investor is an AIG stopped being a pure insurance
is. If they are lending, they are actually important theme. It’s the Warren company a long time ago. They didn’t
selling the shares and agreeing to get Buffet distinction, seeing the value quite admit it, and the regulators
them back at a later stage. Perhaps the of shares in terms of balance sheet didn’t quite admit it.
industry needs to help those beneficial rather than the flux of market
owners to understand what’s going on opinion? 11. So is the research that you have
a little more so the beneficial owners done into the relationship between
can take those decisions more actively Very few people are brave enough to short selling and the value of shares
than they currently are. be contrarians and actually think on done by internal data analysts and
I hope that people in the industry those sorts of time scales. Most people market analysts, or is it just from
will take this as opportunity to reassess in this industry act on a rather more observing the market?
and start afresh with a few more short-term basis. The financial markets
protections in place. The risk is that would be a great deal more efficient We are active participants in most
the lending industry falls into further for the underlying owners if there were markets around the world and we get
disrepute and actually loses its licence more Warren Buffets around. Sadly, we to take a view.
to operate if you like, because nobody seem to be in a cycle where everybody’s
will want to touch something which is thinking about the next quarter rather 12. Have you seen Data Explorers
so badly tarred. than the next 25 years. Frankly, that’s press releases on this subject?
what our team is there to do, to help
6. What about the need for liquidity? pension funds to think on longer time We’ve been subscribers to their data
horizons and to change the dynamic of for years. They are great people, love
The list typically has no more than the discussion. the product, and that’s why we use
20 companies worldwide. That’s it. But they do have a vested interest
20 out of 8000 in which our clients 9. The relationship between in maintaining the industry and
currently invest. But certainly 20 out the pension fund market and therefore spinning us a line. It’s not
of the biggest four to five thousand the alternatives market is fairly surprising to see the press releases they
companies in the world. At the symbiotic. Pension funds use hedge put out, and good on them. They at
moment the list is longer on the funds to increase returns and least have some sensible data on which
financial side. So we are talking nearer participate in securities lending to make some sensible comments. We
50 companies on the list. It’s still for similar reasons. How do you take it with a pinch of salt.=
not a huge proportion of those 5000 reconcile this?
companies. So you are not stopping
lending adding to the efficiency of If you hire short-term focus managers
markets. You are just being a little bit with the right parameters and controls
+UKVUVKNNDGPG¿EKCN!
Regulatory changes and the Lehman Brothers default dramatically affected beneficial owners,
and many reassessed their participation in securities lending. Spitalfields Advisors reports on
the impact and advise on the future.
Beneficial owners have reacted in lent securities. However, those who understanding of the value of their
different ways to the default of Lehman dismantled the situation based on indemnification – the insurance that
Brothers and regulatory changes. Some wording in individual legal agreements the lending agent will cover some
were comfortable with events, probably have potentially complicated matters of the costs incurred from costs
due to good communication with and caused concern to their lenders. counterparty default. The lending
their counterparts or lending agents, Falling equity prices (the lent agents approach to covering the cash
while others struggled to get reliable securities) and rising bond prices (the pool shortfall also requires exploration.
and timely information. Without collateral) has assisted in ensuring that Lenders need to understand that if
exception, lenders will have weighed sufficient available collateral. However, providing cash indemnification is
up the rewards with the risks. for lenders participating in a ‘collateral likely to become market practice, it
Regulators haven’t lost sight of the upgrade’ trade - for example, lending needs to be explored with each lending
benefits of securities lending and the bonds and taking equity collateral agent in detail and documentation
vital liquidity this activity provides. - there may still be a shortfall in the of any implied protection will be
Meanwhile, volatile markets have liquidation of collateral. required. Lending agents will be aware
reemphasised that short selling cannot Lenders taking cash collateral may that any formal acknowledgement
be the only thing that drives down be feeling more nervous. It is a rare of such an indemnity will require a
prices as the restrictions on short money market fund that didn’t hold relevant balance sheet calculation.
selling have demonstrated. But how some form of Lehman Brothers paper
will these events change the securities that is now as good as worthless. Some 'ZENWUKXGU
lending industry? lending agents have stated that they
will stand behind certain losses in Exclusives were popular among
+P.GJOCP¶UVGTOU their money market funds – essentially beneficial owners, but we suspect
suggesting they will cover losses in cash that perspectives will now be
The argument that if a bank goes into collateral pools for lending clients. fundamentally changed. Although
default there are bigger problems than Other custodian banks have they are a good way for lenders to lock
the securities lending programme admitted that they hold Lehman in value, with borrowers continuing
held true when Lehman Brothers Brothers paper in their money market to require key assets and indexes to
filed for chapter 11 protection in the funds but have not yet clarified what satisfy their hedge fund clients, the
US and went into administration in this means for lenders. There are also days of whole portfolio exclusives to a
Europe. But the exposures needed to tax implications of the ‘unwind and single borrower are probably limited,
be unwound. buy-back’ process and the industry certainly in the short term.
For lenders accepting non-cash is now addressing this with the A survey Spitalfields Advisors
collateral, the process was relatively authorities. conducted in August/September 2008
calm – lending agents largely took highlighted that borrowers will also
the view that, regardless of legal +PFGOPK¿ECVKQPU be constrained by capital and will be
wording, the best practice is to sell more selective about the portfolios
off the collateral and buy back the Lenders now have a better they bid for. For those in the process
of auctioning portfolios for 2009, post increased collateral and lenders Chinese authorities have approved
there will be many challenges to price are less likely to lend the security at rules that allow short selling. We
them. The short selling restrictions 20% if others are prepared to accept continue to read stories of lenders
is one factor, but the changing face 2% and 5% haircuts. Remember also who have stopped new lending or are
of financial institutions also makes that providing a haircut to a lender recalling loans. This is not a decision
appetite difficult to gauge. Firms is effectively an unsecured loan that to take lightly. In falling markets, the
merge, and as hedge funds change requires a balance sheet hit. Borrowers additional revenue from securities
prime brokers, the market is too will also be reluctant to pre-pay, the lending is welcome. Reduced lending
dynamic for borrowers to bid on process for pre-collateralising loans to activity will also result in more assets
anything but the most attractive avoid intraday exposures. under custody, which will incur
portfolios. This brings us to cash collateral. It is custody fees. A full pull out of lending
We have spoken to a number of likely that some may choose to restrict for cash takers is more serious. In
lenders who have rather smugly cash collateral. Lending agents are keen addition, if all lenders decide to
admitted to recalling all loans from to hold cash balances that will allow restrict activity then this will have a
Lehman Brothers in advance of recent investments to mature. Generally, detrimental impact on liquidity in the
events. We caution that this needs to lending agents and borrowers have cash equity and derivatives markets.
be managed consistently. Wholesale been successful in managing this,
restrictions to individual counterparts although recent events will have had 6JGHWVWTG
based on bad news may be disruptive a detrimental effect on overnight
to the ability of the lending agent to liquidity in some money market funds Many lenders wish to continue
lend securities. It could lead to the and cash collateral pools. securities lending but say that they
counterparty effectively refusing to need to revisit their programme
borrow from the lender and generally 5JQTVUGNNKPITGUVTKEVKQPU structure to reflect best practice. We
put stress on the relationships in the recommend that all lenders should
securities lending chain. There have been emotional discussions consider this, which is likely to include
regarding the various short selling a review of the following elements:
%QNNCVGTCN bans worldwide. Each is slightly risk management, risk adjusted
different and there is no consistency returns, counterpart exposures,
The liquidation of collateral positions in timeframes or coverage. We legal documentation (including
has been necessary for the first time understand why regulators felt the indemnification language), use of
in recent years. Some lenders have need to act and think this has provided triparty agents, collateral requirements,
increased haircuts on certain collateral, a pause in the somewhat aggressive the use and application of exclusives.
and to certain counterparties. A survey headlines aimed at short sellers. Benchmarking can no longer
conducted by Spitalfields Advisors in In fact, it has demonstrated that be restricted to performance and
September 2008 showed that haircuts short sellers have not driven down monitoring risk. The supply and
have moved from industry standard prices as stock indices have continued demand mechanics have changed
2% and 5% (depending on the to decline. Also, the majority of loans – some lenders will take a while to
currency of the collateral vs the lent by value are fixed income loans that come back to the market and others
security) to as much as 20%. are not required by hedge funds for will restrict the counterparties they
This has emphasised the increasing short selling but actually provide are prepared to lend to. There are less
importance of tri-party collateral important liquidity as collateral for counterparties to lend to which will
agents and their ability to manage a other financing activities. restrict general collateral demand.
number of different parameters that Most of the restrictions applied to Prices will increase for high quality
has allowed lenders to tweak their financial securities, which regulators government bond portfolios and
collateral requirements. We suspect felt were most vulnerable. Interestingly, “hard to borrow” securities.
that this model is likely to be an during the preceding days we had seen On the demand side, short selling
ongoing trend, but we caution that this a gradual shift of lenders to restricting regulations have led to questions
needs to be arranged in conjunction lending of these securities. We certainly about the 130/30 and hedge funds
with lending agents. Not all lending don’t advocate a wholesale restriction that typically short sell. Investors
agents will have the capability to of financial securities but accept that potentially putting on hold investment
manage restrictions to this level, lenders always have the right to recall decisions may pull money from these
particularly where there are a number or restrict securities from lending. strategies as the regulatory uncertainty
of different lenders participating in On the other hand, companies impacts performance. Both will have
one collateral pool. like JP Morgan have requested to be an impact on demand for securities
Borrowers will also be reluctant to removed from the list. Further, the from lenders.=
On 19 September 2008 the Securities and borrowed indexed at 100 on 1 many of them are on the sidelines
and Exchange Commission (SEC) and September 2008, had fallen by 60% by not executing as many trades today,
the Financial Services Authority (FSA) 14 November. or they are receiving large amounts
banned the short selling of financial Jules Pittam, head of sales at Data of redemption requests from their
stocks. It was a coordinated response to Explorers, said: “After the ban we saw investors. So as hedge funds’ assets
what Callum McCarthy, chairman of people stopping short selling securities decline, the increased decline in
the FSA, described as “volatility and... and so there was a buying back of borrowed US equities demonstrated
incoherence in the trading of equities, short positions. If you look at the bank on the chart, after the end of the ban,
particularly for financial institutions”. sector, for example, there was a 60% makes sense.”
The regulators did not change the drop in the amount of stocks being According to Gerdeman, the ban
rules on securities lending, nor did borrowed. Not so much in the UK, has meant that hedge funds have been
they change the rules for market which has a 40% reduction by 14th unable to carry out normal trading
makers – except for in relation to November.”
uncovered, or ‘naked’, short selling. The US - whose ban was repealed on ³1PEGVJGTGIWNCVQTURWV
Similar regulations were then rolled 8 October - has also seen a significant VJGUGUJQTVUGNNKPIDCPU
out in most securities lending markets decrease in borrowing. According to
around the world (see table on page SunGard ASTEC Analytics (see graph,
KPRNCEGVJGUJCTGRTKEG
30) and have been hotly debated. For facing page), ex-financial stocks on QHVJGDCPMUFTQRRGF
some it is hard to distinguish between loan reduced by 20% during the ban. FTCOCVKECNN[´
the effects of the new regulations and Even after the the ban had expired,
other market events. The credit crunch the volume had reduced by 30% on 1 0GKNN'DGTU.KQPJCTV
had been unfolding for a year before November 2008. Over the same period,
the Lehman Brothers collapse and the financial stocks on loan reduced by
buyout of Merrill Lynch. 42%, and to 50% by 1 November. operations because they have been
The rules have directly affected the Aaron Gerdeman at SunGard unable to hedge their purchases with
trading strategies of hedge funds. As ASTEC Analytics says he expected to a short. This has resulted in less new
the primary borrowers of securities, see an influx in short sellers back into borrows and more managers pulling
this has impacted borrowing volumes the market to reclaim short positions, their capital out of the market and
in the securities lending market. but this did not happen. “We’ve only buying back positions that they are no
Volumes of borrowed financial seen a stabalisation, a new norm,” he longer able to hedge.
stocks have significantly decreased says. “It’s hard to measure the effects of The retraction of cash has not
since the ban’s inception. According the short selling ban without factoring supported prices. Valuations of
to Data Explorers Securities Lending in other market events, but from what financials and ex-financials have
Index (DESLI), a weighted average we hear about hedge funds, who are continued to decline since the ban.
of the quantity of stock that is lent the primary borrowers of securities, According to Bloomberg’s S&P 500
index, prices fell from 1250 basis PRIME BROKEN: US borrowing declines lending was a nice income to have, but
points on 1 September 2008 to 750 not the be-all and end-all. We take the
midway through November. Some say view that borrowers, short selling the
it is too early to fundamentally analyse shares, could have a very long-term
how much the declines have been effect on the health and future of the
influenced by other market events, companies.”
though some see the bans as a major Hermes has not permanently
factor. stopping lending, and plans to review
“Once the regulators put these short the situation in January when the FSA
selling bans into place, the share price repeals its ban.
of the banks dropped substantially,” According to DESLI, around 13% of
says Neill Ebers COO of Lionhart, stocks globally have been withdrawn
a global multi-strategy arbitrage from the securities lending market,
fund. “The new regulations froze out Available inventory on loan has also says Pittam, higher than the 8-9%
affordable liquidity. It forced people to decreased since the beginning of the withdrawn when the dot.com bubble
unwind trades that they had already ban. DESLI’s weighted average of the burst. “It has taken liquidity away from
positioned and prevented increased quantity of stock that is lent and stock the market, driven up fees in some
activity, which was very damaging, at inventory available to borrow for all circumstances, which for lenders can
a time when the market was already regions and industry sectors globally, be a good thing. We expect the market
illiquid.” shows that inventory dropped from to flatten out at around 13% and then
VIX, the volatility index, shows 100 to 80 since the inception of the bottom out. We expect people to come
increased turbulence since the bans, ban. back to the market as and when the
leaping from 20 on 1 September to 80 Pittam says people were still regulatory environment returns to a
on the 5 December, having previously able to lend because the regulatory more stable footing. Very few have said
been reaching highs and lows of 30 and environment had only targeted short it will be permanent.”
15 on average. selling, but they didn’t want to. Gerdeman estimates that the
Gerdeman says: “Buying and selling The California Public Employees’ availability of shares borrowed by
interest in the market ultimately helps Retirement System (CalPERS) and institutional investors or hedge funds,
to reduce volatility in the market and APG, the Dutch pension fund, both declined by 12%. “This reflects sales by
to add liquidity. Taking that away has pulled certain financial stocks out hedge fund borrowers as well as sales
made the market more volatile.” of the market shortly after the short among suppliers of securities,” he says.
Volatility has also impacted selling bans came into place. Hermes, “In the US it was 10%.”
convertible bond arbitrage, says Ebers. a fund manager wholly owned by BT Gerdeman explains that, on average,
“You could hedge out the credit and Pensions Scheme, the UK’s largest 90% of beneficial owners are still
interest rate component but you pension fund, claims it has stopped continuing their securities lending
couldn’t hedge out the equity, because lending entirely for the same reason. programmes, because lending has
you couldn’t go short on banking Strathclyde pension fund and the E.On provided good income. Many lenders
stock anymore. So a natural arbitrage pension fund have also temporarily are making more income than ever
which would actually increase liquidity pulled out of lending. before because the lack of lenders has
because you’ve got more buyers of the Karen Jones, head of the GBP6.3 driven up fees.
debt who are looking to hedge out one billion Aviva staff pension fund, said Jane Miller, a market specialist at
of the risks within that component, it was reviewing its lending policy. SunGard Securities Finance, says:
were stopped from being able to do it. Philip Neyt, the chairman of the “One of the things stock lending does
It froze out a part of the market which Belgian Association of Pension Funds for investment managers, specifically
has actually grown rather large as an (BVPI), called on Belgian corporate ones who accept cash collateral, is to
asset class.” and industry-wide pension funds to provide liquidity, which as we know
Hedge funds have also been ushered stop the practice of lending securities is a problem right now. Additional
out of the market having received in October. liquidity, as well as income, may well
redemptions as a result of poor Paul Lee, a director at Hermes be another factor influencing decisions
performance. Deleveraging as a result Equity Ownership Services (EOS), to stay in or get out. It gives them
of the Lehman’s collapse and the says: “We look on the world through another reason to lend over and above
lack of liquidity has also decreased the eyes of the pension fund trustees what was considered a primary reason
borrower volumes and stock prices and and as long-term owners of companies in the past.”
increased volatility. and have always taken the view that Pittam explains the other side of this.
0CMGF structure.
“I don’t like the idea of being able
to purely leverage what’s out there
price.” obligatory to question processes which Galper says that action had not
However, while most in the were more or less permissible in the been taken previously because naked
industry agree that naked shorting past. Regulators and politicians are shorting was simply not a problem for
is undesirable, the role that it played unlikely to be receptive to arguments the investment banks and firms under
in the fall of financial royalty like favouring practices like naked shorting. the auspices of the SEC.
Washington Mutual and the Lehman Though the extent to which naked He says: “Naked short selling
Brothers has probably been inflated by short sellers have deliberately traded allegedly created some level of profit
politicians. to fail in the past is impossible to or at least operational efficiency;
“I personally think that naked quantify, as is the effect of such naked traders were incented to lobby for its
short selling has played little to no shorting, naked short selling has now protection. Once those same banks
fundamental role in the failure of these come under the regulators’ collective were negatively affected by naked
banks, though it did come in to play magnifying glass. In September the SEC short selling, or at least the threat of it,
at certain stages,” says Josh Galper, the adopted rule 10b-21 which requires they became incented to lobby for its
managing principal of the financial short sellers and broker dealers to elimination.
consultant Finadium. deliver securities within three days “I do not believe that until now
“I think that naked short selling of the sale transaction date – known regulations on naked short selling have
was possibly contributed to some as T+3. This essentially makes fail to been enforced. Further, I feel that the
decline in the stocks price, but I think delivers a violation of the law. fines that have been meted out for
that these banks would have failed When the rule was adopted SEC naked short selling violations have
with or without naked short selling been too small to influence changes
being present. Rather, I would say that ³+FQPQVDGNKGXGVJCV in behaviour – they have been more
a lack of reporting and knowledge WPVKNPQYTGIWNCVKQPUQP additional tariffs on the cost of doing
about short selling activity allowed for business, not a deterrent themselves.”
possible bear raids or other directed UJQTVUGNNKPIJCXGDGGP It is hard to predict the concrete
market activity outside the radar of GPHQTEGF´ results of the task forces. However,
market regulations.” when being seen to take strong
Some have even argued recently that measures against financial volatility is
naked shorting can provide a beneficial ,QUJ)CNRGT(KPCFKWO the order of the day politically, strong
service to the financial markets. In their new rules against naked shorting will
paper ‘The Economics of Naked Short chairman Christopher Cox said: “These be the most likely result.
Selling’ Christopher Culp, a professor actions today make it crystal clear that Zimmerhansl says: “Time will tell as
of finance at the University of Chicago, the SEC has zero tolerance for abusive to what the outcome will be, but I am
and JB Heaton, a partner at Bartlit naked short selling”. a very big supporter of the task force
Beck Herman Palenchar & Scott, argue More recently Cox called an objectives.
that the only difference between naked emergency meeting of the International “My concern with the initial
shorting and traditional shorting is Organization of Securities restrictions and bans on short selling
who is effectively lending the security. Commissions on 24 November to was that they were hastily imposed and
They write: “Naked short selling discuss the current financial crisis. The done without forethought. The task
creates competition in the market for result of this was the creation of three forces are the correct way to approach
security lending by allowing a new task forces focussing on coordinating the issues.”
buyer to provide the service of being global regulation of the financial Whether this is so is yet to be seen.
owed the share rather than allowing system. One of these is to tackle naked What seems certain is that soon enough
only the current owner to do so. short selling. All three task forces are naked short selling may become much
“To the extent that competition set to present their results to IOSCO in harder to do undetected, and may
in the securities lending market is February and to the next G-20 summit become a thing of the past.=
desirable then naked short selling, early next year.
far from being detrimental, may be Like many recent government and
valuable in facilitating the gains from regulator measures, this is being seen
short selling.” as something that perhaps should have
Whether many would agree, been done before the crisis hit. Already
especially in the current climate, many have accused the SEC and others
is doubtful. The financial services of effectively shutting the stable door
industry is in disarray and it is now after the horse has bolted.
0GYVQVJGVCDNG
Anyone predicting the arrival of wait for we impatient westerners, but in underlying investment behaviour.
securities lending in China would the Middle Kingdom has never been “More and more investors are
have probably been given a wide berth renowned for placing the emphasis on interested in the region and we have
by most sane people until relatively the short-term. Putting developments introduced direct links to a number
recently. But we live in extraordinary in the region in further context, of markets, including Japan, Australia,
times, and - whisper it gently - such Philippe Metidou recalls that when New Zealand, Hong Kong, Singapore,
is the pace of change in the People’s he first posited setting out guidelines Malaysis, Indonesia, Thailand and
Republic that securities lending has for securities lending there in 1993, Korea,” continues Philippe Metidou.
appeared on the financial services the reaction was less than enthusiastic. “There is a political will in most
industry’s radar and could well be with countries in the region to develop a
us in the not too distant future. ³%JKPCKUVJGOQUV yield curve; everyone is keen to attract
“China is the most obvious example QDXKQWUGZCORNGQH and retain international investors, and
of the radical changes in attitude without a strong securities lending and
that are taking placing in the region,”
VJGTCFKECNEJCPIGUKP repo culture, the big boys just won’t
says Phillipe Metidou, head of client CVVKVWFGVJCVCTGVCMKPI play.”
relationship for Asia Pacific, the RNCEKPIKPVJGTGIKQP However, Asia is not looking to
Middle East and Africa at Clearstream simply replicate developments in
in Hong Kong, a veteran of 20 years
UGEWTKVKGUNGPFKPIKU other international markets in the
there. “It used to be very restrictive, DGKPIURQMGPCDQWV use of securities lending, he contends.
but securities lending is being spoken QRGPN[KPVJGOCTMGV “Asia is looking to establish its own
about openly in the market, has pretty best practices. It hasn’t implemented
much been accepted, and preliminary securities lending to catch up with
consideration is being given to 2JKNNKRG/GVKFQW others who are doing it but because
implementing it there.” %NGCTUVTGCO it wants to do it. Asia now has critical
Nothing much, in fact, needs mass and is much more independent
to change, he observes, given the than in the old days.”
sophistication of the CSD’s systems, “I was crucified,” he says. “Everyone Roy Zimmerhansl, creator of the
and the support that key players are was against it! Things have changed ICAP securities lending platform
offering. “It is more a question of dramatically since then and it’s now and now an independent industry
the political will, and the arrival of part of daily life; it is those centres that consultation, argues that no other
convertibility and transparency of the don’t have securities lending that are region in the world has made as
Chinese currency,” he continues. “We the exception.” much progress with short selling
should see that within the next five Increased interest in securities and securities lending as Asia over
years.” That might seem a long time to lending reflects the broader changes the past decade. “However, given
the unprecedented market turmoil disclosure system implemented. is relatively new, and has been
this year, regulators in the region The bottom line on stock lending in expanding rapidly after enjoying five
have revisited on short selling and Asia is that it has made tremendous straight years of double digit growth.
by implication securities lending,” he strides in the past few years, says More frequently with newer funds,
says. “Having spent years removing Roy Zimmerhansl. “Some of that Asian hedge funds have employed
outright restrictions on short selling, good work has been undone, but equity long-short strategies and have
eliminating up-tick rules and paving importantly there hasn’t been any had far fewer credit-based funds.
the way for a vibrant securities market that has banned stock lending Thus the equity turmoil has had a
lending business, each market across in the same way as Malaysia did in disproportionate impact in Asia.
Asia and Australia re-evaluated their the Asian crisis in the late 1990s. Any Asian hedge funds have suffered worse
regulations.” restrictions on short selling have been performance than their counterparts
Pretty much every country already temporary, with the exception of naked elsewhere in the world. According
had a prohibition on “naked” short short selling which almost everyone to Eurekahedge its universe of Asian
selling (selling shares without having globally agrees is manipulative and hedge funds showed a loss of 22.2%
borrowed them), he continues. This should be outlawed.” for the year as compared to a loss of
may be intentional, or accidental - the The bigger story in Asia is the just over 12% for their total hedge
net effect is that the sold stocks will demand side, he argues. “What has fund universe. Some analysts predict
not be delivered. Some countries redemptions from investors in Asian
- including Japan, Hong Kong and ³/CP[#UKCPJGFIGHWPFU funds to be in the neighbourhood of
Singapore - have reiterated their stance 25-30% and this does not take into
against naked shorts. JCXGGORNQ[GFVTCFKPI account those hedge funds that have
Since the summer of 2008, UVTCVGIKGUVJCVKPXQNXGF restricted withdrawals or those funds
most countries in the region have OCTMGVPGWVTCNQTJGFIGF that have shut down. Eurekahedge
implemented short selling restrictions also reported that hedge fund closures
on a temporary basis. The notable RQUKVKQPU6JGKORCEVQH in Asia jumped 19% from a year earlier
exception here is Hong Kong, where UJQTVUGNNKPITGUVTKEVKQPU by the end of August and anecdotally
the Securities and Futures Commission JCUJCFCXGT[NCTIG that trend has continued.”
has very publicly led the way by Hedge Fund Research (HFR)
saying it was confident in its rules and KORCEV´ reported a 13% decline in assets
reporting requirements and never felt under management at Asian hedge
the need to further restrict market 4Q[<KOOGTJCPUN funds in the third quarter alone. This
activity. However it emphasised that it compares to an increase in assets under
would keep monitoring the situation <KOOGTJCPUN%QPUWNVKPI management in the third quarter of
and would act swiftly and harshly if it 5GTXKEGU the previous year in Asia of 8.7%.
felt the spirit or the letter of the rules Assets in Asian hedge funds dropped
were being violated. Hong Kong’s in the third quarter of 2008 by over
leadership is best exemplified when been the experience with respect USD13 billion with USD10 billion
it took the lead role in the recently to Asian hedge funds? Many Asian coming from performance losses and
announced IOSCO Task Force on hedge funds have employed trading the remainder from client withdrawals.
Short Selling. strategies that involved market neutral KSD, Korea’s central securities
Japan and Australia have announced or hedged positions. The impact of depository, which introduced securities
new disclosure requirements and short selling restrictions therefore had lending and borrowing in 1996,
Singapore has issued a paper seeking a very large impact on these funds. For mainly for the purpose of settlement
comments on enhanced disclosure example, convertible bond arbitrage is facilitation, tells us that it is the leading
reporting requirements. Australia a very traditional Asia focused hedge intermediary for stock lending and
found itself embroiled in securities fund strategy. If you are running a borrowing with roughly 80% of
lending scandals throughout 2008 convertible bond arbitrage fund, and transactions done via its programme.
concerninghe bank ANZ and the failed you suddenly can’t short sell the stock, The programme has about 110
prime broker Opes Prime (see the it dramatically affects your ability to participants with borrowing positions,
Spitalfields Advisors report of March hedge and engage in any trading. It and 183 with borrowing positions,
2008: Putting Australian Securities forces the fund to change its strategy with a considerable overlap between
Lending in Context). As a result, and may result in closure or style drift lenders and borrowers, reports the
recent legislation has been introduced to more of a credit focus.” KSD.
on short selling and a more rigorous “The Asian hedge fund industry “In the case of Korea, the current
financial crisis has had a deep impact activities as usual will depend largely adjusted performance. State Street
on the stock lending and borrowing on the improvement of the financial believes this is the right approach. Our
market as well as other sectors,” market situation. philosophy has long been to provide
the KSD says. “One, short-selling: Interest in securities lending our clients with incremental revenue
plummeting stock prices have focused has been on the rise in the region, within the context of sound and
on short-selling as a possible culprit, adds Francesco Squillacioti, senior prudent risk management.”
which in turn has led to stock lending managing director and regional “We believe the future looks
and borrowing being singled out as business director in Asia Pacific optimistic for securities lending in
a contributing factor. Short-selling for State Street’s securities finance the region. The long term dynamics
was banned in October 2008. The division. “This is a factor of increasing and growth prospects of the capital
ban is temporary but there is no asset growth among institutional markets and the various institutional
definite date set for lifting the ban [the investors and their desire to earn players in the region who would
KSD is referring to covered short- incremental income through ultimately participate in securities
selling; naked short-selling has never established, well-respected securities lending programmes point to
been permitted in Korea, it reminds lending programmes. State Street continued demand for the product. As
readers]. Two, risk management: has seen clients and prospects closely with any other industry, technology is
market volatility and the bankruptcy reviewing and considering overall vital to securities finance. The goals of
of Lehman Brothers have made market heightened efficiency and transparency
participants more cautious regarding ³6JGNQPIVGTOF[PCOKEU in the face of growing and more
risk management. In the case of complex business conditions are very
securities lending and borrowing, CPFITQYVJRTQURGEVUQH much present in State Street’s strategy.
the Financial Services Commission VJGECRKVCNOCTMGVUCPF That’s why we invest significant
(FSC) increased the collateral level VJGXCTKQWUKPUVKVWVKQPCN resources back into the business and
for securities lending and borrowing our technological infrastructure.
transactions to 130% and SLB RNC[GTUKPVJGTGIKQP In Asia Pacific, our regional clients
intermediaries are placing stricter YJQYQWNFWNVKOCVGN[ benefit from the strength of a world
rules for eligible collateral. Three, RCTVKEKRCVGKPUGEWTKVKGU class global franchise and our expertise
foreign investors currently account as a niche specialist in securities
for the majority of stock lending NGPFKPIRTQITCOOGU financing solutions. Our three regional
transactions, although there are some RQKPVVQEQPVKPWGF offices and trading desks located in
restrictions on their activities due to FGOCPF´ Hong Kong, Sydney and Tokyo house
foreign exchange regulation issues. The 36 experienced professionals dedicated
limit on borrowing by non-residents specifically to securities financing
borrowing from local lenders without (TCPEGUEQ5SWKNNCEKQVK activities — including trading,
prior-reporting to the Bank of Korea 5VCVG5VTGGV operations and risk management;
was increased from KRW 10 bn to product development, legal and
KRW 50 bn from 17 December 2007. compliance; sales and relationship
At the same time, it became possible programme parameters — such as management.” He argues, in effect, that
to use foreign currency collateral performance reporting capabilities, State Street is the only global service
for securities lending & borrowing counterparty risk management and provider that has a complete range
transactions.” collateral guidelines — all leading of product capabilities in this region.
Prospects for securities lending in toward a requirement for greater Readers should feel free to dispute this
Korea in the near future do not appear transparency. This scrutiny has been claim if they feel so inclined.=
favourable, the KSD says. “Market with a view toward understanding
conditions are currently uncertain. The and addressing the different risks in
ban placed by the FSC on short-selling securities lending. State Street has
is still in effect with no definite date historically placed a great amount of
set for the lifting of the ban (time of focus on these aspects of securities
writing: early December 2008). Many lending and that discipline resonates
big lenders (e.g. the National Pension with our clients and counterparties.
Fund et al.) have suspended or reduced The change in the Asia-Pacific region
lending activities for the time being. has been to look beyond just revenue
The resumption of securities lending generation, and toward to risk-
2TWPKPIVJGDWUKPGUU
Neill Ebers, COO, and Jason Kennard, head of SBL and
collateral management at Lionhart talk to GSL.
hotly debated subjects in prime are the safe havens? I think previously
brokerage and has been for the last there were around 25 different safe Ebers: Custodians have always wanted
couple of years. The Lehman Brothers havens and now you can probably to get into the prime brokerage arena
collapse demonstrated what happens count them on two hands. and they now have a wonderful
when your balances, which you thought opportunity to do so. A number of
were being held with a London-based 6. Where are the safe havens? firms, such as BNY Mellon, State Street
company, suddenly disappear overnight and JP Morgan, are striking tri-party
and end up in the US. Your accountant Ebers: Firstly, you look at where agreements. Comparing all the models
says you can’t recover them, because at they are supported by banking out there, I love J.P. Morgan’s model.
that moment they can’t actually identify infrastructure. I would say Deutsche It’s a prime broker, a custodian, a tri-
your assets. So you are not able to risk Bank as it has already received the party arranger, a cash facility, and a
manage your positions, you are not able confirmation from the German retail bank – it offers everything. The
to cash P&L, you don’t know what to government that it would be supported. bank will be able to pitch its business
write down against your net asset value UBS I would count as a safe haven and to anyone, and win some of the large
and you get into the legal interpretation Credit Suisse, as the second largest mandates out there. Investors are also
of what does rehypothecation mean. Swiss bank, will definitely be protected going to have much more impact
The other issue is equivalent by its government. State Street, is and will drive some of the scrutiny
securities. It means that in more of a custodian, but has a prime regarding the details of legal contracts,
rehypothecation someone returning brokerage business. Then there are the as hedge funds have done with their
your assets can actually return favoured four and a half: Goldman counterparties. It will be like someone
equivalent securities to you. An Sachs, JP Morgan, Citi, and Bank of is looking over your shoulder and make
example of the legal interpretation of America – the half is Morgan Stanley. sure that you are crossing all the ‘Ts’
equivalent securities is: if I’m long on We may be wrong in this observation and dotting all the ‘Is’. There is a very
Microsoft and IBM is valued exactly but the Federal Reserve has always clear delineation from a FSA standpoint
the same as Microsoft, someone can seemed to approve of these banks. between the role of a custodian
deliver back to me IBN shares, rather Goldman Sachs and J.P. Morgan have and the role of a prime broker. The
than Microsoft. The Lehman Brothers always had a special relationship. Citi requirements are a lot tougher on
collapse opened up Pandora’s box. It has just proved over night that it has a global custodian than on a prime
raised the issue of your legal rights with a special relationship with the Federal broker
regards to the right of substitution, Reserve, having received one of the
equivalent securities and someone’s biggest supporting packages that any 9. How do you think securities
right to rehypothecate your assets. Also, company could receive, USD306 billion, lending industry will evolve?
where does our free cash go, how is that on top of USD25 billion that Citi is
protected, and how does someone go going to get from the Troubled Assets Kennard: Personally, I think the
and get that back? Relief Program (TARP), and the USD20 industry is in survival mode. People
Within 24 to 48 hours of the huge billion it previously received. have got to look at their internal
runs on Morgan Stanley and Goldman counterparty risk and operational
Sachs, their duopoly broke. I think 7. Is the prime brokerage model risk, and really overhaul their risk
it’s good that the dominance of those broken? management and overall returns on
companies has been put into question, the product. Banks are in trouble with
but on the other hand it raises the Ebers: The model is changed rather deleveraging and definancing. A lot of
issue of consolidation in the prime than broken. People are looking banks in the past didn’t go into detail
brokerage landscape. Lehman Brothers for client asset segregation, client about their collateral and funding costs.
was the largest prime broker and left money protection, the removal These have now significantly increased
the market place. Bank of America may of rehypthecation language, and so they are going to have to look at their
– if it’s shareholders vote goes through steady and consistent funding. trades and unwind the ones, which are
– actually buy Merrill Lynch’s prime Rehypothection was one of the reasons no longer profitable. A few houses, as
brokerage business. Bear Stearns was why prime brokers were able to be with some of the beneficial owners, will
brought by JP Morgan. JP Morgan had very competitive in their financing. pull out of the industry. A few strong
already launched it’s own very good With rehypothecation and leverage houses, which keep all these factors in
fixed income prime brokerage business diminishing the revenue streams have mind, will get bigger and bigger. It’s
but did not have a very good equity changed dramatically from that which about figuring out how to adapt to
platform so you’ve got consolidation prime brokers were previously securing. change, getting through the difficult
there. times and come out with a stronger
The huge question mark is - where 8. How will it evolve? business at the end of it. =
2CPGN%QNNCVGTCN/CPCIGOGPV
1. How has the credit crunch affected managers are now willing to be more attractive risk/return ratio. Therefore,
collateral management? secured towards their custodian or it should come as no surprise that
bank, pushing the collateralisation for when firms now trade with each
Morosini: Our volumes have never securities lending to an all time high. other, they are taking measures to
been so high with record peaks at Some counterparties have awoken to collateralise their exposures against
EUR433 billion in November 2008. the unsecured risk they were running stricter eligibility criteria, with shorter
Our wide customer base composed in their business – and this has been maturities, wider spreads and higher
of private banks, commercial banks, driving a large part of the volumes. margins. They are also seeking to make
central banks, internationational Collateral to cover: Cash Correspondent the collateralisation process as risk
banks, investment banks, and local Credit lines, Securities Loans, Cash controlled and efficient as possible. We
and global custodians has enabled us deposits, Derivatives, Structured expect this trend will continue into the
to support various collateral structures Financing etc. are common these days. foreseeable future as an appropriate
in the last 12 months. Allocations to business practice and, in time, possibly
central banks for tenders and central Grimonpont: The recent liquidity as a result of more stringent regulatory
counterparty (CCP) has grown and credit crisis means that there is a pressures.
exponentially. The quest for secured temptation for firms to curtail their
products and liquidity has benefited lending activities. However, those Higgins: We have seen a significant
Clearstream because of its access to firms that are monitoring their risks, growth in the use and acceptability of
central banks and cash via the Euro exposures and collateral positions collateral in the past year. We support
GC pooling repo offering with Eurex. tightly are taking advantage of business the use of collateral as a traded asset in
Funds, insurance companies, and asset opportunities while maintaining an tri-party and as a risk mitigation tool in
Higgins: From a collateral perspective, big changes in 2009. Companies with provide segregated collateral accounts
liquidity is key. Historically, modern flexible risk architectures will with The Bank of New York Mellon.
collateralised lending has been the be significantly better off, but it won’t Rather than post all collateral to a dealer
sustainable method of ensuring be easy for anyone. as the funds would have usually done
liquidity in periods of turmoil. Within (net mark to market and independent
The Bank of New York Mellon’s Global 3.Collateral reinvestment risk is one amount), we have received requests to
Collateral Management programme, of the main areas of concern in the provide creative assistance and ways to
there is a greater demand for the re-use industry at the moment, what is your ‘ring fence’ assets. We have been able to
of collateral. Collateral can no longer view? apply traditional tri-party mechanics to
only be used for the initial move, it support derivatives based exposures and
needs to be re-used to gain the required Morosini: We don’t use cash as activities. The central custody of the
efficiencies. Now that most firms collateral. Although it has affected us collateral by the custodial agent, as with
have moved to a fully collateralised on the revenue side, we have kept many tri-party, presents an ideal way to access
environment, we are seeing a greater lenders in our programme because the stock loan and repo markets while
demand for collateral. To avoid a the collateral is composed of A- Bonds knowing that much of the collateral
collateral shortage in the market, firms being ring fenced and kept on their posted will remain in full view at The
can no longer afford not to re-use behalf. Our simple ‘bonds versus bond’ Bank of New York Mellon.
collateral. And if a cash lending firm model proves to be safe and secure.
needs to raise liquidity, they must be in Rivett: Volatile markets, by their very
a position to benefit economically from Grimonpont: Taking securities as nature, will increase this risk. Mitigation
collateral received. collateral is the simplest and most of this risk has to be conducted as
secure market practice to follow, part of a larger strategy of hedging an
entity’s exposure to this volatility. This
³.KSWKFKV[OCPCIGTUJCXGRWUJGFTGRQFGUMUVQ can be expensive and hence the returns
RWVEQPVTCEVUKPRNCEGYKVJEQWPVGTRCTVKGU³LWUVKP from such transactions are reduced.
47247*.3+472&9.43&'4:9
from all pools within the group business all working together, often with Grimonpont: There are a number
to allocate them to the ECB or the the same technical platform. The next of critical issues in collateralising
FED. Most institutions had collateral challenge will be to see if the business transactions. One is making sure that
management teams that have suddenly lines can or will need to move closer the required collateral is in the right
became a more important function. together. For example, should the fixed place at the right time. Another is
In some institutions, the collateral income and equity repo/SBL business making sure firms are optimising the
still remains fragmented in silos with be separate or would they benefit from use of the collateral, that is becoming
different usage of triparty collateral operating under one functional line. increasingly scarce due to the demands
management. This is mainly due to the placed on it. Third, it is vital for firms
fact that there is no centralised collateral Rivett: The increased requirement to understand the procedures and
management function serving the needs for collateralised transactions in challenges inherent in liquidating
of the treasurers, repo desks, borrowing combination with the need for collateral in the event of a counterparty
and lending desks, derivative desks etc. entities to squeeze more value from default during the life of the
their portfolios will drive collateral transaction. When the worst happens,
Grimonpont: In many firms collateral management away from silos. A risk it is critical to have immediate and
is still managed per business line. I manager who can draw on a single pool reliable information on the collateral
believe those days are over. The recent of assets to collateralise any type of received as well as immediate access to
credit crisis has accelerated this change. transaction will be more efficient. collateral. Euroclear Bank, as a triparty
It makes no sense for firms to have agent, enables the immediate transfer
one line of business wasting good
collateral while another is struggling
to finance with poor collateral.
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back and forth between business
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lines, when centralised collateral
management increases efficiency by
only requiring collateral to cover netted Little: The trend towards a global of collateral minutes after an event of
exposures. This is no different from cross asset view of collateral has been default is declared.
the cash side of the business where, evident for some years. Current events We think transactions between
a few years ago, it was not unusual will strengthen this trend. Vendors counterparties will be increasingly
to see different businesses within the are improving their products to offer collateralised and there will be greater
same firm lending and borrowing cash genuine cross asset capability. I don’t focus on managing the various
with the same external counterparty think anyone questions the benefits of risk-related parameters involved in
instead of centralising the financing merging the silos, but the expense is managing collateral, such as haircuts
needs of the entire firm. This practice considerable and it isn’t necessarily the and concentration limits, which makes
is now in place at most firms and will highest priority for institutions. the issues identified above even more
become common practice for managing difficult to manage.
collateral as well. Granted, centralised 5.What are the major advantages of The use of a triparty collateral
collateral management is more using a triparty? management agent like Euroclear
complex, but the potential benefits are Bank is an excellent way to manage
even larger. Morosini: Well, the “old” core features these issues. We are particularly
such as multiple assets, multiple well placed to manage collateral for
Higgins: Over the last ten to fifteen currencies, eligibility checks and clients very efficiently. The service
years many of the larger banks have sufficiency checks and the right of provided is settlement integrated, and
moved their operational and risk unlimited substitutions are the main highly automated and flexible while
management functions to within key differentiators from bilateral providing timely and granular collateral
central ‘Global Margin/Collateral agreements. Combined with the use reporting. Triparty agents, like
Management’ units. This has given rehypothecation feature, in place since Euroclear Bank, will be increasingly
them economies of scale and extended 2006, and the increasingly sophisticated viewed as the most reliable and
levels of operational risk control. It is eligibility criteria, it is a powerful and safe venues in which to collateralise
now very common to have the SBL, reliable way of many types of securing business.
repo, prime brokerage, derivatives and exposures.
event ETD margin management lines of Higgins: Cost, control, access to new
an eye
for value?
© 2008 Euroclear Bank SA/NV, 1 Boulevard du Roi Albert II , 1210 Brussels, Belgium,
RPM Brussels number 0429 875 591 triparty@euroclear.com
PANEL COLLATERAL MANAGEMENT
business, better risk management to collateral lines, automatic substitution collapse. Maturities shrank; haircuts
name but a few. The automation of and reduced credit risk being the and spreads exploded.
the collateral selection process greatly main ones. These advantages have led Clearly, the intense focus on
benefits the collateral giver of securities to the continued rise of triparty over managing exposures against a wide
as it allows them to concentrate on bilateral lending. Triparty lending range of risks is a driving force for
trading in the knowledge that collateral also coped remarkably well with the collateralisation, both bilaterally and
is always perfectly allocated while fall of Lehman Brothers, when the through triparty. It is no surprise
within easy reach via substitution. Some agents were able to settle counterparty to see so many initiatives providing
organisations enter triparty as a way to claims on collateral within a few days. central counterparty (CCP) services
reduce the operational risk associated But there are also drawbacks. The for securities lending transactions as
with placing and managing the life lack of visibility and inconsistencies well as for general collateral financing
cycle of a trade in the bilateral world. in static and market data are two products. The delivery of a seamless
For example, you may want to invest notable ones. Until recently, triparty rehypothecation feature in collateral
cash in the repo market but don’t have agents provided limited reporting of management, such as that offered by
the ability to book, value and position collateral allocations to the principals. Euroclear Bank, was a prerequisite
keep a portfolio of deals. With triparty, Under Basel II and in current market to the introduction of a CCP in this
you have appointed the central agent to conditions, counterparts are demanding domain.
calculate the value of the cash accrual, - and getting - daily or intra-day feeds I would also not be surprised to see
collateral portfolio and resulting margin of allocations so they can monitor more regulations placed on banks and
requirement. This is all packaged up the exact collateral exposures. Pricing other financial institutions to meet
neatly in a nicely reportable format. discrepancies between the parties can higher capitalisation requirements and
I think triparty will start to be lead to significant differences of opinion to run their businesses against more
seen in a new light and not just in on collateral values. There can also be stringent risk management criteria.
the traditional sense of supporting a lack of standardisation in message Market participants will also look for
efficient triparty collateral management
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of eligible collateral in order to obtain
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&CXKF.KVVNG4WNG(KPCPEKCN facilities.
collateral trading. Its many advantages formats and content between tri-party Higgins: Since the beginning of this
are working their way into the agents. century we have seen a stabilisation of
derivatives sector as we speak. generally accepted market terms and
6. Over the past 12 months have agreements. The Credit Support Annex
Rivett: Triparty agents are experienced there been any major changes in the (CSA), Global Master Repurchase
collateral operators who have invested rules and agreements that constitute Agreement (GMRA) and Global
heavily in infrastructure and technology bilateral transactions? Master Securities Lending Agreement
to mitigate collateral management (GMSLA) are now widely seen as
risks and provide counterparts with Morosini: Certainly, any adhoc or setting the bilateral standards for
a transparent and efficient service. It home-based contracts have been derivatives, repo and stock lending
reduces the cost of entry and minimises replaced with industry contracts such transactions. But as with past events,
settlement risk and transaction costs as the GMSLA or the GMRA. This we can expect to see new ideas and
while also enabling clients to execute provided a more industry-like market policies working their way into these
same day recalls and substitutions. practice especially for liquidation types of documents in future. For
Triparty lends itself to the ‘single pool of and valuation of the collateral. After example after market defaults in the
collateral’ concept - most agents have an the Lehman default more stringent late 1990s, The International Swaps
optimisation engine of some kind that collateral profiles were established and Derivatives Association (ISDA)
allows a collateral provider to allocate and the default procedures have been worked with the market to publish the
collateral efficiently, irrespective of the reviewed. 2001 Margin Provisions document.
underlying transaction. A paper technically admired by many
Grimonpont: We have seen changes but applied by few as it was too hard
Little: There are many advantages in in collateral-eligibility profiles – the or expensive to apply many of its
a triparty arrangement: operational trend started off modestly then became directives.
efficiency in the front and back offices, substantial with the Bear Stearns scare, In the triparty space we do not see
intra-day margining, use of small and has become drastic since Lehman’s
Everywhere
Settlement and Custody - Global Securities Financing - Investment Fund Services get more
PANEL COLLATERAL MANAGEMENT
what is negotiated on a bilateral basis, agents to be clear and transparent about became too expensive to source. There
although we see directly what both their collateral valuation methodologies is a direct relationship between the use
parties consider as acceptable collateral (including price sources) and operating of collateral and the need to raise high
and the terms under which it can be procedures in general. Regarding quality assets for use elsewhere.
applied. And as mentioned before, we collateral valuations, if there are no
have seen all sorts of movements up and fresh prices for securities being used as Little: Basel II has had a massive impact
down in this area over the last year. collateral, nobody, including Euroclear in the way firms are now able to use a
Bank, will have a true price. In addition, wide variety of securities to cover their
Rivett: Most agreements probably even when a fresh price exists prior capital requirements. The greater cost of
have narrower eligibility rules, even to a far-reaching event of default, borrowing cash due to the credit crunch
in the bilateral world. The Lehman such as Lehman Brothers, securities has driven borrowers to demand that
default proved the strength of the legal are unlikely to trade at that price post lenders take non-cash collateral.
agreements GMRA and GMSLA, as the default. It is key for dealers to have a
majority of counterparts were able to true risk management process in place 8. Have margins increased and has
take possession of their collateral and that will allow them to determine what this had an effect on volumes?
realise its value for their own purposes. collateral meets their risk profile, and
what haircuts and spreads are required Morosini: In general, haircuts have
7. What change in the demand for to justify the risks. Euroclear Bank is increased. Some borrowers that
collateral has occurred in the last 12 completely transparent in terms of its consider extra collateral as an unsecured
months? pricing sources, quotation ages, i.e. risk towards their counterparty have
when the price is updated, and in its reduced their outstanding and are not
Morosini: More haircuts, more quality price collection model. willing to pay for an extra risk. It is not
bonds, more liquid securities, more For example, prices used by a question of a good name or a bad
concentration criteria - anything that Euroclear Bank are either true prices, name. It’s just that in front of some
could contain and soothe the collateral
liquidity crisis. Also, we have seen many ³6JGKPETGCUGFOCTIKPUTGÀGEVVJGKPETGCUGF
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Higgins: It is not changes in margins importance in the future. This trend is There are many working groups
that have effected lending or financing not, as in the past, a result of regulatory busily considering what might be best
activity, but rather the banks’ risk initiatives such as Basel II, but from for us all in the years to come, whether
departments’ reluctance to approve more fundamental reasoning. Collateral derivatives, stock lending or repo.
lending. Several banks do not have is used to protect the collateral holder What they are working on will start
direct access to central bank funding from the default of its counterparty. to influence us in 2009 but has the
or other sources of general collateral This seems very basic, but the market potential to last a long time. One thing
lending which have been seen to be somehow overlooked counterparty is very clear, and that is 2009 is going
safer in recent months. risk over time. Market participants to be a different collateral management
now want to know, at any point in world than before the recent crisis, last
Rivett: The increased margins reflect time, where the collateral is held, what month or even yesterday. The pace of
the increased uncertainty in the market collateral they hold, when it can be change is fast and to be taken advantage
and among lenders and borrowers; liquidated and at what price. Triparty of.
this has had a negative impact on collateral management service providers
the amount of lending and financing are helping dealers with those needs, Rivett: While collateralised transactions,
occurring in the market. a trend that I believe will continue as a percentage of total activity, will
to increase significantly in 2009 and rise in volume, the total activity itself
Little: The long term trend has been beyond. Dealers are likely to reduce will probably reduce. The increased
growth in volumes and reduction in their leverage and limit exposures to internal focus on risk for all firms will
margin. It’s difficult to say whether one each other in the foreseeable future, we almost definitely force them to focus
has caused the other as there have been could expect more of the remaining on strengthening their balance sheets.
many factors involved. This long term exposures to be fully collateralised. The potential introduction of a liquidity
risk frameworks shows the direction of
³6JGFGTKXCVKXGUOCTMGVYCUOCMKPIJGCFYC[ regulation. With financial markets and,
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institutions proven to be fundamental
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transparency and management of ‘off-
/CTM*KIIKPU6JG$CPMQH0GY;QTM/GNNQP balance sheet’ activity. As interest rates
begin to approach zero, the spreads
trend has been violently interrupted A larger portion of collateral available to repo desks will also reduce.
by recent events so that volumes are management responsibilities will be
significantly reduced due to fear and outsourced to triparty agents. And Little: I think we will see a continued
uncertainty. we will see a dramatic reduction in preference for secured over unsecured
unsecured exposures and an improved, lending. This will fuel an already
9. How will the market develop in but moderate, reduction in overall buoyant collateral market. Firms will be
2009? exposures. Triparty agents will play an resetting their business strategies and
increasingly meaningful role in making are likely to choose between returning
Morosini: We think that the actors and that happen. to core banking values or continuing
some business structures will change. to seek the higher returns promised by
We hope that unsecured transactions Higgins: We all need a crystal ball aggressive investment strategies. These
will eventually all be secured for that one! It is hard to get a clear choices will result in major changes,
(collateralised), which will really vision in current markets but when with some firms exiting parts of the
emphasise the need for triparty. In the things do finally settle down it will business. But whatever strategy they
meantime, we will continue partnering be possible to see a clearer path. follow, they are likely to retain collateral
with the authorities and the central Regulation and perhaps even greater management as an important part of
bankers to propose services that will depth and transparency of reporting the business. No one can afford to leave
bring back some more OTC trading and is likely to take hold this year. Many their collateral assets unmanaged.M
restore trust. Whether it goes via a CCP more organisations now require good Mark Higgins isVice President and Head of Business
or not, it looks like there is an exciting quality data. Wherever and whenever Development for EMEA Collateral Management in the London
year ahead for triparty providers. they need it, it will be down to service office of The Bank of NewYork Mellon.The views expressed
providers such as The Bank of New herein are those of the author only and may not reflect the views of
Grimonpont: Collateral, particularly York Mellon to ensure clients receive The Bank of NewYork Mellon.This does not constitute securities
good collateral, will be of paramount this information and service. lending advice and it should not be relied upon as such.
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TECHNOLOGY BOOKS AND RECORDS
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Innovation in the front office is driving the need for efficient back office processing. Cherry Reynard
looks at the various books and records systems and the role they play in this.
relatively recently, loans were negotiated business in this space.
over the phone or via email, and record- 4sight Financial Software is the main
keeping was done via spreadsheets. It contender and has been increasing its
is only within the past few years that client base since BNP Paribas became its
technology has emerged to help generate first client in 1997, and a management
scale and transparency. buyout in 2003 made it completely
The emergence of exchange traded independent. Oliver says that 4sight has
platforms has done most to generate been gaining some ground on Global
these increased flows and it has been a One in recent years with its full front to
key development for technology provid- back office functionality.
ers. The EquiLend system was launched Oliver says that connectivity to the
by 11 financial firms and sought to platforms has become key, but vendors
Technology has fuelled significant revolutionise straight-through process- will have other aims. “If you look across
growth in securities lending. Previously ing in securities lending by introducing the board, vendor platforms must have
the business was built on old-fashioned standard protocols and infrastructure. connectivity to the trading and back of-
relationships between borrowers and Compatibility with these systems has fice systems such as EquiLend, “ he says.
lenders, but technology has facilitated become a vital criterion. “Buyers look at how well it links in with
the growth of the industry to its current Now, there is increased automated this and any existing systems, but they
level of around USD 20 trillion. As the borrowing where securities are matched also look at how much experience those
business has grown in size and complex- when available. Lenders publish their providers have and their experience spe-
ity, books and record-keeping systems security inventory daily and borrow- cifically in securities lending. Some are
have had to keep pace with new innova- ers compete to locate and borrow those more repo-based, for example.”
tion on the product side and increased securities. However, the European Other systems include Anvil, Murex
regulatory requirements. settlement market is still fragmented and with its MX3 system, Suncorp’s Dimen-
Books and record-keeping systems this is mirrored by securities financing sion, Openlink Findur and Pyramid.
are the utilitarian end of securities lend- technology. As demand increases the Oliver believes that when looking to
ing technology. Frequently these systems technology is growing more streamlined external vendors people should ask how
are simply parcelled up within a full end and efficient, although there is still a many clients are linked into the system
to end system. They are something that significant amount of off-exchange busi- they plan to use, what it allows in terms
it is vital to get right, but do not generate ness. of collateral and how it handles triparty
significant competitive advantages. They Milner says: “The vanilla stuff is services.
tend to be part of an integrated solution now automated. This is where little Each company has a strong sense
and downstream will be the general led- negotiation is required. But there is still of how it differentiates itself from its
ger of the firm (for in-house systems) or a high proportion considered to be competitors. 4sight, for example, believes
client firm (for outsourced providers). ‘relationship’ business. This is hard for its key strength lies in its independence.
Jane Milner, market specialist, Securi- any system to automate. The electronic Judith McKelvey, 4sight’s global sales
ties Finance, SunGard says: “Securities marketplace is still only dealing with director says: “We are the only indepen-
financing tends to be lifecycle-heavy. the higher volume vanilla deals. Various dent company left and our flexibility
It’s not like other areas where you do a initiatives have emerged to increase is a huge advantage when it comes to
trade and it’s done. A trade could be on the efficiency of the lifecycle, but noth- focusing on our customers. We meet
the system for a number of years. There ing is there yet.” with our customers regularly and host
is lots of activity that the system has to In terms of providers, for years Sun- North American, European, and Asia
manage and record on an ongoing basis.” Gard’s Global One has been a key Pacific user groups. We look towards
As such systems need to be sophisticated application in Europe. Ed Oliver, senior future developments for the market and
and scalable. The development of books business adviser at Spitalfields Advi- our customers help us to prioritise the
and record-keeping systems is largely sors, says that their research demon- product’s direction. We work towards a
the same as that of the wider securities strates that SunGard is a big part of 4sight funded roadmap as a result of this
lending technology market because they the picture, but there are a number of ongoing feedback.”
are usually part of a bigger system. Until other growing players building their Other considerations include whether
the system offers the full front to back of- form. At the time Bancolombia said that Or it may simply be inertia. Oliver
fice solution, covering securities lending it liked the native asset class coverage of says: “Some have patched together a
and borrowing, total return swaps and MX3 and its proactive approach to risk number of systems, particularly those
CFDs; whether it operates across the full management. Like 4Sight and SunGard, that have been involved with a lot of
lifecycle and can be used on an agency or MX3 provides an integrated cross-asset merger and acquisitions.” They will
principle basis. Some systems, like 4sight, trading and risk management system, have a lot of legacy applications and
are modular. They slot in easily with which includes FX and money mar- new functionality or applications have
other systems and users can cherry-pick kets, cash and derivatives, fixed income, been tacked on as securities lending has
the areas they want to use and tack on emerging market products, interest rate become a bigger part of their business.
additional functionality later. derivatives and credit derivatives. Many still use Excel-based models.
SunGard has traditionally been seen OpenLink’s Findur has largely been an Wilson suggests another reason:
as the de facto market standard. Milner US-based technology with recent new “Traditionally many of these systems
says: “So many people use our system it clients such as Ontario Teachers and the were built in-house because securities
is easier to communicate with coun- Home Loan Bank of Atlanta. But it has lending was non-commoditised, but as
terparties. Our reports are standard made in-roads into Central and South- the market has achieved a level of ma-
and well-known and familiarity with ern America, notably with the Costa Ri- turity, external vendors can encompass
our system is often a requirement for can Central Bank, and Europe, with the the breadth and depth of functionality
people when recruiting.” She believes Europe Arab Bank selecting Findur for required by a global securities finance
that the group’s collateral handling its treasury and capital markets division. operation.” Building systems in-house
also sets it apart: “Collateral has to be Choosing a technology vendor is requires huge maintenance and staff-
realigned every day. Our system au- also about relationships. Paul Wilson, ing costs and many underestimate how
tomatically marks the trade every day head of pre-sales at 4sight, says: “We go much this control is costing them.
for both players to bring collateral into out of our way to accommodate our The outsourced providers will say
alignment.” clients’ requirements. We have a close that they offer more bang for the buck.
Some, like Anvil, have grown out of relationship with clients and work hard They can bring down costs and improve
the repo market. The group was bought at maintaining that.” Some buyers will efficiency. So why are some institutions
by Dublin-based Ion Trading, a provider appreciate having someone they know hanging onto their old systems? Brian
of dealing systems for electronic fixed in- on the end of a phone line, while others Traquair, president, capital markets and
come markets, in 2006. Anvil argues that will appreciate the experience of a larger investment banking at Sungard, suggests
bringing together repo and securities company. Wilson adds that if securities that this may be a result of a funding
lending has significant benefits, notably lending groups are to undertake a large battle between middle and back offices.
in collateral management efficiencies and scale outsourcing project, it is best to Or it could be an inherent fear of change
operational benefits. It says it has seen team up with someone who already has as the complexity of the process is often
strong demand for cross-product collat- the experience of replacing certain legacy held as intellectual capital by those cur-
eral management and says it can reduce systems. Of course, some institutions will rently doing the work. However, more
operational costs by using one system for still look to build their own systems. This and more companies are seeing the value
multiple functions. will generally be groups who want to of streamlining their processes, using
Spanish bank La Caixa and Banco- ensure that they retain control or believe one or a number of outsourced provid-
lombia, the largest bank in Colombia, it can give them some competitive ad- ers and freeing up their front office to do
are recent converts to Murex’s MX3 plat- vantage.” more value-added work. There is also a
TECHNOLOGY BOOKS AND RECORDS
risk management element to automat- a regulatory requirement. Clients will be unimaginable to even the current
ing processes fully – corporate actions demand a high quality of reporting largest stock loan business now.” The
aren’t missed, trades are automatically and a good capacity to run books and emergence of the major exchange traded
reconciled with those of the counter- records for them that may feed into their platforms (EquiLend and SecFinex)
party and regulatory requirements own systems. Global One, for example, has been a major shift on the borrow-
are fulfilled. Milner says: “Those using feeds directly into the sub-ledger within ing side, freeing up the trading desk for
in-house systems are increasingly few the books and records of the client firm. higher value activity rather than simply
and far between. There are probably After the events of this year, securities entering trades. This has not yet been
less than a dozen players now. They will lending groups want more information mirrored on the lending side, but could
have deep pockets, but there is no real on counterparties and their collateral to be an important development.
advantage. Large parts of the process are protect themselves from counterparty Wilson says that 4sight is also focus-
not proprietary and are simply day to default. ing on collateral management. Collateral
day administration.” Judith McKelvey of 4sight says: “The requirements change all the time and
Recent market termoil has created International Securities Lending As- securities lending desks are moving
business for outsourced technology pro- sociation has issued agency lending dis- into new markets. He adds: “People are
viders. Institutions have realised than it closure rules. We ensure that our system becoming increasingly sophisticated
may well be cheaper and more efficient complies with these and any rules or best in their requirements for managing
to outsource. Risk management has practice directives.” Risk management collateral. For example, we have seen a
become vitally important and relying on has become much more important over recent upsurge in requests for CSA OTC
an ancient spreadsheet-based system is the last five years with the Basel accords derivatives support as desks look for
a recipe for disaster. Wilson adds that he and Sarbannes-Oxley. MiFID has meant solutions for cross-asset class collateral
has seen no drop-off in business since more scrutiny of the relationship end management of their Securities Finance
the banning of short-selling on certain of securities lending. People now know operations” Collateral standardisation
stocks: “All of our clients are still in busi- more about their counterparties and and re-use is a big issue for the industry
as a whole.
³6JGXCPKNNCUVWHHKUPQYCWVQOCVGF6JKUKUYJGTG Overall, corporate action handling
NKVVNGPGIQVKCVKQPKUTGSWKTGF$WVVJGTGKUUVKNNCJKIJ remains a priority for many technology
providers. There are also developments
RTQRQTVKQPEQPUKFGTGFVQDGµTGNCVKQPUJKR¶DWUK in the auctioning of hard to borrow
PGUU´ stock and many groups are developing
a global locating facility. Technology
,CPG/KNPGT5WP)CTF providers are also aiming to do more
ness but with reduced budgets; they are collateral than ever before, but they have quotidian things like improve speed and
looking to us for cost-effective, innova- the headache of finding effective ways to efficiency. For example, start of day loads
tive risk reduction functionality as they use that data. are now down to a few seconds. This is
formulate their budgets and strategies From 2010, daily reporting will an astonishing improvement over the
for 2009 and beyond.” come into force. Milner believes this is products that were available just 10 years
The areas where securities lending the kind of thing that will change the ago.
technology can really add value are in market. People will have to gather the The challenge is to keep up with the
risk management, collateral manage- data from 200 lenders point to point. Are innovation going on at the front-end,
ment and scenario analysis. The use of they really going to do this themselves plus the increased volumes being gener-
these is the only way to predict the im- or will they get someone who can do it ated by the growth of exchange-traded
minent collapse of Lehman Brothers and through a hub service?”Looking to the platforms. These systems have a vital
the impact it will have, but accounting future, the real innovation in securities risk management role to perform. Every
and record keeping systems ensure that lending technology is likely to be at the technology provider, whether in-house
securities lending groups meet regula- front-end. But the back office has to or outsourced, needs to get this right.L
tory needs. This year’s banking crisis has keep up with the pace of change in the
focused the minds of regulators. Oliver front office.
says: “The events of this year have led to Wilson says that as securities lend-
much stronger requirements for report- ing becomes more standardised and
ing in terms of the loans themselves, consolidates its view on the potential
collateral and the haircuts in place. And for exchange-based trading to in-
on the cash reinvestment side.” crease. He adds: “We are scaling up our
He adds that reporting is not simply volume handling to a level that would
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INTERACTIVE DATA
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Bob Cumberbatch, Business Lines director at Interactive Data, looks at data management as a key
component of risk management.
understand what good data is and where clients detailed entity linkage informa-
to source it. tion that connects families of securities
At the core of data management is and helps institutions understand the
the need for comprehensive valuation relationships of the securities to the cor-
information and high-quality reference porate family structure. This informa-
data that can help financial institutions tion is critical to maintaining compliance
power mission-critical operations. with regulations that require institutions
Institutions can manage risk more to understand their exposure to a given
effectively by prioritising reference firm, industry or market sector.
data management and having a more It is also essential to have a compre-
complete understanding of the financial hensive understanding of the underlying
instruments streaming through their elements of a financial instrument. Over
applications and databases. Critical the past year, we have read stories about
to this approach is the ability to take a firms that didn’t take these steps and
360° view of each financial instrument have been impacted by the far-reaching
held by an institution, understanding tentacles of sub-prime securities. But
the behavioural characteristics – both it wasn’t just financial institutions that
on a stand-alone basis and within the have invested in structured securities,
context of the portfolio – under a variety such as CDOs, that had exposure to
of market scenarios. Determining how sub-prime loans; entities from govern-
an instrument is going to behave under ment organisations to pharmaceutical
stress is essential to understanding the companies have disclosed losses due to
risk parameters of that instrument. With sub-prime-related issues.
accurate and consistent reference data, Effectively managing and review-
an institution is better positioned to ing reference data can help investors
conduct the kinds of analyses which are understand the underlying dynamics of
critical to understanding risk. a security and help them determine their
Financial institutions want to under- risk exposure. For example, even though
stand the concentration and exposure a security may have an AAA rating, that
For many years, data management has
they have to various segments of the rating may be supported by internal or
been seen as an overhead by financial
market; this might include credit expo- external credit enhancement. To un-
institutions. In today’s market environ-
sure and industry segment exposure. derstand the risk profile of that security,
ment, effectively managing data as-
Gaining this understanding requires it can be crucial to know whether that
sets across the securities management
knowledge of the full ‘family tree’ of a credit enhancement will hold up under
lifecycle, which includes trade confirma-
financial instrument. For example, if an stress. Interactive Data delivers the
tion and settlement, can be viewed as
institution owns shares in a certain com- underlying ratings details of municipal
a strategic advantage towards helping
pany, they may not realise that it is a far- bonds needed to assess the underlying
firms meet risk management and regula-
flung subsidiary of a major auto com- risk profile of insured municipal securi-
tory demands. Effective data manage-
pany going through financial difficulties ties. This information is critical as it
ment can also help institutions continue
that could impact their holdings. With provides clients with additional transpar-
to explore new opportunities and work
reference data, an institution could have ency to somewhat opaque investments
to grow their business.
a better understanding of their ‘concen- and can be used to measure their risk
The ever-increasing volume of
tration risk’ in a certain sector or among exposure. With consistent, timely and
data being consumed by large financial
organisations that are facing challenges. accurate reference data, institutions can
institutions emphasises the importance
For instance, they could identify that gain additional transparency into these
of effective data management. Firms
exposure to the auto industry makes up details.
need to have a high level of expertise
too large a percentage of their portfolio Interactive Data provides a huge raft
and flexibility within their technical
and then make an informed financial of essential reference data, which can
infrastructure, not just for systems and
decision to address this issue. help institutions to realise a competitive
applications, but also for personnel who
Reference data providers can offer advantage by making more informed
investment decisions. Assessing risk exposure is a key focus. risk and growing their business, firms
Some fundamental issues need to be In response to this challenge, Interac- must follow processes that can help
addressed before we will see the industry tive Data delivers valuations for a range ensure that they can remain compliant
making real progress toward the goal of of alternative instruments, including with regulations. MiFID, designed to
transforming reference data into the high credit default swaps (CDS), interest rate broaden and strengthen the regulation
octane fuel that institutions need. First, swaps and bank loan prices. Interactive of financial markets in Europe and help
the industry must come together to agree Data also provides valuations of highly ensure market transparency, has posed a
upon standard definitions for reference complex OTC derivatives and structured series of challenges for financial institu-
data. The lack of standard data defini- products as part of its wide-ranging tions. Interactive Data’s real-time and
tions is not due to a lack of trying – over pricing and evaluation services through reference data services can help clients
the years a number of different initia- an exclusive agreement with Prism with the requirements of pre- and
tives have been undertaken by industry Valuation. Prism Valuation – whose post-trade transparency, evidencing best
organisations to establish a standard for philosophy to valuation is built on three execution, trade venue selection and
legal entity identifiers. Despite sincere pillars ‘people-data-models’ – provides reviews of order execution policy, code
efforts to address standards for this criti- services that replicate the pricing and of conduct and client classification obli-
cal aspect of reference data, agreement risk analysis capabilities of a structured gations, transaction reporting, managing
has still not been reached. products dealer, with an emphasis on conflicts of interest and managing risk.
In addition, a much greater under- hard-to-value assets. Another main focus for institutions
standing of data utilisation and data Providers of independent evaluations during 2008 was the Financial Account-
requirements is needed across the data can deliver significant value to finan- ing Standards Board’s Statement of
management ecosystem. Individuals cial institutions during these turbulent Financial Accounting Standards No.
given the responsibility for improving times. For example, Interactive Data has 157, or FAS 157. This statement has
data quality and ultimately reducing teams of experienced evaluators who resulted in firms reviewing their existing
operational risk must have a detailed incorporate available transaction data, valuation policies and procedures and
understanding of how the data is ap- credit quality information and perceived having to develop procedures for fair
plied across the organisation and how market movements into the evaluated value disclosures in their financial state-
the business units derive value from the pricing applications and models for fixed ments. To help clients prepare for FAS
data across the securities management income securities. 157, Interactive Data has developed a set
lifecycle. Global institutions have also been of informational resources that disclose
This will result in much richer impacted by a lack of liquidity as the the types of inputs by asset class that are
conversations among suppliers, consum- credit markets have tightened and they utilised to prepare evaluations.
ers and all players in between. It is also have had to take a step back to determine Enhanced transparency can provide cli-
essential that senior managers make the
connection between data management ³#V VJGEQTGQHFCVCOCPCIGOGPVKUVJGPGGFHQT
activities and managing operational risk.
It might be suggested that forensic analy-
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sis of the firm’s data to realise quality JKIJSWCNKV[TGHGTGPEGFCVC´
goals can be seen as a ‘root cause’ activity
for developing effective operational risk their risk exposure. For their portfolio ents with information to establish their
management strategies. The drive to valuation processes, these institutions own fair value hierarchy determinations
understand operational risk across the have looked to independent providers as required under FAS 157.
enterprise is supported by the drive to of evaluations who put an emphasis on Risk management will continue to be
achieving enterprise-wide data quality. building relationships with a broad range a key focus for financial institutions, and
When it comes to valuations, trans- of market sources. regulation and other mandates will con-
parency and standards are fundamental In recent years, a deluge of new ac- tinue to be a main driver. By working
to the process. Investors and regulators ronyms have taken on almost mythical closely with clients to understand their
expect consistent, transparent and fair status in the financial services industry. workflow, vendors are better able to ad-
pricing across all alternative investment From the Markets in Financial Instru- dress market data and information needs
classes. Independent valuations of ments Directive (MiFID), to Reg NMS, and develop services that can help clients
complex OTC derivatives and structured IAS 39 and UCITS III, new regulations, more efficiently comply with regulatory
products, as well as evaluations of fixed standards and directives have impacted requirements. L
income securities, are seeing increased the industry with new compliance
demand. Financial institutions have processes and procedures to implement
been working to ensure that they have a and follow.
firm grasp on the value of their holdings. In the midst of focusing on managing
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Borrowing on UK Consumer Services stocks has increased
60% since 1 Sept 2008, and available inventory reduced 14%.
There has been a big increases in the quantity on loan by
Whitbread (up 136% since 01/09) and Carnival (up 129%
since 01/09). TUI, which represented about a quarter of the
weighting went up by 23%.
75TGVCKNKPIUVQEMU
Stock on loan and available inventory on US retail stocks
has decreased since 1 September 2008. By 3 November on
loan stock had decreased by 28% and available inventory
stock by 10%. Since then the percentage of stock on loan has
increased by 17% but available inventory has decline by a
further 6%.
7-TGVCKNKPIUVQEMU
Available inventory on UK Retailing stocks has decreased
by 30% since 1 Sept. At the start of the period, Signet
represented c 20% of the lendable qty available in the UK
Retailing portion of the DESLI. The availability of Signet,
since then, has fallen by 97%. Whilst each of them are
individually smaller than Signet’s weighting, Inchcape,
HMV and Home Retailing Group all fell by 24%, 20% and
18% respectively.
7-DCPMUVQEMU
UK Borrowing has seen a
general decline across the
board. A peak though is
shown towards the end of
November. This is purely
down to HSBC quantity
on loan jumping from 231
million on 17 Nov to 1.18
billion on 21 Nov.
75DCPMUVQEMU
Apart from Wells Fargo, the
quantity of US Banks bank
stocks borrowed on DESLI
has reduced by 49% since 1
September 2008. Available in-
ventory has reduced by 21%.
#RRQKPVOGPVU
Felix Oegerli, head of prime finance at Andy Jones, responsible for Penson’s Equity Roy Zimmerhansl,
Cantonalbank of Zurich (ZKB) Financing business in Europe primary at Zimmerhansl Consulting Services
October ZKB’s securities lending and Zimmerhansl Consulting left Deustche Bank. Babbitt
repo activities and to build Services, which provides joined in February 2007 after
Charlotte Wall, former head of up the synthetic finance and securities lending business spending 23 years at Merrill
Morgan Stanley’s European Delta One capabilities. Ueli von consulatency services. Lynch.
equity finance desk joined Data Burg, former head of securities
Explorers. She was responsible lending and repo at ZKB, is now Morgan Stanley’s Andrew Jeff Dorman, managing director
for creating the team that head of prime finance trading, Amstutz and Victoria Foster and head of Prime Finance
was awarded the number one reporting to Oegerli. left the firm. Amstutz, a North America in the Global
borrower by the International managing director and Foster, Markets equities business at
Securities Finance (ISF) survey November an executive director had been Deutsche Bank is no longer
for eight years in a row. She ING Global Securities Finance with Morgan for more than 10 with the bank. Dorman joined
was also an integral part of appointed Ed Donald as years collectively. Deutsche in early 2007 to lead
Morgan Stanley’s Hedge Fund director and head of Global its prime finance business in
December
Management Team and Client Securities Finance Asia. He North America. He previously
Relationship Management manages their new office in The Alternative Investment worked at Bear Stearns and
Committee. Singapore. Formerly he was Management Association spent 18 years at Lehman
global head of European Fixed (AIMA), the body for the Brothers.
Leonard Welter, former Income Repo at ABN AMRO. global hedge fund industry
executive director at Morgan appointed Todd Groome as Andy Jones, former director of
Stanley, has joined Data Nomura Holdings, Inc. its non-Executive Chairman equity finance at Landsbanki
Explorers as chief technology appointed Hideyuki Terauchi as together with the restructuring Islands Hf joined Penson
officer. At Morgan Stanley managing director of Nomura of its Executive team. Prior to Financial Services Limited,
he was responsible for the International plc (Spanish this role, he has held senior where he is responsible for
global development of new Branch) and Masaru Tokiwa positions at the International the Equity Financing business
securities lending analytic tools President of Nomura Bank Monetary Fund and at in Europe. He is now based
and trading systems. He was (Switzerland) Ltd. institutions in London, New York in London, reporting to Mike
also responsible for European and Washington DC, including Johnson, Head of Global Equity
securities lending portfolio Alexis Fosler, who was hired to Deutsche Bank, Merrill Lynch Finance.
pricing and trading. run Citi’s Prime Brokerage sales and law firm Hogan & Hartson.
team in Singapore, has left the
Cantonalbank of Zurich (ZKB) bank. Keith Babbitt, managing
has appointed Felix Oegerli as director and co-head of
head of prime finance. He is Roy Zimmerhansl left ICAP Securities Lending, Global
responsible for expanding to start his own company, Prime Finance North America,
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From the sovereign bankruptcy of Iceland to growth in Sweden, Nick Pratt rounds up the prevailing
trends in Nordic securities lending.
lost 90% of their value and the central have enjoyed record volumes in their
bank was declared insolvent. sec lending programmes in the last
Securities lending is consequently nine months, even if the value of these
not the primary concern for Iceland’s stocks has reduced markedly in the last
financial authorities as they go cap in three months.
hand to the IMF for the kind of multi- “We haven’t seen many firms pull-
billion bail-out package to keep an angry ing out of stock lending,” says Joakim
population off the streets of Reykjavik. Håkansson, head of securities lending
But for the rest of the Nordic coun- and equity finance at Sweden-based
tries, the fate of the securities lending Handelsbanken Capital Markets.
market is a more prescient concern “Maybe lenders are being more careful
with the inevitability that 2009 will about the volume of stocks that they
bring some kind of downturn. Accord- are lending and the GC level [the cost
ing to Chris Angell, principal at pen- of borrowing for more liquid stocks]
sions consultant Mercer Sentinel, the has increased a little bit but we have
majority of lenders have been review- seen little impact in the market so far.”
ing their position in terms of whether Any impact is likely to be in terms of
the returns are adequate enough to demand rather than capacity and the
reward an increased risk. short-term prospects for Handelsban-
“The biggest issues are facing those ken’s domestic sec lending market is
clients that accept cash as collateral,” says very positive, says Håkansson, thanks
Angell. “Along with Lehman Brothers’ to the fact that Sweden, along with
default, a number of cash vehicles have Finland, has no restrictions on short-
gone to the wall which has impaired cash selling. “I am cautiously optimistic. It is a
pools. Those wanting to reinvest cash tough call as no-one really knows what
have realised that the risks of taking cash next year will bring but today we are
as collateral in a securities lending pro- doing well.”
gramme is greater than they thought,” Finland is the second most active se-
says Angell. curities lending market after Sweden and
Nevertheless, any changes are is also yet to introduce any restrictions
unlikely to be dramatic, says Angell and on short-selling. Norway’s stock lending
most borrowers will be able to adjust to industry is hampered somewhat by the
any changes in collateral conditions or difficulty in accessing Norwegian stocks.
increased fees. “There will be a short- Current rules state that listed firms are
term reverse undoubtedly but the un- only allowed to lend 5% of their stock to
derlying demand for securities lending single clients (so in order to lend 50% of
will remain and will be satisfied.” their stock, they would have to find 10
The Nordic market, in terms of separate clients).
securities lending at least, is best viewed While there has been pressure from
in terms of its individual components. the market to relax these rules, current
Iceland has undoubtedly suffered the Sweden is the most active of the Nordic market conditions make it unlikely that
worst in the Nordic region. In less than countries in terms of securities lending. there will be any regulatory relaxation
12 months it has gone from topping a Not only does Sweden have the any time soon.
United Nations poll as the “best place to most active equity market but it has Denmark is still a niche market for sec
live” to a state of sovereign bankruptcy. also been boosted lately by the fact lending with Danske Bank and Nordea
Its three major banks, Landesbanki, that the country’s regulators have the main proponents. Danske Bank has
Kaupthing and Glitnir – all collapsed un- placed no ban on short-selling, unlike not been involved in any stock lend-
der colossal debts, trading was suspended most other European countries. Con- ing in Iceland so the defaults from that
on the national stock exchange as assets sequently many Sweden-based firms market have not had any effect, says Kim
Lilmose, first vice-president at Danske course we have seen some of the inves- As for the prospects for 2009, Lilmose
Bank. tors disappear from the market, par- says that the Nordic market is still niche
“We do see clients who want to ticularly on the hedge fund side, so that in comparison to the more mainstream
hedge their portfolios via futures and access to securities has diminished but markets. “Our business on the likes of
options and those products have to be there are still a lot of long/short investors delta hedging and failing settlement and
delta hedged so there is still a need for in the market.” these are both likely to continue, albeit
stock lending in this area,” says Lilmose. Fees are generally higher at the mo- with lower volumes.
“We have also seen very high volumes ment, says Lilmose, due to the increased “There are less hedge funds out there
on the exchanges so far, even if this focus on counterparty risk and un- and less appetite for risk in the market so
is likely to fall in the near future, and predictable market movements. “With less willingness from the banks to lend to
we have seen a lot of stock lending to a volatile market you have to look at these hedge funds but securities lend-
secure settlement on this exchange higher haircuts, which is something that ing remains a very viable business,” says
activity.” we have done.” Lilmose. L
Nonetheless, 2009 is likely to see a fall
in stock lending activity, says Lilmose, as
the poor market conditions take effect ³6JQUGYCPVKPIVQTGKPXGUVECUJJCXGTGCNKUGFVJCV
and demand for securities lending de-
creases. On the positive side, at least there VJGTKUMUQHVCMKPIECUJCUEQNNCVGTCNKPCUGEWTKVKGU
are no capacity issues, says Lilmose. NGPFKPIRTQITCOOGKUITGCVGTVJCPVJG[VJQWIJV´
“In terms of capacity we have the same
access to securities as we have had before. %JTKU#PIGNNRTKPEKRCNCV/GTEGT5GPVKPGN
There have been no changes there. Of
GSL| Global
Securities
Lending
DATE
Thursday, 15th January 2009
LOCATION
Four Seasons Hotel, Canary Wharf
Consulting
For over 10 years Rule Financial’s specialists have been working alongside their coun- C: David Little,
terparts at the world’s top banks and hedge funds, helping to lower costs, improve pro- Head of Securities Finance
ductivity and extract the maximum value from IT investments. Our expertise in the man- A: 101 Moorgate, London,
agement of change, project delivery and complex technology solutions has helped us EC2M 6SL,
build long-term relationships on a solid track record of success. Our prowess in system UK
design, testing and rapid application development has earned us a powerful reputation.
This means that at Rule Financial we have a thorough understanding of what the front, T: +44 (0)20 7826 4444
middle and back offices each require from their systems and processes, thanks to our E: david.little@rulefinancial.com
practical experience and capability across the broadest spectrum of domains. Buy-side W: www.rulefinancial.com
or sell-side, in both arenas we’ve attracted some of the best in the City to our doors.
Data Services
Data Explorers is the leading global provider of market information and consulting New York
services to the securities financing industry and the largest provider of global short-side A:75 Rockefeller Plaza
intelligence to investment managers. New York, NY 10019, USA
T: +1 212 710 2210
Our products provide market professionals with quantitative measures of securities
lending, performance and risk. We are based in New York and London and collect data London
from over 100 of the top security lending firms representing over 75% of the global A: 2 Seething Lane
securities lending market. On a daily basis we process more than 3 million transac- London, EC3N 4AT, UK
tions from over 22,000 funds. On 1 December 2008, this included over 220,000 fixed T: +44 (0)207 264 7600
income and equity assets worth more than USD11 trillion in lendable value of which
over USD3 trillion was out on loan.
Securities Lending
eSecLending is a full service securities lending agent and administrator of custom- T: US +1 617 204 4500
ized securities lending programs. Their program has been adopted by many of the T: UK +44 (0) 20 7469 6000
world’s largest and most sophisticated asset gatherers including pension funds, mutual C: Christopher Jaynes
funds, investment managers and insurance companies. They are a third party industry E: info@eseclending.com
specialist providing lenders with customized programs, high touch client service, W: www.eseclending.com
comprehensive risk management, and superior risk adjusted returns. The firm takes A: 175 Federal Street, 11th Floor
a highly consultative approach with their clients by structuring separate, non-pooled Boston, MA 02110, USA
programs and utilizing a competitive auction to determine the optimal route to market A: 1st Floor, 10 King William Street,
for their clients’ lendable assets. Having built their business to incorporate investment London, EC4N 7TW, UK
practices such as the use of specialists, multiple-managers, unbundling, price transpar-
ency, and competition, their approach ensures best execution and also provides clients
with greater control over their programs, allowing them to more effectively monitor and
mitigate risks and counterparty relationships. Additional information about eSecLending
is available on the company’s website, www.eseclending.com.
Technology
C: Judith McKelvey 4sight Financial Software is a leading supplier of innovative software solutions to the
T: +44 (0) 207 043 8319 Securities Finance, Settlement & Connectivity markets with offices and clients worldwide.
E: judith.mckelvey@4sight.com 4sight Securities Finance (4SF) is a flexible modular solution that empowers financial
C: Jason Hayes institutions of all sizes, from the smallest direct lender to the global custodian, broker or
T: +1 416 548 7922 intermediary on an agency or principal basis. 4SF contains market leading functional-
E:jason.hayes@4sight.com ity that provides greater automation, faster trading, improved risk management, and
C: Peter Sanders enhanced relationships with clients and counterparties. It supports borrowing, lending,
T: +61 (0) 2 90378416 repo, swaps and collateral management across the equity and fixed-income markets and
E: peter.sanders@4sight.com provides 24 hour continuous operation, inter desk trading, a ‘global book’, real-time value
W: www.4sight.com dated position keeping and a powerful web reporting module, allowing full front to back
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Visit SunGard at With annual revenue of USD5 billion, SunGard is a global leader in software and process-
www.sungard.com ing solutions for financial services, higher education and the public sector. SunGard also
helps information-dependent enterprises of all types to ensure the continuity of their busi-
ness. SunGard serves more than 25,000 customers in more than 50 countries, including
the world’s 50 largest financial services companies.
A: 54 Lombard Street, EquiLend is a leading provider of trading services for the securities finance industry. With
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C: Michelle Lindenberger merly manual trading and post-trade processes. Using EquiLend’s complete end-to-end
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T: +44 20 7220 0961 Pirum provides a full suite of automated reconciliation and straight through processing
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ing increases in operations headcount.
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Amy Sussman, SoftSolutions
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THE MUST-ATTEND EVENT FOR THE
BENEFICIAL OWNER COMMUNITY