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Fundamentals
Securities Services & Securities Lending for Funds, Managers and Investors
ISSUE 03 SPRING 2011
Slow and
steady
Lord Hutton - the long term
Custody fees, CEE & Russia
US Senate sec lending hearing
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Editor's Letter
Welcome to Fundamentals
Spring 2011
The sun has finally started shining in the UK, making it a The theme of pensions carries through to the
good time to shed light on what the Fundamentals team securities lending section of the magazine, as lending of
has been up to over the first three months of the year. pension fund assets was scrutinised by the US Senate,
It has been conferences galore, with our own London while in investor services we have a heavy focus on the
and Nordic Securities Lending Summits and a host of Central and Eastern European region, outsourcing and
industry events. domiciles.
One major event was the National Association of We have a look at various Asian issues, from clearing
Pension Funds’ Investment Conference in Edinburgh in Hong Kong to the effects of the Japanese tsunami
and this issue features a heavy pensions focus as a on the country’s securities lending market and we have
result. a profile on State Street’s Steve Smit and Brandes
We speak to Lord Hutton, architect of proposals to Investment Partners.
overhaul the UK’s public pension sector, while from I hope you enjoy the magazine – as well as the
the USA we feature an article on the funding problems sunshine.
Stateside.
Craig McGlashan, Editor
The
Securities
Sec
Lending
Le
Industry
Ind
Awards
Aw
2011 GSL
:WYPUN 2011|Fundamentals4HNHaPUL| 1
Contents
Contents Editor
Craig McGlashan
craig.mcglashan@2i.tv
FundFront
Contributing Editors
FundFront InvestorServices SecuritiesLending Brian Bollen
Roy Zimmerhansl
P.3 P.28 P.60
People Moves Executive Profile: US Senate hearing Correspondent
Steve Smit Stephanie Baxter
stephanie.baxter@2i.tv
P.4 P.66
News Round P.30 Fixed income: Contributor
Future trading Short selling Ugo Bonaugurio
P.7
Mandates P.31 P.68 Design
OTC Clearing focus CCP: Eurex Luke Merryweather
P.10
InvestorServices
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2 | Fundamentals4HNHaPUL |:WYPUN2011
People Moves
People M o ve s
International Capital team in New York. ICAM president of Nomura Bank brokerage after he resigned
Market Association principal Rod Barker quits Luxembourg. from UBS in March. Prime
(ICMA) has named the firm to join a new asset brokerage executives
Sberbank custody director management business. Roger Harrold has resigned Jonathan Yalmokas and
Yury Dubin as chairman from his position as head of Charlotte Burkeman have
of its newly appointed John van Verre has domestic securities services also quit, reports said.
regional committee for been named head of at Deutsche Bank due to BofA plans to expand its
Russia and the CIS. global custody at HSBC “personal reasons”. Howard prime brokerage team as
ICMA also appoints Alfa- Securities Services (HSS) Topf replaces Harrold with it continues to compete
bank’s Denis Soloviev to develop the firm’s global the full title of global head of with prime broking giants
as managing director, product proposition and direct securities services. Goldman Sachs and Morgan
Sergey Shvetsov as drive the establishment of a Stanley.
director of financial markets consistent global operating State Street has re-hired
operation, and MDM model. He joined the bank Phil McGowan as senior Cornelia Keth has joined
Bank’s Ilya Vinichenko as in 2008, acting as head of vice president and EMEA State Street in Germany as
head of securities market HSS in Singapore and then head of private equity and head of sales and account
trade. Dubin and the new managing director for HSS real estate services after management to help State
committee members will Ireland. leaving the bank in 2008. Street to maintain its
build on ICMA’s involvement McGowan, who was COO strong position in German
in Russia’s market. Matthew Pinnock has quit for HFX Capital’s alternative outsourcing. Keth moves
Nomura, where he has investment distribution and from BNY Mellon.
Daiwa Capital Markets acted as managing director sales efforts from 2009 to
has hired Ali Khan to head of capital markets prime 2010, will help continue SunGard Astec Analytics
up its Asian equity sales services. The move follows State Street’s plans to has appointed Tom Kirdahy
unit as part of the bank’s reports that the bank is develop solutions for clients’ and Bill Mauer to build on
wider plans to expand its trimming its prime brokerage changing needs. relationships with beneficial
non-Japan Asia business. staff to keep its business owners as they show more
Khan joins Daiwa after four in good shape. Most of RBC Dexia Investor interest in their securities
years at Deutsche Bank as the cuts are expected to Services has appointed lending programmes.
head of Indian equity sales. occur in Nomura’s London Sebastien Danloy The firm plans to develop
Alex Lewis has also been headquarters. as its new managing an experienced sales
appointed as managing director for Luxembourg. team to “empathise” with
director for Asia equity Luxembourg operations are stakeholders.
Matthew Pinnock
:WYPUN 2011|Fundamentals4HNHaPUL| 3
News Round
FundFront
NEWS
The top stories from
Fundamentalsmagazine.com
this quarter
10th January 2011 to information while Dreyfus. Swatch Group and horizon. Key findings were:
Goldman Sach’s last big on the move. The app, LVMH are likely acquirers for 60% of managers planned
prop trader team has quit which is available on Tiffany, while Adobe could to increase headcount; the
to start raising money for iPhone and BlackBerry, be a target for Apple and best investment
a new independent hedge provides access to Google. The research said opportunities were in North
fund in London. The team, revenues, balances and that both companies are in America; and investors were
led by Daniel Benatoff loan distribution, as well consolidating markets and keen on endowments and
and Ariel Roskis, has as market news and that there is an “intense foundations.
received a $300m (£193.7m) developments which may fight for pole position” in the
investment from Brummer affect lending revenues. software market. Ingenico
& Partners. Benatoff and The product was created and Meggitt were also 19th January 2011
Roskis are senior traders at in response to recent cited as possible takeover BNP Paribas Securities
Goldman Sachs’ Principal market events and volatility targets. Services announced it
Strategies desk (GSPS) that have “intensified” was the first custodian to
which has been forced clients’ need for financial The Australian securities offer funds of hedge funds
to wind down since the information in real time. lending market needs an integrated liquidity
introduction of the Volcker further changes to attract management solution.
rule to limit banks on putting funds and avoid falling Fund managers now have
capital in speculative trades. 7th January 2011 behind Asian markets, a committed financing and
The Swiss regulator, FINMA, Peter Martin, chairman of FX hedging service which
UK final salary pension has granted Newedge the Australian Securities is fully integrated with
schemes are locking out branch licenses which Lending Association their asset servicing needs
both new and existing upgrade its representative (ASLA), said in an across the entire trade
members, according to offices in Zurich and Geneva exclusive interview with lifecycle, said BNPP SS.
National Association of into branches. The company Fundamentals.
Pension Funds’ annual will now be able to expand While Martin calls ASIC
survey for 2010. One in the scope of its execution the “front runner” among 20th January 2011
five UK final salary pension service, where its Swiss global regulators on A new survey from
schemes are restricting clients will have global disclosure requirements Finadium found that US
future contributions from coverage through a single of short positions, he says plan sponsors now view
existing members, a 7% local office. Newedge says that aligning Australian securities lending as an
increase from the NAPF’s that it is in the process of regulations closer to those investment product and
2009 survey. The results hiring additional staff with in neighbouring markets recognise that custody fees
follow Lord Hutton’s the aim of increasing its such as Hong Kong, is “rarely reflect the true cost
independent review which sales force by one third by necessary for additional of service delivery”.
says that public sector the end of the first quarter transaction flow. Through interviews and
pensions should no longer of 2011. annual reports, the study
be based on final salaries. gauged the opinions of 98
17th January 2011 sponsors handling more
Brown Brothers Harriman 12th January 2011 A survey from BarCap than $2.33 trillion in assets.
has joined the mobile app Tiffany & Co and Adobe showed that the majority of
revolution by introducing Systems have been named investors and managers are
a securities lending as attractive targets for optimistic about 2011, with
application for smartphones, takeover in 2011, according new products, hiring sprees,
allowing lenders access to research by Bernheim, and higher returns on the
4 | Fundamentals4HNHaPUL |:WYPUN2011
... and climbing.
Custody-Depositary / Trustee
Fund Administration
Corporate Trust
CACEIS benefits from an S&P AA- rating
www.caceis.com
News Round
26th January 2011 funds that have as much 8th March 2011 schemes. Northern Trust
Short selling in the Indian as 20% of the Asian hedge Deutsche Bank released claims that local schemes
cash market has risen fund market. David Murphy the results of its ninth annual are looking for ‘tailored’
dramatically in recent - co-head for the Asian Alternative Investment securities lending solutions.
months according to data prime finance unit - revealed Survey, which indicates a Newedge has reinforced its
FundFront
from the National Stock in an interview that the strong recovery in the hedge claims to be a global leader
Exchange (NSE) of India. Bank plans to increase the fund industry despite a in multi-asset brokerage and
The volume of stock unit’s headcount by up to difficult market in 2010. The clearing.
lending and borrowing 10% this year in plans to survey reveals that investors
rose by nearly 20 times in capitalise on the growing predict $210bn of net
the second half of 2010, interest and increasing inflows into the hedge fund 17th March 2011
where 900,000 lakh shares number of hedge funds industry in 2011 to bring US senator Herb Kohl,
were traded this January in the region. He claims the total AUM to a record chairman of the special
alone. The results follow the recession provided $2.2 trillion by the end committee on aging,
steps by the Securities Deutsche Bank with a path of the year. Investors are has made a series of
and Exchange Board of into Asia’s prime brokerage increasing their allocations recommendations to how
India (SEBI) last year to business. and hedge fund teams, securities lending operates
enable short selling, where and smaller funds will have in 401(k) plans during a
it removed the guideline growth opportunities where hearing on the matter. He
on valuing collateral in 23rd February 2011 65% said they will invest in said that securities lending
securities transactions and Finadium released a report hedge funds under $1bn. withdrawal restrictions are
extended securities lending on the implications of Basel “troubling” and that more
contracts from 30 days to III for the securities lending efforts should be made to
12 months. and collateral management 9th March 2011 make the industry more
industries. HSBC Securities Services transparent. “The economic
The report is aimed at (HSS) has launched its downturn showed that
28th January 2011 educating professionals global Islamic securities securities lending is not a
South Carolina has issued about the opportunities services offering in response free lunch,” Kohl said. The
a $200m lawsuit against and challenges in the to a growing demand for hearing was held following
BNY Mellon to recover forthcoming Basel III standardisation in the a three-month investigation
losses from the bank’s regulations and looks Islamic banking world. into securities lending in the
alleged failure to stick to at potential scenarios The new offering is spread largest 401(k) plans in the
investment guidelines in a that could have negative out among 17 markets USA.
securities lending contract consequences if not across the Middle East,
with the State. State addressed properly. Asia-Pacific, Europe
treasurer Curtis Loftis and the Americas and is 4th April 2011
claims the bank invested in ‘globally consistent’. HSBC The Salvation Army’s
mortgage-backed securities 1st March 2011 Amanah Securities Services southern division in the US
that contained risky State Street’s securities complies with Sharia law has filed a $22m lawsuit
subprime mortgages, and lending programme is still and is available to Islamic against the Bank of New
made allocations to debt under investigation from investment managers York Mellon for losses
instruments in the Lehman the US Securities and and traditional investment incurred in its securities
Brothers investment Exchange Commission managers in charge of lending program. The
bank. Loftis added that (SEC), according to a filing Islamic funds. charity claims the bank had
the State plans to “recover made by the company. mismanaged its assets by
every penny due to South The SEC is concerned investing the collateral used
Carolina citizens”. A BNY with the “adequacy” of 11th March 2011 for securities lending in
spokesperson said that the State Street’s disclosures Northern Trust has mortgage-backed securities
bank believes the lawsuit regarding its collateral pools expanded its custody and other risky investments,
is without merit and that at points when these pools and securities lending according to reports. The
it intends to defend itself had fallen in market value, business that services UK Salvation Army says it now
“vigorously”. as well as the redemption local government pension cannot use those “toxic”
policy available to direct schemes, by winning $10bn assets for its projects. BNY
lenders. The bank says it of new client assets in 2010. Mellon claims its actions
31st January 2011 is “cooperating” with the The bank now provides were “appropriate”.
Deutsche Bank’s Asian inquiry but is unsure about custody to 36% of UK
prime finance business the potential outcome. local government pensions,
has doubled its share of and provides securities
the market by supporting lending to 20% of UK local
6 | Fundamentals4HNHaPUL |:WYPUN2011
Mandates
Deutsche Bank has signed a deal to New Zealand market after hiring more been selected by China Construction
provide third-party securities lending than 100 additional employees during Bank (CCB) as the global custodian
services to the Missouri State 2010, many in senior positions. for the upcoming Yinhua Qualified
Employees’ Retirement System Domestic Institutional Investor (QDII)
(MOSERS), which has been a “long- BNY Mellon Asset Servicing has fund to be launched by Yinhua Fund
time participant” in securities lending, been selected to provide Virtus Management Company. The new fund
according to sources. The bank claims Investment Partners with mutual fund is called Yinhua Anti-Inflation Theme
its approach addresses the evolving transfer agency services. The firm will Fund (LOF). Chong Jin Leow, head
needs of investors who are looking provide shareholder services, financial of Asia, BNY Mellon Asset Servicing,
for higher sophistication from their and regulatory reporting, and money says this win indicates that confidence
providers. market stress testing for the Virtus in QDIIs is returning after being out of
Mutual Funds, which had $14.9bn favour for two years, and he expects
BNY Mellon Asset Servicing has in assets and 290,000 shareholder to see a steady increase in QDII
won a mandate from Standard Life accounts as of December 31, 2010. launches.
Investments Global to service 8 Virtus said it chose BNY Mellon for its
billion in assets in its Global SICAV. operational efficiencies and technology Northern Trust has picked up
The bank will provide services to platform, and that it can help it commit a mandate to provide Stenham
the Luxembourg-domiciled SICAV to generating investor success. Asset Management with custody,
including fund accounting, transfer fund administration, credit and
agency and custody. SICAV has assets Brazil’s state-run energy giant, foreign exchange services for $3.5
split across 20 sub-funds. Petroleo Brasileiro SA (Petrobas) billion in hedge fund assets under
has chosen BNY Mellon Corporate management. Stenham will use Hedge
Brown Brothers Harriman has won a Trust to act as trustee, paying agent, Fund Monitor, a Northern Trust online
mandate to provide custody and other registrar and transfer agent for $6bn portfolio management tool, to provide
services for a new series of fixed- in bond issue. The new mandate information and analytics, to its hedge
income exchange-traded funds (ETFs) builds on the longstanding relationship fund of fund portfolios. The firms
from PIMCO. The first two ETFs to be between the two firms. Petrobas will claim this will boost transparency
launched, PIMCO Euro EUR Enhanced use the proceeds to pay for its project on the performance and liquidity of
Short Maturity Source ETF and PIMCO to tap into and refine oil reserves in Stenham’s hedge fund investments.
European Advantage Government Brazil. BNY Mellon said it expects
Bond Index Source ETF, are Irish- mandate activity in Brazil, Russia, India Citi Global Transaction Services
domiciled UCITS recently listed on and China to increase in 2011. has been awarded a new mandate
the Deutsche Börse Exchange’s by the online trading and investment
Xetra trading platform. BBH will also Northern Trust has been selected specialist Saxo Bank Group to
provide accounting, administration and to provide global custody, securities provide global custody services
transfer agency services. lending and other services to the for cash equities and fixed-income
Lothian Pension Fund, which holds instruments traded globally by its
J.P. Morgan Treasury & Securities $5bn (£3.2bn) in assets. The bank says clients. The mandate is an extension
Services has snapped up a $1.5bn that the move brings Northern Trust’s of Citi’s existing relationship with Saxo
custody mandate from City Super, the share of the Scottish local government Bank. Saxo also said that has plans
superannuation fund for current and pension schemes (LGPS) market to to strengthen its global footprint and
former employees of Brisbane City more than 60%, providing for seven widen its product range.
Council, Australia. Bryan Gray, head schemes. Lothian is one of the top
of TSS sales and client management, 10 LGPS by asset size in the UK with CIBC Mellon has been selected to
claims the new mandate strengthens more than 170 associated employers provide custody, fund accounting,
the bank’s position in the investment and serving more than 65,000 securities lending and performance
and administration sector. The members. & risk analytics to the Canadian
mandate win reinforces J.P. Morgan Christian School Pension Trust
TSS’s commitment to the Australian & BNY Mellon Asset Servicing has Fund. The bank’s president and
:WYPUN 2011|Fundamentals4HNHaPUL| 7
Mandates
CEO, Thomas Monahan said he has Northern Trust has snapped up a BNY Mellon Trustee & Depositary
seen increased demand from other £1bn mandate to provide securities (UK) has been appointed by Daiwa
pension administrators looking for an lending services to Shropshire Fund Asset Services, a division
asset servicing provider to “navigate County Pension Fund, adding to of Daiwa Securities Group Global
FundFront
them through market and regulatory the firm’s commitment to the local Asset Services, as a depositary for
changes”. government sector. The fund, which UK authorised funds within its fund
has been a client of Northern Trust hosting service. Daiwa Fund Asset
Northern Trust Global Investments since 2009, is now looking for a Services is extending its established
– the asset management arm of lending solution to allow it optimises hosting service for Irish-domiciled
Northern Trust – has been appointed returns at the same time as managing funds to include UK domiciled
by the Royal Borough of Kensington risk. The move follows “increasing collective investment schemes
and Chelsea in London to provide appetite” for securities lending targeted primarily towards institutional
transition management services and solutions, says Mark Snowdon, senior or high net worth investors. “Daiwa’s
run an £80m index portfolio for six sales and relationship manager for experience in servicing the Irish funds
months. This latest appointment adds securities lending at the bank. market provides a solid foundation
to the bank’s existing asset servicing upon which it can build its UK fund
mandate with the Borough to provide BNY Mellon has been selected hosting solution,” said Peter Craft,
custody services for around £450m by Fatima Fertilizer Company head of trustee & depositary for
in assets. Northern Trust said that Limited as the depositary bank Europe, Middle East & Africa.
it remains committed to the local for its American depositary receipt
government pension sector. (ADR) program. Each Fatima ADR Kenmar Group, a Rye Brook-
represents 50 ordinary shares and based $1.5 billion global alternative
RBC Dexia Investor Services has trades on the over-the-counter (OTC) investment firm, has selected
been selected by Beverly Hills-based market under the symbol "FTMFY." GlobeOp Financial Services to
Paratum Inc to provide custody, fund As the first Pakistan-based company provide an extensive range of fund
administration, shareholder services, to begin trading on the US OTC administration, risk and data centre-
domiciliary and financial reporting markets, Fatima Pertilizer will be the related services. “The integration
services for a new Luxembourg-based first Pakistani stock available for retail of risk and customised reporting is
private equity SICAV-SIF fund. RBC and institutional investors. BNY Mellon a central operational requirement,”
Dexia says this umbrella fund includes hopes to offer the company enhances Esther Goodman, chief operating
several sub-funds, the first being exposure to the global capital markets. officer of Kenmar. The company said
the US Renewable Energy Feeder that GlobeOp’s managed account, risk
Fund, designed to generate attractive BNY Mellon has been also been and technology expertise were key
risk adjusted returns by investing, in selected as sole sponsored elements in the selection decision.
renewable power generation, clean depositary bank by QBE Insurance
fuels and renewable energy. Paratum Group Limited (QBE) for its ADR Societe Generale Securities
claims it wanted to capitalise on the program. Previously, QBE traded Services (SGSS) has been mandated
growing renewable energy market. as an unsponsored ADR program by Ethias, a Belgian insurance
serviced by multiple depositaries. BNY company, to provide independent
J.P. Morgan has been chosen Mellon said it will provide the company valuation services. These services
by Maine Public Employees with a comprehensive suite of support cover a portfolio of complex structured
Retirement System (MainePERS) services to allow it to unlock the full products. This additional mandate
to service the State’s $10.5bn in potential of its sponsored DR program. won by SGSS illustrates the increasing
assets. The custodian will provide The bank has also been mandated need among investors to obtain
global custody, securities lending to act as successor depositary a precise valuation by third-party
and foreign exchange, among other bank for AIXTRON SE ‘s (AIXTRON) specialists of the complex financial
services. Andrew Sawyer, chief American depositary receipt (ADR) instruments held in their portfolios.
investment officer for MainePERS, program. AIXTRON said that BNY Ethias ranks as the 4th largest insurer
said J.P. Morgan was chosen for its Mellon’s services will help it to further in the Belgian market, all sectors
commitment to the public pension strengthen our U.S. shareholder base, included, with a 10.4% market share
market as the pension scheme looks as well as increase visibility of its DR as of December 2009.
to increase allocations to alternative program. BNY Mellon said it work
investments. The deal is the latest in closely with the company to broaden
a series of J.P. Morgan’s mandates its outreach to global investors,
in the public pension space, which leveraging its services and resources.
reflects the bank’s commitment to this AIXTRON is a provider of deposition
market segment. equipment to the semiconductor
industry.
8 | Fundamentals4HNHaPUL |:WYPUN2011
Europe’s leading
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efficiency and
cost-efficiency.
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Despite the advent of these transactions while they manage And because we’re one of the largest
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the global financial system ways of doing business. members see reduced handling
continues to suffer from costs across a range of markets,
inefficiencies. In OTC Eurex Clearing has been built to from exchange-traded financial
trading, manual trans- simplify this complexity and to make and commodity derivatives, to cash
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UK Pensions: Hutton report
Craig McGlashan talks to Lord Hutton of Furness about his report on the future of public
sector pension provision in the UK; its benefits, potential problems and the risk of backlash
as some in the media and the public associate the reforms with the government's
unpopular austerity programme
In the UK in March, Lord Hutton unveiled a from final salary to career average schemes is
report aimed at reforming the country’s public nothing to do with current fiscal challenges or any
sector pension system. future challenges.
Hutton outlined his three main recommendations “The reason I have made that recommendation
during a speech at the National Association is fundamentally about fairness and the way these
of Pension Funds Investment Conference in schemes work within the professions and across
Edinburgh. workforces in the public services.
“First, I am recommending that the current “They are fundamentally unfair to the majority
defined benefit schemes are replaced by of people whose careers don’t follow the
new career average schemes... Second, path of a high flyer. So that’s why I
I have recommended that the recommending that we change the
pension ages in most of these basic financial model; it’s not
schemes is linked to the State because I’m trying through
pension Age... Third, I have I think there is far too that vehicle to save money for
recommended that a clear much lazy journalism the taxpayer. I think it’s the
cost ceiling is set for these around this issue best way to achieve financial
schemes going forward - I and that doesn’t sustainability for what will
have suggested basing this on help get some of the be very good defined-benefit
the percentage of pensionable pensions going forward.”
arguments across to
pay paid by the taxpayer,” he Does he feel that some of
said. people the more negative headlines
At a time of cuts and austerity and backlash have been down
in the UK, many in the mainstream to a general lack of education
press and a number of unions have about financial matters in the UK,
derided the proposals (it should be noted something that should be addressed at the
the government does not have to accept them). school level?
Hutton spoke to Fundamentals about some of these “I agree very much with that,” he says. “It’s
issues. very clear to me that there isn’t a great level of
Just how worried is he that his proposals will get understanding on some of the issues around
caught up in the language of deficit reduction? pensions, which I understand because these are
“Obviously I am concerned about that because I issues often one doesn’t really turn to until later on
don’t think my reforms are anything whatsoever in life. It would certainly help the reform process
to do with the current fiscal challenges the country if there was an improved level of awareness
faces,” he explains. about pensions. I think there is far too much lazy
“These are long-term reforms and questions that journalism around this issue and that doesn’t help
I’m trying to address and they have implications get some of the arguments across to people.”
over the next several decades. I understand the One particular detail of the report indicated
background, I know how complicated and difficult that existing scheme members should be able to
these issues are, but my reforms I hope will be maintain the final salary link for their past service.
looked at on their own merit. They are not about From an operational point of view, does Hutton
saving money in the short term, and the switch foresee any potential difficulties in having two
10 | Fundamentals4HNHaPUL |:WYPUN2011
BNP Paribas Securities Services
THE CLOSER WE ARE, THE BETTER YOU PERFORM
securities.bnpparibas.com
BNP Paribas Securities Services is incorporated in France with Limited Liability and authorised by the French Regulators (CECEI and AMF). BNP Paribas Trust Corporation UK
Limited and Investment Fund Services Limited are authorised and regulated by the Financial Services Authority. BNP Paribas Securities Services London Branch is authorised by the
CECEI and supervised by the AMF and subject to limited regulation by the Financial Services Authority. Details on the extent of our regulation by the Financial Services Authority
are available from us on request. BNP Paribas Securities Services is also a member of the London Stock Exchange.
UK Pensions: Hutton report
12 | Fundamentals4HNHaPUL |:WYPUN2011
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In the 1930s, labour unions drew the battle lines can get the benefits they have contractually been
between the owners of labour - the workers - and promised when they retire:
the owners of capital. The unions fought to improve
the conditions for the workers at the expense of the 1. The returns on the invested assets can
owners, shifting a portion of profits from owners to improve to make up the difference between
workers. pension assets and liabilities.
Unlike the ‘30s, today’s union workers 2. The school districts can contribute
ARE the owners - through their more money to the pension.
pension plans - and they are, 3. The teachers can contribute
in many cases, government In order to fully fund more money to the pension.
employees. These differences are the [defined benefit]
not trivial and can change who programme in 30 I’ll discuss these ideas in turn.
bears the cost of improving years, investment
worker benefits from the “Us
versus Them” argument of the
returns for the next 1) Increased asset returns
1930s. Let’s use teachers as an five years would have
example. to exceed 20% per Asset appreciation is the
The conflict between year, a rate of return least painful way to make up
politicians (school boards, the pension shortfall as no one
that is 2½ times the has to pay any more than they
mayors, governors - the owners assumed investment
of the schools) and teachers is already are; the problem is it is very
coming to the fore for one very simple
return unlikely to happen.
reason: teacher pension plans are massively The head of the California State
underfunded. Teachers’ Retirement System has said: “In order
According to an April 2010 report by the Manhattan to fully fund the [defined benefit] programme in
Institute for Policy Research, the 59 pension funds 30 years, investment returns for the next five years
that account for most teachers’ pensions in the United would have to exceed 20% per year, a rate of return
States are underfunded by between $332bn and that is 2½ times the assumed investment return.” (The
$933bn, depending upon the assumptions you make California pension system is about $100bn short and
about the appreciation of existing assets. Only five of is in the worst shape in the country).
the 59 are better than 75% funded. Returns on investments are limited to what is
These pension plans receive funds from two available in the marketplace: 30-year government
sources: teacher contributions and school district bonds are yielding about 4%; equity returns for the
contributions, and the contributions are primarily last 10 years have been approximately flat—and it is
invested in US debt and equity instruments. As a an open question what they will do the next ten years.
result, the teachers own portions of US companies, While the Federal Reserve’s efforts to keep interest
and lend money to US companies and US rates low have benefitted borrowers, those same low
governmental entities. rates have hurt lenders like the pension plans.
Thus, there are only three ways to make up the Efforts to raise taxes on corporations to increase
shortfall in the pension funding so that the teachers Government revenue hurt the profitability of these
companies and, by extension, their owners - the
14 | Fundamentals4HNHaPUL |:WYPUN2011
US Pensions provision
pension plans - and reduce the possibility of asset pensions, driving more residents away in a spiral of
appreciation. It seems clear that federal government community decline and decay.
action going forward will impact the returns available
to the pension plans and their beneficiaries, the
teachers. 3) Increased teacher contribution
:WYPUN 2011|Fundamentals4HNHaPUL| 15
OTC derivatives: over the top?
Could the proposals to force pension funds to counterparty,” says Ben Clissold, deputy chief
clear OTC derivatives centrally represent a classic investment officer at P-Solve, which is part of
case of the law of unintended consequences in the Punter Southall Group and was founded in
action? If the low, growling rumblings emitting March 2001 to provide advice to liability-driven
from the industry are as well informed as they organisations such as trustee groups, corporations,
seem to be, this might well turn out to be the case. charities and insurance companies. “If they
The central clearing measures dictated from on are required to switch from collateralised OTC
high with the intention of making financial services derivatives to central clearing it will reduce capital
safer might well in reality very quickly increase efficiencies by requiring them to post initial margin
risk levels. which are not needed in bilateral transactions.”
This emerges as one of the key issues to present This could cause a drag on overall performance by
itself in even the most cursory examination of the requiring the amount of assets that would need to be
Dodd-Frank and EMIR proposals to ‘improve’ the available as collateral by a further 6%, he calculates,
safety of OTC derivatives, and ultimately the as cash will return only Libor. “The other 74%
value of pension funds. of assets will have to work even harder
Apologists for pension funds argue to compensate, so paradoxically the
that the funds should be exempted requirement to post margin to a
from the central clearing
If they are required central counterparty to reduce
requirement on what are in to switch from risk could actually increase risk,
effect the same grounds used collateralised OTC reduce income, or both,” he
to argue for the exemption derivatives to central says.
of corporates which use clearing it will reduce Tony Kirby, director,
hedging as an intrinsic capital efficiencies by regulatory and risk
component of their business management at Ernst & Young
model. It is exceedingly well
requiring them to post and chair of the MiFID Forum
documented that pension initial margin which are Best execution and Trading
funds which pursue liability- not needed in bilateral Group, predicts that there will
driven investment strategies need transactions be what he calls a rolling wave of
to use hedges of one kind or another higher costs all the way back to the
to enable them to meet their liabilities, buy side. “In a worst case scenario,
especially over the longer term. There is no a whole range of costs will increase, and the
single standard in this process, and the extent of each increases will be worse if there is initial and variation
individual pension fund’s customised needs would margin segregation on top,” he says. “These will all
create the mother of all challenges. Central clearing be passed on to the buy-side as fees.” Little good,
would become, if not an absolute nightmare, at least moreover, will come of it, he argues. “Will it make
a very, very bad dream. things safer? Are the measures proportionate?
The impact would be felt not only on the technical Do they tackle the problem of speculation? No.
side of the business. It would also affect the financial Speculation is the flip side to hedging, yet some
arithmetic. Central clearing will mean additional regulators think hedging is good, while speculation
costs (widely estimated at the equivalent of 100- is bad. They have to be careful not to stifle growth or
200 basis points lower performance), making it a pension funds won’t be able to plug their deficits.”
certain drag on income. This could in turn nudge a Neill Pattinson, chief strategy officer, global rates,
fund into taking a riskier approach to investment, at HSBC Investment Bank, could scarcely agree
or demanding more support from its sponsoring more. “What will be the impact of using a central
company. counterparty? It will clearly be a drag on investment
“If a pension fund is using OTC derivatives we return if they continue to use derivatives in the way
recommend that they hold 20% of their assets in that they have done until now,” he says. Not only
cash or gilts to post as collateral with the bilateral will pension funds have to post initial margin that is
16 | Fundamentals4HNHaPUL |:WYPUN2011
OTC derivatives: over the top?
not currently required in bilateral OTC transactions, memory serves me, I recall the numbers quoted were
but they will have less flexibility in the assets they some $30bn of current revenue which was predicted
must post. “They will have financing needs for the to reduce to $6bn. I don’t know how or where they
clearing house eligible collateral, which will represent get the numbers, and of course what rigour was
an ongoing cost.” applied to discover them, but what is certain is that
He concedes readily that clearing will provide the lost revenue to brokers has to end up somewhere;
certain benefits, but adds that there are other ways yes, mostly back in the pockets of the buy-side clients
of mitigating risk. “No-one in the fund manager who will now be able to see prices centrally, have
community is looking at clearing as an immediate better visibility of what the market is doing, and will
imperative; they feel that their existing bilateral therefore achieve a tighter spread.
facilities give adequate credit protection." “Now, I know it is not a completely zero-sum-game,
Whatever the philosophical and theoretical since new technology has to be put in place and
debates, a sense of acceptance and readiness to higher capital requirements are needed, but I imagine
adapt abounds. Says Stefan Gavell, executive vice the visibility gained by a centrally cleared OTC will
president of State Street Corporation, for example: greatly mitigate the cost of providing it. I remember
“Clearing of derivatives is going to be a reality -as in 1986 (pre big bang at the LSE), where naysayers
well as enhanced requirements for OTC contracts. were claiming that going visible on electronic markets
While there are overall benefits from clearing in would kill prices, cost too much and that liquidity
the reduction of systemic risk, it will also would plummet. Well, have we learnt a lesson
require major changes to how market yet?
participants, including buy-side “There is that other wee side effect –
firms, execute, settle, collateralise the one that regulators are pressing
and report on trades. A word of What will be the for – and that is insurance. I
caution comes, though, from impact of using a believe CCPs will provide a
Philippe Rozental, head of asset central counterparty? degree of insurance that will
servicing at Societe Generale It will clearly be a drag protect us from a repeat of
Securities Services. “It’s the on investment return the crash recently suffered.
pre-trade area that pension We all know to our detriment
funds must still concentrate
if they continue to use that insurance costs money,
on when making a decision derivatives in the way but the upside is that almost
whether to invest in OTC that they have done every single country west of
derivatives, not the post-trade until now China would have avoided the
processes, however sophisticated depths of depression that we have
they might be.” stooped to. We would not have
We return to Mr Clissold of P-Solve. to nationalise our banks, have no
He believes that the worst of all possible ballooning unemployment and poor GDP
worlds would be to require pension funds to clear etc. And the buy-side simply cannot complain that
derivatives before central clearing counterparties can 1-2% of performance will be lost due to these costs. I
deal with all the types of derivatives pension schemes think the ensuing crash, the failure to understand the
use. Making it possible to clear some transactions risks, resulting in a worldwide crash has had a rather
centrally but not others would defeat the objective more significant cost than an annualised 2%.
of the exercise, he argues. “It would reduce the “Finally, taking the last word from Mr Clissold, I
efficiency of the system while raising costs for its simply do not agree that unless every instrument is
participants.” able to be cleared centrally then we shouldn’t start
Kevin Neville, head of prime services and securities clearing any of them. We know that $450 trillion
finance at Rule Financial, challenges the assertion of OTC Swaps are traded, and $6 trillion of OTC
that ‘new’ costs related to central clearing will equities, and the same in OTC repos, and maybe a
cause unintended consequences, such as reduction few others – so why don’t we start with swaps and
in performance and riskier investing. “I remember get 90% of the game covered? Simple.”
reading recently that broker dealers were concerned
that with central clearing they would lose a huge
profit stream in the spread they charge the buy-side
over these bilateral agreements,” he says. “If my
:WYPUN 2011|Fundamentals4HNHaPUL| 17
Fund manager profile
In 1972 Charles Brandes worked for a small, now- In terms of applying these principles to non-US stocks,
subsumed brokerage firm in La Jolla, California. He there has been an evolution. Even in the 1980s it was
was a young guy and had been in university when hard to get US GAAP comparable data out of a lot of
they were still teaching Securities Analysis as a companies and so there was more of a bias towards
textbook in the finance classes, which was written large cap, but over the years non-US firms wanted
by Benjamin Graham and David Dodd, and The access to US capital and the only way to get that was
Intelligent Investor which came out a few years later, to open up the books, or come up with US GAAP
which was also written by the two of them. comparable financials.
Who walks into the office on that day – that brokerage You also have the evolution of custody. It used to be
firm on Wall Street, which was about six houses long in that you’d find a lot out about a firm but trading it was
downtown La Jolla, but Ben Graham, retired after 30 or a nightmare, as were the expenses on top of that, but
so years at Columbia University. He spent six months now you can trade non-US securities extremely cheaply
a year in La Jolla and was writing the fourth edition of from an institutional standpoint.
The Intelligent Investor. As we talk to our elder statesmen here about how
Interestingly, after Charles had finished college they it was in those days, they wouldn’t get a lot of
began teaching modern portfolio theory and they quit information but they would get a sufficient amount to
teaching the various books written by Ben Graham and start developing the models compared to what we can
David Dodd, so the fact that he had even read this stuff get today on companies.
was interesting. The interesting thing is non-US companies aren’t
Having recognised that this who was in front of him, restricted in terms of what they can talk to you about,
he said: “I really liked what I read in your books and it versus what happens in the US now. In the US a
really seems like the way I think you ought to approach company can’t tell you anything more than they tell
investing.” So for the next couple of years Charles the public so it gets pretty difficult to get additional
would pursue Ben Graham for donuts, lunch or coffee; information.
any pretext to sit down and talk about investing. You can find out more from the competition on
They developed a mentor/student relationship over another company than you can from them if they
the next couple of years and Charles became imbued haven’t released it, because they can talk about other
with the rightness of this theory of managing money firms; they just can’t give you information about
and not with the types of things that were being themselves that’s not published. You don’t have that
advocated by the brokerage firm he worked for. restriction on the non-US side.
He quit his job and took all the money he had in In the present day, the firm itself is a partnership
the world – which wasn’t much – and set up Brandes and we have a 100-year vision of remaining employee
Investment Partners in the next beach community north owned. Charles still has a substantial ownership
of La Jolla called Del Mar, above the Double Chinese interest or partnership interest but there are 21
Happiness restaurant (editor’s note - for anyone in partners currently and the 100-year vision is to remain
the area the restaurant is still there, although Brandes employee-owned because if you look at the way we
has - not surprisingly - moved) and laboured there by invest, it does not sit well with a corporate parent.
himself for the next 10 years. The reason for that is Graham talked about value
Graham’s work is known for his applying value investing as thinking differently from the herd. The
principles to domestic US securities. But the first client market itself is a manic depressive and can’t be
at Brandes was a Canadian multi-national, who said: “I anticipated in terms of how it’s going to behave, and
really like this whole value idea, but why can’t you do it’s really the sum total of a lot of irrational behaviour.
it with both US and non-US stocks as well?” So Charles First and foremost we’re a research boutique. We don’t
started applying the principles to a global portfolio for have a top down view or an economist on staff, we
the very first client. research businesses as an investor or an entrepreneur
So it could all have gone differently if someone else might look at a company.
had walked in that first day. When we develop a valuation of a security we look at
18 | Fundamentals4HNHaPUL |:WYPUN2011
Fund manager profile
its history. It might take 10 or 15 years’ worth of data to investment committee who will opine on any issues
come up with the cash generative properties of a firm on the report. They can request anything they want
as it goes through the various market cycles. We’re not and send the analyst back many times until they are
saying it’s a good firm or a bad firm, we’re looking at comfortable.
fundamentals and how it performs over time. Then the committee will discuss what the value
Next, we only get interested in purchasing a name if should be. Part of what we do to ensure it is truly
you can purchase it at a discount. Graham pointed to a committee decision is that when comments are
a 20-35% discount – if you can purchase names in that requested of the committee members the most junior
range you’re going to do better than the market and people have to speak first so you don’t have the most
sometimes the reason for that discount can be very senior people intimidating the newer members. We
uncomfortable – it can be headline risk of factories want the intellect of everybody to be rendered equally.
being destroyed, it can be problems with regulators, We like to call our valuations a neighbourhood rather
and so on. than an address; we don’t say a firm is worth say $30 a
We are looking for that sweet spot at 20-25% discount share. We might say as a committee that it is worth $30
of what we think it is worth. Graham called that the to $32 a share.
margin of safety and the valuation the intrinsic value. Then let’s say it’s trading at $15, the committee will
The next tenet of value investing is to take a long- decide whether that current market price is cheap
term view. Our typical portfolio is three to five years, enough. If it is, the committee will say the current
although we’ll have outliers that will be in the portfolio margin of safety is acceptable and we would like to put
for seven to nine years before they reach their valuation 2% of the stock into our cash flows and then we put
target. that into our computer systems to look around all of
That’s the philosophy, but where we are unique is in our portfolios and look for cash opportunities.
the way we render our valuation philosophy. We don’t So in our portfolios we’re looking to have an average
have a star system, legitimately. All of our buy, sell and margin of safety of 20-35% across the board and to the
allocation decisions in our portfolio are actually made extent there are no cash flows we’ll look for situations
by an investment committee. where names are approaching their intrinsic value.
We have four investment committees –large cap, mid- Let’s say they were purchased three years ago, it is
cap, small-cap and emerging markets products. 40% margin of safety and now they’re only 10% away,
We have 35 researching analysts who are responsible so we might pick up cash from those names that are
for putting together these valuations. They might spend approaching their intrinsic value.
anywhere from four to six weeks or more coming Our portfolio managers don’t have discretion because
up with the valuation of a company. They bring this the investment committee itself does all buy, sell and
research report to investment committee and everybody allocation decisions.
who sits on a committee is either currently a research
analyst or has been one in the past.
Once a research report is ready it is brought to the
Watch a video
interview with Debra
at the IMN Beneficial
Owners' Securities
Lending Summit at
Fundamentalsmagazine.
com/videos
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20 | Fundamentals4HNHaPUL |:WYPUN2011
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Private Equity Endless-Liberata
European community.” A first step in this direction has enhance the integration in the government bond market
been taken with the deal agreed by government leaders of is progressively becoming more concrete, and European
the eurozone countries on 12th March 2011 that increases policymakers now have the unique opportunity to make
the lending capacity of the EFSF and gives the EFSF the it happen.
ability to purchase bonds in the primary market.
FundFront
22 | Fundamentals4HNHaPUL |:WYPUN2011
Private Equity Endless-Liberata
the management team on 4th October and we knew at years the business has a positive balance sheet which it
once that it was a transaction well suited to the Endless can be proud of and unlike many competitors has zero
business model. I was very impressed with Dermot and bank debt. Furthermore the cash injection from Endless
Martin, who had already taken the company a long way of over £20m has given the business substantial cash
through the turnaround process.” headroom. Many employees have asked why Liberata
Two big obstacles remained, however, to make was acquired by a Turnaround Fund and the reasons lie
Liberata truly attractive. One, the company was running in the historic debts and weak balance sheet which were
out of cash, as its modest profits were too low to service unsustainable.
the debt taken on by General Atlantic to fund its The acquisition marks the first deal from the firm’s
previous private equity purchase, and General Atlantic new London base in Curzon Street, Mayfair, and the 11th
had reached the limits of its appetite to provide further in Endless Fund II. Liberata employs over 2,000 people
funding. Two, Liberata’s defined benefit pension fund in 20 business centres across the UK and its core focus is
had a deficit in excess of £100m that had to be addressed. on improving and streamlining operational processes to
“On the cash front, we knew we had until Christmas,” drive costs savings and improve administration at Local
Wilson continues. “That made it a tight timetable, but Authorities and Central Government Departments.
one that is within our usual norms.” On the pension Liberata describes itself as one of the UK’s leading
front, the management team had already been in providers of business process services having supported
discussions with the fund trustees and the UK’s clients for over 35 years in improving their operational
pensions regulator. Those discussions had very handily cost management and service performance to deliver
pinpointed a groundbreaking way forward, which was business and social benefits and improve their
to place the fund in the care of the country’s customers’ experience. Its origins lie in a business
Pension Protection Fund. At a stroke, founded in 1975, by the Chartered Institute
using a Regulated Apportionment of Public Finance and Accountancy
Agreement, and handing over a cash (CIPFA), called CIPFA Services
sum in excess of £10m, the pension A possible solution Ltd. CIPFA was acquired by its
liability vanished. The exchange to the debt crisis management in 1989 and renamed
of contracts took place on 26th CSL. CSL provided management
November, and although the
would be to learn from consultancy services, Business
formal public announcement did the crisis resolution Process outsourcing (BPO)
not take place till early January, mechanisms adopted and corporate finance advice,
completion followed on 24th by Latin American predominantly to local
December, delivering yet another government until 1993, when
cliché opportunity. “Yes, it was a countries at the end it was acquired by Deloitte &
nice early Christmas present for of the 1980s and Touche and renamed Liberata.
us,” agrees Garry Wilson. take the Brady bonds BPO services became the focus of
The total of more than £20m its activities resulting in a number
committed by Endless includes the
scheme as a template of partnerships with local authorities
premium paid to the PPF. The firm and governmental agencies for the
paid a nominal sum for the business itself, provision of services including Revenues &
which is now debt-free, leaving around £10m for Benefits, Finance & Accounting Management, ICT,
working capital as Endless gets on with doing what it Human Resources & Payroll and other transactional
does best. “What struck me most on meeting Dermot services. Recent successes include contracts for the
and Martin was that despite having been through a provision and management of business support services
tough time their primary concern was about providing for the London Borough of Bromley and North Somerset
a secure base for employees and customers alike,” says Council and the Local Government Association.
Wilson. “Those principles are very closely aligned to “Endless understood the financial restructuring that
our own. Harnessing the motivation and support of was required and that is one of the final pieces in a
Liberata’s employees and customers will mean a bright turnaround strategy already well advanced by the team
future ahead. The company is already making modest at Liberata,” says Garry Wilson, bringing the current
profits, and we hope to improve the level of those chapter of the story to a neat conclusion. “Now that the
profits.” At the time of acquisition, Liberata’s annual deal is done all stakeholders can look to the future with
revenues of around £110m were generating around £5m Liberata as a financially strong, independent company. I
of ebitda [earnings before interest, taxes, depreciation, am very much looking forward to seeing the team take
and amortisation], he adds. Turnover is underpinned by the business forward for years to come.”
contracts with the UK’s Ministry of Justice and several of
the country’s largest local authorities.
The transaction has seen the financial position at
Liberata strengthened considerably. For the first time in
:WYPUN 2011|Fundamentals4HNHaPUL| 23
Private Equity Pearson-SEB
Pearson agreed to pay around £326m for SEB’s school learning systems business and to provide technology
and materials to SEB’s educational institutions, using part of the proceeds from its earlier sale of Interactive
Data Corporation.
Barclays Capital advised Pearson while Morgan Stanley advised SEB. Pricewaterhouse Cooper handled due
diligence for Pearson. Lobo de Rizzo was Pearson’s legal adviser, while Pinheiro Neto looked after SEB.
Education. Education. Education. The one-time business on 16% 2010E); two, the business has achieved
favourite election campaigning mantra of Anthony 20% organic growth (and drivers for growth remain –
Charles Lynton Blair could also double as a modern young demographic profile, increasing public and private
mission statement for the Pearson Group. In the early to education spend); and three, there are meaningful tax
mid-1980s the company was little more than a de facto benefits (no tax to be paid in Brazil for five years).”
investment trust with a ragbag assortment of holdings He points out that Pearson has an existing small position
ranging from the Financial Times to Lazards to Madame in Brazil and that the combination of the two entities
Tussauds to Penguin books. Today Pearson describes should allow cost synergies. He adds that with integration
itself with no false modesty as the world’s leading costs taken above the line, Pearson expects the deal to be
education company, providing learning materials, mildly EPS accretive in 2011E and value accretive. Clear
technologies, assessments and services to teachers and operational synergies also exist. Pearson can point to a
students of all ages and in more than 60 countries. very large sunk investment in creating educational content
The most recent addition to the stable is the learning for the US and European markets. The translation of these
division of Sistema Educacional Brasileiro (SEB), one of into other languages for sale and use in other markets
Brazil’s leading education companies. Strictly speaking, the is a relatively simple and high-margin process, rather
formal announcement of the link-up spoke of a strategic resembling the traditional syndication of newspaper and
partnership to develop educational products and services magazine content. The process works particularly well for
for the fast-growing Brazilian education market. Brazil is subjects such as mathematics and science, although some
described as one of the world’s largest education markets products need to be carefully adapted for local language
with 56m students and an educational materials market and cultural reasons.
valued at approximately $2bn. Older observers whose memories are still sound will
Under the terms of the agreement, Pearson will acquire surely find their eyes twitching wildly at the mention of
SEB’s school learning systems business and will provide any tax concessions, like Commissioner Dreyfus in the
technology and materials to SEB’s educational institutions. Pink Panther films upon any mention of the name of
Pearson agreed to pay a cash consideration of R$888m Inspector Clouseau. Brazil was known long ago for its
(US$497m; £326m) or R$22 per unit. This compares with tendency to issue withholding tax certificates for large
a reported price tag of around £250m when murmurings amounts of tax ‘paid’ locally. The clinching argument
about the deal first surfaced several weeks ahead of its of many a proposition for many international investors
confirmation. Citi analyst Tom Singlehurst, who covers was not the soundness of the underlying investment, but
Pearson, is, however, reasonably relaxed. the implications for domestic tax savings using WHT
“The multiple looks high but for good reason we certificates that were, to put it bluntly, pretty much fake, but
believe,” he observes in his examination of the deal. “SEB’s genuine fakes. There is not the remotest suggestion that this
learning systems business is expected by the company is a factor in this deal, but it seems appropriate to provide
to generate c. R$160m of revenue this year (c. £60m) This younger readers with a degree of longer-term context that
implies Pearson is paying around 5.5x sales and around they might not otherwise possess.
15x EBIT. While this is higher than the recent acquisition Returning to the present, Singlehurst’s counterpart at
multiples we have seen (around 2x sales) we note that: UBS, Alastair Reid, echoes many of his thoughts. “Revenue
one, the business is much higher margin (35% operating growth for the SEB unit Pearson is buying has been 20%
margin compared with Pearson’s existing education pa with EBITA margins of 35%,” he comments. “Assuming
24 | Fundamentals4HNHaPUL |:WYPUN2011
Private Equity Pearson-SEB
this growth rate continues, a higher than 50% incremental curriculum design, teacher support and training, print
margin and given the relatively low cost of financing and digital content, technology platforms, assessment
using the proceeds of the Interactive Data Corporation and other services. SEB’s four sistemas – COC, Dom
disposal (£900m of net cash), we estimate the deal would be Bosco, Pueri Domus and NAME - serve more than 450,000
more than 3% enhancing to 2011E EPS and more than 4% students across both private and public schools. It offers
enhancing by 2012E, all else remaining equal.” undergraduate and graduate programmes to approximately
The strategy makes sense, adds Singlehurst, even though 9,000 college students and distance learning courses for
this is not the exact deal hypothesised in Citi’s own recent undergraduate, graduate, test preparation and further
report “Pearson: Building BRICs”. It reflects the execution education programmes. It directly operates 31 schools
of the same strategy, he explains, reallocating resources providing full-time pre-school, primary, secondary and test
towards faster growing markets. Although small, it will preparation courses.
shift Pearson’s emerging market exposure in Education Based on current market conditions, Pearson expects
from 13% to 14% on our estimates. “We believe Pearson will SEB’s learning systems division to generate revenues of
have the opportunity to grow the business (no.3 player in around R$160m in 2010 and to continue to grow rapidly.
a fragmented market) by bringing in existing expertise in The division has achieved average organic revenue growth
English Language Training and technology from previous of more than 20%, supplemented by acquisitions, and
acquisitions like Fronter.” Alastair Reid adds: “We see the operating margins of around 35%. Pearson will invest
move as a strategic positive as it allows Pearson to bulk to grow the business, integrating its content, assessment
up its faster growing international education unit (around and digital services into SEB’s sistemas and enabling SEB
20% of estimated 2011 EBITA) and expand into a high to provide a more complete offering to a wider range
growth market.” This will be building on the company’s of schools and students. The integration of SEB’s
recent progress. Over the five-year period from significant infrastructure with Pearson’s
2005-09, the international education market existing business in Brazil will enable
outside North America was Pearson’s Pearson to reduce costs for the combined
fastest-growing market. The headline organisation.
In Sistema
compound annual growth rate of Pearson expects the acquisition to
sales was 17%, rising to £1.035bn in Educacional Brasileiro, enhance adjusted EPS from 2011,
2009 from £559m in 2005. Operating we are delighted to its first full year, and to generate a
profit from that sector almost have found a dynamic return on invested capital above
tripled over the period, rising to Pearson’s weighted average cost of
£141m from £51m.
partner who shares capital from 2012.
Charles Goldsmith, head of our vision and Pearson says that this acquisition
corporate communications at commitment for supports its stated goals of building
Pearson, points out that Pearson innovative and significant education companies in
flagged up its intention to make selected fast-growing markets and
acquisitions of just this kind on effective learning applying its learning services and
the occasion of the Interactive Data technologies to support governments
Corporation sale. “Most recently, back in and institutions in making educational
May, we said that we would use the proceeds opportunities more accessible and more
of the sale to accelerate the expansion of our effective. It extends Pearson’s position as the
businesses, including through bolt-on acquisitions, with a world’s leading education company and follows recent
particular focus on adding complementary technology and investments in both acquisitions and organic growth
services to our international, consumer and professional opportunities in China, India, Southern Africa and Nigeria.
education businesses.” Juan Romero, president of Pearson Latin America, will
Although it is a small deal, Singlehurst says he believes it relocate to São Paulo to manage the business and lead
is transformative to the profile of the group and additive to Pearson’s growth strategy for the region from Brazil. John
earnings. Importantly, he calculates that it only represents Fallon, chief executive of Pearson’s international education
around one-third of the proceeds of the IDC sale. He company, said: “Given the size and growth prospects of
therefore expects to see more bolt-on acquisitions over its education sector, Brazil has been a focus for Pearson
the course of the next six to 12 months. He views the for some time. In SEB, we are delighted to have found a
SEB purchase as a mild positive in as far as it refocuses dynamic partner who shares our vision and commitment
market attention on the opportunities for growth through for innovative and effective learning. For Pearson, this
acquisitions and from emerging markets. also provides a platform to build a more significant Latin
SEB was founded more than 40 years ago and listed American business and takes us further into the provision
on Bovespa in October 2007. It has strong positions of broad-based integrated education services.”
in several key segments of the Brazilian education
market. It is a leading provider of sistemas (or ‘learning
systems’) to pre-school, primary and secondary schools.
A sistema is an integrated learning system incorporating
:WYPUN 2011|Fundamentals4HNHaPUL| 25
InvestorServices
P.28 P.33 P.38 P.42 P.50
Executive Profile: Russia gets ready Third-party Domiciles: Sustainable
Steve Smit clearing: Hong On and off again investment
P.34 Kong Guernsey focus
P.30 CEE outline P.54
Future trading P.40 P.48 Outsourcing
P.36 Dodd Frank Stock exchange
P.31 Corporate actions consolidation P.56
OTC Clearing automation Wine custody
Road to Ratification
26 | Fundamentals4HNHaPUL |:WYPUN2011
Gateway to the Russian Financial Market
www.nsd.ru ■ www.isin.ru
Executive Profile: Steve Smit
manage the global markets operation for State Street in to provide a whole range of services which are priced
Canada”. transparently allows that transaction to become viable in
What expertise has this experience given him? “I many cases.”
have great, broad exposure to our markets business in As said at the outset, the current environment is an
terms of foreign exchange, both building and running exciting one for Smit, not least within the potential
trading rooms. I’ve had stints with responsibility for our opportunities that the current raft of regulation being
investment research, with responsibility for building our seen in Europe and North America could provide.
electronic trading platforms in Europe and so on, so I’ve “The evolving regulatory environment is in many
had good broad exposure rather than the very narrow ways a new product laboratory for us to the extent that,
asset class exposure that many people tend to follow in while it can certainly create challenges, it can also create
terms of a career in the markets.” opportunities, for instance if our clients have enhanced
However, it was his move to Canada – for the second disclosure reporting requirements that we can assist
time – that saw him tasked with taking both a global them in meeting.
markets and investor services role. “Looking at Dodd Frank and the Volker Rule in the
What was State Street’s thinking behind this? “There USA and what is in the process of playing out here
was a very conscious decision on the part of the in Europe, there will be new regulation around OTC
organisation to start breaking down the silos within the derivatives clearing and there is a potential opportunity
bank, but also recognition that 70% to 75% of our growth there because clearing is really an adjacency to much of
in revenues actually comes from our existing client base. what we do already in terms of securities settlement and
“The idea that a big component of our revenue growth safekeeping.
was actually our ability to cross-sell products and “Like everyone else, we need to continue to evolve
services between the businesses was a key element.” and refine our operating model as there continues to be
So was Smit’s experience on the other side of the a certain amount of downward pressure on fees and we
business a major part of this decision? He thinks so. need to get more efficient in terms of how we go about
“When you spend 20 years around an institution like our activities, our processing.
State Street you are going to pick up a fair amount of “Automation is obviously a key element of that; we
knowledge about the servicing business, but I think it allocate a pretty significant 20-25% of our operating
also enabled me to bring a slightly different mindset expense budget to IT. I think it’s probably difficult
to that business to the extent that I don’t necessarily for many of our competitors to maintain that kind of
see what we are selling in the marketplace as being expenditure in that area.”
custody and accounting; the service I see us selling is the Despite these potential opportunities, Smit is cautious
assumption of operational risk. about some of the problems that could arise as global
“I think that background in managing risk in a trading regulators look to reform the financial world following
environment really allows me to bring a slightly different the crisis.
perspective to our core business on the asset servicing “I don’t think all of the implications have necessarily
side.” been thought through and I’m not sure there is someone
The renaming of the custody business is becoming a looking across the whole agenda and ensuring that
theme of the Fundamentals executive profiles and Smit there’s consistency across markets; certainly not globally.
is no exception. With ‘risk awareness’ being one of the “A lot of the new regulation and legislation will be
most oft-used phrases in the financial services business enforced in the USA probably 12 months before Europe,
since the onset of the crisis, ‘operational risk’ may well so a lot of the rules will come in as we are drafting
28 | Fundamentals4HNHaPUL |:WYPUN2011
Executive Profile: Steve Smit
the rules here. There will be some ability to ensure meet increased disclosure requirements, it’s very likely
consistency between North America and Europe but we that these costs will be passed on and detract from the
have yet to see whether that consistency will exist.” investment performance of the asset managers and in
During the interview, Smit talked at great length that way ultimately impact the end investor, whether it’s
about the client focus he and State Street attempt to a pensioner or someone putting money in their ISA.
achieve when running their business. But, while Smit “I don’t think that aspect has really been recognised by
talks expertly about the regulations his bank must the end investor, but certainly not by the politicians that
deal with, does he feel his customers are in the same are proposing this increased regulation.”
knowledgeable position? Despite these concerns, Smit is optimistic about the
“It varies. There are certain elements of the changing future, citing the potential for State Street to take on
regulatory environment that our clients are very well operations that fund managers are currently finding a
aware of, like UCITS and AIFMD, but I think there are drain on resources.
other elements that perhaps they are not so aware of. “Demand on the asset servicing side is very robust
“The implications of Solvency II on the insurance and the pipeline is very robust, for a number of reasons.
industry are probably well recognised in the UK, Asset managers are endeavouring to address their cost
perhaps less so on the continent. We’re trying to work challenges because right now levels of assets under
collaboratively with our clients, where necessary to management generally have returned to pre-crisis levels,
help educate them and we have a variety of mediums as has asset managers’ expense base, but revenues have
for doing that; our vision paper series, our client probably only returned to about 80%, as the money that
roundtables and so on. has flowed in has flowed into lower margin strategies.
“It really is a two-way street; our ability to provide “We are seeing tremendous demand for an end-to-
information and education to our clients and receiving end solution, middle and back office, and regulation
their feedback in terms of what’s important to them, is enhancing that demand, not necessarily in the
at the front end trying to consolidate that information asset manager space but also the insurance space
and influence the regulatory agenda, but at the back with Solvency II. Insurers are looking at what their
developing products and services to help our clients requirements and needs are going forward and who can
meet those requirements.” help support them.
However, there is one area where Smit expresses “On the pension side, we still continue to visit the
explicit concern, a concern that filters down to the level shift from defined benefit to defined contribution and
of the participant within some of the pension funds that that’s a trend that will continue to play out over years.
State Street counts as its customers. There are lots of trends out there creating challenges
“One area where I don’t think there is necessarily a and opportunities, but certainly from where I sit the
good appreciation - maybe it’s beginning to manifest opportunities are outweighing the challenges - making it
itself now - is that the result of many elements of this up- a very exciting time.”
and-coming regulation is going to be increased costs. As stated earlier, Steve Smit has been in the business for
“Whether that’s cost to meet the increased risks that an “awfully long time”, but – if he is right – this might
asset servicers are assuming or it’s increased costs to well be his most exciting time yet.
:WYPUN 2011|Fundamentals4HNHaPUL| 29
Future trading
Does automated trading mean the death of the traditional market data somewhere and make those trading decisions
trading floor? somewhere and you then have to make the order flow.
There has been a lot of discussion about the long-term They tend to optimise these servers, but then they are
death of the trader but we haven’t seen that yet – there are optimised at one venue but not for the rest. So where BT fits
approximately 180,000 traders globally. BT serves about in is that we take that infrastructure and sit in the middle
a third market share for the trading floor population and and connect to everybody, so if you’re order routing engine
we haven’t seen that go down. What is happening is that and your decision-making point is in our infrastructure, you
can broadly get to everywhere equally.
InvestorServices
Which regions dominate in terms of electronic trading? Are Which areas of electronic trading will see the biggest
there any upcoming areas? changes over the coming years?
London and New York, in terms of volume of trade, The advent of cloud-based services will dynamically
dominate. Chicago is another major market and they are change how things are operated as people access the
fairly well linked together for low latency trading. Another markets more flexibly. There’s a background demand for
factor is the merging of big exchanges and how this will more bandwidth but that’s there every year, I don’t see that
impact trading as they start forming their new power bases. fundamentally changing.
In Asia, Australia and Japan are very active. China’s On the people side, unified communications mean the
market will become more active I’m sure but at the moment trading floor is going to be a much more interactive,
the regulatory regime and the capital restrictions will collaborative place, with people trading and experts
impact trade volumes and external investment. brought to bear using all sorts of different media types.
Additionally, there is the regulatory obligation for storage
recording and interrogation of that data; you have to make
What advantages are there for traders to use providers like
sure you’re compliant with regulations. So compliance and
BT instead of hosting their servers at the exchange? risk management are places where people are spending
While the market is so fragmented, as it is currently, there
money, and they’re looking to providers like us to help
is a cost of placing infrastructure at the exchange. If you are
implement these things.
doing arbitrage between exchanges, you still have to gather
30 | Fundamentals4HNHaPUL |:WYPUN2011
OTC Clearing focus
:WYPUN 2011|Fundamentals4HNHaPUL| 31
Central on CEE
Central on CEE
estate, that this is in many important respects a solution in
search of a problem.”
For Florence Fontan, head of public affairs, BNP Paribas
Securities Services, the key for clearing house governance
is expertise before independence, and this is particularly
true for OTC derivative products. “Neither the financial
industry nor the public authorities can afford the collapse
of a CCP,” she comments. “We therefore need to ensure that
the risk committee and the CCP board both have sufficient
expertise to ensure proper risk management and to avoid
InvestorServices
32 | Fundamentals4HNHaPUL |:WYPUN2011
Russia gets ready
:WYPUN 2011|Fundamentals4HNHaPUL| 33
CEE ING
the recent economic activity would predict. Due to Bank in connection with the global certificates will
the weakening outlook of the eurozone the external be passed on to the NDU. Parallel to the creation of
environment is not supportive and remains volatile. the CSD the All Ukrainian Securities Depository is
Analysts expect that on a three-to-five year horizon supposed to function as a clearinghouse.
the regional growth in CEE will become The Czech market already took the lead
more attractive. No one will doubt last year in creating the CSD by a
however that it will require further similar merger, now Ukraine
stability and market developments Analysts expect that might succeed as well.
in the region. on a three-to-five A few other countries where
Can we expect that the similar structures operate
sentiment for Russia would
year horizon the today might decide to do
change? Most of the comments regional growth in the same. The Bulgarian
about Russia’s ambition CEE will become Central Depository launched
to become an International more attractive a project to implement SWIFT
Financial Centre (IFC) refer to communication with its members,
the slow market developments. The which will allow better STP rates.
decision has been announced a few years Poland performed extremely well
ago that Moscow desires to become an IFC but during the crisis so it is not surprising that the
the progress is slow. Lately, there have been positive country attracts a lot of interest. Poland continues
signs but any actions needed toward of achievement further with the implementation of the omnibus
of Moscow’s goal should be speeded up. account concept and by year end hopefully all
The requirements and comments of international outstanding questions will be clarified. Implementing
participants should be taken seriously otherwise how the new account structure from the beginning of 2012
would it be possible to become “international”? In seems to be realistic. Surprisingly there is a parallel
addition to the plans to create a CSD in Russia it has move in Poland and Hungary in connection with
been announced recently that a megaregulator will pension funds: hand-in-hand they decided to reverse
be established for the creation and execution of the the first pillar of the private pension scheme, which
state policy related to the financial markets. Parallel to created a lot of negative comments.
this, the FSFM will become a megasupervisor. By this No doubt that the Central and Eastern European
the regulatory and controlling functions will be split region offers good opportunities, however, these
which should lead to more efficient and simplified opportunities can be turned into benefits if the
decision-making. investors are supported by a strong, committed
Due to its size and importance in the region Russia is sub-custodian bank with good market knowledge,
always in the centre of interest but important changes proactive client service and with a focus on risk
can be seen in other countries as well. Investors mitigation and clients’ asset protection.
and the agent banks in Ukraine are faced with
challenges but it has been good to see recent efforts
for the development of the market infrastructure.
After several years of discussion it has been recently
34 | Fundamentals4HNHaPUL |:WYPUN2011
Nordea Bank
Custody services with
a broader horizon
Are you looking for a single point of entry to the Nordic and Baltic region? Or do you
have your eyes set on a specific local market? Nordea is the leading Nordic custodian
and the only truly Nordic player with well-established banks in Finland, Denmark,
Sweden and Norway as well as a strong presence in the Baltic countries.
Actions station
Stephanie Baxter talks to Laura Pollard, executive vice-
president of Fidelity ActionsXchange, about the need for more
timely sources of information in the corporate actions world
Corporate actions are an on-going challenge for the to Pollard, both the front
asset management world, and continued market volatility and back offices need and
in recent years has only increased the complexity of expect more timely, accurate
managing that information. sources of information,
Automation in the collection process still remains at a low whereas historically the
level of 60-70%, but more firms are starting to open their front office was willing to
eyes to the consequences of failing to install a system that work on rumour but expected that information to be correct.
InvestorServices
can computerise the process. For example, a recent Tower Regulation will play a huge part in driving the changes in
Group survey revealed that 66% of firms are making plans how corporate action and related events are managed, says
to implement technology to improve their corporate actions Pollard. “It’s a critical imperative that we have standards”,
data within the next 12-24 months. she continues. “Regulatory reform will help the public
Fidelity ActionsXchange claims to tackle these problems sector with transparency in terms of supervising and
head-on with an enhanced version of its ActionService managing risk by implementing standards starting at the
platform, launched in November 2010 in a bid to improve legal entity identifier level, but it will also help promote the
the ‘timeliness’ of corporate actions data. Laura Pollard, standardisation and efficiencies that we’ve been pursuing
executive vice-president of Fidelity ActionsXchange, talks for some time.”
about the need for more timely sources of information, Fidelity ActionsXchange claims it has seen an
which ActionService attempts to produce by getting closer ‘overwhelming’ response from institutions and trade groups
to the issuer who generated the event. participating in an industry dialogue and response to the
“We’ve always believed that the more timely sources of Dodd –Frank Act and the Office of Finance Research as to
information come directly from the issuers, the exchanges the impact that the new requirements will have on the legal
and issuer agents, so the closer we can get to the source entity identifier and subsequently to financial instruments
the more timely, standardized and comprehensive the and corporate actions.
information will be.” Pollard adds that there is room for additional providers in
Pollard claims that since the improvements, the platform the marketplace who can create new end-to-end solutions
has seen an increase in terms of timely data, where more for corporate actions and related event processing In a
than 25% of the time the data is timely by more than 24 bid to stay ahead of the game, Fidelity ActionsXchange is
hours compared to the firm’s traditional sources. She also extending its product offering this year beyond sourcing
says that the firm has seen an increase in new business and validation of announcements to offer a new service,
and expanded usage among its clients. “We support Notification and Response. A natural extension of our
about a third of the top 20 asset managers and we’re offering is to automate notifications out to their clients
seeing increased interest in broadening the usage of this and to be able to collect those responses to pass onto their
information within their enterprises.” The firm is now recordkeeping systems and custodians, says Pollard. The
looking to globalise through expanding its reach beyond new product will aim to automate that process for its
North America into Europe and Asia Pacific. customers.
Fidelity has seen some significant changes to the product The firm is also looking to bring in subscription-based
in recent months with last November’s enhancements and servicing to meet customer demand for flexibility well
the recent linking to Asset Control’s data management as more timely sources of corporate action and related
platform, AC Plus. Phil Lynch, Asset Control’s president event information. “We want to be able to provide our
and CEO, claims the move will help firms improve the customers with flexibility and choice around the sources of
quality of corporate actions data and reduce time-to-market information they want to use. They may have relationships
delays to ensure business continuity. that they wish to preserve and e different asset classes
“We’re seeing increased focus on corporate actions data they want to support and providing flexibility and choice
across departments at a variety of financial organisations, provided value,” she adds.
such as improving data quality before corporate actions The corporate actions space is an important one to watch
processing takes place, or integrating issuer data, security this year and it will be interesting to see if institutions and
master data or (historical) pricing data as a result of regulators take the next step to standardise the process, or
corporate actions,” said Lynch. whether other pressing issues on their agendas will take
In the past, errors taking place in corporate actions were priority.
seen as a cost of doing business, and many organisations
budgeted for those potential financial losses. According
36 | Fundamentals4HNHaPUL |:WYPUN2011
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harness the combined power of highly skilled analysts,
proprietary and commercial data sources and configurable
technology to deliver timely information and guidance
necessary to mitigate risk, reduce cost and increase
efficiencies across your organization.
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Visit www.actionsxchange.com
Third-party clearing: Hong Kong
Third-party clearing:
Hong Kong style
BNP Paribas Securities Services has become the largest third-party clearing participant on
the Hong Kong Stock Exchange. Barnaby Joel Nelson, head of business development,
talks to Stephanie Baxter about the growing trend towards outsourcing in Hong Kong
and why it’s taken so long for the market to accept the concept of third-party clearing
BNP Paribas Securities Services first entered the Hong broker’s name on the clearing ticket, even though
Kong market three years ago. How does the market back the client would never see it. This situation is still
InvestorServices
then compare to what it is now? occurring where Asian brokers don’t want to give
up clearing membership. It’s very strange, but it all
Asia is very crowded in terms of custody, but there comes back to the lack of precedent because they’ve
was a need for someone to manage more of the never seen third-party clearing work. The Asian
value-added tasks around clearing and back-office markets are also led by the majority – if no one else
processing. is doing it then you don’t do it. However, five years
In Asia we’ve been leveraging what we do in from now I expect outsourced clearing to have taken
London and Paris, transferring our knowledge over off in the region.
here. The news that we are the largest third-party
clearing participant on the HKSE is the first major How have BNP Paribas and other institutions tried to
milestone for us. change Asia’s attitude toward clearing and is it working?
However, what is more important is the value to
the Hong Kong market. Before the Lehman Brothers’ During the last few months we’ve been working
scandal you couldn’t outsource clearing in Asia like with the SFC to validate and finish the clearing
you could in Europe. The Hong Kong Securities and model. We’ve been trying to get the message across
Futures Commission (SFC) started to create a clearing that using a clearing agent is no riskier than using
model in 2007 but stopped after Lehman Brothers a clearinghouse. There have been massive amounts
because they didn’t want to make any more changes of education which led to the SFC signing off the
to the market until they had a better understanding model in January. In advance of legislative changes
of the clearing model. Since then, the regulators have - which will take a long time to bring into force – the
been trying to understand it but there’s been a long regulator has given us special dispensation per client
delay between its development and final sign-off. to use us as a clearing agent. It now means Hong
Kong’s regulators are happy to see any major broker
Why has it been difficult to outsource clearing in Asia? outsource their clearing. From a market perspective
it means this includes both small and large brokers in
The problem was how the Asian markets viewed Hong Kong.
the clearinghouse and clearing agent. They viewed
clearing agents as riskier than clearing houses, and How has the role of the custodian evolved in the Asian
therefore you had to put down more capital with the market over the past year?
clearing agent. For a big broker that’s a lot of money
and it’s very prohibitive. That one limitation stopped The role of the custodian is growing all the time
anyone from doing anything large scale with clearing and the amount of services you can outsource will
in Hong Kong. continue to expand. The temperature in Asia is rising.
The other reason is that there is very emotional The pace of transfer into Asia has accelerated, leading
connection to clearing in Asia. Clearing is perceived to more fund managers, brokers and practitioners all
to be a very visual activity in front of clients, which I competing for some share of the pie. At the end of
personally don’t see any explanation for. In the past, 2010 people were saying that their costs had tumbled,
brokers thought they had to offer a one-stop shop so they had to build their margins back out. Moving
to gain the client’s trust. This included keeping the out to Asia has to be a profitable set-up. You need to
38 | Fundamentals4HNHaPUL |:WYPUN2011
Third-party clearing: Hong Kong
Bio:
Barnaby Nelson is head of
client development in Asia for
broker-dealers and investment
banks at BNP Paribas
Securities Services. Having
lift out whole sections and outsourcing is the only grown up in Hong Kong,
way to do that. I expect outsourcing to be bigger this Barnaby has worked in the
year, perhaps even doubling last year’s figure. Asian financial services sector
for over ten years, servicing
What do you see at the key drivers behind outsourcing in major banks across both custody and technology.
Asia?
He holds a BA (Hons) in modern languages from the
University of Bristol.
It’s all about reducing cost, which is the biggest
factor for clients. Margins are being eroded because
of increased competition in Asia. You can’t spend in its own right, and secondly to be an international
money on everything so you’ve got to spend market. Singapore is thinking along the same lines. At
money on the things that differentiate you when the moment there’s a big race in Asia to snap up the
you’re under pressure from competitors. This is last places left to capitalise on. Everyone is running
an important issue in Asia at the moment. There around the region trying to find a bit of margin
are more than 700 brokers in Hong Kong who are wherever they can. Australia and India have had
all targeting investors. The important question for a lot of interest while Thailand and Sri Lanka have
them is: "How do I differentiate myself?" which is experienced strong growth. Most of it is happening
becoming more acute as more people move into Asia. from Hong Kong and Singapore but there are still
The Lehman Brothers’ scandal did a lot of damage to those niche areas. Singapore is positioning itself as a
outsourcing and made people extremely risk-averse. new trading venue. The lines are blurring between
The reaction in Asia was: "Let’s not do anything yet," Hong Kong and Singapore and there’s a huge
which was very similar to the regulators’ approach. ‘ebb and flow’ of movement between the two. For
There is also less precedent for outsourcing in Asia example, many Hong Kong brokers now have offices
compared to other global markets. Outsourcing is in Singapore too.
still a foreign concept as opposed to something that’s
been tried and tested. But there will be precedent for As outsourcing becomes a growing trend in Asia,
outsourcing this year, which will give credibility to there will undoubtedly be other institutions who want
everyone in the market. to capitalise on that. How competitive do you think that
market will become?
Are Asian custodians looking to provide clearing services
too? Citi, Deutsche Bank and BNP Paribas Securities
Services are currently the main providers of clearing
The problem that Asian custodians have is that services in Hong Kong. There will undoubtedly be
they haven’t offered outsourced clearing services those who want to tap into that market, but some
before. Without that precedent, you can’t build these institutions have taken a very passive approach
clearing operations quickly because it takes years to clearing in Hong Kong. They have been caught
of investment and implementing new technology. napping and will find it hard to catch up. The
There’s only two or three of us in Asia that have message we’ve been getting from our broker clients is
done this before, but that will be enough to expand that those institutions have never actually sat down
clearing operations in the region. We’re not in Asia and thought it through. For the time being there is a
just as a custodian; we’re there to be offering a range wide gap but that will narrow over time. Clearing is
of services. new because it’s only been topical in the last couple
of years. Japan, Australia and Singapore are set to be
How are the Hong Kong market and other Asian markets the next markets to introduce outsourced clearing,
developing? and I expect Singapore to be the first to follow Hong
Kong. Those markets haven’t really kicked off yet so
Hong Kong has two purposes: firstly to be a market it’s an important space to watch.
:WYPUN 2011|Fundamentals4HNHaPUL| 39
Regulation: Dodd Frank
ISDA on Dodd-Frank
Brian Bollen in conversation with Conrad Voldstad, CEO of the International Swaps
and Derivatives Association (ISDA) and Robert Pickel, ISDA executive vice chairman
Does ISDA have a clear idea of what it would like to see for US companies who had swaps with non-US
happen in the industry by 15th July 2011, the deadline banks (which added another $80 billion in collateral
for rule-setting following the Dodd-Frank Act? requirements). This brings the total to about $405
billion.
Our primary goal is to ensure that we continue But you also need to factor in collateral
to have a safe, efficient and liquid OTC derivatives requirements relating to future movements in market
market that enables firms to better manage their prices that influence the value of swaps. We utilised
risk. We think this is a goal that policymakers share a calculation called Potential Future Exposure
InvestorServices
and we’re working with them on a number of issues. and found this would add another $370 billion of
There is no simple yes or no answer here. There collateral needs. Finally, if market conditions reverted
will be gradations as regulators weigh the costs and to the severe turmoil of 2008, we estimated variation
benefits of different approaches to rulemaking. margin might increase by over $200 billion for end-
users. This brings the total to about $1 trillion.
And those would include?
ISDA has something of a robust view on transparency
End user margin exemptions. The Act exempts and its limitations, doesn’t it?
end users from its clearing requirements but also
gives regulators the power to require them to post We identify two kinds of transparency: regulatory
margin. That is tantamount to forcing them to transparency and market transparency, which
clear, as clearing obviously involves posting initial includes pre- and post-trade transparency. Everybody
margin to the clearing house and variation margin believes in regulatory transparency, because
depending upon market movements. We think that regulators need to see what is happening in the
companies which are using derivatives to reduce risk industry, and where the concentrations of risk are
in the normal course of their business should not be taking place. The industry has already set up three
penalised. data repositories, for equities, interest rate swaps and
credit, supplying the necessary information. Work is
What would be the consequences if they are compelled progressing on doing the same for commodities and
to? foreign exchange (FX). It’s working very well.
With regards to market transparency, we believe
We crunched some numbers at the time Dodd that users of most derivatives have tremendous
Frank was finalised, which showed that it could cost pricing transparency and extremely competitive
corporate America $1 trillion in capital and liquidity pricing, and we have research to support this. We
requirements. This could impede their ability to do are working to further improve transparency, but we
business. need to keep in mind that there is a clear trade-off
between transparency and liquidity.
How have you arrived at this figure?
Can you elaborate?
We analyzed 2009 year-end market statistics
and determined the total outstanding of end-user Detailed real-time reporting of a very
swaps with US banks (about $21 trillion). We then large transaction could affect the market
estimated, using current industry practices, what the disproportionately, adversely affecting the ability
initial margin requirement would be (about 1% of of market-makers to provide liquidity. This would
the total, or $213 billion). We also determined what mean more risk for those who want to undertake
the variation margin would be on the portion of large transactions, forcing them to drip-feed smaller
end-user swaps that are not currently collateralised transactions into the market, thus reducing liquidity.
(about $112 billion). We performed the same exercise
40 | Fundamentals4HNHaPUL |:WYPUN2011
Regulation: Dodd Frank
:WYPUN 2011|Fundamentals4HNHaPUL| 41
Domiciles: On and off again
Offshore investments are increasingly popular EU. He adds that Malta is making a “concerted” push
and many investors and managers have sought to in the hedge fund sector. “Movement is slow, with
capitalise on emerging low-cost domiciles such as funds and investors wary of a relatively untested
Malta and Cyprus. But fund domiciles have been jurisdiction, but it is quite possible that Malta will
put under a glaring media spotlight following the soon reach a ‘critical mass’ in fund terms, giving
fast-approaching Alternative Investor Fund Mangers comfort as to the jurisdiction.”
Directive (AIFMD), government crackdowns on tax But several factors need to be considered when
havens and fiscal uncertainty. With many different re-domiciling funds to another jurisdiction, such as
InvestorServices
factors affecting these jurisdictions, it begs the geographical location, economic and political stability,
question: “Is the offshore model still valid?” as well as the availability of a skilled workforce. “I do
The directive came under scrutiny in 2010 for its not think that any one factor can be taken in isolation
potential connotations for the alternative when deciding whether to re-domicile,” says
funds industry and many industry Farrugia.
professionals predicted that it Another important factor on
would create a ‘lock-in lock-out’ Under the directive, investors’ minds is a jurisdiction’s
scenario in the EU. This could reputation, which can easily be
hedge funds will be
create problems for some non- damaged. Dublin’s reputation has
EU domiciles that might have looking for jurisdictions suffered as result of its financial
to reconsider their regulatory that are more turmoil and subsequent $115bn
structures if they want to regulated. People EU bailout last November. But
keep their European fund are uneasy about the offshore centre appears to
managers at home. going to offshore have survived unscathed by
Paul Wilkes, group partner reaching a record 964bn in the
centres that
at Guernsey law firm Collas value of Irish-domiciled funds at
Crill, says: “Under the directive, have lightweight the end of 2010, an increase of 29%
hedge funds will be looking regulation from the year before. A press summit
for jurisdictions that are more hosted by the Irish Funds Industry
regulated. People are uneasy about Association (IFIA) in March certainly
going to offshore centres that have lightweight displayed this positive atmosphere, where the
regulation.” former Irish prime minister John Bruton said: “We
This may put some centres in a better position than faced more trouble in the 1980s and survived it, which
others, but each jurisdiction has its own niche and shows we can service this debt.”
offers product expertise that another centre does not. Dublin is arguably in a better position than the
Malta, which is an EU onshore fund domicile, Cayman Islands, which has been in its own debt crisis
has seen a number of funds migrating from non- over the past two years and was forced to ask the
EU jurisdictions to use Malta as a gateway to the British Foreign and Commonwealth Office to borrow
EU. Kenneth Farrugia, chairman of FinanceMalta, £278m in 2009, but was refused. The jurisdiction’s
says this could be a result of the AIFMD, a strong debt situation has grown from $142m in 2005 to about
move to regulated jurisdictions, or the new UCITS $560m at the end of January 2011, and is expected to
‘passporting’ mechanism which makes it necessary to increase to $626m by June. “Offshore jurisdictions
have an EU domicile. are masters of their own destiny, but they have less
According to David Williams, head of investments support”, says Wilkes.
funds practice at DLA Piper, the AIFMD will throw This, in addition to the UK government’s decision
challenges in the way of traditional hedge fund to stop Cayman from borrowing more money in the
jurisdictions such as the Cayman Islands, which he next financial year, has sparked fears of rising tax
claims will be beneficial to Malta as a member of the rates. This has been a similar concern in Ireland, but
42 | Fundamentals4HNHaPUL |:WYPUN2011
structured
for success
Exceptional Growth for Malta’s Fund Industry
The number of collective investment schemes more than doubled from 200 in 2006 to 434 in 2010.
This success was made possible by Malta’s highly favourable business environment. This includes the role
played by the island’s Single Regulator, renowned throughout the industry for its flexibility coupled with
meticulous attention to detail.
The island’s highly competitive, cost-effective business environment and the presence of all the Big Four
accounting firms adds even further advantage.
An onshore EU jurisdiction allowing passporting and redomiciliation of funds, with an efficient fiscal regime,
a balmy Mediterranean climate and a multilingual, ethical and professional workforce, Malta offers a winning
combination of advantages specifically designed to foster further growth and maximise success.
(IIHFWLYH_6HFXUH_6NLOOHG
)LQDQFH0DOWDGarrison Chapel, Castille Place, Valletta VLT1063 - Malta | info@financemalta.org | tel. +356 2122 4525 | fax. +356 2144 9212
)LQDQFH0DOWDLVWKHSXEOLFSULYDWHLQLWLDWLYHVHWXSWRSURPRWH0DOWDҋV,QWHUQDWLRQDO)LQDQFLDO&HQWUH
Domiciles: On and off again
44 | Fundamentals4HNHaPUL |:WYPUN2011
Domiciles: Guernsey focus
Guernsey focus
Stephanie Baxter took a trip to Guernsey to find out what makes the island's
financial services industry tick
For a small island with only 62,000 inhabitants, which was established in 2007, services clients with
Guernsey might appear to be a small fry in the ocean, private equity, real estate and fund of hedge funds, but
but it might surprise many to discover that - unlike is getting demand in new areas. “We have clients who
its larger counterparts - Guernsey has not only had a are looking to launch in many new areas: start-up hedge
pretty smooth ride through the financial crisis but has funds, real estate derivatives and more IFA-focused fund
also managed to break a few records in the process. offerings,” Everitt adds.
Its greatest achievements this year include receiving This need to diversify is more important now than ever
recognition from the International Monetary Fund as emerging fund domiciles such as Malta and Cyprus
InvestorServices
(IMF) for its “high standard” regulatory infrastructure. creep into the picture, citing concern that Guernsey and
Guernsey has long been viewed as a holiday destination other well-established centres could lose out to the rising
with its close proximity to France and the UK, but the competition. Yet according to Mark Douglas, managing
island’s main income is generated from its financial director at Mercator Fund Services Limited Guernsey:
services sector rather than tourism. “Malta and Cyprus have tried to be new entrants, but
The island’s finance industry contributes around 40% we’ve got the history, the positive IMF reports and
to the Crown dependency’s total GDP, which could regulation that’s developed over time.”
easily have led to its downfall during the economic Another potential threat to fund domiciles is the
crisis. But despite a 4.5% decline in the EU’s Alternative Investment Fund Managers
economy during 2008 the island is (AIFM) Directive which came under
currently in a stronger position than Despite the IMF considerable scrutiny in 2010 for its
other jurisdictions, with no public and OECD reports, potential threat to the alternative
deficit and a well-supported state Niven claims that funds industry.
pension scheme. Despite the global uncertainty
Yet it is Guernsey’s investment
Guernsey still has over the Directive, Guernsey’s
funds industry that has really some way to go to fund sector seems to have a
taken off recently by moving overcome ingrained pretty relaxed attitude to the
past the £250bn mark at the misconceptions new regulations. “Business as
end of December 2010 with a usual” is the phrase on everyone’s
and convince its
phenomenal growth rate of 40% lips. According to Neale Jehan,
over just one year. detractors that it chairman of the technical committee
Guernsey’s focus on niche is a well-regulated of the Guernsey Investment Funds
products has helped it to ride international Association (GIFA), Guernsey will be
out the storm, says Jarrod Cowley- finance centre in a better position than its European
Grimmond, director of finance sector counterparts because the island is not
development for the States of Guernsey. part of the EU, unlike Malta for example.
Like most offshore jurisdictions, Guernsey has “If you’re not sitting in the EU then you’re still open
specialised in certain products to differentiate itself to non-EU investors without having the additional cost
from the rest of the market. Over the past two decades of the Directive, which means that your products will be
the island has experienced a gradual shift from retail or more flexible,” he says.
equity-traded schemes to predominantly institutional Although Guernsey does not have EU membership,
niche funds. the doubt over the directive has given the island an
While the Cayman Islands have concentrated on hedge opportunity to go into Brussels to have some input in the
funds, Guernsey has become well-known for its private formation of the new fund passport rules.
equity funds, fund of hedge funds and closed-end Guernsey is very proud of its strong regulatory
listed funds. Investors are looking for those alternative network, but it has somewhat struggled to bring that
funds now more than ever as well-regulated and secure message across in previous years. “The IMF visit and its
products are set to become the future. subsequent positive report were catalysts for promoting
Paul Everitt, who is managing director at Fund Guernsey as a well-regulated jurisdiction,” says Lyndon
Corporation of the Channel Islands, says that Guernsey Trott, Guernsey’s chief minister. The island’s finance
will benefit from diversifying itself. Fund Corporation, industry now hopes that this will encourage other
46 | Fundamentals4HNHaPUL |:WYPUN2011
Domiciles: Guernsey focus
:WYPUN 2011|Fundamentals4HNHaPUL| 47
Stock exchange consolidation
Exchange interchange
Fundamentals gives a summary of the
new spurt of plumbing consolidation; or in
formal terms the new exchange mergers
that were announced in Q1 2011
48 | Fundamentals4HNHaPUL |:WYPUN2011
Stock exchange consolidation
:WYPUN 2011|Fundamentals4HNHaPUL| 49
Sustainable investment
Sustainable investment
Brian Bollen provides a roundup of the latest trends
and opportunities in environmentally-friendly investing
The future’s bright, the future’s clean, the future’s technologies and energy efficient building materials
mandatory - recycling and waste treatment, water treatment,
energy storage, electric car infrastructure and
Solar panels, ground source or air source heat efficiency in transportation also fall under the Clean
pumps or some other source of renewable energy Technology umbrella.
will be mandatory on new-build houses by 2020 in “Anything that enables us to do more with less
many parts of Europe. That is one of the confident resources or less environmental damage – that
predictions made by Evelyne White, a former qualifies for inclusion in our book,” she says. “The
InvestorServices
Wall Street analyst who now specialises in clean technology involved does not have to be new or
technology and energy efficiency investing for ground-breaking, just improved and with a clear
Riverside, a small/mid-market private equity firm value proposition to its end customers.”
that has worked on a number of clean technology Riverside looks to invest in niche leaders in
& energy efficiency deals, particularly in the area markets with huge growth potential, and at the
of energy efficiency for the built environment. time of writing (early March 2011) has made nine
She believes there is huge potential in this area, investments in Clean Technology & Energy Efficiency
particularly since it is less vulnerable to drastic companies. It made its first in August 2005, in
swings in government guaranteed feed-in-tariffs UK-based Sentinel Performance Solutions Ltd, a
(FITs). leading manufacturer of products designed to clean,
At current levels, explains White, these FITs protect and improve the efficiency of residential
provide an incredibly profitable investment central systems, and solutions for the cleaning and
opportunity for the participating green householder, maintenance of solar and heat pump systems.
but utility companies – and ultimately all ratepayers On March 1 this year it announced the £43m sale of
- are paying an enormous premium for their Sentinel, its first clean technology exit, notching up
electricity. In response to this concern, a few months a 22% gross internal rate of return and a three times
ago the French government put a moratorium on all gross cash-on-cash return.
installations over 3kw since the major French utility Riverside describes Sentinel – sold to Electra
EDF was paying roughly eight to 10 times the spot Partners - as Europe’s number one supplier of
price of electricity to cover its obligations to buy residential heating and hot water system treatment
solar energy at a hefty premium. The moratorium products.
in France and ensuing cap on solar construction Sentinel, based in Runcorn, England, has market-
combined with what took place in Spain in 2010 leading positions in the UK, France, Italy and
has led to a lack of trust in government-sponsored Germany. Sentinel’s biodegradable and OEM-
incentives – particularly for solar photovoltaic. recommended products clean and prevent corrosion
This lack of trust - especially in challenging in heating systems, improving energy efficiency and
financial times - could undermine the niche as an area increasing system lifespan.
of potential investment for us, so we’re especially
looking for areas that are less reliant on government Success of the corporate carve-out
subsidies. As older readers will be well aware, today’s
government incentive is tomorrow’s tax loophole Riverside invested in Sentinel in August 2005, as a
that the government in question can suddenly feel corporate carve-out from General Electric. Riverside
compelled to close by moving its goalposts onto a transformed Sentinel from a small corporate division
new moral high ground. to a standalone company with operations and
personnel spread across six countries. Riverside
Clean a broad umbrella helped strengthen the management team and worked
with them to build the systems and processes to
White describes her interpretation of clean position the company for future growth.
technology as a broad umbrella term covering During Riverside’s ownership, Sentinel added a
renewable energy generation, and cites wind, solar, range of products and customers with the 2007 add-
biofuels and geothermal at the top of her list of on acquisition of Salamander Engineering Ltd., a
sources. Energy efficiency – including smart grid smaller UK-based competitor.
50 | Fundamentals4HNHaPUL |:WYPUN2011
Sustainable invstment
The firm also helped Sentinel launch 24 new professionals in 19 offices, and longstanding
products, including its flagship X800 line. relationships with partner lenders.
“We’re proud of the work we did with Sentinel,”
said Riverside managing partner Suzy Kriscunas. Greening the economy: Abellon to create 25,000 new
“We harnessed Sentinel’s potential, working with jobs
management to expand the company’s strong UK
position, build sales channels in Benelux, France, Italy Just days before the sale, demonstrating the
and Germany and initiate sales in the U.S. Sentinel connection between the concept, the economy
is well positioned to build on this strong growth worldwide and society, the news broke that Abellon
foundation going forward.” CleanEnergy a sustainable energy company based in
The investment was truly international for the India, was pledging to create 25,000 jobs over the next
global firm, as it involved two Riverside funds – the five years, and to produce clean, affordable energy
North America-based Riverside Capital Appreciation that could power 100,000 homes in Ghana. The
Fund and the Riverside Europe Fund. Having deal commitment to the Business Call to Action (BCtA) – a
team members on both sides of the Atlantic global initiative that aims to support the private
delivered a broad range of insight and sector’s efforts to fight poverty through its
experience to the company.
In addition to building and
Anything that enables core business - is also expected to reduce
carbon dioxide emissions by over one
strengthening Sentinel’s core us to do more with million tons by 2015.
hot water system sales, less resources or less “Abellon’s commitment is a
Riverside helped Sentinel environmental damage concrete and effective example
capitalise on the growing of how the private sector can
renewable energy market – that qualifies for
adopt sustainable, pro-poor
and build on Sentinel’s inclusion in our book. business strategies to tackle
environmentally friendly The technology the twin global challenges of
reputation. involved does not poverty and climate change,”
“We saw some said BCtA programme
compelling opportunities to have to be new or manager, the magnificently
expand Sentinel’s offerings,” ground-breaking, named Natalie Africa.
said Riverside partner Volker just improved and Through this initiative, we
Schmidt. “The company now learn, Abellon will convert 10,000
has a comprehensive product
with a clear value
hectares of degraded earth into
line for renewable heating systems, proposition to its agricultural land with crops such as
which can be used in solar thermal, end customers bamboo, palmarosa and sweet sorghum
air source and ground source heat pump that require little to no irrigation, and are not
heating systems.” used primarily for food. Some 21,000 farmers will
Principal Trey Vincent and vice president Scott be employed through this scheme, and will receive
Bogard worked with Schmidt and Kriscunas on assistance and training to grow these crops. Abellon
the transaction for Riverside. Riverside’s associate will then purchase their harvest and convert it into
director of origination, Amy Margolis, worked with fuel at a planned biofuel manufacturing plant. The
the deal team and the sell side advisor to facilitate the company will then convert the bio-fuel into clean
exit. Lincoln International advised Riverside on the energy at a mid-size bio-power plant that it will also
sale of Sentinel to Electra Partners. Jones Day, KPMG build.
and LEK provided legal, financial and commercial By 2015, this power plant is expected to produce
support. enough clean energy that, upon sale, could meet the
The Riverside Company describes itself as a global needs of up to 100,000 homes. An additional 4,000
private equity firm with a focus on acquiring growing skilled and unskilled workers will be employed as
enterprises valued at up to $200m ( 200m in Europe). technicians, fabricators, engineers and agronomists
The firm partners with strong management teams and along the entire energy production process.
enhances its investments through acquisitions and “We are dedicated to partnering with Ghana in the
organic growth. Since its founding in 1988, Riverside domain of clean energy and low carbon economic
has invested in 250 transactions with a total enterprise processes,” said Aditya Handa, managing director of
value of more than $5.4bn/ 4.4bn. Abellon CleanEnergy. “Our aim is to create a holistic
The firm’s portfolio in North America, Europe and sustainable approach of energy production
and the Asia Pacific region includes 74 companies that helps meet national economic and energy
with roughly 14,000 employees. Riverside completes goals, and creates real development impact for local
acquisitions smoothly thanks to $3.4bn/ 2.7bn communities.”
in assets under management, more than 195 Abellon says its commitment to renewable energy is
:WYPUN 2011|Fundamentals4HNHaPUL| 51
Sustainable investment
based on a philosophy of non-conflict of food, fodder comprehensive ESG engagement reports available on
and fuel. This focuses on the conversion of biomass mystatestreet.com.
waste from crops into fuel, and then into energy using Wade McDonald, head of client management and
innovative, low-carbon conversion techniques. sales for State Street’s Global Services business in
This contributes to Ghana’s strategic national the UK Middle East and Africa commented: “We are
energy plan to increase and diversify the country’s the first investment service provider to bring this
energy source so that 10 % of total energy is based on service from F&C directly to institutional investors.
renewable energy sources. Abellon CleanEnergy Ltd. As part of State Street’s broader investment analytics
is an integrated sustainable energy solutions provider suite of services, the ESG reporting service has the
with a vision to contribute to clean energy generation information needed to support our clients’ fiduciary
through focus on bio energy, including bio pellets, and regulatory duties, ensuring their investments in
bio fuels, bio power, and other forms of clean energy companies that demonstrate a global commitment to
generation. The company is part of a global business environmental and social responsibility and corporate
group with interests in diverse areas including clean governance. We provide institutional investors with
energy, agrisciences and genomics research. At social the ability to implement and manage a responsible
front, the group has undertaken several educational investment strategy so they can communicate positive
InvestorServices
initiatives like RedBricks Education and Xcellon engagement outcomes to their stakeholders.”
Institute. Karina Litvack, head of governance and sustainable
investment at F&C added: “Partnering with State
State Street in ESG link with F&C Street for this new service will enable their clients to
be better informed on ESG issues and better placed to
Adding to the general visibility and viability of assess any potential ESG risks and opportunities, key
the notion of clean and/or ethical investment, State factors in investment decisions today. F&C’s approach
Street reported the launch of its new environmental, to ESG recognises that investment returns over the
social and governance reporting service. State long-term are driven primarily by the performance
Street has partnered with F&C Investments to of innovative, well-managed corporations that, in
provide an environmental, social and governance themselves, are dependent on the health of the human
(ESG) reporting service to enable investors to meet societies and ecological systems that sustain economic
stewardship goals. enterprise.”
It says that F&C’s ESG service provides investors “State Street is committed to being a leader in
with comprehensive, global engagement reporting, environmental sustainability and providing our
enabling them to fulfil their UN Principles for clients with a range of ESG products as they continue
Responsible Investment (PRI) reporting needs. to value the importance and manage the impact on
Investors that can benefit from this service include their business,” said Pat Centanni, executive vice
pension fund managers and pension fund trustees, president, head of global product management and
institutional clients including endowments, chair of State Street’s ESG Committee.
foundations and sovereign wealth funds and Each year, says F&C, it engages approximately
financial institutions seeking to implement best 6,000 companies through active dialogue on material
practice responsible investment and enhance the long ESG issues such as biodiversity and climate change,
term value of their investments. The new service human rights and labour standards, corporate
will enable State Street to provide its clients with governance, bribery and corruption, business ethics
and sustainability management and reporting.
It identifies companies for engagement based on
client input, financial exposure, material ESG risks,
Our aim is to create governance practices and ability to influence.
a holistic and
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that helps meet
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and creates real
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52 | Fundamentals4HNHaPUL |:WYPUN2011
Flexibility for
a world in motion
ade services,
eed them
the source of growing levels of discomfort and concern. in August 2007 and is the leading specialist provider of
It is an ill wind, though, that doesn’t blow someone software for wealth management and client registry in
some good, and the providers of all kinds of outsourced Australia, and increasingly, the United Kingdom.
administration services, of all shapes and sizes, are Palion, Australia’s foremost derivatives trading and client
looking confidently ahead to rolling out their products accounting technology, was acquired in December 2005.
and growing their business and profitability. GBST currently clears 47% of equities transactions on the
Australian stock exchange by volume, and GBST’s DCA
GBST niche platform processes over 70% of derivatives volumes. In the
One such niche provider is GBST, which provides global UK and Australia, its wealth management platform, GBST
technology services to the financial services industry at the Composer, administers more than $250 billion in assets.
point where institutional meets retail in the pensions arena. GBST has four divisions, the first of which is GBST
It was established in 1983 in Australia and since then it has Global Broker Services, a provider of client accounting and
grown to a staff of 350 people in Australia, Hong Kong, securities transaction technology to capital markets in Asia
London and New York. GBST was listed on the Australian and Europe. Through the Syn~ platform GBST provides
Securities Exchange in June 2005. next generation technology to process equities, derivatives,
Daniel Carpenter, head of business development, EMEA, fixed income and managed funds transactions.
since arriving at the company in September 2010, says GBST Broker Services is currently focused on the Australia
the company is looking to grow in terms of territory, market place selling financial solutions, including front
architecture and product range. He argues that the rules- office tools, to this region. This division is also engineering
based real-time processing and integration capabilities the Syn~ solution as its strategic solution for this territory.
that it provides in the recording of settlement activity GBST Wealth Management is the leading provider of
and interfacing with custodians will be invaluable to funds administration and registry software to the Australian
institutional clients in today’s and tomorrow’s more heavily Wealth Management industry. GBST’s wealth management
regulated world. software, Composer, administers funds in Australia and the
He identifies the growing flexibility and interactivity of United Kingdom.
web tools as a key area of interest. “We are launching and GBST Financial Services is a wholesale provider of
redeveloping products using new Google web tools which independent, market-leading financial product data and
will make the front end more proactive and functional,” he related services to financial advisers and institutions. It also
says. “Older products that used a web browser for access provides web design, development and usability services.
were only able to provide a dumbed-down experience. Now
it feels more like using a full, rich application but with the Other end of the scale
simplicity of accessing a website. We’ve shown the fruits Will all due respect to the ambitions at GBST, already
of our efforts to existing and potential new clients and they sitting at the other end of the scale sits Misys plc, a global
love what they see. This paves the way for us to be more application software and services company. It followed
aggressive in the EMEA region, and our current growth of traditional British folklore by storming into the month
10-15% a year could jump exponentially if our predictions of March like a lion, confirming the completion of its
and projections are right.” acquisition of Sophis to create what it describes as the
number one capital markets solution provider
Official history The acquisition, which was approved by Misys
The official company history shows that as part of its shareholders on 11 February 2011, has brought together
growth strategy GBST has acquired a number of companies two high profile software and services providers in capital
54 | Fundamentals4HNHaPUL |:WYPUN2011
Outsourcing administration focus
Older products that used a web browser for access were only able to provide a
dumbed-down experience. Now it feels more like using a full, rich application but
with the simplicity of accessing a website. We’ve shown the fruits of our efforts to
existing and potential new clients and they love what they see
Misys customers will be able to take advantage of the more advanced functionality
around equities, equity derivatives, portfolio management and portfolio analytics
from Sophis. Whereas, Sophis clients will have access to greater interest rate and
credit derivatives, bonds and foreign exchange capabilities from Misys solutions
markets. The newly enlarged combo modestly claim innovation in the capital markets, as well as increase
that the merger has created a business ‘that has the most transparency,” states Stephen Bruel, Research Director,
comprehensive cross-asset and front to back-office coverage TowerGroup, a Corporate Executive Board company. “The
available in the market today’. ability to manage cross-asset portfolio strategies, combined
Sophis solutions are used by financial institutions on with comprehensive risk management from the front to the
both the sell-side and the buy-side. Its buy-side solutions back office on one integrated platform will keep institutions
will help accelerate Misys’ penetration into this lucrative ahead of their competitors. Having a single vendor offering
market. Its sell-side solutions, particularly around the this broad coverage potentially reduces risk for financial
equities, equity derivatives and commodities areas, are institutions.”
complementary to Misys’ existing strong solutions in Sophis solutions now have greater exposure to non-
interest rate derivatives, foreign exchange and fixed income, European markets, in particular the fast-growing Asian
as well as its commercial lending capabilities. and Latin American markets, through Misys’ international
The two businesses now have more than 1,800 domain footprint and its existing sales and services infrastructure in
specialists with an ‘unrivalled knowledge and expertise these regions. Additionally, the combined solution portfolio
covering all asset classes across all functional areas, and broader capital markets expertise will provide new
including trading, investment decision support, portfolio customers with a wider choice of cross-asset coverage.
management, risk management, compliance, pricing and Sophis, which becomes Misys Sophis, a business unit
collateral management’. of Misys, has approximately 130 financial institutions in
its customer base. Among its 80 buy-side customers are
Combo delights organisations such as UBS Global Asset Management,
Mike Lawrie, CEO of Misys, is clearly delighted with the Groupama Asset Management, Fidelity International and
additional strengths the acquisition brings to the company: Dexia Asset Management. Its 50 sell-side customers include
“This really catapults us into the No.1 position in the Barclays, HSBC, Natixis and Royal Bank of Canada.
market. Misys and Sophis clients will both benefit from this
acquisition: Misys customers will be able to take advantage In conclusion
of the more advanced functionality around equities, equity Misys concludes by saying that it now has over 500
derivatives, portfolio management and portfolio analytics customers benefiting from its broad range of capital markets
from Sophis. Whereas, Sophis clients will have access to solutions. It adds that it generates more than 60% of its
greater interest rate and credit derivatives, bonds and revenue from the combined capital markets businesses.
foreign exchange capabilities from Misys solutions.” “Misys is a new force in buy-side systems with 13 of the
“Systems that enable traders, investment managers top 20 asset managers and has added 22 new customers in
and risk managers to price and manage any instrument, 2010,” it claims.
regardless of complexity or asset class, encourage
:WYPUN 2011|Fundamentals4HNHaPUL| 55
Wine custody
and it is a commodity. You can see the price go up, you whether the asset involved is a collateralised mortgage
can see the volumes being traded and the prices being obligation or a bottle of wine. That swung the argument
paid on Livex. It also boasts a number of underlying in favour of tackling the challenge.
fundamentals such as the year of vintage and the Richard Brierley joined Vanquish as head of fine wine
quality of the chateau from which the wine originally from New York, where he was vice president and head
emanated.” of Christie’s North America wine department and was
Investors can either invest directly, tapping into the responsible for $27m in sales in 2007. He now sources
experience and expertise of a firm like Vanquish, which and sells the rarest wines to elite clients on a global
in its own words will act as prime broker, custodian, scale. In 2010, he and the team launched Magenta Wine
and investment advisor. Or they can invest indirectly via Investors Ltd, a dedicated investment vehicle for the
an entity such as the Fine Wine Fund, the vinicultural purchase and sale of fine wine. He spends a good deal
equivalent of a unit trust. One benefit of taking physical of time, he says, persuading owners with rare wines
ownership is that because Her Majesty’s Revenue & languishing unappreciated in their cellars to part with
Customs views wine as a wasting asset (despite all them. “It’s like trying to convince people to give away
evidence to the contrary) any profits are not currently their children,” he says.
subject to UK capital gains tax. Vanquish, he says, manages bespoke portfolios of
For the record, this writer is a fine wine sceptic who blue-chip wines for both the investor and investor/
is working his way through a case from Berry Brothers drinker. Their team of specialists will craft a balanced
& Rudd, vintners to more than one member of Britain’s basket of investment worthy cases to meet personal
Royal Family. With only one or two bottles left I am requirements. They arrange for the cases to be stored
distinctly underwhelmed. The Lindemans Cawarra in an underground, temperature and humidity
Shiraz Cabernet on offer for £4.99 at my local Netto store controlled, fine wine storage facility in the individual's
is greatly superior in both absolute and relative pound- name. Each quarter or on request, Vanquish provides
for-pound terms than anything in the BB&R case. regular updates on the market value of the collection,
For what it is worth, the best red wine I have ever opportunities to add to the basket or liquidate certain
tasted is the Lanz Thomson 2006 Shiraz from the Barossa portions. One client wished to create a vertical collection
Valley, a marvellous SwFr48 companion to the weekly of Sassicaia (Italy) in six-litre large formats. Vanquish, we
cheese fondue at the Hotel Baeren in the Swiss Alpine learn, was able to put together the collection in perfect
upmarket ski and summer hiking resort of Wengen. condition in their original wooden cases from each
Snobs might literally turn up their noses at it, but if there vintage from 1995 – 2007.
is a fuller bodied more enjoyable way on the planet to Brierley defines a fine wine as one that represents a
pleasure the taste buds, I’d love to sample it. combination of price (£25-plus a bottle), the way it is
Back in the Old World, the following communication marketed, the producer’s production values and its
landed in the Fundamentals in-tray in late February: “I pursuit of quality. It will also drink for several years. His
was wondering if you might be interested in speaking own favourite? “Red burgundy pulls at my heart strings,
to the Fine Wine Department at Vanquish Wine (www. but it also pulls at the purse strings. A very good red will
vanquishwine.com). Vanquish Wine started out as sell for thousands of pounds per bottle, but is delicious
London's leading drinks distributors to top clubs and and otherwise very accessible.” At home, he will drink
bars and in 2009, the company used their experience wines from the Rhone Valley (such as Chateauneuf du
to adapt their business so as to make the most of the Pape). A particular favourite is Vacqueyras, normally
recession. The business expanded and they launched based on the Grenache or syrah grapes. “It’s a big rich
56 | Fundamentals4HNHaPUL |:WYPUN2011
Wine custody
wine that almost smells of where it comes from,” he Interestingly, wine has taken on a secondary function
says. “You can pick it up for around £15 [the Berry in today’s China, helping to lubricate trade and business
Bros price is £15.65 a bottle at the time of writing, end- with government at all levels. Chateau Lafite 1982, it
February 2011].” seems, is the gift of choice at the top of the hierarchy
in Beijing. In such an environment, one cannot help
The Market In Asia wondering what influence or favours might be bought
Reflecting the broader macroeconomic environment, by deploying bottles of Mateus Rose, Asti Spumanti
China is identified as a key source of future growth. and Chianti, staples of the mass British wine scene in
Indeed, sales to Asia already represent more than 50% decades past. The thrusting go-getters of China are
of Vanquish's fine wine sales. The team, we are told, has highly unlikely, we suspect, to be driving around with
worked hard at developing long term relationships with cases of those in their car boot on the off chance that a
both private and trade clients in the region and makes spot of lubrication might be needed to clinch a deal of
regular trips to Greater China throughout the year. some kind. The Chinese might be consuming fine wines
Face to face meetings in Asia count for a great deal and five years younger than connoisseurs in the west might,
Vanquish have been eager to be sensitive to business but they are no mugs.
practices and culture in the region. Chateau Lafite, incidentally, pulled off something
Brierley comments: "We are not just looking to of a coup by announcing that it plans to carry the
sell to these people but deeply understand Chinese symbol of the number ‘eight’ on its
how individuals are learning about new 2008 bottles. That number is synonymous
products. For example – In Beijing with wealth and good fortune in China,
we held a dinner/seminar with 10 Fine wine is being and the price jumped 25% in 24-48
young wine collectors who agreed hours, recalls Brierley.
to join us to discuss their approach
consumed quicker Their enthusiasm for drinking
to fine wine, what they wanted than it is being young vintages that Europeans
to learn and which wines they produced for the first would leave in the cellar
were excited to try. It was a time in a long time, somewhat longer is, though,
frank, open discussion about inevitably affecting the pricing
and supply can’t rise
their preferences and their ‘wine dynamics of the industry. “Fine
journey’. Bordeaux and Burgundy wine is being consumed quicker
continue to dominate Vanquish's than it is being produced for the
portfolio of wines sold, as well as first time in a long time, and supply
vintage Champagne. can’t rise,” explains Brierley. “The land
This new-found interest in foreign wines devoted to vineyards is pretty much fixed, and
reflects not only China’s economic growth but also the you can’t increase quantity at the top level without
glacially paced opening up of the country over the past compromising quality. This is putting upward pressure
15 to 20 years. “As European restaurants have opened, on young vintages; the wines from 2000 to 2008 coming
serving European wine to go with the food, so interest in to the market are more expensive.” What we will see, he
the wine has grown,” he observes. Another contributing believes, is that the grand chateaux will stay top quality
factor was the decision to cut to zero Hong Kong’s duty but will produce more, younger, second wines.
on wine in February 2008. “That made Hong Kong in In the meantime, 2009 prices were the highest on
essence China’s freeport for wine,” he adds. “Wine is record, and existing vintages responded to that. When
everywhere, in bars and in restaurants. It reminds me the 2010 prices are set in April/May this year, Brierley
a lot of mid-America 10 to 12 years ago. The US wine expects the same to happen again for a wine as buyers
culture was to be found mostly on the east and west position themselves to secure an allocation of wine
coasts, and in Chicago and Houston, but today there are that won’t actually be released to the market until
great wine bars and restaurants all over the country.” 2013. “You’re buying a future,” he says, concluding by
The rich are different in India, too. According to a beginning to use language that is meat and drink to
recent story in London newspaper The Times, Moet & Fundamentals readers. “Whoever can work out a way to
Chandon, one of the world’s best known Champagne replicate wine-style investment returns using derivatives
houses, is reportedly planning to produce a new could make themselves a lot of money.”
sparkling wine in the state of Maharashtra to satisfy
demand from the sub-continent’s growing middle As mentioned in the article, our editorial staff includes
class. Indians drink an estimated 1.5m cases of wine two Scotsmen – we invite any similar firms dealing in whisky
each year, compared to 150m cases in the UK, the story to come forward with contributions - editorial, or alcoholic
relates, but growth has plateaued in the UK while India’s (ideally both) - for the next issue of Fundamentals
consumption is growing at 25% a year.
:WYPUN 2011|Fundamentals4HNHaPUL| 57
SecuritiesLending
P.60 P.70 P.76 P.82
US Senate hearing CCP: Diana Chan Repo: Asia IMN Beneficial Owners
Conference
P.66 P.72 P.78
Fixed income: Market focus: Japan ISLA: Kevin McNulty
Short selling
P.73 P.80
P.68 Islamic banking GSL Summit:
CCP: Eurex Nordic 2011
OF IT
3
S A
4 5 6
2 A motorised caravan reversed around an article is a risky proposition.
P R O P R I E T A R Y B U N D
(3)
E N A
7 8
3 LA spice turned around to give the hottest deal. (7)
C C D S S M 5 Bad spin with Europe in other words creates a similar type of asset. (2,6)
9 10
Q E I I O P E S I V 6 It sounds like Mr Fawlty is involved as well, this time in Switzerland.
11
A N E U L A (5,2)
12 13
L V C R T I M E 7 Rag top automobile that doubles as an equity stake, eventually. (11)
14 15 16
C E I N D E M N I F I C A T I O N 8 Where Don Johnson meets the financing crowd this year. (5)
U R E C L C H 11 How much is employed may be a useful metric. (11)
S T O I P A 12 An important firm announcement made by an LP in the diary? (6,4)
17
T A L L I N R S N 13 The yield gets bigger and better! (11)
18 19 20
O B D O D D F R A N K B R I C 14 Have your assets broken the law? They are kept here until they need to
21
D E F A U L T T D T E be sent elsewhere. (7)
22
Y E C A R B I T R A G E M 16 Cyrillic Russia without a hundred leads to a medium through which to
23 24
M T O F E E trade. (3)
25 26 27
S I N G A P O R E N A K E D N 19 This method of trading is certainly above board! (3)
28 29 30
E S R X R T 23 I heard a maiden strike a light to get a different maturity. (8)
31
T M C O L L A T E R A L E 26 Not one for democracy, I am telling you how to vote! (5)
32
F I N A L X B 28 Echo, tango, foxtrot? (3)
33
T H Y P O T H E C A T I O N A 30 Beater redefined to give you your money back. (6)
C T
34 35
T H E B I G S H O R T D I V I D E N D
Across 22 A bear grit wrongly will get a good deal! (9)
1 Deviate strangely with a bad Roman man to get an off-shoot. (10) 24 Part of the coffee culture creates the return. (3)
4 One’s own business supports an irate short year gone bad. (10) 25 A good part of cleansing a pore leads to a PASLA event. (9)
6 Tied up with no love for an obligation. (4) 27 A vulnerable position frowned upon by the authorities! (5)
7 Common dictated statement initially used for asset type. (3) 29 Does it sound like the top of the range sporty version of arachnoids? No,
9 Big boat that helped get us over a rough patch twice over. (4) rather ten and real treats initially to be invested. (3)
10 Four-wheel-drive vehicle with its heart changed from thee to me. (3) 31 A local mismatch to a later redesign provides a safeguard. (10)
15 It’s a protection sort of thing! (14) 32 and 35 Your ultimate return on your investment. (5,8)
17 Totally exhausted but it gives you the return you want. (3,2) 33 Toy cenotaph when mixed with the periodic table’s main element and me
18 Two American lawmakers one of whom doubles as a sausage? (4-5) provides a way to get more out of it. (13)
20 The next big 4 building material that lacks the silent part of knowledge. (4) 34 A large but vertically challenged novel approach to selling securities? (3,3,5)
21 Of French mistake that puts contractors in the wrong. (7) 35 See 32
58 | Fundamentals4HNHaPUL |:WYPUN2011
I needd to see credit
dit limit
li it breaches
b h when
h I book
b k a
trade – I don’t have truly real-time global position
management – I have to provide locate authorization
codes to my day traders – I have to maintain the
correct level of debit/margin balance all the time – I
am unable to benefit from hot stocks tied up in my
margin/debit balances – Many of my operational
activities are highly labor intensive - I only have
time to sort out the large billing discrepancies
Managing multiple technology
vendors takes too much of my time
– I am missing corporate actions that
impact the profitability of a trade – I
have to work very long hours to sort
our billing discrepancies – I can’t
take risks when choosing the
supplier for my mission critical
solutions - I don’t have
truly real time global
globa
SECURITIES FINANCE
©2010 SunGard
Trademark Information: SunGard, the SunGard logo and the products listed in this document are trademarks or registered trademarks of SunGard Data Systems Inc. or its subsidiaries in the U.S. and other countries. All other
trade names are trademarks or registered trademarks of their respective holders.
US Senate hearing
Kohl, as “employers are required by law to be able to consultants and are more likely to have investment
change the investment options offered in their 401(k) committees that thoroughly vet investments.
plans”. “Others are small and medium-sized plan sponsors.
The report also surveyed the seven largest banks in We’ve seen instances where they thought they’ve
the securities lending market, three of which said they given their fiduciary responsibility to their investment
had restricted retirement plans from exiting securities adviser and not understood what their role is under
lending funds. ERISA. So there is a large education that needs to go
“Securities lending is a complex financial transaction on in terms of what the fiduciary’s responsibility is
that goes on every day, often without employers and what they should know.
even knowing it is going on within their plans,” Kohl “GAO has taken some steps in that direction but the
said. “And if they are aware, many employers do not important thing to understand is that the assumption
understand the added risk.” that all plan sponsors can read a contract and
In general, the thrust of both the committee and understand what they’re investing in is not the best
GAO reports, along with the discussions at the assumption right now.”
hearing, were around improved disclosure in Jeszeck adds: “A lot of small plan sponsors’ main
securities lending. focus is growing their company; they may not
The committee itself laid out the recommendations be financially savvy in regards to investments,
Charles Jeszeck, acting director of the GAO’s Education, Workforce and Income
Security programme
60 | Fundamentals4HNHaPUL |:WYPUN2011
US Senate hearing
:WYPUN 2011|Fundamentals4HNHaPUL| 61
US Senate hearing
that their investments are being utilised in securities longer maintained the 102% that you owed back to
lending so to make the blanket statement as the the borrower.”
senator did, that this is the way the industry works, I “I think it is reported on some level, maybe monthly,
think is not a correct comparison. maybe quarterly but my suggestion was that someone
“In this particular instance it does seem that the cash should be aware of that on a daily level, because those
collateral pool manager is able to lay off all the market reports are available. The banks and large providers,
risk on to people that may not be completely aware they do know what that is, it’s just I don’t think that
that they’re involved in this transaction.” information is always getting across to the beneficial
Jeszeck adds: “Being respectful to the senator, the owner or whoever represents the beneficial owner.”
difference is that very often the participants are The GAO agreed that these proposals could be
completely unaware. In the federal government of beneficial, as its own report suggested that there
the USA one of the main funds that is analogous to a should be tighter rules around lending agreements, to
401(k) fund engages in securities lending. ensure that cash collateral managers cannot invest in
“I have not met one federal employee yet who I’ve securities that do not match those out on loan.
asked that, they knew what securities lending was, Despite the concerns raised during the hearing,
whether they were aware that their fund did it. People securities lending came out well, despite some of
just don’t know about it and the more shocking thing the mainstream media reporting at the time. All of
is that when we were doing our work we would the senators who spoke believed that the practice
meet plan sponsors, some of whom were incredibly was beneficial as pension funds struggled to find
knowledgeable people who were also unaware that revenues, although it was clear that the concerns
some of the investment options that they had were about disclosure were genuine.
engaging in these transactions.” It does seem that this may not be the end of the
On top of the recommendations from the committee story however; a number of noises from the senators
and GAO, Nazzaro himself offered some areas suggested that securities lending may come under
where securities lending could be demystified for yet more scrutiny, although the GAO confirmed that
plan sponsors, particularly around cash collateral they have not been asked to conduct any further
reinvestment. investigations so far.
Citing the example of AIG and others, which For now, this is a watch this space.
62 | Fundamentals4HNHaPUL |:WYPUN2011
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Fixed income
Some may wonder why this could affect the Few people have as much experience of talking to
securities lending industry; after all, one of the drivers those that make and implement the laws that affect
of demand behind lending is the covering of short hedge funds and, by extraction, the securities lending
sales, so anything that discourages a short position industry. Does he feel they are getting the message?
should in fact be welcome. “I suspect the regulators have always known what
The picture is more complicated than that, however. abusive short selling is. But you have the guys
At the Clearstream Global Securities Finance Summit making the laws and they are by and large in the
in January 2011, audience members were asked to European parliament, and their counterparts in the
vote on four different definitions of naked short ministries of finance who are on the working groups.
selling - the vote was fairly evenly spread across the “So the difficulty is usually at the lawmaking stage,
four options. because the lawmakers have to come up with key
Indeed, even a look through the literature provided definitions and in a world which is polarised on a
by the EU fails to turn up a concrete definition on topic as politically sensitive as short selling, there are
exactly what naked short selling is. those who easily confuse short selling with naked
The Alternative Investment Management short selling and naked short selling with abusive
Association (AIMA) has lobbied politicians across short selling.”
Europe to try to ensure that, of the raft of new Confusion reigns supreme then, it seems. Has AIMA
regulations being drafted for the financial markets, attempted to clarify the debate by introducing its own
unintended consequences do not come to the fore. definition? The answer is no.
AIMA CEO Andrew Baker agrees that there has so “We deliberately avoided coming out with a
far failed to be consensus on the issue. definition of naked short selling because you’d
66 | Fundamentals4HNHaPUL |:WYPUN2011
Fixed income
PIIGS in a poke
Borrowing costs of sovereign debt for
European fringe economies
actually have to subdivide it into good naked and something supported by AIMA - to an extent.
bad naked and that wouldn’t help with the vote,” he Baker believes the proposed public disclosure
explains. regime is “the number one topic” for the organisation.
It is this second confusion of terms - between While AIMA supports the public disclosure of
covered short selling and naked short selling - that anonymous, anonymised short selling data, it is
may be more worrying to the industry. Despite against the proposal to require individual managers
numerous academic reviews highlighting the positive to be named when they make short sales.
aspects of short selling to market liquidity and price “The bad thing about it is we think that there is
discovery, there continues to be voices against the no need to publically disclose individual names of
practice, as there have been for hundreds of years. managers. What should go into the public domain
This outcome is not helped by the fact that the is the aggregate, i.e. add up all of the short positions
mainstream press consistently fails to make a that are there, because that does give information to
distinction, as seen in September 2008 when headlines the market,” he explains.
were full of the “evil” practice of short selling, Baker does highlight an advantage of the proposal,
resulting in various temporary bans and restrictions namely that it would introduce a consistent regime
across the world. across Europe which is “nothing but a good thing” as
Indeed, even the Church of England jumped on traders could put the figure into their computer “and
the bandwagon during that same month, with the that would be how it worked in every single market
Archbishop of York, Dr John Sentamu, referring to in which you want to operate”.
short sellers as “bank robbers and asset strippers”, Another advantage would be that if aggregated
before it emerged that the church’s investment short selling data had been available in September
programme was itself engaged in a securities lending 2008, it could have shown that short selling was not
programme. behind the collapse, Baker adds. The same could be
Of course, while these were all great headlines, once true of the sovereign debt crisis.
the dust had settled and the work of examining the While it is too early to see whether short selling
wreckage had begun, any findings that vindicated will again be the fall guy for the mismanagement
short selling were by and large ignored by the by politicians of a country’s funds - in this case
mainstream press. Portugal - it seems that of the new regulations at least
For instance, it was found that the short selling of the disclosure proposals could mean that all those
banks’ shares had all occurred earlier in 2008 and involved in the practice - from agent lenders to hedge
those who had sold short had become net buyers funds - will be able to point to the data and absolve
during September 2008. themselves of blame.
“So much time and effort was wasted on the subject However, it remains to be seen whether AIMA and
of short selling that you could argue that the real the industry will get the type of disclosure it wants;
source of the fire wasn’t being tackled because there and if the fallout from Portugal creates more of the
was too much diversion of attention on a non-issue,” headlines that have been seen during the previous
adds Baker. two bailouts, it could be third strike and out for their
Another proposed European regulation on short hopes.
selling involves the disclosure of short positions,
:WYPUN 2011|Fundamentals4HNHaPUL| 67
CCP: Eurex
One of the most highly debated topics arising the analysis put forward in some recent studies
from the crisis since the summer of 2007 has been that a large part of the OTC market is standardised,
the increased use of a central counterparty (“CCP”). despite not being exchange traded. Nevertheless, just
CCPs are a feature of many of the world’s largest because it works for some products, doesn’t mean it
exchange traded products, both securities and can or should be applied to all products. So what is
derivatives. the driver for the market to adopt CCP for securities
Their importance and necessity are acknowledged lending?
by regulators and market participants alike as adding “While the securities lending marketplace is correct
value through counterparty risk reduction and to be satisfied with its experience through Lehman,
improved resource utilisation. there are larger issues it is being forced to consider,”
Regulators have recently proposed that over- comments Wißbach. He adds: “First, successfully
the-counter (“OTC”) products should be dealing with one unforeseen crisis does not
CCP cleared on a mandatory basis. guarantee that the next time will yield
By definition, OTC products lack Many consider the same result. Second, pressures
standardisation and centralised that CCPs are only on firm resources: human, capital
reporting, making them an for on-exchange and balance sheet means that
obvious area of concern for there is an inevitable push to get
SecuritiesLending
transactions. As
those charged with market better results. Third, we expect
oversight. Whether undue
a matter of fact that the market will only be
risks exist, and if they can that is not true. convinced to pro-actively adopt
be brought into a CCP Approximately the CCP if it can be shown to
environment in a commercially 40% of our cleared add value.”
sensible manner is somewhat contract volume The final point hits the key
less obvious. Securities lending at Eurex Clearing issue. Absent a regulatory
is one product that has seen imposition of CCP, it requires a
heated debate. Fundamentals
is OTC-traded meaningful participation from the
recently had an opportunity to speak business securities lending community. How
with Matthias Graulich, executive to convince an obviously successful,
director, head of clearing initiative and Thomas profitable industry to implement change?
Wißbach, senior vice president of Eurex Clearing Wißbach describes the lengthy research phase: “We
about CCPs generally, and specifically with respect to have taken our time to listen to market participants
securities lending. to get their views and needs through a series of
individual meetings and group workshops. We have
Given that OTC instruments are unique, individual proposed ideas and developed them in the context of
contracts, many question whether they are suited for the feedback from potential users.”
central clearing through a CCP. Graulich tackles this Lengthy indeed. While the first securities lending
question head-on: “Many consider that CCPs are only CCP in Europe was launched in June 2009, the first
for on-exchange transactions. As a matter of fact that release of Eurex Clearing’s CCP offering for securities
is not true. Approximately 40% of our cleared contract lending is currently targeted for Q4 2011 live date.
volume at Eurex Clearing is OTC-traded business.” When pressed on the development time, Wißbach
This is a surprisingly large figure and given that explained: “We didn’t think that simply taking our
Eurex Clearing is one of the world’s leading clearing existing service model and trying to re-use it for
houses, puts to bed the question of the potential for securities lending would be successful. So our newly
CCP application to OTC markets. It also supports developed dedicated lending offering takes some
68 | Fundamentals4HNHaPUL |:WYPUN2011
CCP: Eurex
core values that lenders and borrowers made clear they use should also apply for CCP and collateral
were important to them. Even though the CCP will management processing should follow existing
novate trades and become the legal counterparty to models.” Does that mean tri-party will be part of the
borrower and lender, our product will ensure that the Eurex Clearing’s CCP? “We fully expect that tri-party
bilateral nature of securities lending relationships is will be part of our service,” Wißbach confirms.
maintained. We are here to help reduce counterparty Yet, is now the right time? Profitability has never
risk and enhance efficiency.” been under more pressure and the introduction of
Graulich adds a valuable point on risk management. CCP brings more mouths to feed. Wißbach outlines
“By having a portfolio approach to risk across their approach: “Of course our service will not be
derivatives and cash markets as well as other asset for free. However, our approach differs from others.
classes like securities lending, we can take a portfolio First, our model enables trading to continue as at
view of risk using off-setting transactions to reduce present. Second, our unique Specific Lender Licence
risk within individual participants and the market as for beneficial owners does away with the need for
a whole.” CCPs that have multiple products covering a General Clearing Member for the lender side of
exposures in opposite directions “will be able to the business. This eliminates the concern over risk
add value in reducing collateral requirements while concentration and the additional processing cost.
improving market integrity.” Third, leveraging off users’ existing operational
Efficiency is another challenge. CCPs potentially add infrastructure will reduce, if not eliminate the
complexity by requiring users to process securities practical cost of change. The resource efficiency that
lending trades differently for CCP eligible trades. we expect to bring will provide a net benefit to our
Wißbach explains: “Our objective is for users to users.”
operationally deal with us almost as if we were just There are challenges ahead for Eurex Clearing. Most
another counterparty. The challenge is to ensure that importantly they will have to deliver the product they
participants can employ their existing infrastructure have described. Second, and perhaps an even bigger
to interface with us.” But what does that really mean? task, they must convince a sceptical community that
He goes on: “That means that the existing post-trade change is not only needed, but should be embraced.
processing should be the same whether or not trades There are indeed many compelling arguments for a
go through CCP. Therefore any reconciliation services better marketplace if they can pull it off. And a market
that mutualises risk will, almost
by default enforce best practice on
By having a portfolio approach
participants. Graulich concludes: “If
to risk across derivatives and
you have skin in the game, you have
cash markets as well as other
an incentive to make sure the system
asset classes like securities
continues to run.” Regulators, and
lending, we can take a portfolio
others, will watch with interest.
view of risk using off-setting
transactions to reduce risk within
individual participants and the
market as a whole
:WYPUN 2011|Fundamentals4HNHaPUL| 69
CCP: Diana Chan
70 | Fundamentals4HNHaPUL |:WYPUN2011
CCP: Diana Chan
The issue of using CCPs for securities lending is a hot For EuroCCP, what additional challenges are involved with
topic at many of the recent securities lending conferences. clearing securities lending compared to other products?
The industry is considering the benefits of the model but EuroCCP currently does not clear securities lending
the take-up to date has been modest. Any involvement by transactions but I can offer some observations from analysis
the regulators would accelerate the process. we had done in the past.
It is worth considering the risks that could be In the case of cash equities we net all transactions to
introduced to securities lending if securities collateral is settle them on T+2 or T+3. In the case of securities lending
rehypothecated. The Lehman Brothers situation highlighted we may be involved in reduced settlement cycles and
that when securities which are pledged for any purpose need to track the outstanding balance on a loan by loan
are in turn rehypothecated, reclaiming such collateral could basis since each loan might have unique characteristics
be very difficult, which might be one cause of regulators’ to include different rebate rates even if the same issue of
concerns. Borrowers that offer up securities collateral in security is involved. Loans may be for short duration such
return for loans need to be aware of these risks. as overnight, maybe rolled forward each day with a rebate
rate re-set if required or could be term loans for a longer
With a CCP that wouldn’t be the case? duration. Securities on loan may be subject to corporate
It depends on the risk model employed by the CCP. If actions activity. In the case of dividends, the withholding
securities are passed from the borrower to the CCP which tax rate of securities to be loaned must be known and
in turn passes them through to the lender, the same risk agreed before the loan is made. More complex corporate
could exist. However, if the CCP retains control of non-cash actions can be managed either via an unwind of the loan
collateral on behalf of the parties, the risk could be avoided. prior to record date or the protection of lender rights. All
What about the danger that smaller players will have to this implies an extra level of risk and operational know-
go via a clearing member, so instead of diversifying their how.
risk it will intensify the risk into one single counterparty?
Yes it is true that a smaller player will be exposed to How does cash reinvestment work in the CCP model?
the clearing member it uses, because the contractual Loans made versus cash collateral are agreed at a specific
relationship for clearing is between the smaller firm and rebate rate offered by the lender. It is important for the CCP
its clearing member and not directly with the CCP. The to pass through cash collateral to the lender so that they can
smaller firms will need to do their own assessment, based invest such collateral and pay the agreed rebate rate. The
on a number of factors including financial robustness, CCP protects itself by securing margin from both parties.
to determine which clearing member they go through. This margin might be in the form of eligible securities. If
Provided there is variety and a significant number of the margin is paid in cash the CCP will invest it overnight
clearing members, firms will be able to have a choice of and pay its customary interest rate. The parties involved in
which firm they use. the loan will track the interest rate paid by the CCP on any
cash margin paid, to ensure it is adequate.
What about default guarantees? If there is a regulatory push to
get lenders and borrowers onto CCP, will guarantees lie with the Is it up to your members to decide what happens to the
members or government? collateral?
I do not believe any government will give that guarantee Cash collateral is passed via the CCP to the lender and
because that creates moral hazard. There are schemes being the CCP protects itself by margining both sides. In the case
proposed for the orderly winding down of systemically of non-cash collateral we believe the collateral should be
important institutions. held and controlled by the CCP.
Even if the use of CCPs is mandated by regulations,
having taxpayers pay for firms mismanaging their own What other challenges are there for securities lending and
finances is completely unrealistic. borrowing CCPs?
Regulators and prudential supervisors, such as CPSS- In addition to the comments previously made regarding
IOSCO, have devised standards to ensure that CCPs don’t corporate actions to include withholding tax implications,
run into problems. A CCP will fail if a member of the CCP the CCP must track each loan to ensure that rebates (for
goes bankrupt, has not provided sufficient collateral to the cash loans) and fees (for loans collateralized with securities)
CCP so the CCP sustains a huge loss beyond its available are calculated, billed and paid.
financial resources. The CCP’s operational procedures
have to be such so that it calculates the sufficient amount of What are EuroCCP’s plans for the rest of 2011 and 2012?
collateral, collects that collateral from members promptly, If there is a big demand and we are sure that the large
and has absolute legal rights to liquidate the collateral to parties are going to embrace CCP clearing we will certainly
fill any losses that it might sustain after a member’s default. look at it as an opportunity – we are responsive to user
Regulatory standards are set to ensure all of these elements needs. But so far we haven’t heard a groundswell of
in a CCP’s construct are working properly and that the demand.
system is safe. If the big firms embrace CCP clearing, then there would
That having been said, I don’t think that even if the tail be a business case.
risk or black swan materialises, there could be a presumed
government bailout.
:WYPUN 2011|Fundamentals4HNHaPUL| 71
Market focus: Japan
Japan focus
Roy Zimmerhansl provides a special report on the Japanese lending market and how
the devastating earthquake and tsunami that hit the country could affect the industry
Global securities lending volumes have a long way to on their performance for the month since the very
go before returning to the peaks of early 2008. If there difficult trading sessions of Monday and Tuesday.”
has been any bright spot in recent years, it has been Last year some market participants were writing off
the explosive growth in lending Asian securities. Asian Japan in favour of other markets and in light of events
economic activity has translated into rising markets Japan’s prospects may indeed have been damaged.
with more deals and new issues relative to North Francesco Squillacioti, regional director of securities
America and Europe. finance, State Street Asia Pacific, adds some perspective:
The Japanese securities lending market has been “The market has certainly been affected by the recent
an anchor of the business since the earliest days of tragic events, which have created some degree of
international lending. Yet 2010 saw HK surge ahead, uncertainty. The deal space has stalled somewhat since
with Data Explorers announcing late last year that lender the disaster comparative to the start of the year, which is
fees for HK securities had outpaced Japan to become the to be expected.”
biggest market in revenue terms. But by the end of But the breadth, depth and history of Japanese
the year, Japan had clawed its way back to equity lending might yet be its saviour.
the top. Deutsche’s Yanagisawa adds: ``The bank
Then in March the markets were We feel despite the remains incredibly positive on the
hit by the dual horrors of the events lately in Japan ability for the hedge fund industry
earthquake and tsunami. While we’re going to see to increase in size this year. We feel
the human tragedy was central further growth in the despite the events lately in Japan
to people’s thoughts, some we’re going to see further growth
were concerned with how the hedge fund industry in the hedge fund industry in
SecuritiesLending
market would respond to the in general. Global general. Global investors will
single biggest disruption since investors will continue to look at absolute return
the Lehman default. Masa continue to look strategies in volatile markets like
Yanagisawa, director and head these. ‘’
of global prime finance sales,
at absolute return Hedge fund analysts and portfolio
Japan at Deutsche Securities in strategies in volatile managers have long been familiar
Tokyo comments: ``When we last markets like these with Japanese companies and this
saw market events of this magnitude experience is helping them dig deep to
in 2008, I think that was far more jarring. identify opportunities on both the long
You can understand why people were selling and short side. Deutsche’s Donald expands on
last week and you can understand why we had these the point: ``Analysts are taking a look at manufacturing
market moves, but during the Lehman crisis it was just companies in the prefectures that were hit. How have
complete absence of liquidity.” plant capacity, or auto parts component supplies been hit
Adds his colleague Christopher Donald, managing and what are the implications on a case-by-case basis? It
director and head of global prime finance, Japan: ``When is really now a researchers’ game. Out of the companies
the Lehman bankruptcy occurred, the financing rate of listed on the TSE, the focus is on which companies are
the Japanese yen went right through the roof. This time, going to be able to respond, and even which companies
the Bank of Japan acted very quickly and they were are going to be able to pick up a drop in their own
responsive in flooding the market with Japanese yen, so or competitor’s capacity. It’s become a stock-pickers
the cost of funding did not increase. That provided a lot research-driven market.’’
of liquidity and comfort to the overall market.” As hedge fund results start to come in over the
While some Japan-focused hedge funds suffered coming weeks, we will be able to assess the impact on
double-digit losses in the immediate aftermath of the alternative space. The long history of the Japanese
the disaster, improvements have already been noted. equity lending business, considered by some to be a
In a letter to investors, Ed Rogers, of Wolver Hill weakness in 2010, will be its strength. Volatility brings
Asset Management, described the situation as the opportunities and every market participant contacted for
market stabilised some days later: “We have been this article carried the same message.
communicating with all of our managers constantly Chris Antonelli, head of prime services, Asia-Pacific
since last week. Almost every one of them has improved at Nomura Securities shares the experience of Japan’s
72 | Fundamentals4HNHaPUL |:WYPUN2011
Islamic banking
:WYPUN 2011|Fundamentals4HNHaPUL| 73
Islamic banking
Islamic developments:
Save the date!
Oct 2010 - Deputy CEO of Qatar Exchange announces plans for short selling.
We will be holding a Middle
Oct 2010 - Deputy CEO of Abu Dhabi Securities Exchange asks UAE regulator East Securities Lending Summit
to allow short selling and introduce margin trading on 1st December in Abu Dhabi
Feb 2011 - National Bank of Abu Dhabi announces repo product Visit Fundamentalsmagazine.
com/MiddleEast to register now
Mar 2011 - National Clearing Company of Pakistan announced plans for a
securities lending and borrowing system on the country’s stock exchanges
short-selling will essentially be ‘covered’ short selling, most important changes in the Qatar market is that the
which is allowed under Sharia. This can seem confusing Central Bank is asking conventional banks to close down
considering the Islamic world’s criticism of short selling, their Islamic operations, which will see a segregation of
but Mujtaba explains that Islamic law does not consider conventional and Islamic banking activities. This is an
covered short selling to be short selling because it important space to watch.
involves selling something you actually own. “People “There is demand in the Muslim and Arabic world to
need to come up with clearer terms of short selling,” he make those products as Shariah-compliant as possible.
adds, reflecting the global industry’s criticism But at the end of the day, there’s going to be a
over the lack of clarity on the definitions of balance between conventional and sharia-
covered and naked short selling. compliant transactions.”
However, there are concerns that Finding this balance will not be an
Sharia funds can be too restrictive easy task judging by the lack of
in terms of the stocks participants Islamic finance is at standardisation across Islamic
are prohibited from investing in. a critical crossroad finance, primarily due to different
Mujtaba responds: “The interpretations of the code across
SecuritiesLending
74 | Fundamentals4HNHaPUL |:WYPUN2011
Repo: Asia
conference that while Asia is beginning to move future. There is also concern that current limitations
towards repo, it is out of its comfort zone because could increase borrowing costs for issuers who can’t
the region has an emotional attachment to unsecured join the club. Lee immediately dispels this theory by
funding. saying that while borrowing costs are affected by a
But that is changing as banks are becoming more number of factors including credit standing of bond
conservative in clean lending since the financial crisis issuers and present market conditions, restrictions
in 2008, says Esmond Lee, executive director for on eligible issuers should have “minimal impact” on
financial infrastructure at the Hong Kong Monetary bond pricing.
Authority (HKMA). Yet despite the new facility’s advantages, Lee says
He attributes Asia’s weak relationship with repo to that its usage remains very minimal at the moment
its banks’ inactivity in uncollateralised lending and due to ample liquidity in the RMB RTGS clearing and
also deficiencies in the existing market infrastructure. settlement system which had an average turnover
Asian banks are now switching to collateralised of RMB58 billion per day in March this year, which
lending to have a better management of credit risk, accounted for only 14% of RMB deposits as of the end
Lee adds. of February. “Nonetheless, repo may be used more
The HKMA is also planning to upgrade the repo frequently if more payments are settled through the
platform across Hong Kong’s four currency RTGS RMB RTGS system in the future,” Lee adds.
systems later this year in order to promote the use of It is still early days to tell whether the yuan repo
repo. The regulator claims that these enhancements launch will change Asian banks’ attitude to repo, but
will help automate several processes including it is clear that there is demand for it. On a wider scale,
collateral substitution and valuation. Lee predicts 2011 to be a “crucial” year for the growth
However, the new renminbi repo facility has been of Hong Kong’s offshore RMB business and its status
criticised for being restricted to certain bonds, which as an international finance centre.
include sovereign bonds issued by China’s Ministry
of Finance, and bonds issued by the Bank of China
and the mainland’s policy banks. There is a fear
that this limitation could decrease the repo facility’s
76 | Fundamentals4HNHaPUL |:WYPUN2011
CRAFTING THE vision FOR THE securities industry
www.isitc.org
ISLA comment
Stephanie Baxter talks to Kevin McNulty of the International Securities
Lending Association about the push for education and transparency in
securities lending and why he is optimistic that demand levels will rise
These are uncertain times for the securities lending for increased clarity in the industry. “A lot of people
world as demand for borrowing securities remains are talking about transparency, but it’s not clear what
low and regulators push for transparency and anybody really means by that,” says McNulty. He
control. Yet there is cause for “cautious optimism” believes that the SEC is working to get clearer about
in the industry, according to Kevin McNulty, CEO what it is looking for in terms of transparency, and
of the International Securities Lending Association he thinks this could have as much to do with how
(ISLA).
While regulation is still a dominant issue as
European regulators put the finishing touches to the
AIFM Directive, new short selling rules and Basel III, The industry is slowly emerging
McNulty says that the more pressing issue is how the from the crisis, but people
market is emerging following the recession. are cautiously optimistic
“The industry is slowly emerging from the crisis, that demand for borrowing
but people are cautiously optimistic that demand for securities will grow
borrowing securities will grow.”
McNulty points towards the pick-up in merger and
acquisition activity, news that interest rates could
rise, and the fact that pension funds and other long securities lending actually works between the lending
term investors are looking for alternative ways to and borrowing parties as the actual market data. The
SecuritiesLending
invest. Together they suggest the securities lending UK FSA raised this very issue at the beginning of
environment will improve and that demand will 2010 and ISLA responded by ensuring that suitable
increase, he adds. educational materials were made available to pension
Despite a strong supply of securities available fund trustees.
to borrow, the demand for those securities has McNulty refers to education a lot, which he claims
somewhat dipped over the past few years. This has is something that the global industry just can’t do
been primarily due to a reduction in the volume of enough of. He claims that education is paramount
investment strategies that fuel demand, and the lack and that one of its key areas should be to make
of regulatory certainty in the marketplace. securities lending terms as clear as possible for
These topics will come under the spotlight at the beneficial owners and other involved parties. “I think
ISLA annual conference in June, which this year we have become much better at educating but there is
features a regulation workshop and hedge fund panel. always room for improvement,” he adds.
The two-day event will be held in Lisbon, which may The conference will be structured around a number
be a surprise to some following the downgrading of key panel sessions, one of which will feature senior
of Portugal’s credit rating. Some may ask, is it regulators from across Europe who will discuss their
appropriate to hold a securities lending conference in priorities and how the processes that shape regulation
a market that not only is suffering financially but does are changing. A panel of hedge fund managers
not have a developed securities lending industry. In will address the recent growth of hedge funds and
recent years, ISLA has chosen to hold its conference consider whether that will continue and have a
in small securities lending markets such as Berlin, positive impact on the securities lending business.
Lisbon and Barcelona. “But it isn’t necessary to hold There will also be a focus on country-specific issues,
the conference in a country that has a developed and more general issues such as cash collateral
securities lending market,” says McNulty. “What’s reinvestment and central counterparties through
more important is the location to make it easy for round tables, which McNulty claims will allow more
people to come over and do business.” active involvement in the industry debates.
Transparency is another topic likely to crop up at
the conference following the US Senate’s recent call
78 | Fundamentals4HNHaPUL |:WYPUN2011
in association with
20th Annual
International Securities
Lending Conference
28th – 30th June 2011 | Penha Longa, Lisbon-Sintra, Portugal
Organised exclusively by market participants, this conference is the only event of its
kind in Europe attracting in EXCESS OF 400 ATTENDEES such as senior market
participants from banks, broker dealers and asset managers, beneficial owners, hedge
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80 | Fundamentals4HNHaPUL |:WYPUN2011
GSL Summit Nordic 2011
:WYPUN 2011|Fundamentals4HNHaPUL| 81
Conferences: IMN Beneficial Owners, Arizona
Christine Bosco, senior securities lending analyst at Mick Chadwick, head of trading, securities finance
Franklin Templeton, said that her firm had spent 2010 at Aviva Investors, began by saying that it was
“re-evaluating” their programme. While the core business “incontestable” that CCPs provided a very useful
had remained intact, they were now taking a “modified function in “some markets”. However, he was “not
approach”, looking at increasing transparency. entirely sure” that securities lending was one of these
markets.
Charles Rizzo, CFO at John Hancock Funds, told a similar
story. Words such as “tweaking” of guidelines indicated Gregory DePetris, co-founder and chief strategic
that while the crisis had altered the firm’s perception of officer of Quadriserv focused his piece on what CCPs
how to conduct lending, any changes would be on a softly, offer beneficial owners, summing it up with one word:
softly basis. “distribution” DePetris explained that a CCP allows a
beneficial owner to gain access to a much wider range
Emerging Markets Panel: of borrowers than before, without affecting things from
a credit point of view. More borrowers should mean
Christopher Poikonen, executive vice president – higher returns, he added.
SecuritiesLending
82 | Fundamentals4HNHaPUL |:WYPUN2011
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The Fundamentals Glossary
AFME Association of Financial Markets Europe Margin collection In securities trading, it’s the difference between the
APJAsia-Pacific & Japan loan amount advanced by a stockbroker to a speculator.
ASICAustralian Securities and Investments Commission Market maker A broker-dealer firm that creates a market for financial
ASLAAustralian Securities Lending Association obligation. They hold a certain number of shares of a particular security
Asset managementThe professional management of investments such to ease up trading in that asset. Market makers therefore help to keep the
as stocks, bonds and real estate. financial markets running efficiently.
Basel Committee on Banking SupervisionProvides a forum for Naked short-selling A practice that is illegal in many countries, where
regular cooperation on banking supervisory matters, aiming to improve the the short seller does not borrow the security in the first place or does not
quality of banking supervision around the globe. ensure that it can be borrowed. It allows manipulators to drive down stock
Basel IIIAn update to the Basel Accords (recommendations on banking prices, ignoring normal stock supply and demand patterns.
laws and regulations in the G20 countries) which are currently under NAPF National Association of Pension Funds (UK)
development. Under the new rules, banks will have to increase their core NY Fed Federal Reserve Bank of New York
tier-one OCC Options Clearing Corporation
capital ratio PASLA Pan-Asia Securities Lending Association
Beneficial owner The actual owner of the asset, but that does not mean Prime broker A broker who provides a special group of services to clients
they are necessarily the legal owner. The beneficial owner enjoys the benefits such as securities lending, leveraged trade executions and cash management.
of ownership even though the asset is under another name. Prime custodian A custodian who takes responsibility for managing a
Broker-dealerAn agent that trades securities for its own account or on client’s custody relationships when they have several global custodians across
behalf of its customers. a number of portfolios.
Buy-side firms This refers to firms that invest money or ‘buy’ securities. Private equity Equity capital that is not put on the public exchange,
Capital requirements A bank regulation which tells banks and where investors and funds make direct investments into private firms or buy
depositories how they must handle their capital. They are put in place to out public companies that results in a delisting of private equity.
ensure that institutions are not holding investments that increase default risk Proprietary desk/trader A trader who deals with a securities firm’s
and that they have enough capital to cover operating losses. transactions that affect the firm’s accounts but not the accounts of its clients. The
Cash collateral Negotiable securities such as certificates of deposit and bank uses its own balance sheet to take positions in shares, bonds or commodities.
gilt-edged securities that are accepted as collateral by lenders because of their Proxy voting Where someone acts on behalf of a company member at a
low risk and ability to be converted into liquidity. company meeting where at least one vote is taken.
Cash reinvestment Where the service provider reinvests cash collateral Repo A repurchase agreement which is the sale of securities tied to an
under the terms agreed with the client. agreement to buy the securities back at a later point.
CASLA Canadian Securities Lending Association Request for proposal (RFP) A document used by many organisations
Collateral management A process of dealing with collateral to receive offers of services from potential suppliers. It enables organisations
transactions, where its main function is reducing credit risk in unsecured to receive the right information to make good business decisions.
financial transactions. RG 196 Australian short selling regulation that was introduced by the
Collateral pools Cash collateral provided by the borrowing party in a Australian Securities and Investments Commission in April 2010.
securities-lending transaction, which is then pooled and invested in short- Risk mitigationTaking efforts to reduce the exposure to risk. Also called
term securities to generate return. risk reduction.
Contract for difference (CFD) A contract between two parties where Risk versus return The balance between the risk of loss and the
the issuer agrees to pay the buyer the difference between the asset’s current potential return. Usually, the higher the risk of loss, the greater the potential
value and its value at time contract was made. The buyer pays the issuer if the return, while the lower the risk of loss, the lower the potential return.
difference is negative. RMA Risk Management Association (US)
Corporate actions An action which is part of a process that brings SAS70 audits Standards that an auditor must use to assess the contracted
change to a company’s stock, such as stock splits, mergers, dividends and internal controls of a service organisation.
acquisitions. Some corporate actions have a direct or indirect impact on the SEC Securities and Exchange Commission (US)
shareholders, while others do not impact them at all. Securities lending The lending of securities from one party to another
Covered short selling The opposite of naked short-selling (see below) in return for a fee. The borrower is obliged to return them either on demand
where the short seller has a binding stock lending agreement in place. or at the end of the agreement.
Custodial agent An agent, bank or trust which looks after an individual’s Sell-side firms Investment banks that provide buy-side firms with
mutual funds or an investment firm’s assets. services and products.
Custodian bank Financial institutions that look after the financial assets SFC Securities and Futures Commission (US)
BackOffice
of an individual or firm. Short selling An advanced trading strategy in securities lending where
Dodd-Frank Wall Street Reform and Consumer Protection the short seller hopes to capitalise from a fall in the asset price. ‘Going short’
Act A US federal statute that was signed into law in July 2010 to promote the is the opposite of ‘going long’.
financial stability of the US and to put an end to the bailing-out of the banks. SIFMA Securities Industry and Financial Markets Association (US)
Exchange-traded fund (ETF) A security that tracks like a stock on an Single stock future (SSF) A futures contract with the underlying asset
exchange instead of having its net asset value evaluated every day like a mutual being one particular stock. It gives investors more capabilities to leverage
fund. It tracks an index, commodity or pool of assets like an index fund. themselves in the market.
Fed Federal Reserve (US) Swap-based ETF ETFs that use swap arrangements to replicate markets
FSA Financial Services Authority (UK) where there may be difficult access or poor liquidity. Unlike standard ETFs,
Hedge fund A largely unregulated portfolio of investments that are catered swap-based ETFs hold a pool of securities which may have no relation at all
for sophisticated investors. These funds are often partnerships or mutual to the index being tracked.
funds that aim to make high returns by taking advantage of ups and downs in Third-party lender A firm specialising in securities lending which is not
the markets. the custodian of the beneficial owner’s assets.
IOSCO International Organisation of Securities Commission (US) Triparty collateral managers These provide a centralised service
IRS Internal Revenue Service (US) to manage, clear and hypothecate collateral among different OTC
ISDA International Swaps and Derivatives Association (US) counterparties in the market.
ISLA International Securities Lending Association Workflow management Managing and defining a series of tasks within
Liquidity The more liquid an asset, the easier it is to convert it into cash. an organisation to produce a final outcome.
Liquidity is also known as marketability.
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in securities trading, registration, foreign exchange and Money Market.
Nordea is the leading financial services group in the Nordic and Baltic region
and operates through three business areas: Nordic Banking, Private Banking
and Institutional & International Banking. Nordea is the leading custody services
provider in the region. Nordea provides high quality, tailor-made custody services
Contact:
for local and foreign investors dealing with Nordic and Baltic securities. Due to
Nina Groth
the unique history of being formed from four established banks, Nordea is the
Head of Sub-custody and Clearing
only Nordic custody provider with strong local presence and expertise in all four
Tel: +45 3333 6124
markets. Nordea combines Nordic competence with local expertise, and has
E-mail: nina.groth@nordea.com
proven ability to deliver high quality services that meet both clients’ and each
local market’s requirements.
• Leading Nordic custodian:
• Critical mass and resources available;
• deep local experience and active involvement in each Nordic market;
• Complete operational capabilities and best-fit systems developed in each
Nordic market;
• Proven ability to deliver high-quality service in all Nordic markets; Excellent
connection with key players in all Nordic Markets;
• Extensive product and service offering;
• Your single point of entry to the whole Nordic region.
Apex Fund Services Ltd is a global hedge fund administration solution for hedge C: Peter Hughes
funds and private equity clients located in 12 separate jurisdictions across the Group Managing Director
globe. The company uses the software solution, PFS PAXUS, which is a fully T: +1 441-292-2739
integrated hedge fund accounting system combined with web-based reporting F:+1 441-292-1884
to allow clients and investors to access their information 24/7 securely online. We E: peter@apex.bm
will tailor all solutions to meet your needs and our continuing focus on the quality John Bohan
of service and the relationship with each and individual client ensures that we Group Manager of Operations
retain our ethos of providing a personalized service rather than a generic solution. T: +353 21 4633366
Highly qualified and experienced staff, mirrored with top tier technology and F: +353 21 4633377
competitive fee structures make Apex Fund Services Ltd the clear choice for your E: John@apexfunds.ie
fund administration needs.
BackOffice
Custom House Global Fund Services Ltd. (“CHGFS”), the Malta based parent Custom House Global Fund
company of the Custom House Group of Companies (“Custom House”), was Services Limited
established when Equity Trust’s fund services division was merged into Custom Head Office Address:
House in September 2008. CHGFS is recognised as a fund administrator and Tigne Towers
licensed under a Category 4 license as a Custodian for Funds of Funds and is also Suite 33
an authorised Trustee for Trusts. Tigne Street
Custom House offers a full 24/5, “round the world”, “round the clock” Sliema 3172
administration service out of its offices in Amsterdam, Chicago, Dublin, Guernsey, Malta
Luxembourg, Malta and Singapore. This service, which enables Custom House
www.customhousegroup.com
to offer daily dealing NAVs covers all aspects of day to day operations, including
Contacts: Dermot S. L. Butler,
maintaining the fund’s books and records, carrying out the valuations, calculating
Chairman
the NAV and handling all subscriptions and redemptions, as well as over-seeing
dermot.butler@customhousegroup.
payment of the fund’s expenses.
Custom House uses the PFS-PAXUS fully integrated fund administration system. com
Reporting is effected through CHARIOT, Custom House’s secure web-reporting T: +353 1 878 0807
platform for managers and investors. Albert Cilia, Managing Director
Custom House is fully SAS70 compliant and the Dublin office was the only hedge albert.cilia@mt.customhousegroup.
fund administrator in the world ever to be awarded a Moody’s Management Quality com
Rating. CHGFS and its subsidiaries are fully regulated, as required, by the relevant T: +356 2702 2799
authorities in their jurisdiction.
86 | Fundamentals4HNHaPUL |:WYPUN2011
Directory of services
Securities Lending
Technology
Eagle Investment Systems LLC Eagle Investment Systems LLC is a global provider of financial services technology
The Bank of New York Mellon Financial serving the world’s leading financial institutions. Eagle provides enterprise-
Centre wide, leading-edge technology and professional services for data management,
160 Queen Victoria Street, London investment accounting and performance measurement. Eagle’s Web-based
UNITED KINGDOM solutions support the complex requirements of firms of any size including
EC4V 4LA institutional investment managers, mutual funds, hedge funds, brokers, public
Phone Number: 44 (0)20 7163 5700 funds, plan sponsors and insurance companies. Eagle’s product suite is offered
E: sales@eagleinvsys.com as an installed application or can be hosted via Eagle ACCESSSM, Eagle’s ASP
W: www.eagleinvsys.com offering. Eagle Investment Systems LLC is a subsidiary of The Bank of New
York Mellon Corporation. To learn more about Eagle’s solutions, contact sales@
eagleinvsys.com or visit www.eagleinvsys.com.
With annual revenue of USD5 billion, SunGard is a global leader in software and
Visit SunGard at processing solutions for financial services, higher education and the public sector.
www.sungard.com SunGard also helps information-dependent enterprises of all types to ensure the
continuity of their business. SunGard serves more than 25,000 customers in more
than 50 countries, including the world’s 50 largest financial services companies.
C: Mr Ras Sipko KOGER is a leading provider of technology solutions to the fund administration
T: +1-201-291-7747 industry. KOGER products are used by some of the largest and most respected
E: ras@kogerusa.com institutions in the industry. KOGER has offices in each of the USA, Ireland, Slovakia
W: http://www.kogerusa.com and Australia and
provides comprehensive 24/5 technical support.
NTAS (New Generation Transfer Agency System) is the premier shareholder
register and transfer agency system in the market. NTAS modules include an
extensive range of incentive fee calculation methods as well as an extensive list
of capabilities such as dividend processing, cash flow management, anti-money
laundering, blacklist, taxation and fee management. NTAS supports a wide
variety of fund structures including master-feeder, fund of funds, series, limited
partnerships, private equity and side pockets. Reports are fully customizable and
worldwide replication is available.
KOGER’s GRID (Global Reach Interface Daemon) is a middleware interface that
integrates NTAS with any third-party system.
Consultancy
Visit SunGard at With annual revenue of USD5 billion, SunGard is a global leader in software and
www.sungard.com processing solutions for financial services, higher education and the public sec-
tor. SunGard also helps information-dependent enterprises of all types to ensure
the continuity of their business. SunGard serves more than 25,000 customers
in more than 50 countries, including the world’s 50 largest financial services
companies.
:WYPUN 2011|Fundamentals4HNHaPUL| 87
Pensions: Dinnae tell me to retire...
Will pensioners
become The reason he is still going strong is because
pickpockets? any younger man that tried to tell him to retire
would, once the shouting had stopped, find himself
considering retirement himself.
For instance, the statutory retirement age of 65 in Which is probably a good thing.
the UK was removed on 5th April 2011.
Are all jobs that involve a public profile to be See you next quarter....
the reserve of 20-somethings with flashy smiles
and the gravitas of a child’s balloon?
No more the serious, grave voice reading the
news; no more the staid, solid statesman.
BackOffice
88 | Fundamentals4HNHaPUL |:WYPUN2011
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SGSS is a business division of Societe Generale and/or its related companies, which provides a wide range of securities services only to asset managers, institutional investors, financial intermedia-
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