Fundamentals

Long&Short
THE

OF IT

MarketSummary
PowerBalance
ExpertPanel
SummitReport
TaxOverview
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Introduction
elcome to The Long & Short of It,
the definitive guide to movements in
the securities lending sphere during 2010. In
producing this yearbook, Fundamentals has
taken what it learned from the GSL Summit
Series 2010, which toured in 12 countries across
Asia-Pacific, Europe and the US, enabling us to
meet a wide range of investors and regulators
who have all had very different attitudes to
securities lending.
We have combined this knowledge with data
kindly provided by SunGard Astec Analytics to
shed light on the principal issues affecting the
industry in what has been a tumultuous year for
securities lending. This presents an opportunity
for both securities lending professionals and
those new to the industry to look back on
the year’s key developments, presented by
leading names including SunGard, Deloitte and
eSecLending, as well as input from iShares and
the industry trade associations.
As ever, regulation was the talk of 2010 as
regulatory bodies sent a tsunami of restrictions
and bans on short selling practices. The
Securities and Exchange Commission (SEC)
caused controversy with its introduction of the
‘alternative uptick rule’ and Germany’s surprise
ban on naked short-selling shook the global
markets and angered its EU partners.
In this report, Fundamentals asks the leading
trade associations if regulators have learned any
lessons from the aftermath of the 2008 crisis.
Collateral management continued to be a big
focus this year, but many banks went further to
ensure they take the maximum value of their
assets through ‘collateral optimisation’. SunGard
explains how this approach can allow firms to
have more control over liquidity and the steps
they should take to optimise the use of collateral.
The Long & Short of It also examines the different
tax regimes around the world, where Deloitte
puts the spotlight on the Portuguese and German
markets.
As the year comes to a close we look back on
the GSL Summit Series of 2010, which tackled
fresh issues such as the growth of exchange-
traded funds and unwarranted criticism from
mainstream media like the infamous New York
Times article on cash-collateral reinvestment
losses.
Lastly, Fundamentals would like to thank
SunGard for contributing to this yearbook, and
we hope you enjoy it as much as we have enjoyed
putting it together. Fundamentals also produces
the Securities Lending Handbook 2012 for
beneficial owners and pension funds, which will
be published at the end of the first quarter
of 2011.
Stephanie Baxter
Fundamentals
The Long & Short of It | Securities
ies Lendi view 1
Lending Market Review
 Editor
Craig McGlashan
Craig.McGlashan@eFunds.tv

Editorial Advisory Board

Chairman
Clive Gande
Clive.Gande@eFunds.tv

Investor Services
Editor
P.1 Brian Bollen
Introduction Brian.Bollen@eFunds.tv

Correspondent
P.4 Stephanie Baxter
Foreword Stephanie.Baxter@eFunds.tv

P.6 Design
Market summary 2010 Luke Merryweather
Luke.Merryweather@eFunds.tv
P.14
Tax issues: a glance at Senior Account Manager
Gary Allen
Portugal and Germany
Gary.Allen@eFunds.tv
P.17 Senior Account Manager
The evolution of Neil McPhee
third-party models Neil.McPhee@eFunds.tv

P.18 Finance
Educating the regulator: Elliot Ainley
we ask the experts finance@2i.tv
Contents
Chief Technology Officer
P.24 Peter Ainsworth
The holy grail of Peter.Ainswoth@eFunds.tv
collateral optimisation
Sales Director
P.28 Marc Young
Changes in market Marc.Young@eFunds.tv
dynamics: relationships
and power balance Non-Executive Director
Jon Hewson
Jon.Hewson@eFunds.tv
P.34
GSL Summit Series
Publisher
Review 2010
Mark Latham
Mark.Latham@eFunds.tv
P.38
Shifts in trading
patterns: journey of
the ETF

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2 The Long & Short of It | Securities Lending Market Review

 The financial information
you need when you need
it. Because there’s no
pause button in business.

Considering the current economic environment, staying on top of your securities lending
programme and managing risk has never been more important. So Northern Trust has
launched a specialised securities lending technology and reporting platform designed
to provide you with transparent, targeted and timely information. Just one of the reasons
Global Custodian named us Best in Class for reporting.* For more information,
visit northerntrust.com/securitieslending or call Chris Doell at +1 312 444 7177 or
Sunil Daswani at +44 (0)20 7982 3850.
*Securities lending survey 2010

Asset Servicing | Asset Management | Wealth Management

© 2010 Northern Trust Corporation, 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the United States. Northern Trust operates in Canada as The Northern Trust Canada, Branch which is an
authorized foreign bank branch under the Bank Act (Canada) and as The Northern Trust Company, Canada which is an authorized trust company under the Trust & Loans Companies Act (Canada). Deposits with Northern Trust and its affiliates
are not insured by the Canada Deposit Insurance Corporation. Northern Trust, London Branch (reg. no. BR001960) registered in England & Wales each with their registered office at 50 Bank Street, Canary Wharf, London, E14 5NT. Where
Northern Trust’s UK entities undertake regulated business, they are authorised and regulated in the United Kingdom by the Financial Services Authority. Northern Trust (Guernsey) Limited, Northern Trust Fiduciary Services (Guernsey) Limited,
Northern Trust Fiduciary Company (Guernsey) Limited and Northern Trust International Fund Administration Services (Guernsey) Limited are licensed by the Guernsey Financial Services Commission. Northern Trust International Fund Administrators
(Jersey) Limited and Northern Trust Fiduciary Services (Jersey) Limited are regulated by the Jersey Financial Services Commission. Northern Trust International Fund Administration Services (Ireland) Limited and Northern Trust Fiduciary Services
(Ireland) Limited are regulated by the Financial Regulator. Northern Trust Global Services is authorised and regulated in the Netherlands by De Nederlandsche Bank. Northern Trust Global Services Limited Luxembourg Branch and Northern
Trust Luxembourg Management Company S.A. are authorised and regulated in Luxembourg by the Commission de Surveillance du Secteur Financier. Northern Trust Global Services Ltd (UK) Sweden Filial is authorised by the Financial Services
Authority and subject to regulation by the Finansinspektionen.
SunGard:foreword

Foreword
t has been a great honour for SunGard’s Astec be THE area of interest for 2011 and beyond is collateral
Analytics to partner with Fundamentals to produce management and we devote a paper to this theme. This area
this Yearbook for such an eventful year. When we is especially important as many people throw the phrase out
started this project, we all wanted to ensure that it would there without really knowing the real scope or significance.
not only be a useful publication but also that it would Finally, we have allowed for a little unwind time with
strike chords of familiarity with its intended a professional twist in the form of a cryptic
audience. As a consequence, rather than crossword based on securities financing where
just a simple presentation of charts and participants have the chance to win a prize.
graphs (although we do have these as A Kindle will be awarded for the first
well!), we felt we needed to address three correct entries drawn out of a hat
some of the key themes that made Is this a that are emailed or faxed back to the
2010 the ‘crossroads’ year for the publishers in accordance with the
securities ‘specials only’ instructions. The winners’ names will
finance industry.
In the following pages we have
market now? be announced in the next edition of
Fundamentals.
chosen some of the main themes of Consequently, I recommend this
the year to analyse. Firstly, we have book to you and certainly would
picked out some key market movements welcome any negative or positive
and regional differences and have explained feedback. If we generate at least a little
their relevance. Secondly, no serious exposé bit of debate, then we think we will have
would be complete without some analysis of the been successful.
tax perspectives and we are delighted that Deloitte has
produced an in-depth usable piece to explain some of Have a very prosperous
the confusing issues in a non-confusing way. New Year!
No study of 2010 would be complete without
the input of the various industry bodies around Best regards
the world and we are very grateful to their Tim Smith
representatives for providing their unique
perspective. It is fascinating that 2010 saw so
many coordinated activities by the regulators and
industry bodies and their take on what happened
and what aspects are key to prepare for 2011.
Besides the above, we have picked up on
certain additional themes such as the growth of
ETF lending as well as providing an overview
of the changing market dynamics and what has
caused them. We ask: is this a ‘specials only’
market now? Furthermore, the main issue
SunGard’s clients as a whole have deemed to

4 The Long & Short of It | Securities Lending Market Review

 SunGard:contributors

SunGard Astec Analytics Contributors

Timothy Smith
Executive vice president

Andrew Shinn
Vice president, sales and development
Aaron Gerdeman
Senior vice president, development

Jane Milner AMERICAS

Securities finance strategy and 340 Madison Avenue
product management New York, NY 10173
+1 212 514 8340

ASIA-PACIFIC
19/F 100QRC
100 Queen’s Road Central
Hong Kong
For more information about
+852 3719 0861
Astec Analytics
please contact us at
EUROPE, MIDDLE EAST, AFRICA
astec.analytics@sungard.com
25 Canada Square
London E14 5LQ
United Kingdom
+44 208 081 2057

The Long & Short of It | Securities Lending Market Review 5

 2010 MarketSummary
2010 Market Summary
It was the year when securities lending started to make a comeback and
emerging Asian markets made a stand against the big market players.
Tim Smith reveals the best-performing markets in 2010 and asks if
securities lending is turning into a specials-only environment.
with Andrew Shinn, Aaron Gerdeman
he frustration, complexity and yes, beauty, of our
industry is reflected in the statistics and charts below.
The trouble with this business being either an ancillary
operation or a strategy of its own volition is that there are
many variables that have an impact. As a result, what follows
over the next few pages is one view of what the figures show.
It hopefully adds, promotes, and facilitates the debate and
maybe provides a few answers along the way. What must be
said, however, is that just as when you pose a question to 10
economists you get 15 different answers, it is the same with
reviewing tables and charts on securities financing. So, settle
down, gird your loins, park your pre-conceived notions at the
door and review what follows, and, if you disagree, you might
be right or we might both be.
Available shares continue to increase
DIAGRAM 1
6 The Long & Short of It | Securities Lending Market Review
The high level view
The changing dynamics of the global securities lending
market are discussed later on in this book, but here we shall
focus on the numbers that have made up the year. However,
the first chart shows that 2010 was the year that the securities
lenders came back into the market place. Abstracting the
market movement element from the equation there would
appear to be at least a 10% increase in overall supply this year
which has taken it back to the level at the end of 2008. This
may be more important than it seems as the supply decrease
was masked by many lenders being locked in to their lending
contracts when they wished to exit in 2009. Also, there is an
influx of additional types of lenders in 2010. As a result, the
truly available supply has grown as well. This is definitely not
an exact science, however, and can never be one because of
the human element of ‘shall I or shan’t I lend today’ adopted
by many fund managers around the world.
 2010 MarketSummary

Equity number of shares borrowed

DIAGRAM 2

The demand side has been one of ‘steady as you go’. Mixed
signals have abounded in 2010 but there have been some
old stalwarts such as the seasonal European business and
the new kids on the block in Asia. Consequently, the charts
show the dichotomy quite distinctly. The North American
market has been fairly static this year in terms of volume
borrowed; the European bounce in the early summer
was there - which seemed to be more pronounced and of
shorter duration than before - but the real growth has come
out of the Asian markets excluding Japan. These trends are
shown in the Equity Number of Shares Borrowed chart
(above) that again takes out the market variances to reveal
the trends. However, these charts do not show the whole
picture so we have to delve deeper.

Focus on volumes
The tables at the end of this Equity market value on loan
publication provide the pure numbers
behind these pictorial displays but
even a cursory glance shows that the
percentage increase in the market
values being borrowed has increased
significantly in percentage terms
in the Far Eastern markets. This is
further enhanced because Japan
has remained flat for the year thus
holding the market aggregate picture
DIAGRAM 3

back. Taiwan, Korea and Hong

Kong have been the region’s star
performers. There are several factors
behind the growth in these markets.
Firstly, participants have become
more comfortable with the controls

The Long & Short of It | Securities Lending Market Review 7

 2010 MarketSummary
and market rules in place, so the reliance on access-
market products to establish a virtual short position have
been replaced by a more regular form of short selling and
securities lending. Secondly, the economic potential of the
region has now been accepted. The sleeping giants of India
and China have been ensured that there is a greater interest
in the Asian securities-financing markets in general. Hong
Kong, in particular, has been brought up to equal Japan in
terms of volume. Given the lack of the historical impetus of
a driven convertible arbitrage trade that kick-started Japan
in the 1980s, this is all the more remarkable for Hong Kong.
Turning to Europe, given the historical yield enhancement
business, the major markets on the equity side have been
consistent and uninteresting to be frank. Some of the major
Growth in securities lending since 1992
DIAGRAM 4
The amount of activity is another indicator of what the
market is doing and maybe even what it is about to do.
Taking a look at the simple increases and decreases in
volume is one view, but not the complete one. In terms of
activity, namely movements, turnover, borrows, returns and
the like, activity has increased in 2010. It has certainly not
reached the peaks of 2007 and 2008, but it at least shows a
discernible trend.
The other discernible trend in the US market has been the
growth of ETF lending, and this has indeed been mirrored
on a global basis as well. The growth began in the start
of 2009 and has continued unabated throughout 2010
8 The Long & Short of It | Securities Lending Market Review
short names such as BP following the Gulf disaster did lend
a few short periods of interest but the trend has been one
of steady movement. With the market indices bouncing
along with no firm movement in either direction and the
economic woes within the Eurozone, it is not expected that
2011 will be a stellar year for equity securities lending
and borrowing.
North America, and specifically the USA, still dwarfs the
other markets in terms of securities-lending activity despite
the uninteresting trend to the year. There were occasional
flickers of promise as market participants tried to generate
something of interest, but the demand side stayed away in
the main. However, there are a couple of features that need
to be highlighted.
as a clear antithesis to what is happening in the rest of
the market. It appears that shorting ETFs has become as
popular as owning them. The outstanding balance of USD
45 billion, whilst still small compared to global balances,
is still larger than all the Asian markets (excluding Japan)
added together. Also of note is the reduction in the number
of ADRs that are being borrowed. Again there are two
reasons for this: firstly, the rationale to own ADRs as a
safeguard against foreign market settlement issues decreases
as these markets have become more mature. Secondly,
ADRs are affected by the general apathy to borrow and lend
US securities.
 2010 MarketSummary

Market value of ETFs and ADRs on loan

DIAGRAM 5

Focus on income
2009 was all about two things in terms of income: the collapse
of reinvestment income and the Citibank trade. 2010 has not
had such a profitable trade and thus the cash collateral
markets, principally the US, have had a hard time achieving
returns. Because this was not such an important element for
the European, Canadian and Asian markets, the overall returns
year-on-year have been affected less in Europe and Canada and
hardly at all in Asia due to the concomitant rise in volume.

Equity borrowing costs

DIAGRAM 6

The Long & Short of It | Securities Lending Market Review 9

 2010 MarketSummary
The first point to note regards the Asian markets. Every other
chart has shown the Asian line indulging in meteoric rises
so why not this one. Despite what anyone says, size matters.
The volumes in Taiwan and Korea, markets of historical high
fees, may have had massive increases in size but they are still
fairly small at USD 4 billion and USD 6 billion, respectively.
Furthermore, the history of developing securities-lending
markets shows that as a market becomes more easily tradable,
the fees required to borrow securities in those markets are
reduced. If you look carefully you may still find a dinosaur
professional eking out a living in the securities-lending
business who remembers when callable Japanese securities
Fixed-income borrowing costs - PIIGS
DIAGRAM 6
There are many charts to view on fixed-income securities
lending but we felt that a good one would be the topical
one concerning Greece. Certainly, the effect of the crisis
in that country was reflected in the borrowing cost of its
bonds and the price has remained high as it has continued
to struggle. What is also interesting, however, is that whilst
there has been slight increases in the other countries of
10 The Long & Short of It | Securities Lending Market Review
sometimes traded at 400 basis points in the late 1980s!
The seasonal yield enhancement transactions in Europe still
continue to make it a worthwhile activity for a frenetic couple
of months. A feature of 2010 was that the period of high rates
was shorter as the fixed-term transactions seemed to be made
over a shorter period of time than in previous years.
As for the North American market, as we will discuss later,
there has been a slight recovery in fees as the focus appears
to be on the securities being lent rather than the cash being
invested and while that does mean that overall income
generated has been decimated, the income tied to the lending
volume itself remains slightly firmer.
the Eurozone where issues have been evidenced, they have
not shown the large jumps as seen in poor old Greece.
This would appear to add weight to the old adage of ‘it
is also worse to be first’! As the markets have become
more inured to bad news about countries rather than
companies, the impacts have been lessened.
 2010 MarketSummary

Specials hold steady as market climbs

DIAGRAM 7

Focus on the intrinsic value of lending

One of the main themes of 2010 is the perceived drive
towards a specials-only or intrinsic-value driven securities
lending environment. As in all things, this may or may
not be the case. It may be different in different regions
of the world and it may be different for different types of
lenders. What is definite, however, is that there are many
conflicting trends, many within 2010 alone, and this topic
warrants very careful observation and analysis.
The chart above provides a superficial overview of the
split in proportionate value between GC and special
transactions. In terms of what constitutes ‘specialness’,
in this chart it is represented by any security that
commands a fee greater than 20 basis points. There are
certainly seasonal increases in the proportion of special
transactions around the European yield enhancement
periods and the Citibank trade of 2009. Apart from these
there would appear to be a fairly stable relationship except
perhaps in the last half of 2010 which does appear to show
a greater move towards the specials, proportionately.
The superficial view however is just that. There needs to
be a much greater analysis to at least get one answer for
the change in perception or even a change in actuality.

The charts on the next page, although apparently similar,

do seem to lend themselves to supporting a particular
set of circumstances. However there is a twist in the tale
just like the very best crime novels, and like the cutting
edge breed of cinematographic visual feasts, it provides
the audience, or in this case, the readership, with an
alternative ending upon which to vote!

The Long & Short of It | Securities Lending Market Review 11

 2010 MarketSummary

Share of loan volume due to specials






















DIAGRAM 1












This is how the thinking goes. Taking out the market noise
and simplifying the data to show the whole year in one
shot, the first chart shows that the special-to-GC ratio
was virtually the same from 2009 to 2010 ( about 80:20).
The second chart shows that the proportionate revenue
obtained from lending in 2009 and 2010 was pretty much
the same as well, maybe just a tad higher in 2010 (around
70:30). This seems all very reasonable thus far.
It then starts to become a bit confusing. The intrinsic
fee, excluding any reinvestment of cash collateral income,
for special transactions seems to have diminished in 2010
when compared to 2009 (from 250 basis points to 182
basis points if you want the figures behind the charts)
and the rate for the GC trades appears to have picked up
(by 3 basis points, miniscule in real terms but huge in
percentage terms) on 2009.
The question is therefore, if the proportion of specials
lending has remained virtually the same in terms of value
and proportionate income, how can this be when the
intrinsic rates have fallen in 2010 for specials and risen
for GC transactions? The answer my friend is blowing
in the reinvestment premium for all those cash-taking
lenders. The cash reinvestment premium from 2009
to 2010 is down from an average 35 basis points to 11
basis points. This explains the whole thing. The relative
proportions on revenues has remained the same because
the reinvestment pick-up has kept the returns way down
for GC lending particularly.

Share of revenue due to specials lending



















DIAGRAM 2












12 The Long & Short of It | Securities Lending Market Review

 2010 MarketSummary

TheTwist
Now we must introduce the twist, or maybe two. Firstly, information that displays the essence of 2010. Hundreds
let us review 2009 and remember what the main game of such charts could be produced for your edification
changing special was for that year. The rates and volume but that would serve no purpose other than to obfuscate
on the Citibank trade could be argued to have distorted the issues and stifle the interest. We do recommend that
the rates year on year and that the special intrinsic rates you continue to read the remainder of the articles in this
were actually as high or even higher than 2009 for the Yearbook that build upon and expand this initial foray into
more normal specials. the world of securities lending in 2010.
Secondly, we may have to be more in depth of our
analysis of the GC balances. There was a significant switch
in the first three-tier bands of GC securities
lent in respect to their intrinsic rates, Intrinsic rate on specials


thus perhaps distorting the proportionate
amounts still further. 

This would tend to show that lenders


are indeed looking towards lending the
securities for what they are rather than for 


what they can earn on the cash. 




As you can see it is very possible to get
DIAGRAM 3



into a circular argument about whether
the market is now only an intrinsic market 

place. Even the comments about taking 






the Citi trade out of the equation could be

argued against as it was indeed a special Cash reinvestment premium

trade and thus was ‘normal’. Until there is 






another year of data after the major events
 

of the previous years, it may still be difficult



to obtain the final answer. 




We could go on but…. 

The charts and figures are what they are. 





They do tell a story about 2010 but it is up
DIAGRAM 4




to the reader to put their own spin on them.


Our responsibility is to put them out there 







for discussion and not to impose our views
upon you. The above represent a sample of
GC volume by loan rate













 

 









 






 








 

















 

 

DIAGRAM 5





 
 
 
 
 


The Long & Short of It | Securities Lending Market Review 13

 Tax:Portugal

The expert
Deloitte gives the lowdown on everything you need to know
Portugal: A less competitive domestic market due to tax uncertainty and ‘unique rules’
he Portuguese tax system has been identified as a This taxation applies to both short and long positions and is
unique tax regime with several aspects that differentiate calculated on the difference between the proceeds received,
it from most international tax regimes and prevent it from proceeds reduced by any commission on the sale, and the
accompanying the global taxation trend. acquisition cost (not including any commission incurred). It is
important to note that the legal owner of the shares can benefit
In addition to the existence of these special rules, seen by
from an exemption applied to capital gains obtained by non
some foreign potential investors as “odd rules”, Portugal has
residents on the sale of shares, provided they are not domiciled
undergone several changes in its tax legislation in light of
in a tax haven or held directly or indirectly in more than 25%
the current international economic crisis. In 2010 alone, the
by Portuguese resident entities.
Portuguese tax law was subjected to three major alterations,
implemented by the Stability and Growth Pact 1 and 2, as This assessment at the legal owner’s level is a rule that
well as the State Budget Law. presents itself as quite odd in comparison to other
With so many changes in such a short time, jurisdictions, considering that tax should be a
doubts and uncertainties have been raised burden on those who benefit from the income
regarding the interpretation of the law and and that the figure of the intermediary,
Unlike most tax nominee or broker - trading on behalf
taxpayers are left wondering what rules
regimes, the of someone else - is becoming more
are no longer in force, while trying to
understand the meaning of these new Portuguese tax common and may find limitations
changes and the impact they will have system was built in Portugal.
on their tax liability. based on the However, this may be about to change.
Unlike most tax regimes, the concept of the One of the new measures to be
Portuguese tax system was built based implemented by the State Budget Law
legal owner of for 2011 (which came into force on
on the concept of the legal owner of the
income, with no mention of the beneficial
the income January 1st 2011) pertains to the taxation
owner concept. of investment income and prescribes that
Portuguese legislation therefore determines any investment income paid or made available
that gains are assessed at the legal owner’s level as in accounts with account holders acting on behalf
the beneficial owner concept does not exist in the country’s of unidentified third parties, will be subject to withholding
tax rules. Additionally, it does not recognise the nominee, and taxation at a rate of 30% (final taxation). However, the general
instead attends to the legal ownership of the assets for purposes rules apply if the beneficial owner is disclosed.
of taxation. With this new measure the beneficial owner of the income
gains relevancy, where a higher tax rate - seen as a penalty
This has several consequences, namely with regards to the
rate - will apply if they are not identified.
Portuguese tax treatment of long and short positions where
However, considering the change the new legislation
the legal form of a transaction, rather than its economic
substance, is the relevant factor to determine the liability to represents, there are already doubts about its impact as the
taxation. This is very different to tax laws in countries which terms of its application are unclear, especially considering
attend to the beneficial owner of the income. Therefore it is that there is no “beneficial owner” definition in Portuguese
important to firstly look at these transactions from a legal law. But the potential result may limit the intention to invest
perspective, attending to the legal ownership of the shares in in Portugal through an intermediary.
each moment in order to qualify them and fully ascertain their On the other hand it is important to note that stock lending
tax framework. In most cases long and short positions are is subjected to stamp tax in Portugal at a rate that can vary
taxed similarly in adherence to the legal owner concept, i.e., from 0.04% to 0.60%, depending on the duration of the loan.
the name in which the shares are registered. In conclusion, the Portuguese domestic market is seen as less
In fact, gains and losses arising from the disposal of competitive and attractive due to uncertainty arising from
Portuguese shares by non-resident entities are considered to be constant changes in its tax legislation and unique rules that go
capital gains and are taxed at a rate of 25% on the net amount. against the understanding of tax in other countries.

14 The Long & Short of It | Securities Lending Market Review

 Tax:Portugal

guide to tax
about Portuguese and German tax laws
Germany: Understanding GAAP and unclear tax accounting rules

Development and market loan, the (Sachdarlehen) transfer of the securities does not
lead to a realisation of any paper-profits, as a corresponding
The domestic securities lending market in Germany has
claim to re-transfer the securities to the lender is accounted
existed since 1990 when Deutsche Börse Clearing AG (as it
for in his balance sheets. In parallel, the borrower’s balance
is known today) introduced a functioning securities lending
sheets book the securities at the purchase price together with
system. The group of lenders comprising of the large security
the liability to return them at replacement value leading to a
traders, banks, funds, principal stockholders entered the
balance sheet extension.
market for purposes of increasing portfolio returns and
reducing custody costs. For repos and sell-buy-back arrangements, specific German
GAAP rules apply (Sec. 340b HGB).
Security lending came to be used to facilitate short
The securities continue to be accounted for in the seller’s
sales and other trade fails. In repos, the focus has
(i.e. the cash borrower) balance sheet at purchase
been on cash borrowing.
price together with a liability towards the
For the lenders security lending was buyer (i.e. the cash lender) to the value of
implemented in order to achieve advantages While security
the purchase price. Differences between
in the tax treatment of capital gains lending has sales and resale price have to be
and dividends-withholding tax. Due become less allocated evenly across the term of the
to changes in German tax legislation attractive, lending arrangement. Conversely, the buyer has
such as the disallowance of deduction
fees continue to to account for a claim in the amount
of lending fees and manufactured of the paid purchase price. There are
dividends as a business expenses at the be an incentive
especially for however, no special tax accounting
level of the borrower in certain cases, rules. In the outcome they are treated
and as the Corporate Income Tax (“CIT”) institutional similar to loaned securities. There is
rate was generally reduced from 25% to investors no uniform view among tax experts and
15%, tax dimension of such transactions the jurisprudence remains unclear on
has became less important. Furthermore, the the treatment in the tax balance sheets. There
speculative character of short sales tends to be view seems to be the view that the buyer becomes the
with suspicion, in particular in Europe, and as such has led economic owner, and accordingly the income is so allocated.
to legislative restrictions. As a result, while security lending This is despite the sale component, which is categorised as a
has become less attractive, the lending fees continue to be an mutual loan in kind and cash, and therefore no paper-profits
incentive especially for institutional investors. are realised. The aforesaid does, however, only apply if the
As regards repos, the European market has grown arrangement creates a repurchase obligation for the seller
continually from 2001 to 2006 but temporarily contracted and not merely an option.
in 2008 due to the financial crisis. It had, however, largely
recovered by mid 2010. Income taxation
German tax resident borrowers/lenders
German GAAP and tax accounting Any dividends received on the loaned equities by a corporate
German GAAP and tax accounting rules do not specifically borrower during the term of the loan are subject to the
provide for the treatment of securities lending arrangements German participation exemption rules, i.e. the dividends
(Wertpapierleihe). Under the applicable general accounting are effectively 95% tax exempt as 5% of the gross dividends
rules, the loaned securities are transferred from the balance received are treated as non-deductible business expenses.
sheet of the lender to the borrower’s for not only the legal The participation exemption rules do not apply to banks and
ownership but, according to the prevailing interpretation the financial institutions holding the equities as current assets, as
economic ownership of the securities is also transferred to well as to life and health insurance companies.
the borrower during the period of the loan. However, given The borrower is entitled to deduct German
the nature of the securities lending arrangement as a kind of

The Long & Short of It | Securities Lending Market Review 15

 Tax:Germany

dividend withholding tax on the dividends received from the
loan securities from its own tax liability.
Any lending fees as well as the manufactured payments
received by the lender are fully taxable in particular the
German participation exemption rules do not apply to
manufactured dividends.
Generally, the lending fees as well as manufactured
payments are, for German tax purposes, tax-deductible for
the borrower. However, effective as of 2007 an anti-avoidance
regulation has been introduced. Under this provision lending
fees as well as manufactured dividends are non-deductible
for German tax purposes by the borrower where (a) the
equities are lent from the current assets of a German resident
bank or financial institution as well as from a German life
and health insurance company, (b) the borrower is entitled
to the benefits of the German dividend participation
exemption, and (c) the equities are lent over the dividend
payment date. This rule also applies to repos and sale-buy-
back arrangements. It is not possible to circumvent these
measures by the borrower surrendering yielding assets as
remuneration, as the income is deemed to be realised by
the borrower.
Furthermore, the lending fees and the manufactured
dividends remain tax deductible as long as the manufactured
dividends have been subject to a withholding tax. Generally,
no dividend withholding tax applies to manufactured
dividends. However, a 15% withholding tax applies to lending
fees and manufactured dividends paid to certain German
public bodies and tax exempt corporations. Interest income
on any cash collateral received by the lender is fully taxable
in Germany.
Non-German tax resident borrowers/lenders
Non-German resident lenders/borrowers are only subject
to German non-resident taxation with respect to certain
specific cases of income deriving from German sources.
Any lending fees and the manufactured dividends are not
subject to German non-resident taxation (unless derived
through a permanent establishment or through an agent with
dependant status) and therefore are not subject to German
withholding tax.
Interest income on any cash collateral (to the extent the
interest does not contain any profit participating features)
received by a non-German resident lender is not subject
to German non-resident taxation unless the loan is
collateralised with German real estate and the right to tax
such interest is not attributed to the state of residence under
an applicable double tax treaty.
Indirect/transfer taxes
Germany does not levy any indirect (VAT) or transfer taxes
on securities lending and repo transactions.

Disclaimer
This material and its content as well as any comments or representations associated with it, are a general guide only and should not be relied on to cover specific situations or
circumstances or as a substitute for professional advice.
Deloitte LLP and each other member of the Deloitte Touche Tohmatsu international network does not accept a duty of care nor accepts any liability of any kind to any person acting
or refraining from action as a result of this material, its content, or any associated comments or representations. We strongly recommend that you obtain professional advice before
any actions or decisions are taken.
This material does not constitute an opinion.
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Deloitte LLP 2011. All rights reserved.

Ali Kazimi Marcus Roth Claudia Bernardo

Partner, Financial Services Tax Partner, Financial Services Tax Partner, Financial Services Tax
T: +44 (0)20 7303 0144 T: +49 89-29036 8278 T: +(351) 210 427 513
E: akazimi@deloitte.co.uk E: mroth@deloitte.de E: cbernardo@deloitte.pt

16 The Long & Short of It | Securities Lending Market Review


What was once viewed as operationally challenging, third-party lending is
now common place in today’s environment. Third-party lending involves
securities lending through an agent who is not the custodian of the assets.
Peter Bassler, managing director of eSecLending
What are some of the benefits of third-party lending?
One of the primary benefits associated with third-party-
lending models is that it gives beneficial owners the
choice to hire a specialist rather than defaulting to their
custodian to act as agent. As more and more institutions
recognise securities lending as an investment product,
they are unbundling service providers to utilise best-in-
class providers for each competency, similar to how they
hire asset managers for their portfolios.
Some believe that third-party models are operationally
challenging, is this true?
Not anymore. Ten to fifteen years ago, operational
challenges may have been a legitimate concern. However,
due to advancements in technology and the evolution of
the industry, third-party lending is now as operationally
efficient as it is through a custodian. In fact, most of
the custodian banks are now in agreement that third-
party lending is a portable investment product and are
therefore starting to market this capability as part of their
core offering. Reports from industry consultants also
suggest that custodial agents no longer have the edge with
respect to operational efficiency when compared to third
party. Regardless of which entity is providing securities-
lending services, it is essential for beneficial owners to
evaluate the operational integrity of their provider
including the review of documented procedures,
SAS70 audits and periodic on-site visits.
How was the model perceived when
eSecLending first emerged in 2000?
As mentioned, operational challenges
associated with third-party models led to a
lack of acceptance initially.
For eSecLending in particular, this lack
of acceptance combined with our
unique process via an auction resulted
in questions from participants who
were doubtful that a new third-
party model would succeed. Here
we are, ten years later, with
offices in the US, UK and Asia-
Pacific, servicing some of the
most sophisticated
Third-partylending
institutional investors globally. eSecLending’s entrance
introduced an alternative approach and was designed
to empower beneficial owners with the ability to have
greater control over their programmes by providing them
with increased price transparency and flexibility.
The firm played a significant role, along with other agents
and beneficial owners, in increasing the acceptance and
adoption of third-party lending structures across the market.
What impact did the credit crisis have on
third-party models?
The credit crisis made more people aware that a
securities-lending transaction, particularly in the US, is
comprised of two distinct functions: securities lending
and collateral management. The product caught the
attention of the most senior levels of organisations
whether due to issues or in response to headlines.
These factors encouraged organisations to scrutinise their
securities-lending programmes. As a result, they have
been looking at new ways to structure their programmes
going forward including the review of alternative
providers and routes to market in recognition of the
industry’s changing landscape. As beneficial owners
review their programmes, many are looking for greater
price transparency, control and customised solutions
built around their unique parameters and goals which
are all key attributes of a successful third-party model.
How can lending agents (third-party or custodial)
differentiate themselves in today’s market?
While there is little differentiation among
lending agents today, one factor to consider is
each agent’s process. In asset management,
mandates are won based on how they
manage a process to deliver a strong and
consistent performance. Lending agents
should be subject to some of the same
criteria including lending execution
strategy, risk management, collateral
management options etc.
The Long & Short of It | Securities Lending Market Review 17
 Regulationpanel

ExpertPanel:
PeterMartin
• Chairman of the Australian
Securities Lending Association
(ASLA)
• Vice president and head of
securities finance Australia for
State Street
• At State Street he manages the
Sydney trading desk for both
equities and fixed income
with general oversight for all
securities finance activities

KevinMcNulty
• Chief executive of the
International Securities Lending
Association (ISLA)
• Has worked in the securities
lending industry for many years
in the UK and US
• Prior to joining ISLA in August
2009, he worked for Barclays
Global Investors where he ran Short selling was
the securities lending business in
Europe and North America at the centre of
heated debate
throughout 2010 as
ZubairNizami regulators continued
• Executive committee member of
the Pan Asia Securities Lending to take action in the
Association (PASLA)
• A second vice president and
form of bans and
senior securities lending trader circuit breakers.
in Northern Trust’s Hong
Kong office Fundamentals
• Began his career at Northern
Trust Hong Kong in March 2005 interviewed four
• Has approximately 6 years
experience in the securities
securities lending
lending industry associations about
the regulatory
ChrisKunkle landscape in their
• Director of securities lending
and market risk at the Risk respective countries.
Management Association (RMA)
• Has previously held senior roles
at Wachovia Global Securities
Lending Group, J.P. Morgan and
Mellon Global Securities Lending
Educating
• Also represented the securities
lending industry with the
Internal Revenue Services, the
US Treasury Department and
the regulator
the SEC

18 The Long & Short of It | Securities Lending Market Review

 Regulationpanel

hat are you currently doing to educate regulators actively engage in industry events and conferences around the
about short selling and securities lending? region and we maintain regular dialogue with regulators and
PM: ASLA and its constituent members have been exchanges to help promote best practices/regulations.
responsive to invitations from the Australian Securities and CK: In the US the RMA and SIFMA have been working
Investments Commission (ASIC) to discuss the benefits together in 2010 to have quarterly outreach meetings, led on
securities lending brings in promoting liquidity and efficiency the regulatory side by the Federal Reserve Bank of New York,
within financial markets. One of the main initiatives is to seek the SEC, the Options Clearing Corporation (OCC) and to
additional exemptions to the current short-selling regulations some extent the Department of Labour. In these meetings
such as defining liquidity to make it easier to operate in the we agendise the main topics along with regulators’ questions.
Australian market. At present much business is being directed The RMA co-managed the Annual RMA UNC Kenan-Flagler
away from Australia, in markets such as Hong Kong, and that Academic Forum with the University of North Carolina in
trend will continue unless we see change. April on major educational papers around short-selling and
KM: Over the past year we have spent a lot of time with UK securities-lending studies. It enables academics to have a forum
regulators (the Financial Services Authority (FSA) and The to receive feedback on these papers before they’re completed.
Pensions Regulator) helping them to understand more about The RMA has also educated the OCC and the NY Fed in our
how securities lending works. A particular focus was ensuring securities lending training classes over the last two years.
that the regulators gained comfort that the industry was doing How has your approach changed since the events of 2008?
enough to educate beneficial owners about the benefits and PM: ASLA’s approach and objective has always been to
risks of securities lending. Along with a large number of trade provide a unified representation in regulatory and other
associations including the National Association of issues relevant to its members. Since the short-
Pension Funds (NAPF) we produced a series of selling ban was imposed by ASIC in September
guides aimed at helping trustees understand 2008, ASLA has engaged with ASIC on
this business better. Regarding short some of the unintended consequences of
selling we have been working closely ASLA: At present
the short-selling ban, including lenders’
with the Association of Financial much business is rights to recall stock to cover a long sell
Markets Europe (AFME) and the being directed away so that it would not be deemed a naked
International Swaps and Derivatives from Australia, in short sell.
Association (ISDA) to educate markets such as KM: One of the most significant
regulators and policymakers across Hong Kong, and developments for the financial markets
Europe about the benefits of short that trend will post 2008 has been the increased
selling. This has involved meetings continue unless volume of regulatory proposals coming
with member state regulators, members we see change from member-state regulators and the EU.
of the European Parliament (MEPs) and Whilst we continue to try and be proactive in
EU Council officials. This week we are in promoting the benefits of securities lending and
Frankfurt and Rome and next week we’re off short selling with regulators, the reality has been that
to Strasbourg. we’ve spent a huge amount of time reacting to proposals.
ZN: PASLA has always worked in close conjunction with ZN: We haven’t changed our approach drastically. Due to
other industry bodies to help promote securities lending and the heightened focus on short selling and securities lending,
to provide an industry consensus on issues that affect the we have seen more requests to clarify business practices. In
development of the securities-lending business. Our objective this regard, PASLA members were in active discussions with
is not just to assist regulators but other market participants, exchanges and regulators to help alleviate any concerns they
such as stock exchanges, monetary authorities and the media may have had regarding some aspects of the business.
about the benefits that the business can bring to the efficiency CK: We have had a lot more proactive communication with
of capital markets. Our members are from a diverse group regulators since 2007. There’s more open discussion and
and represent a whole spectrum of market participants be it regulators can call us with questions and get a fair, non-biased
broker dealers, custodian agent lenders or industry vendors. answer. Regulators feel comfortable with calling members of
As such we have a wealth of knowledge and understanding the executive committee and there is open dialogue in our
of the dynamics of securities lending at our disposal which is outreach meetings. We get a lot of calls from the NY Fed and
extremely beneficial when addressing various stakeholders’ the OCC. Although we rarely needed to communicate with
concerns regarding the business. We believe that education them in the past, now we need to in order to give them the
is a continuous process in order to help all stakeholders have information they require to make the best decisions.
a better understanding of securities lending. Our members

The Long & Short of It | Securities Lending Market Review 19

 Regulationpanel

Do you think regulators sometimes have a tendency to They realise that things aren’t back and white, but the hard part
think of short selling and securities lending in terms of is understanding whether short selling supported securities
black and white? lending or if it’s an activity that’s going to occur nonetheless.
PM: Regulators make policy decisions which must be How are you educating them about the nuances in the
definitive. ASLA has sought to ensure that the regulators market, for instance the difference between naked and
understand the increased administrative burden that some covered short selling? Or the difference between forcing
regulations put on the securities-lending industry. Over broker dealers to borrow stock before executing a short (as
the past couple of years ASLA have made a concerted effort in Australia) and allowing brokers more flexibility to execute
to demystify some of the misunderstanding pertaining to shorts for their clients but penalising brokers if they fail to
securities lending, the aim being to remove ambiguity and deliver (as in the US)?
clarify exactly what securities lending is and how it benefits the PM: The industry’s interpretation of RG 196 has generally
financial markets as a whole. been that a short seller must have a firm commitment from a
KM: If by black and white we mean good and bad, the answer lender prior to executing the covered short sale. Now that the
I think, is that virtually all believe they are good (for markets market has stabilised, ASLA has initiated communication with
and investors), but many also believe there should be some ASIC to discuss whether it might consider a different test for
form of regulation. Recent attention has been on short selling, covered short selling, such as an approved list of short-sellable
an activity which we know gets a rather unfair hearing during products for which the borrow market is highly liquid and
market crises, and the reality is that politicians are driving the risks of settlement failure are minimal. Their interpretation of
regulatory agenda here. The majority of policymakers the regulations has been made very clear but it is their
do not support bans of short selling (although application that we seek changes to. Requiring the
some support having powers to ban the net short-sell position to be covered by close
activity in exceptional situations), but ISLA: There is a of business as in other jurisdictions would
most support some form of regulation. risk that regulators allow a significant number of arbitrage
The challenge for regulators will be simply cherry-pick transactions that are simply not feasible
to implement rules that meet their the most stringent under the current regulations.
policy objectives, without substantially requirements from KM: Along with AFME and ISDA we
reducing the benefits short selling different markets and are meeting with as many people as we
provides to the markets and its users, bundle them together can. We have also produced a number
the investors and issuers. The industry in a way that is very of briefing papers specifically aimed at
is supportive of regulation that gives damaging for MEPs who naturally do not have the same
regulators information about the level of the market degree of technical understanding of these
activity and sensible measures to ensure matters as market participants or securities
that uncovered short selling doesn’t lead to regulators. Understanding how the US and
unacceptable levels of failed settlements. The Asian countries regulate short selling is important.
challenge for us is to try and persuade the policymakers ZN: We believe that it is important that all stakeholders,
that our proposals make sense. be it regulators, the media or beneficial owners, understand
ZN: It is not necessarily the case that all regulators think of that we do not condone abusive short-selling practices.
short selling and securities lending as inextricably linked. To this extent we encourage regulations that help develop
Indeed there were various other stakeholders who may have orderly, efficient and competitive development of markets
had the same view purely out of a lack of understanding of how around the region.
the business actually operates. Not all regulators implemented CK: We haven’t had the issue of educating on short selling
drastic changes to short-selling regulations during the global (either naked or covered) that much. We are educating on cash
financial crisis. For example, Hong Kong already had a robust reinvestment, which is the most important thing right now
short-selling mechanism in place and, much to their credit, for the US. We’re also educating the clients, agent lenders and
the Securities and Futures Commission (SFC) in Hong Kong broker dealers. We’re not getting hit by inflexibility in covering
did not feel the need to make any amendments to the existing shorts because there is a system in place, along with regulatory
regulations as they had kept them in good stead. requirements, where before broker dealers short, they know
CK: Securities lending had some bad press but regulators have they can cover the security through various activities.
said they are understanding the issue and while cognisant of Is there a specific country’s regulatory body that is leading
the business issues of the past two years, they feel that they the way in terms of short selling / securities lending
understand the risks associated with the business. They can regulations? Whereas the SEC was ahead in 2008, now it
differentiate between short selling and securities lending. seems that the Japanese and Australian regulatory bodies

20 The Long & Short of It | Securities Lending Market Review

 Regulationpanel

are at the forefront of disclosure and transparency regarding counterparts in this regard as well.
short selling / securities lending. CK: On the broker and agent sides, the SEC is looking to
PM: ASIC has been very thorough in its regulation of the review their activities and the potential changes under Dodd-
Australian market in terms of securities lending and short Frank. We’re working on attempting to eliminate cost-basis
selling and the market has responded to the increased transaction reporting with the Internal Revenue Service (IRS);
administrative burden. The concern is that the increased presently this includes securities lending but we’re working
regulation has reduced the level of activity that is now observed to address if that was the intention of the IRS. In the US the
in the Australian market in comparison to other markets. At leading regulators are a combination of the SEC, the Federal
its peak in 2007 there was approximately $80bn in Australian Reserve and the OCC.
equities on loan, that figure is now $15bn. If it is accepted that We know that there is coordination among the various
securities lending provides stability and liquidity to financial securities lending associations around the world, but how
markets then given the low volumes of shares on loan one must much coordination is there between the regulatory bodies?
assume this is detrimental to both the liquidity and efficiency ZN: We understand that regulators often consult with each
of the Australian market. The stability of the regulations other as they develop markets and regulations and have done
in Hong Kong has provided comfort to funds operating in so for many years. One such recent example has been the
that market and that is a driving force behind the increased coordination of regulators around the world as members of
transaction flow. the International Organization of Securities Commissions
ASIC have certainly been at the forefront of introducing rules (IOSCO). Indeed, the SFC in Hong Kong, in their role as Chair
on disclosure and that is something other jurisdictions of the Task Force on Short Selling, took a leading role in
will be paying close attention to. One would expect the publication of a consultation report, Regulation
this to be getting discussed on a global basis. of Short Selling in 2009, which outlined
KM: It’s hard to pick one that is perfect. several recommendations with regards to
Many in the market are comfortable with the regulation of short selling around the
RMA: According to
the Hong Kong market’s disclosure world. We at PASLA maintain a strong
academics, the
regime and many are happy with the relationship with the SFC and we deal
short-selling ban
SEC naked short selling regulations. with them frequently as a key partner in
It’s not however straightforward to
didn’t work.
our work across the region.
assume that these can be imported to Was the uptick rule
CK: We’re having joint meetings with
the European marketplace. For example known for always
the executive committees of other
the SEC buy-in regime for shares might having worked?
associations. IOSCO has an international
work in the US but trying to impose a I understand that
regulatory force that is composed of
common buy-in framework across Europe it didn’t
representatives from most major regulatory
with many different exchanges, central agencies in each country. Through that
counterparties (CCPs), regulators and settlement process, regulators are communicating with each
conventions is very challenging. other and short selling is one of many things they’re
Regulators are keenly aware of how other regulators around looking at. If ISLA or PASLA wants us to be involved in a
the world deal with subjects like short selling. The European specific global topic, we’ll offer our services or that of our
Commission produced a table of regulatory measures in executive committee or subcommittee.
existence throughout the world when it published its draft What work are you doing to coordinate discussion regarding
set of regulations in September. The worry is that regulators short selling among the various worldwide regulatory bodies?
assume that if the market can deal with rules in the US for PM: ASLA engages in discussions with other securities-
example, then it must be able to do so in Europe. This may not lending associations around the world. A newsletter is
be true and in addition there is a risk that regulators simply produced and sent to other securities-lending organisations
cherry-pick the most stringent requirements from different updating them on what has been happening in the Australian
markets and bundle them together in a way which is very market. ASLA does not actively seek to engage in discussions
damaging for the market. with regulatory bodies outside Australia.
ZN: As mentioned earlier, the SFC was probably the stand-out KM: Given the intent focus in Europe on developing a new
regulator in the region. This is because it already had robust and regulatory framework for short selling, we have spent most
effective short-selling regulations in place prior to the crisis of of our time working with other trade bodies here. We have
2008. Our counterparts at ASLA are in close dialogue with the been working with AFME and ISDA since the second half of
main regulator in Australia, ASIC, regarding the short-selling 2009, and are in the process of building a wider coalition of
regulations and we are always on hand to assist our Japanese interested parties. We continue to communicate with the RMA

The Long & Short of It | Securities Lending Market Review 21

 Regulationpanel

and PASLA through calls, and meet with each other at our to it? What do they think worked well? What do they think
respective conferences. didn’t work?
ZN: By virtue of our close connections with other industry KM: We hope that, with the benefit of time and some good
bodies such as ASLA, ISLA and the RMA, we host various academic research, regulators understand that short selling
industry events & seminars around the world that help provides beneficial liquidity to markets and may be especially
formulate debate and consensus regarding short selling. We useful during a financial crisis. What was missing in Europe in
hope that with active participation in these events, all market 2008 was the fact that regulators had little insight into the level
participants will take heed of the positive attributes of of short selling taking place. We hope that in future they will
short selling. have more information and that this will help to allay fears and
CK: The RMA is not presently working on discussions on avoid knee-jerk reactions.
short selling, which is now old news in the States. It does ZN: The main lesson learned from the 2008 global financial
remain very active in Europe in which ISLA is very actively crisis should be that it is important not to panic and impose
participating. The main area of focus for the RMA is how it draconian measures to limit short selling whenever there is
is educating regulators both domestically and globally. We’re a major sell-off in the markets. Given the uncertain outlook
asked to provide information for discussions around securities of the global markets in light of the European sovereign debt
lending. For example, in our November interim white paper crisis and slowing US growth, it is inevitable that we will
on proxy voting, academics are reviewing the numbers and witness some volatility in the markets again in the
metrics in the issues behind proxy voting when a security is on near future.
loan. This will be provided led by CSFME based on data from The global financial crisis was an unprecedented event in
six different banks. We’re trying to find out if it was global markets and we hope we do not experience
a problem – we don’t believe it was, but we’re PASLA: The main such an event anytime soon. That said, global
looking into it. lesson learned from regulators worked their hardest to steer a
Chris Cox* admitted that the ban on the 2008 Global path through a number of concurrent
short selling was one of the biggest Financial Crisis issues. If significant market volatility
mistakes he made during his time as should be that it reoccurs, we hope that regulators will
chairman of the SEC. Has the SEC be able to reflect on the numerous
is important not to
learned a lesson from this admission? academic studies recently published that
panic and impose
Has it been internalised? Have other have demonstrated that short selling
draconian measures
regulatory bodies picked up on this helps add liquidity to markets and that
to limit short selling
admission and do they say they will act evidence of falling prices is not solely a
whenever there is
differently in the future? result of short selling.
a major sell-off in
ZN: We are not in a position to comment CK: Regulators are understanding more
the markets
specifically on the SEC’s stance. However, it about how the business works. For example,
seems that most regulators that did impose short- the Fed has been meeting directly with the
selling restrictions have probably learnt a few lessons RMA and SIFMA, the clients and the pension funds.
from the crisis. That being said there is still a lot of work to Pension funds are not monitored by the Fed, but they give
be done as an industry as there are a few jurisdictions in the them feedback. The Fed has learned that it’s good to open up
region that still have some restrictions on short-selling activity. communication, and they’ve involved the SEC in that too.
We at PASLA will continue to work closely with other industry
bodies as well as regulators and exchanges to help formulate
best practices. *Under Chris Cox’s leadership, the SEC imposed a three-
CK: I hope the SEC will be willing to learn and listen. I don’t week ban on the short selling of nearly 800 financial company
get as many calls from the SEC as I do from the Fed. I hope stocks in September 2008 to “protect the integrity and quality
that they would communicate with other people in industry of the securities market” and “strengthen investor confidence”.
before making a major change. If legislation comes in that stops But just a few months later Cox said that this decision was the
all shorts, you would hope that the framework would be out biggest mistake of his role as SEC chairman. He has claimed
there to support you. According to academics, the short-selling he was under pressure from the Treasury secretary Henry
ban didn’t work. Was the uptick rule known for always having Paulson and Federal Reserve chairman Ben Bernanke to take
worked? I understand that it didn’t. It’s important to have all action, and that he did so reluctantly. They “were of the view
your facts and engage with the financial markets so that you that if we did not act and act at that instant, these financial
don’t create further reaction down the line. institutions could fail as a result and there would be nothing
What lessons have the regulators learned from the 2008 left to save”, Cox said. He left the SEC in January 2009 and was
crisis? What lessons have they learned from their responses replaced by Mary Schapiro.

22 The Long & Short of It | Securities Lending Market Review

Offer valid until Monday 28th February 2011
 Collateraloptimisation
The holy grail of
collateral optimisation
Jane Milner
HY THE FOCUS ON COLLATERAL
OPTIMISATION?
Collateral optimisation has become a primary focus for
many of the larger financial institutions as the tightening
of credit, the shortage of liquidity and increased capital
requirements from various regulations have all combined to
focus banks even more keenly on ensuring that they extract
the maximum value from all of their available assets.
Where many banks already have sophisticated processes
around efficient management of collateral and margin
collection, the issue of collateral optimisation has come
under closer scrutiny. Assets given and received as collateral
have not always been used in the most effective way. In the
past the quality of collateral given may have been more than
required and collateral received may have been left to lie
dormant when, through more active collateral management
and re-use of collateral that can be re-hypothecated, these
assets could be put to more effective use.
Collateral optimisation is also important to give greater
control over liquidity. The concern over liquidity is reflected
in much of the new regulation in the market, and with all
firms looking at how much each individual business line
costs in terms of capital adequacy requirements, then any
way of improving liquidity and getting better use of assets
is welcomed. Notably the latest proposals from the Basel
Committee on banking supervision make specific reference
to the liquidity of collateral assets. It calls for firms to be
able to run stress tests and measure the potential liquidity
risks around the changing value of collateral with a view
to allocating additional capital requirements to cover the
volatility of the changing values of these collateral assets.
Today, financial institutions are looking to improve the
effectiveness around the allocation of collateral assets in
order to balance both risk mitigation and revenue generation.
By using the best possible blend of assets for collateral, firms
will be able to control their concentration risk and ensure
they are not overly exposed to changing market conditions
affecting specific asset types. However, by identifying
collateral available for use for financing purposes (through
repo, stock lending, etc), greater value can be extracted. In
effect, the demand for collateral optimisation brings together
the disciplines of well-managed securities financing with
effective enterprise collateral management.
24 The Long & Short of It | Securities Lending Market Review
WHAT IS REQUIRED FOR COLLATERAL OPTIMISATION?
The attainment of collateral optimisation is likely to be a
multi-stage process. The first step in the journey is to define
what is actually meant by collateral optimisation, and the
answer to that question will vary from firm to firm. Success
will depend upon organisational and operational structure,
current processes, and the potential firm-specific internal
‘Achilles heel’ in the current collateral management processes.
A necessary stepping stone to attain collateral optimisation
is a holistic view of available assets. A considerable challenge
facing many institutions is the establishment of a single
view of the global pool of assets available. Typically assets
are in multiple individual silos, therefore one of the keys
is to centralise and consolidate inventory so as to make it
visible, and accessible, where it is most needed. There are also
complications around what makes a security ‘available’ for
use, including regulatory, financial and practical
operational considerations.
Once a firm has a centralised view of inventory, the next
challenge is to match this single view of available assets with
a similar view of the various collateral requirements across
all business lines and the relative eligibility of collateral
to each counterparty. These inputs can then be applied to
the pool of available assets when pledging collateral in a
transaction to determine the best possible combination
of assets to use as collateral from both an economic and
operational perspective. To succeed, a firm must take
multiple factors into account, including the financing cost
of using a particular asset as collateral, practical issues and
costs associated with asset movement, avoiding assets that
are maturing or may have corporate actions coming up etc.
Defining, and refining, the algorithms required to balance
all of these factors in order to define an optimal proposal for
collateral pledging is key to achieving collateral optimisation.
It is unlikely that there will be a standard way to achieve this;
it is definitely not a one rule fits all process.
Another key, in addition to the effective initial allocation
of collateral, is the active management of the collateral on
an ongoing basis. Typically when assets are pledged out
as collateral, they are left inactive until the time when the
exposure moves in a favourable direction and the asset is
recalled. A smarter approach is to constantly reassess the
combination of assets used as collateral and, where necessary,
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 Collateraloptimisation
change this combination. Active management requires not
only the acceptance of the counterparty to enable collateral
to be moved on such a regular basis, but also an efficient
systems set-up – principally involving the aforementioned
establishment of a consolidated, single view of available assets
and a similar single view of all collateral arrangements
and conditions.
THE CHALLENGES IN COLLATERAL OPTIMISATION
The practice of active collateral management and effective
asset optimisation is likely to be restricted to a relatively
small proportion of the market. The larger institutions will
engage in active management of the collateral pools used
when trading between each other, but this practice is less
likely to be extended to the smaller buy-side firms where the
operational capability needed to actively manage collateral is
beyond their resources. Ineffectual active management could
yield few benefits and has the potential to
derail counterparty relationships.
These same buy-side firms may turn to the tri-party
collateral managers that will offer to provide these services on
an outsourced basis. While such an arrangement has obvious
advantages to smaller firms, it does, however, add a further
operational layer to the collateral process and creates more
silos. Given that many buy-side firms are increasingly looking
to improve the visibility of their available assets, these
additional silos could be viewed as operational obstacles to
achieving collateral optimisation. The question that buy-side
firms have to consider is whether the potential compromise
of control, visibility and flexibility of their available assets
outweighs the potential cost-savings that tri-party collateral
arrangements may offer. In this area collateral optimisation
is likely to have less complexity and be more about improved
operational efficiencies in controlling collateral received.
Many financial institutions have developed over many
decades on an individual business-line basis, meaning that
these silos are often deeply embedded within the institution.
The many systems that an institution uses have been installed
and deployed on an individual business-line basis as have
the various employees that run these systems. Therefore
getting an institution and its employees to change this way
of working and unwind deeply embedded systems and
processes can be a daunting challenge. Nevertheless, it is a
necessary step.
For many, the move to the active management of collateral
is still an aspiration rather than a working practice because of
the operational and organisational challenges.
The challenge of realigning the business in a manner that
allows the right operational processes is something that many
firms are struggling with. This task presents challenges not
only from a technical and systems perspective but also an
organisational and even political perspective. Some firms
26 The Long & Short of It | Securities Lending Market Review
have set up enterprise collateral management groups to
address these very issues and to promote the case for the
active management of not only collateral but also the assets
used for repo, stock lending and other post-trade business
activities. These groups can help to manage the change
process and sell the subsequent benefits in order to get the
much-needed buy-in of management and acceptance by staff.
HOW CAN TECHNOLOGY PLAY A PART?
Once a firm has addressed the organisational issues, there
will also be additional steps that need to be taken and
additional technology that must be used in order to enable
collateral optimisation and active management to thrive.
Solutions will be required to maintain a single, visible,
enterprise-wide inventory of available assets and to map that
inventory alongside the list of collateral requirements and
conditions. Business logic engines that can look at both the
asset inventory and the collateral requirements, and make
intelligent and frequent automated decisions regarding
collateral requirements, will be needed.
The collateral allocation process will also need to be linked to
the various different trading and post-trade systems so that
collateral arrangements that accompany every transaction
can be swiftly acted upon. Intelligent workflow management
will be required to provide greater control and at-a-glance
management of the operational aspects of delivering,
receiving, reconciling and responding to any collateral
queries and disputes.
THE ‘HOLY GRAIL’ OF COLLATERAL OPTIMISATION
Collateral management has a broad impact across the bank
and traverses all three of the principal areas of activity –
trading, operations and risk. Therefore the benefits achieved
from a more efficient collateral management process will
be felt across the institution. From a risk perspective, the
increased transparency, visibility and control will reduce
much of the operational, credit, counterparty, market and
liquidity risk associated with the use of collateral. It will
also help institutions comply with the future requirements
of the Basel Committee and any related regulations that
require capital allocations and will calculate these capital
requirements based on a bank’s quality of operations.
Achieving true collateral optimisation will also create
extra revenue for a bank and limit the revenue previously
lost through either assets lying dormant or assets being
used inappropriately for collateral. By making more assets
available for trading, banks can improve their liquidity,
relieve the demands on their balance sheet and ultimately
increase profit.
 Finding Value?
Setting the 2011 Agenda

2011 is likely to be the year of

“Client Empowerment” in the
investor services and securities
lending industries.

Find out how custodians,

agent lenders and the rest of
the sector plan to meet a year
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heightened scrutiny with a
drive for transparency.
To register visit www.FundamentalsMagazine.com/London
For more information contact: Craig.McGlashan@FundamentalsMagazine.com

The 2011 London Investor Services &

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Thursday, 27th January, 2011
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 Marketdynamics
Changing market dynamics
Timothy Smith considers the big catalysts for change in 2010 with
an in-depth look at regulation, CCPs and the drive for transparency
Contributors: Andrew Shinn, Aaron Gerdeman
ne of the key themes of 2010 for the securities
lending industry was the changing dynamics
between the participants triggered by many
variables, both subjective and objective. The result is a
host of new relationship pressures that overall bears no
similarity to that which existed even two or three years
ago, let alone in the last century. By comparing the model
of today with those of the 1990s and early 2000s, one can
better understand the progression of the culmination of the
current environment.
The model of the 1990s depicted below was characterised
as a fairly simplistic approach to the securities financing
business. It was still a rarity for a beneficial owner to be
responsible for its own lending programme. The vast
majority was lent through an agent/custodian bank for
the most part. The brokers borrowed securities from these
custodian banks although attempts were made to access the
1990
Beneficial Lending
Owner agent
DIAGRAM 1
(custodian)
The intermediate model of the early 2000s shows a more
complicated relationship structure. Participants had become
more comfortable with securities lending, and some sought
more information and were less prepared to accept the
status quo. As a result, the number of relationship channels
was expanded as more stakeholders sought to hinder
28 The Long & Short of It | Securities Lending Market Review
underlying clients so as to establish exclusive arrangements.
In order to protect against this, US global custodians closely
guarded the identity of their underlying clients. In Europe
and Asia-Pacific & Japan (APJ), this cloak of secrecy was
less pronounced.
The ultimate borrowers - the hedge funds and proprietary
desks of the investment banks - were dependent upon their
prime brokers for not only supply, but for information
as well. As such, hedge funds and prop desks were not
attempting to obviate their primes as securities lending was
seen as a relatively small part of investment management.
The activity and the costs involved, while sometimes
burdensome, were seen as a cost of doing business.
There was, and still is, an active broker-to-broker market
in which brokers, most prevalent in the US market, engage
in widespread lending and borrowing between themselves
with agent lenders ultimately feeding in supply.
Broker
dealers
Prop
desk
Broker Hedge
dealer Fund
PB
the traditional means of communication driven by the
demand side. In addition, there was more desire by the
lenders to open more avenues or routes to market, driving
the development of third party, bidding and exclusive
arrangements to proliferate.
 Marketdynamics

2000

Broker
dealers

Prop
desk
Lending
Beneficial agent Broker Hedge
Owner (custodian) dealer Fund
DIAGRAM 2

Third PB
Party

The model now being developed is somewhat more
complicated. It is a result of the various pressures and
changes that have developed or been forced upon the
market in the last few years. The majority of these
relationships and changes have been implemented
and prepared for in 2010. The pressures, both internal
and external to the business activity, have led to a new
structure in which all stakeholders had to develop their
own operations in order to cope with the new order and to
prepare for the multitude of ways of doing business.
In addition, the availability of numerous ways to enter the
market or ‘put a position on’ have led to a pivotal change in
the balance of power between the borrowers and lenders.
In itself, this would be incredibly important if it were not
for the fact that there would appear no longer to be such a
thing as a straightforward borrower or lender.

2010

Broker
dealers
Prop
desk

Lending
Beneficial agent Broker Hedge
Owner (custodian) dealer Fund

Third PB
DIAGRAM 3

Party

PC
CCP
CCP

The Long & Short of It | Securities Lending Market Review 29

 Marketdynamics
To explain the new order, we need to analyse the
variables that have had an influence in 2010
The balance of power
The nineteenth century invented the phrase ‘balance of
power’ when it came to the relationships between sovereign
states. Since that time, such principles have governed
relationships between countries. In its own way, the
securities lending industry has been governed by the same
principle.
When demand has been high, the power has been in the
hands of the lenders who possess the desired securities,
and then in the hands of the prime brokers via their
relationships with their hedge fund clientele. This balance
has changed radically over the last year, and has been all the
more surprising as the previous one had been in play for
such a long period of time.
Clearly, lenders have come back into the market in 2010.
This, taken with the subtle change in the attitude toward
risk and the changing shape of demand, has meant that
the supply side of the street has ‘lost’ some of its power in
respect to the demand side. This means that the pressure
will be on the lenders to become more flexible in terms of
their collateral and rates.
Similarly, there has been an ebb and flow of power over
the last few years between the brokers and their hedge
fund clients. Some of these changes have helped provide
the hedge fund community with more knowledge and
thus more leverage. Competing ways to market and the
introduction of more prime brokers and most recently
prime custody services from the custodian banks have
also changed the power balance.
The regulatory framework
2008 and 2009 saw unprecedented global regulatory
coordination of action to address immediate meltdown
threats and populist measures to curb the perceived
excesses of capital markets with particular emphasis on
short selling. In 2010, there was less of a focus on the short
term and more discussions around what to put in place for
the long term.
The main effect on the demand side of securities lending
was to stultify the business. Without firm decisions
from regulatory authorities, participants had to rely on
their own views as to the outcomes. To this end, many
30 The Long & Short of It | Securities Lending Market Review
borrowers of securities have written off 2010 as a year to
put on positions. Indeed, figures for how the assets under
management have been allocated among the various
strategies have demonstrated this confusion.
Those investments that have relied upon a long/short
model have been the slowest to grow.
This regulatory scrutiny and the uncertainty of the
outcome has also served as a catalyst for lending
institutions, agents, broker-dealers and prime brokers to
become more introspective. Many have sought to prepare
themselves for what they think will come next. Others have
decided that it is more sensible to scrutinise what they do in
order to combat any regulatory diktats.
The drive for transparency
If 2008 and 2009 were the years of scrutiny, retrenchment
and protectionism, then 2010 was the year of transparency
even though it has been talked about for years. Because
much trust has been lost and many relationships have
been newly strained, the only way to rebuild has been to
have absolute transparency. Indeed, it has become the new
mantra even in the notoriously discreet hedge fund world.
Why is this the case?
In terms of the supply side, there is no doubt that the trust
between beneficial owners and their lending agents had
been shaken, and in some cases, destroyed. Unfortunately,
it has been on the back of investment management issues
in the main rather than the securities lending transactions
themselves. Naturally, this has mostly been a phenomenon
in the US where cash collateral was and continues to be
prevalent. Problems surrounding non-cash collateral
sufficiency were highlighted during the crisis and this too
tended to erode trust. The irony of the situation is that those
entities accused of betraying or concealing the position were
themselves just as surprised at the issues that arose.
Among beneficial owners themselves, their angst was
turned upon their lending agents mostly to conceal their
own feelings of guilt as they felt for not having devoted
the same amount of time and attention to managing or
overseeing the investments and operational processes of
their securities lending programmes, as they did to their
regular investments.
 Marketdynamics

For the borrowing side, the quest for greater transparency covering risk and return in securities lending – ‘there are risk
had traditionally revolved around suspicions of the costs assessment models and there are return measurement models,
of borrowing securities and recall protection of securities but there are no risk/return performance assessment models.’
loaned that might suddenly become ‘hot’ and were lent to The problem with the whole risk/return area of securities
the best relationships. In 2010, this has changed somewhat. lending is that there are so many variables and views that
Never have the borrowers shown as much interest in the make it a rather contrived comparison. Furthermore, each
process of securities lending and how the business works. entity possesses a variety of viewpoints, which in turn causes
Hitherto, it has often been said that investment managers some of the variables to conflict.
were the cleverest people but the most ill-informed about 2010 saw a big change in attitude towards risk, although
how securities lending worked. Despite many hedge funds it did progress slowly like warm water topping up in a
closing their doors, those that have remained have sought to bathtub. In 2008/9, especially from the beneficial owners’
learn much more about how the business works and have, perspective, it was all about risk. With the discovery of the
in many cases, hired experienced people who have found lack of information on reinvestment risk, the pendulum
themselves available due to job attrition throughout the shifted towards a complete risk-averse nature, though led
financial industry. to a massive reduction in income to which the industry
Transparency has also made inroads with the industry had become accustomed over many years. In the first year
bodies around the world. For them it has been evidenced of retrenchment, this was an acceptable position dictated
in the form of greater education. It is fair to say that until by prudence and oversight. However, in 2010 there had
recently, many of the industry associations relating been a large dose of realism injected into the mix; but
to securities lending have only been active and unfortunately, the demand is not there to take up
even heard of by the industry participants the new found enthusiasm. Furthermore, new
themselves. While they have lobbied ways of establishing positions and the new
regulators on occasion, their output participants have reduced the need for
and influence has been less than they traditional lending opportunities.
It is fair to say that until
should have been except perhaps
in the APJ region. However, 2010
recently, many of the The methodological
industry associations choices
has seen an engagement by these
relating to securities We have seen how the business has
associations as never before and
lending have only developed in terms of changing
mostly in the area of education of
been active and relationships. Both as drivers and
those outside of the industry as to
even heard of by the results of these relationships, there
the benefits and necessity of having
industry participants are a growing number of ways that
a functioning and efficient securities
themselves. participants can operate in the way
lending business. By positioning itself
at the forefront of developing thought they want to without being labeled
and promoting greater transparency within ‘securities lending’ or using the traditional
the business, they have been able to share counterparties. This methodological complexity
knowledge with the world at large and demonstrate how and diversity has increased not only because of the
the industry helps to generate liquidity and make the capital breakdown of the traditional alliances, but also because, as the
markets operate smoothly. business contracted, easier ways of doing things emerged.
In short, 2010 saw the time that participants came to accept, There are two more elements that have driven this change.
rather grudgingly in some cases, that transparency is a good First, there is the need to prepare for change that is coming
thing and actually can be turned to one’s advantage in many which may be imposed upon market stakeholders. Second,
cases. Understandably, there are still competitive pressures there has been a realisation by the potential providers of
that run counter to complete transparency in all areas of these new offerings that it is not an ‘all-or-nothing’ game
the business. However, this year has seen big steps towards and that new ways of doing business can and do co-exist
providing better or timelier information. with each other. More realistic goals have been set for
the growth of new offerings and this has meant that their
Risk versus return success, while slow to start, has been more assured. Of the
What a difference a year makes! There is an aeronautical two main areas of difference – processes replacing securities
saying that ‘there are old pilots and there are bold pilots, lending, and processes changing securities lending - both
but there are no old bold pilots.’ There is a similar one have been driven by the need to satisfy client requirements

The Long & Short of It | Securities Lending Market Review 31

 Marketdynamics
and differentiate their offerings from others in a more
competitive environment.
The move towards the use of central counterparties
(CCPs) in all derivative transactions in order to promote
transparency and accountability has spilled over into the
securities lending environment. In terms of transparency,
it can be argued that the introduction of a CCP into the
mix only adds transparency to the price discovery equation
and not to the ‘who am I dealing with’ question. No matter
how large the absolute value of their impact will be going
forward, 2010 has seen a very high profile for all central
counterparty opportunities on a global basis. This has
increased accessibility for all participants and has been
manifested by an acceptance by service providers that this
will augment the traditional way of doing business and not
replace it. In other words, there appears to be no pressure
that it has to be one method exclusive to another, which is
another 2010 distinguishing feature.
Looking outside of traditional securities lending structures
to establish the same underlying economic position is not
a new phenomenon. The use of equity linked notes, CFDs,
pre-releasing ADRs and other derivative structures have
always found favour in establishing a foothold in a market
or asset class that did not lend itself to easy access. However,
these have tended to be on one side of the equation, and
are usually driven by the demand side. It now appears that
single stock futures may well offer an additional way for
both borrowers and lenders bringing their wares to market,
with 2010 probably seen as the year that SSF came of age
as well. Add in to the mix the ability to factor out dividend
enhancement issues that the tax authorities have been
scrutinising for many years in regular securities lending,
and a new route to market takes shape.
Whatever happened to…
Did anyone hear much about proxy voting in 2010?
Certainly there are ongoing studies, but the impetus seems
to be lacking somewhat given the bigger causes for concern.
Some would argue that this is a good thing because it
was, and still is, a small issue that has been blown out of
proportion by several early academic studies.
Not many companies themselves have been complaining
this year about nasty short sellers. Perhaps because the
regulators and the public have taken up the mantle and they
feel that it does not warrant them having to do it.
Maybe it is because they feel they can get access to
information and maybe, just maybe, they should look to
themselves to correct their company’s strategies rather than
blaming others for their own mismanagement.
32 The Long & Short of It | Securities Lending Market Review
History matters
One feature of 2010 that has turned the whole RFP process
on its head is the fact that historical information that only
covers the last two years provides a particularly false picture
of future income. In fact, even if the information is available
from premier providers such as SunGard’s Astec Analytics,
a five-year history, while an improvement, will not provide
an exact prediction as to what will happen in the future.
There are too many imponderables and changes. Certainly
more information is better, but the market is too dynamic.
Additionally, in looking back to when liquidity was scarce,
many participants today are looking at trading volumes in
the main markets to see whether positions can be closed in
an orderly manner.
On the demand side, securities lending historical data has
become an additional feature of a signal provider in order
to create models for demand. Information on the dynamics
of changing demand, movements in utilisation, and even
movements in returns and borrow amounts, have been
known to create signals and the daily history is
now available.
‘Go east young person…’
There used to be only one mature securities lending market
in the Asian region and that was mostly controlled by
offshore holders of securities, namely Japan. Over the last
twenty years, several other countries have seen some growth
in their markets in terms of volume and value being lent
and borrowed, such as Hong Kong, Singapore, Australia and
most recently South Korea and Taiwan. With the impending
development of China and India as significant players over
the next two years, it can certainly be said that the region is
coming of age.
2010 saw significant growth and support of how the
newly emerging markets had been established. The slowly
controlled processes seem to have been proved to be the
right approach. Just as a teacher can start firm and then ease
up with a pupil, the regulatory authorities adopted a strict
approach and then yielded to lobbying by participants and
industry bodies when it was proved to be the correct thing
to do. As such, the increase in activity in the new markets of
the region has been the one significant upward movement
in 2010.
‘Everyone’s an expert’
As mentioned above, the desire to learn more about
securities lending by all those involved has been a key
feature of 2010. It is all very well for the likes of the
industry associations to offer training courses and to be
out there speaking with the regulators and the press but

this counts for naught if those to whom they are speaking
do not have the appetite to learn. One of the major hurdles
securities lending has had to leap has been the presumption
of unimportance. Because it is important, and there is no
getting away from it. As a passive activity reacting to other
needs, it has suffered from been consigned to a back-office
environment. Sure enough over the years everyone has said
that ‘securities lending has come out of the back office’ and
indeed that may be true, but only for those who have been
actively engaged in the process, and not for those who have
been on the receiving end of the service.
2010 has seen a much wider uptick in understanding how
the industry works. Long-only investment managers and
insurance company leaders now know that their assets are
used to cover short positions set up by hedge funds, and that
they are not just lending to mainstream broker-dealers in
order to cover fails. Ultimate borrowers of securities are now
aware to a greater extent that the securities lent may not only
be coming from beneficial owners, but also from people like
themselves who are on the opposite side of the trade.
In addition, there is a greater understanding now in the area
of pricing and liquidity. All securities are available all the time
and estimates of availability are just that – they are subject to
the vacillations and sometimes mercurial pragmatism of the
beneficial owners. It is not a Machiavellian plot to protect an
internal position at the expense of their clients.
One of the major reasons for these changes is the available
talent pool to work within the new information-hungry
stakeholders. There has never been as much movement
between types of participants as there is now. It used to be
the case that it was a rare move for staff to move outside of
their comfort area, but this has now changed. As a result, the
spread of knowledge around the market has accelerated.
Drive toward efficiency
Securities lending grew up with a number of intrinsic
inefficiencies. It has been built upon maximising market
share and locking up supply. 2010 has seen a breakdown in
this dynamic. No longer are the reciprocal arrangements or
apportionment undertakings as relevant as they were.
As the number of relationships has grown, the need to
have the same arrangements has lessened. The economic
constraints leading to a drive for efficiency have meant that
the inefficient, established routines have been replaced by a
desire to use available assets more efficiently.
Nowhere is this more defined than with the broker-dealers.
In the past, they have given up using their in-house holdings
in order to borrow easy-to-borrow securities in order to
obtain the hard-to-borrow ones. Always important has
Marketdynamics
been the capital usage aspect of the broker-dealer world and
2010 has seen this take on an added impetus because of the
preparations that need to be undertaken for whatever Basel
III is bringing into play.
Although seemingly the loser in this drive for efficient
use of assets, the lending agents and beneficial owners have
actually been willing participants, albeit bemoaning the
downturn in balances on loan. Until the dust settles on the
whole ‘lending to generate cash for reinvestment’ argument,
lenders have focused on the intrinsic side of lending rather
than on the reinvestment aspect. This has led to a more
lending-focused efficient use of assets from the lending side
as well. Whether true or not, it is perceived as better to obtain
a big return on a smaller book of business, rather than to
obtain the same return through a larger book of business
with most of the income derived from reinvestments.
This is something that totally non-cash based lenders have
been used to for a long time, if not a novel departure for the
cash-based lenders.
Alternative investment managers have also become more
efficient in their use of assets in 2010. As the demand for
shorting has lessened, the desire to lend hedge funds’ long
positions has grown. This has had a not inconsiderable
effect on the whole market dynamic. As the knowledge and
understanding of the processes has grown with imported
talent and greater transparency, the drive to make money
on previously under-utilised assets has become greater.
Taken together with the additional ways to get these assets
to market has meant a growth in the lending base and an
erasure of the distinctions between traditional long-only
investors and the hedge-fund side of the business.
What lies ahead?
2010 was a year of change in the securities lending
market. The changing relationship structure has meant
that the business is less an ‘old boy’ network and more
of a ‘trust but verify’ approach. The disappearance of the
traditional relationships has meant that there are now more
opportunities to develop alternative strategies with less
innate inertia in the system. On top of this, external pressures
from regulators and the development of new ways of doing
business have led to the changes even if they had not been
welcome. 2011 will continue this trend as greater clarity is
brought to the regulatory framework and the global economy,
we hope, changes for the better.
The Long & Short of It | Securities Lending Market Review 33
GSL Summit Series: 2010 Review
In 2010, GSL took its summit series to three continents,12 countries,
and 13 cities, with some 14 summits in all. Craig McGlashan reports.
Canada has avoided issues in other markets due to
a very prudent and conservative approach to how
banks have run their securities lending businesses
Oliver Madden (RBC Dexia)

The European Central Bank has become a heart

bypass for the financial markets surgery in that
too many institutions are dependent upon it
Arne Theia (UniCredit)

When it comes to short selling and securities lending,

there will always be politicians who look at those areas
and say ‘that’s sounds a bit fishy’
Greg Hands (Parliamentary Private Secretary to the
Chancellor of the Exchequer)

Toronto, June 2010


erhaps the most interesting aspect to come out of the
summits was the differences in how securities lending was
perceived by beneficial owners across the globe.
In the more developed markets, issues around risk and the
Lehman default continued to cause headaches for investors,
with cash collateral reinvestment a heavy topic in the USA, not
surprising given the trend towards that collateral option stateside.
However, in countries such as Hong Kong, there was
a feeling of optimism, with a number of speakers
suggesting that regulators in both Hong
Kong and other Asian jurisdictions, such as
Singapore, had “got it right”. Rules that had
seemed odd and overbearing to some of the
European and North American expats who
had set up shop in the area had proven to
assist in helping securities lenders avoid the
worst of what had been seen elsewhere.
In the words of SunGard’s Tim Smith,
the Asia ex-Japan region was “ahead of the
game”. Indeed, with the Chinese regulators
introducing short selling trials in 2010, an oft-
discussed topic was not if a securities lending industry
would flourish in the country, but when – although the exact
timing of this was something that caused much debate.
In the more developed markets, meanwhile, it was interesting
to note the different events taking place during the year that
shaped the discussions.
In the USA, securities lending continued to come under fire,
with perhaps the most high-profile case being a New York
Times article on cash collateral reinvestment losses, which
came complete with a video explaining the process of securities
Summits Series: 2010
Amsterdam
London
Toronto Paris
Luxembourg
Boston New York
GSL SummitReview 2010
lending and cash reinvestment, including the line that agent
lenders “shared in customers’ profits but not their losses”.
GSL took the opportunity to show the video at the Boston
Summit in November, with many participants commenting that
they had read the article but not seen the video.
Speaking from the audience, Chris Donovan, global head of
securities lending at Brown Brothers Harriman, suggested that
the piece “bordered on the sensational” and had missed
one key element of many lending programmes:
indemnification.
She added: “Clearly that is potentially a big
cost that the provider would bear and to
that end it would not be, ‘heads I win, tails
you lose.’ I think that was a very, very big
omission. Today most fee splits we see are
lending agents earning 20% to 10%, yet still
bearing the cost of all sorts of operational
indemnification and borrower default
indemnification. The one area that obviously
the client does bear is any cash
reinvestment risk.”
Indeed, Donovan’s words did echo much of the
sentiment from the audience, which felt that securities
lending had spent the years since the Lehman Brothers default
being criticised by a mainstream press that failed to properly
understand the processes involved, particularly around the
difference between securities lending losses and cash collateral
reinvestment losses.
One country where beneficial owner education did not appear
to be an issue was in the Netherlands. Holland had hosted the
first non-UK GSL Summit in 2009 and the 2010 event was the
Stockholm
Frankfurt
Zurich
Tokyo
Dubai
Hong Kong
The Long & Short of It | Securities Lending Market Review 35
 GSL SummitReview 2010
Roy Zimmerhansl (Fundamentals)
have a business
without borrowing demand, we don’t really
We’ve survived the crisis, but at the end of day,
The idea that securities lending is an integral part
of short-term money markets wasn’t perhaps
appreciated before
Andrew Dyson (Data Explorers)

Beneficial owners will

continue to both exit and
return to securities lending
for some time, and this
movement will lead to a more
creative market
Maarten Roels (Percival
Trading Partners)
The securities lending industry is now facing less flexibility than it did before Beneficial owners have gone from believing there is no
the crisis due to a new age of conservatism and regulation risk in securities lending to believing that it carries too
Raymond Blokland (BofA Merrill Lynch) much risk, to a balance between the two
Keith Haberlin (Brown Brothers Harriman)
Dimitri Arlando (State Street)
transparency as possible
questions and we must ensure that we give them as much
It’s a good thing that clients are asking more intelligent

William Smith (J.P. Morgan)

thought they’d ever need to
last few years than they
risks of securities lending in the
learned a lot more about the
A number of our clients have
Kirtes Bharti (PASLA)
mature peers in Europe
manner compared to our more
evolving in a more transparent
Markets in Asia-Pacific are

We need everybody to have a basic

policy but we don’t need to become
broke to do it
Lawrence Kotlikoff (professor of
economics, Boston University)
36 The Long & Short of It | Securities Lending Market Review

second year running that a large number of people from across
the industry, including beneficial owners, appeared in abundance.
As in 2009, audience members from across the spectrum were
not afraid to join the debate, and indeed one of the topics
covered was the willingness of Dutch beneficial owners to
engage with the industry and ensure that they understood the
issues at the heart of their programmes, as well as considering
new and innovative lending models.
One reason suggested for this trend was the Dutch model of
pension systems, which proved prescient later in the year with
the release of a vision report in the UK from David Pitt-Watson,
of Hermes Fund Managers, and a team from the Royal Society
for the Encouragement of Arts, Manufactures & Commerce,
which suggested that British pension funds could make vast
savings in fees if they adopted the Dutch model.
Perhaps the major new theme to emerge from the summits
over the year was the issue of exchange-traded funds in
securities lending.
From a dedicated panel on the subject at the Nordic conference
in Sweden, the first GSL Summit of 2010, right through the year,
the discussion of ETFs both as a source of lending supply and
as a collateral option was something that always had delegates
listening intently, and the issue is only likely to become more
popular as a point of debate in the 2011 summits and beyond, as
ETFs continue to grow in popularity across the investment world.
Of course, any attempt at a worldwide tour is always going to
Fundamentals
World Summit Series
GSL SummitReview 2010
have its unavoidable mishaps, and the GSL Summit Series was
no exception.
Thanks to the icy weather in Europe in December and the
inability of UK airports to operate in cold temperatures, just
one member of the GSL team managed to make it to the
Luxembourg Summit, resulting in that person being chairman,
cameraman, greeter and organiser for the day.
But even that incident was nothing compared with the German
event in April, when the unthinkable happened – a volcano
in Iceland stopped half the team from getting into Frankfurt.
Luckily, that event was not so short-staffed, although the trip
home involved a slightly more time-consuming scenario than a
flight into London.
As we move from 2010 into 2011, the GSL Summits will
again try to reflect the key concerns, hopes and thoughts of
the industry and the clients it serves. The first event of the year
will be in London on 27th January, with a focus on setting the
agenda for 2011 – will this be the year of “client empowerment”?
Which of the upcoming regulations – the AIFM Directive, Basel
III to name but two – are likely to most impact the industry for
good or bad? Will demand for securities recover?
The answers to these will be hotly debated at the 2011 Summits.
In addition, many of the conferences next year will include
ISJ morning sessions, focusing on custody and other investor
services. For full details see www.FundamentalsMagazine.com.
We look forward to seeing you there.
• 27th January
GSL & ISJ London Summit, London
• 24th February
GSL & ISJ Nordic Summit, Stockholm
• 7th April
GSL Asian Summit, Shanghai/Beijing
• 12th May
GSL North American Summit, Chicago
• 15th September
GSL & ISJ Boston Summit, Boston
• 6th October
GSL & ISJ Dutch Summit, Amsterdam
• 3rd November
GSL & ISJ London Summit, London
• 1st December
GSL Middle East Summit, Abu Dhabi
 ETFfocus
Shifts in trading patterns: the rise of the ETF
SunGard’s Andrew Shinn looks at the concerns around ETFs following a year of
media attacks and disparaging reports
xchange-traded funds (ETFs) have had a long
relationship with the securities lending industry.
After all, many ETFs are initially created with the
use of borrowed stock. Therefore, it has been encouraging
to see the growth in popularity of ETFs among both retail
and institutional investors over the last several years. Along
with the increasing appeal of ETFs, however, they have
come under some scrutiny recently, particularly in a recent
report that criticised the instrument and the ways in which
securities lending desks trade and profit from them.
ETFs are popular with all types of investors because they
provide exposure to almost every asset class and country in the
world. Hedge funds frequently use ETFs to get short exposure
to an entire index in one trade. Short sellers like ETFs because
the risk of a short squeeze is less than the similar risk when
shorting an ordinary stock. A rush by short sellers to close
out their short positions in an ETF would undoubtedly drive
up the price of the ETF and the prices of the underlying
securities. However, the ability to create new shares of an ETF
makes short covering easier than finding shares of an ordinary
stock for sale in the market, especially if the stock in question
is thinly traded.
Media assertions abound
Since the credit crisis, it is natural for observers to be on the
lookout for the next product innovation that will bring down
the system. With nearly $1 trillion under management, ETFs
have come under fire recently in the media.
In a September 2010 report, equity fund manager Andrew
Bogan asked, “Can an ETF Collapse?” (Seeking Alpha,
September 21, 2010; http://seekingalpha.com/article/226233-
can-an-etf-collapse). As a result, the story gained traction in
the news media, including CNBC which mused whether the
Fed could get stuck holding a bag with billions of dollars in
losses. Unfortunately, such media scare tactics tend to work
well because the public and many investors are still scarred by
the credit crisis.
In addition, there is a tendency to view new and old
investment vehicles alike with suspicion. Bogan’s report was
written in the same style as reports by Susan Christoffersen
and Henry Hu a few years ago regarding proxy abuse and
securities lending. These reports were based on a limited
sample of securities lending transaction data from 1999
and select anecdotes of non-US stock proxy manipulations.
Similar to Bogan’s report, they incited concern and gained
traction in the media. In the end, the securities lending
industry answered the charges in the proxy abuse reports. The
recent Bogan report is a reminder that misleading information
can have long-lasting negative effects and the claims made
should be addressed as well.
38 The Long & Short of It | Securities Lending Market Review
Getting the record straight on short selling
In Bogan’s report, his contention that an ETF could collapse
rested on the fact that short interest of certain ETFs is often
many times higher than the actual outstanding shares of the
ETF. In other words, the number of owners of an ETF may far
outnumber the actual shares in existence.
Bogan used XRT (the S&P retail sector ETF) as an example.
For XRT at the end of June 2010, there were 95 million shares
short, but only 17 million shares outstanding. In the report,
Bogan incorrectly stated that there were 95 million shares
of the ETF owned by investors who had purchased them
unknowingly from short sellers. He also stated that “78 million
of those ETF shares were naked short – the short seller had
promised their prime broker to create those non-existent
shares if necessary to cover their short in the future”. To arrive
at the 78 million figure, Bogan is presumably subtracting 17
million from 95 million. Unfortunately, this arithmetic is
unsound. More importantly, the fact that there are 17 million
shares outstanding and 95 million shares short does not prove
that even one share has been sold naked short.
For XRT, there are actually 112 million investors who hold
a long economic interest in the ETF. As the diagram opposite
shows, 20 million shares outstanding can generate any number
of synthetic shares, depending on how many times the shares
are loaned and shorted. In order to calculate the total number
of investors who hold an economic interest in a stock or ETF,
one must add short interest to the number of outstanding
shares. Therefore, there are 20 million shares outstanding, 60
million shares short, and investors hold an economic interest
in 80 million shares. For XRT, we can easily arrive at the 112
million shares that are held long, either actually
or synthetically.
For XRT, Bogan is concerned that the owners of more than
17 million shares may rush to redeem their shares and cause
a run on the ETF operator’s assets. However, the owners
who have loaned their shares (95 million shares in this case)
cannot redeem their shares, simply because they don’t hold
the shares anymore. This will not come as a surprise to those
owners who loaned their shares because they agreed to lend
them and they are earning fees to do so. Should these owners
want to sell or redeem their shares, they know that they would
first have to recall their loaned shares. Upon a recall, the short
seller would either have to find a replacement borrow from
another owner, or barring that, would have to buy the shares
on the open market. If that were not possible or if it were more
advantageous, the short seller’s prime broker could simply
create new shares of the ETF. In this way, the overhang of short
interest would unwind itself by creating additional shares of
the ETF.
 ETFfocus

20 million actually existing shares outstanding

can generate any number of synthetic shares
because of securities lending and short selling
HOW SHORTING WORKS

Loan by Owner A
and short sale by
short seller X

Owner A Owner B

20MM 20MM
Loan by
Owner B
and short
sale by
Shares in existence = 20MM short
Short interest = 60MM seller Y

Shares held long = 80MM

Owner D Owner C

20MM 20MM
DIAGRAM 1

Loan by Owner C
and short sale by
short seller Z

The Long & Short of It | Securities Lending Market Review 39

 ETFfocus
Going back to the example in the diagram, should owner C
recall his loaned shares, short seller Y may buy the underlying
equity components, deliver them to the operator through an
authorised participant, and 20 million new shares of the ETF
will be created. Then there will be 40 million shares outstanding,
40 million shares short, and investors will still hold an economic
interest in 80 million shares. When owner C redeems his 20
million shares with the ETF operator, there will then be 20
million shares outstanding, 40 million shares short, and long
investors will hold an economic interest in 60 million shares.
To continue with Bogan’s example, though, even if the
owners of the actual 17 million shares outstanding tried to
redeem all their shares at once, they would not be able to
shut down the ETF and leave the rest of the long investors
holding shares of a non-existent ETF with no underlying
assets. The ETF operator, such as iShares, reserves the right to
refuse redemption requests if it would deplete the supply of
underlying equity securities that the operator holds. In iShares’
prospectus, it states that iShares has “the right to refuse any
order (creation or redemption) that is deemed to be placed
in improper form. An order may be deemed in improper
form if it exceeds or approaches a significant portion of total
shares outstanding”. Furthermore, “a redemption request may
not be accepted by the Fund unless it is first ascertained that
the shares have not been loaned or pledged to another party
and are not the subject of a repurchase or securities lending
agreement”. The ETF operators have already thought about
the points raised in Bogan’s report and have taken measures to
ensure that an investor cannot redeem all outstanding shares
and shut down a fund.
This being said, it is understandable why large short interest
in ETFs have some people concerned. After all, it is rare for
short interest to be higher than shares outstanding for an
ordinary equity. But for ETFs, this has more to do with the
high demand from hedge funds to use ETFs as an efficient
short position.
In-specie versus swap-backed ETFs
Another issue that frequently causes confusion is the
difference between in-specie and swap-backed ETFs.
In-specie, or physical ETFs, are backed by all the underlying
(or a representative sample of the underlying) securities
constituting the fund’s index. It is up to the ETF operator to
determine the exact set of securities to best track the index.
On the other hand, swap-backed ETFs are based on
swap agreements. The ETF operator will enter into a swap
agreement in which a counterparty will pay if the index
rises in value, and the ETF will pay if the index declines.
The operator will also hold securities as collateral in case the
counterparty cannot pay the difference. However, the collateral
securities may not be the same as the underlying index
securities. Hence, an S&P 500 swap-backed ETF may not hold
any shares of S&P 500 stock; however, swap-backed ETFs often
hold some of the underlying index securities in order to hedge
against exposure. In this way, even swap-backed ETFs can
40 The Long & Short of It | Securities Lending Market Review
earn securities-lending revenue by lending out the securities
(whatever they may be) in their collateral pools. Swap-backed
ETFs are originated mainly to facilitate investor demand for
asset classes in which the underlying index components are
difficult to hold.
Securities lending is integral
Securities lending desks are an integral part of both creating
ETFs and maintaining liquidity in them. In terms of creating a
new ETF, the operator will require a market maker to provide
the underlying components. Once the ETF is created, the
market maker will also buy and sell the ETF on the open
market and earn a spread from doing so.
Securities lending is a crucial component because market
makers will not purchase the component stocks, but rather,
borrow them in order to deliver to the ETF operator.
Upon delivery, the market maker will receive the newly created
ETF shares from the operator and either sell them to investors
on the open market or loan the ETF shares to another broker-
dealer that executes a short sale on behalf of a hedge fund
client. The market maker is perfectly hedged in terms of the
rise or fall in the price of the ETF. As the market maker sells
ETF shares to investors, it will take the proceeds from that sale,
buy back the underlying equity shares and return them to the
lender, thereby closing out its borrowed position.
The other way that securities-lending desks earn revenue
from trading ETFs is by arbitraging the difference between
the borrowing cost for an ETF and the borrowing costs for
the underlying component stocks. In order to take advantage
of this price difference, the securities lending desk will
borrow the underlying equity shares, deliver those shares to
the operator, and receive newly-created ETF shares. If the
borrowing cost of the ETF is higher than the component parts,
the desk will earn the spread and be completely hedged in
terms of ETF price movement.
This transaction is demonstrated in the diagram opposite.
A broker-dealer borrows shares of stock that underlie an ETF,
delivers those shares to an ETF operator, and receives shares of
the ETF in return. The broker-dealer then lends those shares
of the ETF to another broker-dealer or charges a hedge fund to
take a short position. At some point in the future, the broker-
dealer recalls the loaned ETF shares, delivers those ETF shares
back to the operator (redeems them), receives the underlying
shares, and in turn delivers those shares back to the original
lender. The main cost to the securities-lending desk is the use
of its balance sheet.
ETFs will continue to become a bigger part of the market
in the future. While ETFs are not the most complicated
investment vehicle, it is still possible to become confused
and get the facts wrong, thereby creating uncertainty among
investors. Because ETFs generate revenue for the securities-
lending industry, it is in our best interest to know how they
work so that reports that run contrary to real-world fact can be
quickly addressed and understood more fully by investors.
 ETFfocus

A securities lending desk may borrow

component shares, deliver these shares to an
ETF operator and receive shares of the ETF.
The desk may then lend out these ETF shares
at a higher fee than the desk is paying to borrow
the underlying component shares. The main cost
to the desk is the use of the firm’s balance sheet
ARBITRAGING DIFFERENCE BETWEEN ETF AND COMPONENT STOCK BORROWING FEES

1. SL desk borrows ETF

component shares and
delivers to operator to
receive new shares of ETF

ETF 2. Lends ETF

to another
broker dealer
at relatively
higher fee
than the cost
to borrow
underlying
components.

ETF
Components of ETF
3. SL desk eventually recalls
DIAGRAM 2

loaned ETF, redeems ETF

with operator and delivers
component stock back to
original lender

The Long & Short of It | Securities Lending Market Review 41

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/ŶĚƵƐƚƌŝĂůƐ &ŝŶůĂŶĚ;KDy,ĞůƐŝŶŬŝͿ ϭϲϲ͕ϴϴϲ ϰϱďƉ Ͳϱϯй нϭϲďƉ
ĂƉŝƚĂů'ŽŽĚƐ ϴϴ͘ϲ ϵϴ͘Ϯ ϵ͘ϱ &ƌĂŶĐĞ;WĂƌŝƐͿ ϴ͕ϳϰϲ͕Ϯϰϱ ϯϲďƉ ͲϮϱй ͲϰϰďƉ
ŽŵŵĞƌĐŝĂů^ĞƌǀŝĐĞƐ ϯϵ͘Ϭ ϰϴ͘ϴ ϵ͘ϳ 'ĞƌŵĂŶLJ;&ƌĂŶŬĨƵƌƚͿ ϭϯ͕ϭϱϮ͕Ϭϳϰ ϲϯďƉ ͲϮϮй нϴďƉ
dƌĂŶƐƉŽƌƚĂƚŝŽŶ ϲϮ͘ϱ ϱϳ͘ϲ Ͳϰ͘ϵ 'ƌĞĞĐĞ;ƚŚĞŶƐͿ ϱϴ͕ϬϮϳ ϰϰϬďƉ Ͳϵϱй нϰϬϮďƉ
ŽŶƐƵŵĞƌŝƐĐƌĞƚŝŽŶĂƌLJ ,ƵŶŐĂƌLJ;ƵĚĂƉĞƐƚͿ ϵϵϴ͕ϴϭϵ ϳϯďƉ Ͳϴй ͲϱϯďƉ
ƵƚŽŵŽďŝůĞƐΘŽŵƉŽŶĞŶƚƐ ϭϴϲ͘ϯ ϯϭ͘ϭ Ͳϭϱϱ͘Ϯ /ƌĞůĂŶĚ;DĂŝŶDĂƌŬĞƚͿ Ϯϳϵ͕ϴϵϴ ϮϮďƉ Ͳϲϭй нϭϯďƉ
ŽŶƐƵŵĞƌƵƌĂďůĞƐΘƉƉĂƌĞů ϲϭ͘ϴ ϱϳ͘ϰ Ͳϰ͘ϰ /ƚĂůLJ;ŽƌƐĂ/ƚĂůŝĂŶĂDKdͿ Ϯ͕ϳϭϲ͕ϱϬϵ ϯďƉ Ͳϱϴй нϭďƉ
ŽŶƐƵŵĞƌ^ĞƌǀŝĐĞƐ ϳϴ͘ϴ ϯϴ͘Ϭ ͲϰϬ͘ϴ >ƵdžĞŵďŽƵƌŐ ϯ͕ϲϰϳ͕ϱϳϳ ϭϴďƉ Ͳϴϵй нϯďƉ
DĞĚŝĂ ϱϱ͘ϲ ϱϰ͘ϱ Ͳϭ͘ϭ EĞƚŚĞƌůĂŶĚƐ;ŵƐƚĞƌĚĂŵͿ ϰ͕ϲϬϯ͕ϳϯϱ ϮϭďƉ нϭй ͲϭϭďƉ
ZĞƚĂŝůŝŶŐ ϴϯ͘Ϭ ϲϲ͘ϭ Ͳϭϲ͘ϵ EŽƌǁĂLJ;KƐůŽͿ ϲϰϲ͕ϰϯϵ ϰϮďƉ нϴϮй нϵďƉ
ŽŶƐƵŵĞƌ^ƚĂƉůĞƐ WŽůĂŶĚ;tĂƌƐĂǁͿ ϮϭϬ͕ϴϰϲ ϭϵϳďƉ нϱϭй ͲϰϴďƉ
&ŽŽĚΘ^ƚĂƉůĞƐZĞƚĂŝůŝŶŐ ϰϲ͘ϯ ϱϰ͘Ϭ ϳ͘ϴ WŽƌƚƵŐĂů;ƵƌŽŶĞdžƚͿ ϯϳϬ͕ϰϵϳ ϮϮďƉ ͲϮϰй нϮďƉ
&ŽŽĚĞǀĞƌĂŐĞΘdŽďĂĐĐŽ ϲϴ͘Ϯ ϰϭ͘ϰ ͲϮϲ͘ϴ ZƵƐƐŝĂ;Zd^Ϳ ϯϰ͕Ϯϳϭ ϯϳďƉ Ͳϭϳй ͲϴϲďƉ
,ŽƵƐĞŚŽůĚΘWĞƌƐŽŶĂůWƌŽĚƵĐƚƐ ϳϬ͘ϴ ϰϵ͘ϳ ͲϮϭ͘ϭ ^ƉĂŝŶ;DĂĚƌŝĚͿ ϵϰϮ͕ϯϮϰ ϭϬϲďƉ Ͳϲϰй нϮϭďƉ
,ĞĂůƚŚĂƌĞ ^ǁĞĚĞŶ;KDy^ƚŽĐŬŚŽůŵͿ ϯϮϵ͕ϮϮϮ ϮϴďƉ Ͳϭϵй нϭďƉ
,ĞĂůƚŚĂƌĞƋƵŝƉŵĞŶƚΘ^ĞƌǀŝĐĞƐ Ϯϴ͘ϰ ϱϲ͘Ϯ Ϯϳ͘ϳ ^ǁŝƚnjĞƌůĂŶĚ;^tyͿ ϭϮ͕ϴϭϰ͕ϭϱϭ ϭϮďƉ Ͳϭϵй ͲϲďƉ
WŚĂƌŵĂΘŝŽƚĞĐŚ ϱϯ͘Ϯ ϲϱ͘ϭ ϭϮ͘Ϭ dƵƌŬĞLJ;/ƐƚĂŶďƵůͿ ϲϱ͕ϵϮϭ ϭϭϱďƉ нϯϭй ͲϮϯϮďƉ
&ŝŶĂŶĐŝĂůƐ ƵƐƚƌĂůŝĂ;^yͿ ϰ͕ϵϵϱ͕ϯϲϵ ϱϳďƉ Ͳϭϰй нϭϮďƉ
ĂŶŬƐ ϭϬϮ͘ϰ ϲϱ͘ϳ Ͳϯϲ͘ϴ ŚŝŶĂ;^ŚĂŶŐŚĂŝͿ ϭ͕ϮϭϬ ϳϯďƉ Ͳϰϴй нϮϭďƉ
ŝǀĞƌƐŝĨŝĞĚ&ŝŶĂŶĐŝĂůƐ ϯϰϵ͘Ϯ ϯϯ͘ϱ Ͳϯϭϱ͘ϳ ŚŝŶĂ;^ŚĞŶnjĞŶͿ ϲ͕ϱϵϬ ϮϱďƉ Ͳϴϴй ͲϮϲϳďƉ
/ŶƐƵƌĂŶĐĞ ϭϯϬ͘ϭ ϵϰ͘ϳ Ͳϯϱ͘ϰ ,ŽŶŐ<ŽŶŐ ϭϬ͕ϳϴϳ͕ϳϵϱ ϱϳďƉ нϰϬй ͲϯϯďƉ
ZĞĂůƐƚĂƚĞ ϰϯ͘ϯ Ϯϴ͘ϲ Ͳϭϰ͘ϳ EĞǁĞĂůĂŶĚ;EyͿ ϯϬ͕ϱϳϴ ϵϱďƉ Ͳϱϳй ͲϯϵďƉ
/ŶĨŽƌŵĂƚŝŽŶdĞĐŚŶŽůŽŐLJ ^ŝŶŐĂƉŽƌĞ;^'yͿ ϯ͕ϭϵϭ͕ϯϴϮ ϴϴďƉ нϮϬϰй нϭďƉ
^ŽĨƚǁĂƌĞΘ^ĞƌǀŝĐĞƐ ϯϳ͘Ϭ ϯϯ͘ϱ Ͳϯ͘ϱ ^ŽƵƚŚ<ŽƌĞĂ;<ZyͿ ϵϴ͕ϱϱϱ ϭϬϮďƉ нϱϬй ͲϰϵďƉ
dĞĐŚŶŽůŽŐLJ ,ĂƌĚǁĂƌĞ Θ ƋƵŝƉŵĞŶƚ
dĞĐŚŶŽůŽŐLJ,ĂƌĚǁĂƌĞΘƋƵŝƉŵĞŶƚ ϱϳ ϲ
ϱϳ͘ϲ ϲϳ͘ϭ
ϲϳ ϭ ϵϱ
ϵ͘ϱ dĂŝǁĂŶ ;dĂŝƉĞŝͿ
dĂŝǁĂŶ;dĂŝƉĞŝͿ ϭ ϵϮϳ ϱϰϮ
ϭ͕ϵϮϳ͕ϱϰϮ ϮϬϬ ďƉ
ϮϬϬďƉ нϯϯϬй нϮϭ ďƉ
нϮϭďƉ
^ĞŵŝĐŽŶĚƵĐƚŽƌƐΘƋƵŝƉŵĞŶƚ ϯϳ͘ϰ ϰϴ͘Ϯ ϭϬ͘ϴ dŚĂŝůĂŶĚ;ĂŶŐŬŽŬͿ Ϯϵ͕ϴϵϭ ϮϭϰďƉ ͲϰϬй ͲϭϲϬďƉ
dĞůĞĐŽŵŵƵŶŝĐĂƚŝŽŶ^ĞƌǀŝĐĞƐ ƌŐĞŶƚŝŶĂ;ƵĞŶŽƐŝƌĞƐͿ ϱ͕ϵϭϴ ϭϴďƉ Ͳϯϵй нϭϭďƉ
ŝǀĞƌƐŝĨŝĞĚdĞůĞĐŽŵ^ĞƌǀŝĐĞƐ ϵϰ͘ϴ ϴϴ͘ϵ Ͳϱ͘ϵ ƌĂnjŝů;^ĂŽWĂƵůŽͿ ϭϳ͕ϱϭϮ ϮϱϳďƉ нϯϮй нϮϭϬďƉ
tŝƌĞůĞƐƐdĞůĞĐŽŵ^ĞƌǀŝĐĞƐ ϭϵ͘Ϯ ϭϳ͘ϳ Ͳϭ͘ϱ DĞdžŝĐŽ;DĞdžŝĐŽŝƚLJͿ Ϯϯϯ͕Ϯϲϯ ϭϴϱďƉ нϮϴй нϮϳďƉ
hƚŝůŝƚŝĞƐ /ƐƌĂĞů;dĞůǀŝǀͿ ϯϱ͕ϳϬϮ ϭϮϱďƉ нϮϲϰй ͲϭϵϴďƉ
ůĞĐƚƌŝĐhƚŝůŝƚŝĞƐ ϮϬϮ͘ϴ ϭϭϭ͘ϱ Ͳϵϭ͘ϯ ^ŽƵƚŚĨƌŝĐĂ;:ŽŚĂŶŶĞƐďƵƌŐͿ ϮϬϮ͕ϯϲϮ ϲϲďƉ Ͳϵϭй нϯϰďƉ
'ĂƐhƚŝůŝƚŝĞƐ ϳϮ͘Ϭ ϳϬ͘Ϭ ͲϮ͘ϭ
DƵůƚŝͲhƚŝůŝƚŝĞƐ ϭϯϰ͘ϳ ϴϬ͘ϯ Ͳϱϰ͘ϰ
tĂƚĞƌhƚŝůŝƚŝĞƐ ϱϲ͘ϲ ϰϵ͘ϱ Ͳϳ͘Ϭ
ŶĞƌŐLJWƌŽĚƵĐĞƌƐΘdƌĂĚĞƌƐ Ϯϴ͘ϰ Ϯϱ͘Ϭ Ͳϯ͘ϱ

/ŶĚƵƐƚƌŝĞƐǁŝƚŚŚŝŐŚĞƐƚĂǀĞƌĂŐĞƐƚŽĐŬůŽĂŶĨĞĞƐŝŶϮϬϭϬ

hƚŝůŝƚŝĞƐ

/ŶĚƵƐƚƌŝĂůƐ

dĞůĞĐŽŵŵƵŶŝĐĂƚŝŽŶ^ĞƌǀŝĐĞƐ

,ĞĂůƚŚĂƌĞ

&ŝŶĂŶĐŝĂůƐ

ŶĞƌŐLJ

ŽŶƐƵŵĞƌŝƐĐƌĞƚŝŽŶĂƌLJ

/ŶĨŽƌŵĂƚŝŽŶdĞĐŚŶŽůŽŐLJ

ŽŶƐƵŵĞƌ^ƚĂƉůĞƐ

DĂƚĞƌŝĂůƐ

ϬďƉ ϭϬďƉ ϮϬďƉ ϯϬďƉ ϰϬďƉ ϱϬďƉ ϲϬďƉ ϳϬďƉ ϴϬďƉ ϵϬďƉ ϭϬϬďƉ

42 The Long & Short of It | Securities Lending Market Review

ŽƵŶƚƌŝĞƐ
йĐŚĂŶŐĞŽŶLJĞĂƌĂŐŽ >ŽĂŶsŽůƵŵĞŝŶϮϬϭϬ >ŽĂŶ&ĞĞƐŝŶϮϬϭϬ
Yϭ YϮ Yϯ Yϰ Yϭ YϮ Yϯ Yϰ
'ƌĂŶĚdŽƚĂů Ͳϯ͘Ϭ нϬ͘ϴ Ͳϯ͘ϯ нϮ͘ϳ нϬ͘ϴ Ͳϯϱ͘ϵ ͲϮϯ͘Ϭ нϱ͘ϲ
EŽƌƚŚŵĞƌŝĐĂ Ͳϵ͘ϵ Ͳϵ͘ϱ Ͳϲ͘Ϯ нϬ͘Ϭ нϱϰ͘Ϭ Ͳϱϲ͘ϲ Ͳϯϳ͘ϲ нϭϲ͘ϱ
ĂŶĂĚĂ нϱ͘ϲ нϭϭ͘ϳ нϭϯ͘ϳ нϭϮ͘ϲ Ͳϱ͘ϳ нϭϮ͘ϴ нϰ͘ϰ Ͳϭϴ͘ϲ
hŶŝƚĞĚ^ƚĂƚĞƐ Ͳϵ͘ϵ Ͳϵ͘ϲ Ͳϲ͘ϯ ͲϬ͘ϭ нϱϱ͘Ϭ Ͳϱϳ͘ϭ Ͳϯϴ͘Ϭ нϭϳ͘Ϭ
ƵƌŽƉĞ нϳ͘ϱ нϭϳ͘Ϭ Ͳϰ͘Ϭ нϭ͘ϲ Ͳϯϱ͘Ϯ ͲϯϬ͘ϰ Ͳϵ͘ϭ Ͳϴ͘Ϭ
ƵƐƚƌŝĂ нϭϯ͘ϱ нϭϴ͘ϵ нϭϳ͘ϳ нϱϲ͘ϱ нϮϵ͘ϰ Ͳϱϲ͘ϵ Ͳϱϴ͘Ϭ Ͳϳϲ͘ϭ
ĞůŐŝƵŵ ͲϰϮ͘ϰ ͲϮϬ͘ϲ ͲϰϮ͘Ϭ нϲ͘ϱ ͲϭϮ͘ϯ нϲϵ͘ϯ Ͳϵ͘ϲ нϭϯϰ͘ϳ
ĞŶŵĂƌŬ нϭϰ͘Ϭ нϮϭ͘ϭ нϲϱ͘ϱ нϰϲ͘ϲ ͲϰϮ͘ϯ Ͳϯϰ͘ϴ Ͳϯϯ͘ϱ Ͳϯϳ͘Ϭ
&ŝŶůĂŶĚ нϮϯ͘ϴ нϮϲ͘ϭ нϭ͘ϰ нϮ͘ϲ Ͳϱ͘ϴ Ͳϰϲ͘ϰ ͲϮϱ͘ϰ нϱϯ͘ϱ
&ƌĂŶĐĞ Ͳϲ͘ϰ Ͳϭϲ͘Ϭ Ͳϯϲ͘ϱ Ͳϯϯ͘ϵ Ͳϲϲ͘ϭ Ͳϭϯ͘Ϭ Ͳϱϱ͘ϳ Ͳϱϰ͘ϭ
'ĞƌŵĂŶLJ ͲϮ͘Ϯ нϰϬ͘ϳ нϭϮ͘Ϭ Ͳϭ͘ϳ нϮϯ͘Ϯ Ͳϯϭ͘ϳ нϭϴϳ͘Ϭ нϮϴ͘ϵ
'ƌĞĞĐĞ нϱ͘ϱ Ͳϯϳ͘ϲ Ͳϵϭ͘Ϭ Ͳϴϵ͘ϯ нϭϴϱ͘ϵ нϯϲϰ͘Ϭ нϳϰϱ͘ϰ нϵϬϬ͘ϲ
,ƵŶŐĂƌLJ нϭϮϴ͘ϯ нϲϵ͘ϵ нϭϰ͘ϭ нϰ͘Ϯ Ͳϴϵ͘ϯ Ͳϴϵ͘ϭ Ͳϲϲ͘ϯ Ͳϯϭ͘ϯ
/ƌĞůĂŶĚ нϲϳ͘ϰ ͲϯϬ͘ϲ ͲϴϮ͘ϱ Ͳϴϯ͘Ϭ ͲϲϬ͘ϰ нϱϱ͘ϭ нϮϲϬ͘ϰ нϮϯϴ͘ϰ
/ƚĂůLJ Ͳϵ͘ϯ Ͳϭϵ͘ϰ ͲϰϮ͘ϵ Ͳϰϯ͘ϴ нϱϵ͘Ϯ нϮ͘ϴ нϱ͘ϯ нϴϮ͘ϰ
>ƵdžĞŵďŽƵƌŐ нϭϴ͘ϱ нϮϵ͘ϴ ͲϮϭ͘ϰ ͲϮϮ͘ϵ Ͳϯϭ͘Ϯ ͲϮϬ͘ϵ ͲϬ͘ϱ нϭϴ͘ϳ
EĞƚŚĞƌůĂŶĚƐ нϬ͘ϱ нϯϱ͘Ϭ нϭϲ͘ϲ нϮϯ͘ϴ Ͳϰϵ͘Ϭ Ͳϰϳ͘ϴ ͲϮϭ͘ϱ ͲϮϱ͘ϯ
EŽƌǁĂLJ нϭϮ͘ϯ нϮϵ͘ϲ ͲϮ͘ϳ ͲϯϮ͘ϰ нϯ͘ϴ Ͳϭϰ͘Ϭ ͲϮϮ͘ϵ нϵ͘ϵ
WŽůĂŶĚ ͲϮϱ͘ϴ нϰϯ͘ϭ нϰϮ͘Ϭ нϴϴ͘ϭ Ͳϯϰ͘ϭ Ͳϯϲ͘ϳ Ͳϲϯ͘ϰ Ͳϯϳ͘Ϯ
WŽƌƚƵŐĂů Ͳϰϱ͘ϰ Ͳϵ͘ϱ ͲϰϬ͘ϯ Ͳϭϰ͘ϵ нϭϵ͘ϰ нϯϭ͘ϴ нϮϯ͘ϭ нϯϯ͘Ϭ
ZƵƐƐŝĂ Ͳϰ͘Ϯ нϭϮϮ͘ϭ нϮϯϰ͘ϵ нϮϭϳ͘ϲ Ͳϴϱ͘ϱ Ͳϱϯ͘ϱ Ͳϱϯ͘ϰ ͲϱϮ͘ϯ
^ƉĂŝŶ нϱϮ͘ϳ нϱϮ͘ϴ нϮϳ͘ϯ нϯϯ͘ϱ Ͳϱϯ͘ϴ Ͳϰϭ͘ϯ ͲϭϮ͘Ϯ нϰ͘ϰ
^ǁĞĚĞŶ нϰϯ͘ϯ нϵ͘ϴ Ͳϭϵ͘ϱ нϳ͘ϱ Ͳϱϲ͘ϳ ͲϯϬ͘ϴ Ͳϰϲ͘ϱ нϭϰ͘ϱ
^ǁŝƚnjĞƌůĂŶĚ Ͳϲ͘ϵ ͲϮϬ͘ϳ ͲϯϮ͘Ϯ ͲϯϮ͘ϲ Ͳϱϲ͘ϰ Ͳϯϳ͘ϵ нϮϴ͘ϳ ͲϮϲ͘ϭ
hŶŝƚĞĚ<ŝŶŐĚŽŵ нϴ͘Ϭ нϰϱ͘ϵ нϮϴ͘Ϯ нϯϴ͘ϴ Ͳϯϴ͘ϴ ͲϰϮ͘ϵ нϴ͘ϵ нϴϵ͘ϭ
ƐŝĂ нϯϰ͘ϲ нϱϰ͘Ϭ нϲϭ͘ϱ нϱϱ͘ϭ Ͳϯϵ͘Ϭ Ͳϱϳ͘ϴ ͲϮϱ͘Ϯ Ͳϭϲ͘ϲ
ŚŝŶĂ нϭϰϴ͘ϰ нϲ͘ϱ нϭϭϯ͘Ϭ Ͳϲϲ͘ϱ нϰϴ͘ϯ нϭϲϰ͘ϯ нϮϭϯ͘ϭ Ͳϲϱ͘ϰ
,ŽŶŐ<ŽŶŐ нϯϯ͘ϱ нϱϮ͘Ϭ нϴϲ͘ϳ нϯϯ͘ϯ Ͳϰϱ͘ϵ Ͳϰϱ͘ϭ Ͳϯϳ͘ϲ Ͳϯϱ͘Ϭ
/ŶĚŝĂ Ͳϲϱ͘ϰ ͲϳϮ͘ϭ Ͳϴϳ͘ϰ Ͳϱϯ͘ϯ Ͳϳϵ͘ϴ Ͳϯϱ͘ϵ Ͳϭϳ͘ϵ ͲϮϳ͘ϳ
:ĂƉĂŶ нϮϮ͘ϴ нϰϵ͘ϰ нϰϯ͘ϳ нϱϲ͘ϭ ͲϳϬ͘ϯ Ͳϳϰ͘ϯ Ͳϰϴ͘ϱ ͲϮϮ͘Ϯ
WŚŝůŝƉƉŝŶĞƐ Ͳϰϳ͘Ϭ ͲϱϬ͘ϭ Ͳϰϴ͘ϱ Ͳϵ͘ϳ Ͳϰϴ͘ϰ Ͳϰϵ͘ϭ Ͳϰϲ͘ϳ Ͳϭϯ͘ϴ
^ŝŶŐĂƉŽƌĞ нϰϱ͘ϵ нϱ͘ϵ Ͳϭϭ͘Ϭ Ͳϲ͘ϴ нϱϴ͘ϳ ͲϳϮ͘ϵ нϭϵ͘ϳ Ͳϯ͘ϭ
^ŽƵƚŚ<ŽƌĞĂ нϭϬϯ͘ϱ нϭϬϰ͘ϴ нϭϰϯ͘ϰ нϭϲϯ͘ϭ Ͳϯ͘Ϭ Ͳϭϭ͘ϳ ͲϮϰ͘ϲ ͲϯϮ͘ϳ
dĂŝǁĂŶ нϰϱϴ͘ϰ нϯϳϵ͘ϴ нϱϴϵ͘ϲ нϯϮϮ͘ϯ Ͳϴ͘Ϯ нϭϵ͘ϯ нϮϰ͘Ϯ нϲ͘ϯ
dŚĂŝůĂŶĚ нϭϳϯ͘ϳ нϰϴ͘ϱ Ͳϰϲ͘ϵ ͲϮϱ͘ϰ нϭϮ͘ϳ ͲϭϬ͘Ϭ Ͳϭ͘Ϯ ͲϰϬ͘ϰ
ƵƐƚƌĂůĂƐŝĂ нϳϱ
нϳϱ͘ϭ
ϭ нϱϰ ϴ
нϱϰ͘ϴ нϯ Ϯ
нϯ͘Ϯ нϭϰ ϳ
нϭϰ͘ϳ ͲϰϮ͘ϳ
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dƵƌŬĞLJ нϯϮ͘ϳ нϮϴ͘ϱ нϰϯ͘ϰ нϭϬϰ͘ϲ ͲϮϵ͘ϳ ͲϰϬ͘ϵ ͲϱϬ͘ϲ Ͳϲϲ͘Ϭ
hŶŝƚĞĚƌĂďŵŝƌĂƚĞƐ Ͳϱϱ͘ϱ ͲϰϬ͘ϯ нϰ͘ϳ нϭϮϵ͘Ϭ ͲϰϮ͘ϵ ͲϮϬ͘Ϭ Ͳϲϰ͘ϵ Ͳϭϰϵ͘Ϭ

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йĐŚĂŶŐĞŽŶLJĞĂƌĂŐŽ >ŽĂŶsŽůƵŵĞŝŶϮϬϭϬ >ŽĂŶ&ĞĞƐŝŶϮϬϭϬ
Yϭ YϮ Yϯ Yϰ Yϭ YϮ Yϯ Yϰ
ƋƵŝƚLJ нϮϯ͘Ϯ нϭϲ͘ϱ нϮ͘ϳ нϰ͘ϴ ͲϮϵ͘ϳ Ͳϰϲ͘ϰ ͲϮϮ͘ϲ нϭϳ͘ϳ
Z нϯϯ͘ϭ ͲϭϮ͘ϳ ͲϮϭ͘ϯ Ͳϭϱ͘Ϭ ͲϮϯ͘ϭ ͲϰϮ͘ϵ ͲϮϯ͘ϰ нϭ͘Ϯ
ƋƵŝƚLJ нϮϮ͘ϴ нϭϳ͘Ϯ нϯ͘ϲ нϱ͘ϲ Ͳϯϯ͘ϱ Ͳϰϳ͘ϲ ͲϮϮ͘ϱ нϮϮ͘ϰ
džĐŚĂŶŐĞdƌĂĚĞĚ&ƵŶĚ нϭϳ͘Ϭ нϭϲ͘ϵ нϴ͘ϴ нϭϰ͘ϲ нϮϳϭ͘ϯ нϯϴ͘ϳ нϰ͘ϭ нϯϲ͘ϯ
Z/d нϮϴ͘Ϭ нϯϳ͘ϲ нϴ͘Ϭ нϰ͘ϯ нϭ͘ϭ ͲϰϬ͘Ϭ Ͳϰϵ͘ϯ Ͳϱϭ͘ϲ
ŽƌƉŽƌĂƚĞŽŶĚƐ Ͳϰ͘ϯ Ͳϱ͘Ϭ Ͳϳ͘ϳ нϲ͘ϭ нϱϲϮ͘Ϯ нϯϳ͘ϳ нϭϱ͘ϭ нϰϮ͘ϭ
ŽŶǀĞƌƚŝďůĞďŽŶĚ нϭϱϰ͘ϳ нϭϯϳ͘ϱ нϱϵ͘ϭ нϭϳϲ͘ϰ нϮϴϯ͘Ϯ нϯϱ͘ϱ Ͳϯϯ͘ϳ нϰϮ͘Ϭ
ŽŶǀĞƌƚŝďůĞƉƌĞĨĞƌƌĞĚ нϱϯ͘Ϭ нϴϱϰ͘ϲ нϵϲϬ͘ϴ нϭ͕ϭϲϵ͘ϴ ͲϳϬ͘ϵ ͲϭϯϬ͘ϵ Ͳϭϭϳ͘ϯ Ͳϭϭϭ͘Ϯ
ŽƌƉŽƌĂƚĞŽŶĚ Ͳϲ͘ϰ Ͳϳ͘ϭ Ͳϵ͘ϰ нϮ͘ϳ нϱϰϱ͘Ϯ нϯϵ͘Ϭ нϭϳ͘ϯ нϰϯ͘ϲ
,LJďƌŝĚWƌĞĨĞƌƌĞĚ нϭϯϮ͘ϵ нϯϳ͘Ϯ нϴϱ͘ϰ нϲϰ͘ϵ нϮϵ͘ϯ Ͳϰϴ͘ϲ Ͳϱϯ͘ϲ Ͳϰϳ͘ϱ
DŽƌƚŐĂŐĞͲĂĐŬĞĚͬŐĞŶĐŝĞƐ Ͳϯϴ͘Ϯ ͲϮϴ͘ϲ ͲϮϮ͘ϰ ͲϮϬ͘ϴ нϭϭϳ͘ϭ нϮϯϳ͘Ϯ нϯϵ͘ϵ нϮϯϭ͘ϭ
'ŽǀĞƌŶŵĞŶƚŐĞŶĐŝĞƐ ͲϮϴ͘Ϯ ͲϮϲ͘ϲ Ͳϯϳ͘ϰ Ͳϰϰ͘ϰ нϭϮϬ͘ϲ нϮϱϭ͘ϱ нϭϮϯ͘ϱ нϭϰϯ͘ϵ
DŽƌƚŐĂŐĞͲĂĐŬĞĚ^ĞĐƵƌŝƚŝĞƐ Ͳϰϳ͘ϵ ͲϯϬ͘Ϯ Ͳϴ͘ϱ нϱ͘ϲ нϭϭϯ͘ϭ нϮϭϵ͘Ϯ Ͳϭϳ͘ϳ нϭ͕ϬϴϮ͘ϳ
KƚŚĞƌ&ŝdžĞĚ ͲϮϱ͘ϯ ͲϮϵ͘Ϭ ͲϮϱ͘ϴ ͲϯϬ͘ϭ нϭϲϵ͘ϯ нϮ͕ϯϱϬ͘ϱ нϱϭϯ͘Ϭ нϭϯ͘ϵ
&ŝdžĞĚ/ŶĐŽŵĞ Ͳϲϯ͘ϭ Ͳϲϲ͘ϯ ͲϲϬ͘ϵ ͲϮϴ͘ϴ нϱϱ͘ϱ нϲϲ͘ϴ нϮϬ͘ϯ нϯϵ͘Ϯ
'ŽǀĞƌŶŵĞŶƚ нϭ͘ϱ нϯ͘ϰ ͲϮϬ͘ϵ ͲϮϯ͘ϰ нϭϯϳ͘ϭ нϱϯϱ͘ϭ нϰϭϭ͘ϴ нϱϵ͘ϰ
/ŶĨůĂƚŝŽŶWƌŽƚĞĐƚĞĚ^ĞĐƵƌŝƚLJ Ͳϯϲ͘ϱ ͲϰϮ͘ϭ ͲϮϲ͘ϲ Ͳϯϰ͘ϵ нϮϬϬ͘ϲ нϴϲ͘ϰ Ͳϲϳ͘ϭ Ͳϯϵ͘ϯ
h^dƌĞĂƐƵƌŝĞƐ ͲϯϮ͘ϵ ͲϮϰ͘ϭ Ͳϳ͘ϭ нϭϭ͘Ϯ нϮϯ͘ϳ Ͳϯϲ͘ϴ Ͳϲϵ͘ϵ ͲϯϬ͘ϵ
dƌĞĂƐƵƌŝĞƐŽŶĚ Ͳϯϯ͘ϲ ͲϮϬ͘ϴ Ͳϴ͘ϴ Ͳϭϵ͘ϱ нϭϳϴ͘Ϯ нϱϯ͘ϱ ͲϲϮ͘ϭ ͲϮϭ͘ϵ
dƌĞĂƐƵƌLJŝůů ͲϱϬ͘ϲ Ͳϰϱ͘Ϭ Ͳϭϰ͘ϵ нϭϯ͘ϲ ͲϮϬ͘ϯ Ͳϵ͘ϴ Ͳϰϯ͘ϯ нϳ͘ϭ
dƌĞĂƐƵƌLJEŽƚĞ ͲϮϴ͘ϱ Ͳϭϵ͘ϲ Ͳϱ͘ϰ нϭϴ͘ϯ нϮ͘ϱ Ͳϰϲ͘ϰ Ͳϳϰ͘ϳ Ͳϰϭ͘Ϯ

The Long & Short of It | Securities Lending Market Review 43

 Upcomingevents

Industry Events Calendar 2011

• 27th January GSL & ISJ London Summit, London
• 13th - 16th February 17th Annual IMN Beneficial
Owners’ International Securities Lending Summit
Scottsdale, US
• 24th February GSL & ISJ Nordic Summit, Stockholm
• 1st - 3rd March 8th Annual PASLA/RMA Conference
on Asian Securities Lending, Singapore
• 7th April SunGard City Day, Vienna
• 7th April GSL Asian Summit, Shanghai/Beijing
• 11th May SunGard City Day, Frankfurt
• 12th May GSL North American Summit, Chicago
• 12th May SunGard City Day, Hong Kong
• 20th June SunGard City Day, New York
• 28th - 30th June ISLA International Securities
Lending Conference, Lisbon
• 6th July SunGard City Day, London
• 15th September GSL & ISJ Boston Summit, Boston
• 20th - 21st September IMN European Beneficial
Owners’ Securities Lending Summit, London
• 29th September SunGard City Day, Zurich
• 6th October GSL & ISJ Dutch Summit, Amsterdam
• 10th -13th October 28th Annual RMA Conference, Naples
• 3rd November GSL & ISJ London Summit, London
• 10th November SunGard City Day, Dubai
• 1st December GSL Middle East Summit, Abu Dhabi
44 The Long & Short of It | Securities Lending Market Review
 The Securities Lending Glossary
AFME Association of Financial Markets Europe
APJAsia-Pacific & Japan
ASICAustralian Securities and Investments Commission
ASLAAustralian Securities Lending Association
Asset managementThe professional management of investments such as
stocks, bonds and real estate.
Basel Committee on Banking SupervisionProvides a forum for
regular cooperation on banking supervisory matters, aiming to improve the quality
of banking supervision around the globe.
Basel IIIAn update to the Basel Accords (recommendations on banking laws
and regulations in the G20 countries) which are currently under development.
Under the new rules, banks will have to increase their core tier-one
capital ratio
Beneficial owner The actual owner of the asset, but that does not mean
they are necessarily the legal owner. The beneficial owner enjoys the benefits of
ownership even though the asset is under another name.
Broker-dealerAn agent that trades securities for its own account or on
behalf of its customers.
Buy-side firms This refers to firms that invest money or ‘buy’ securities.
Capital requirements A bank regulation which tells banks and
depositories how they must handle their capital. They are put in place to
ensure that institutions are not holding investments that increase default risk
and that they have enough capital to cover operating losses.
Cash collateral Negotiable securities such as certificates of deposit and
gilt-edged securities that are accepted as collateral by lenders because of their
low risk and ability to be converted into liquidity.
Cash reinvestment Where the service provider reinvests cash collateral
under the terms agreed with the client.
CASLA Canadian Securities Lending Association
Collateral management A process of dealing with collateral
transactions, where its main function is reducing credit risk in unsecured
financial transactions.
Collateral pools Cash collateral provided by the borrowing party in a
securities-lending transaction, which is then pooled and invested in short-
term securities to generate return.
Contract for difference (CFD) A contract between two parties where
the issuer agrees to pay the buyer the difference between the asset’s current
value and its value at time contract was made. The buyer pays the issuer if the
difference is negative.
Corporate actions An action which is part of a process that brings change
to a company’s stock, such as stock splits, mergers, dividends and acquisitions.
Some corporate actions have a direct or indirect impact on the shareholders,
while others do not impact them at all.
Covered short selling The opposite of naked short-selling (see below)
where the short seller has a binding stock lending agreement in place.
Custodial agent An agent, bank or trust which looks after an individual’s
mutual funds or an investment firm’s assets.
Custodian bank Financial institutions that look after the financial assets of
an individual or firm.
Dodd-Frank Wall Street Reform and Consumer Protection
Act A US federal statute that was signed into law in July 2010 to promote the
financial stability of the US and to put an end to the bailing-out of the banks.
Exchange-traded fund (ETF) A security that tracks like a stock on an
exchange instead of having its net asset value evaluated every day like a mutual
fund. It tracks an index, commodity or pool of assets like an index fund.
Fed Federal Reserve (US)
FSA Financial Services Authority (UK)
Hedge fund A largely unregulated portfolio of investments that are catered
for sophisticated investors. These funds are often partnerships or mutual funds
that aim to make high returns by taking advantage of ups and downs in the
markets.
IOSCO International Organisation of Securities Commission (US)
IRS Internal Revenue Service (US)
ISDA International Swaps and Derivatives Association (US)
ISLA International Securities Lending Association
Liquidity The more liquid an asset, the easier it is to convert it into cash.
Liquidity is also known as marketability.
Margin collection In securities trading, it’s the difference between the loan
amount advanced by a stockbroker to a speculator.
Market maker A broker-dealer firm that creates a market for financial
obligation. They hold a certain number of shares of a particular security to ease
up trading in that asset. Market makers therefore help to keep the financial
markets running efficiently.
Naked short-selling A practice that is illegal in many countries, where
the short seller does not borrow the security in the first place or does not
ensure that it can be borrowed. It allows manipulators to drive down stock
prices, ignoring normal stock supply and demand patterns.
NAPF National Association of Pension Funds (UK)
NY Fed Federal Reserve Bank of New York
OCC Options Clearing Corporation
PASLA Pan-Asia Securities Lending Association
Prime broker A broker who provides a special group of services to clients
such as securities lending, leveraged trade executions and cash management.
Prime custodian A custodian who takes responsibility for managing a
client’s custody relationships when they have several global custodians across a
number of portfolios.
Private equity Equity capital that is not put on the public exchange, where
investors and funds make direct investments into private firms or buy out
public companies that results in a delisting of private equity.
Proprietary desk/trader A trader who deals with a securities firm’s
transactions that affect the firm’s accounts but not the accounts of its clients. The
bank uses its own balance sheet to take positions in shares, bonds or commodities.
Proxy voting Where someone acts on behalf of a company member at a
company meeting where at least one vote is taken.
Repo A repurchase agreement which is the sale of securities tied to an
agreement to buy the securities back at a later point.
Request for proposal (RFP) A document used by many organisations
to receive offers of services from potential suppliers. It enables organisations to
receive the right information to make good business decisions.
RG 196 Australian short selling regulation that was introduced by the
Australian Securities and Investments Commission in April 2010.
Risk mitigationTaking efforts to reduce the exposure to risk. Also called
risk reduction.
Risk versus return The balance between the risk of loss and the potential
return. Usually, the higher the risk of loss, the greater the potential return,
while the lower the risk of loss, the lower the potential return.
RMA Risk Management Association (US)
SAS70 audits Standards that an auditor must use to assess the contracted
internal controls of a service organisation.
SEC Securities and Exchange Commission (US)
Securities lending The lending of securities from one party to another in
return for a fee. The borrower is obliged to return them either on demand or at
the end of the agreement.
Sell-side firms Investment banks that provide buy-side firms with services
and products.
SFC Securities and Futures Commission (US)
Short selling An advanced trading strategy in securities lending where the
short seller hopes to capitalise from a fall in the asset price. ‘Going short’ is the
opposite of ‘going long’.
SIFMA Securities Industry and Financial Markets Association (US)
Single stock future (SSF) A futures contract with the underlying asset
being one particular stock. It gives investors more capabilities to leverage
themselves in the market.
Swap-based ETF ETFs that use swap arrangements to replicate markets
where there may be difficult access or poor liquidity. Unlike standard ETFs,
swap-based ETFs hold a pool of securities which may have no relation at all to
the index being tracked.
Third-party lender A firm specialising in securities lending which is not
the custodian of the beneficial owner’s assets.
Triparty collateral managers These provide a centralised service to
manage, clear and hypothecate collateral among different OTC counterparties
in the market.
Workflow management Managing and defining a series of tasks within
an organisation to produce a final outcome.
The Long & Short of It | Securities Lending Market Review 45
 Company Profile:Northern Trust

Northern Trust
Northern Trust has been lending securities on behalf Transparency and technology
of clients for 30 years and continues to operate at the Northern Trust has continually invested in new technology
forefront of the industry. Broad market coverage, innovative and reporting tools and these play a key role in its securities
reporting and dedicated risk management are among the lending programme. Through regular client reporting
key components in its successful lending track record. and service reviews, all aspects of client programmes are
“Our securities lending programme aims to provide diligently monitored, including lending performance,
clients with flexible lending options and an opportunity collateralisation and adherence to pre-agreed parameters
for optimising returns on loaned securities,” says Sunil and investment guidelines.
Daswani, Northern Trust’s International Head of Client
Relations. “Ultimately, we seek to enhance the overall In addition, clients can access Northern Trust’s new
return of their portfolios without impacting the underlying securities lending dashboard, a specialised technology and
investment strategy of their investment managers.” reporting platform integrated with its client reporting web
portal. “This allows clients to access instant information
Scale and flexibility on their lending programmes,” says Daswani, “and is part
Northern Trust’s lending programme draws on the resources of our commitment to providing clients with transparency,
and global market presence of one of the industry’s most allowing them to actively monitor and control their lending
established market participants. These include 24-hour activities on a daily basis.”
trading access to equity and fixed-income markets, now
lending in 50 markets worldwide and continually expanding
into new ones where opportunities exist.
Flexibility is key and clients have a range of collateral
choices and investment choices for cash collateral.
Northern Trust can also work with clients to develop
customised collateral funds, helping them develop their
own investment criteria and customised investment
programmes. “We can help clients find the mixture of
risk and reward that suits them and with which they
are comfortable,” says Daswani, “allowing them to
participate within their own individual risk tolerances.”

Dedicated risk management

A dedicated risk management team for securities
lending continually implements and reviews risk
practices, while senior risk committee oversight takes
place over different aspects of the lending process.
Senior executives at Northern Trust also occupy senior
positions in many of the industry’s key associations,
bolstering the team’s ability to anticipate and shape
positive change for clients.

Contact:
Sunil Daswani
International Head of Client
Relations
T: +44 (0)20 7982 3850
E: sunil_daswani@ntrs.com

46 The Long & Short of It | Securities Lending Market Review

 Company Profile:SunGard

SunGard, a Fortune 500 company, is the largest privately
held business software and IT services company with annual
revenue in excess of $5 billion. SunGard serves more than
25,000 customers in more than 50 countries, including the
world’s 25 largest financial services companies.
SunGard provides a comprehensive suite of securities finance
solutions: from trade initiation through to final return;
including order routing, trading, position management,
operations, accounting, settlement, transaction analytics and
benchmarking, and trade automation services. With over 20
years experience SunGard has a global linked community of
securities finance users around the world.
• SunGard Apex enables customers to manage their entire
international securities finance business in a single
framework. From position management, trading and
P&L at the front end, through collateral and operational
management in the middle office, to settlement in the
back office, Apex is a complete international solution.
• SunGard Astec Analytics solutions leverage an expansive
database of daily securities lending transactional data
to give ‘market color’ to the trader, as well as providing
performance measurement and program management
insight.
• Global One’s experience with the lender community
means that beneficial owners, asset managers and global
custodians alike benefit from the reliability and depth of
functionality that Global One has delivered over many
years, bringing a quick route to market coupled with
operational efficiency to your lending program.
• SunGard Loanet provides a fully comprehensive,
integrated, regulatory compliant solution for N.A.
Domestic securities lending, along with access to a broad
securities finance community for facilitation of inter-
market automation services, such as contract compare.
• SunGard Martini provides integrated global trading and
operations support for financing institutions worldwide.

17 out of the world’s top 20 banks use one or more products from
SunGard’s suite of solutions for Securities Finance.

Find out more: www.sungard.com/securitiesfinance

The Long & Short of It | Securities Lending Market Review 47

Crosswordcompetition

Has
Securities
Lending
twisted
your mind

CRYPTIC CROSSWORD
sufficiently
to think
‘cryptically’?

Think
you can
solve the
crossword in
the fastest
time? Well if
you do, you
can win a
Kindle Wi-Fi.

he
in t
a t ing ms &
cip e ter on
arti h
: B y p e to t nGard nce
CE u agre by Su sfina
OTI h ie
A L N tion yo et fort ecurit
LEG mpeti ons s om/s
co nditi ard.c
co sung
w.
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48 The Long & Short of It | Securities Lending Market Review

 Crosswordcompetition

1 2

To compete, send a copy of the 3

completed crossword with your
contact details to: 4 5 6
Crossword Competition
2i Media,
One Angel Wharf,
7 8
59 Eagle Wharf Road,
London, 9 10
N1 7ER,
or email us at 11
stephanie.baxter@efunds.tv
12 13

Entries for the prize crossword

14 15 16
must be received by
February 28th, 2011.
The first three correct
entries drawn will win a
Kindle Wi-Fi and the winners will
be announced on 17
www.sungard.com/
securitiesfinance 18 19 20

together with the solution.

21

22

23 24

25 26 27

28 29 30

31

32

33

34 35

Across
1 Deviate strangely with a bad Roman man to get an off-shoot. (10)
4 One’s own business supports an irate short year gone bad. (10)
6 Tied up with no love for an obligation. (4)
7 Common dictated statement initially used for asset type. (3)
9 Big boat that helped get us over a rough patch twice over. (4)
10 Four-wheel-drive vehicle with its heart changed from thee to me. (3)
15 It’s a protection sort of thing! (14)
17 Totally exhausted but it gives you the return you want. (3,2)
18 Two American lawmakers one of whom doubles as a sausage? (4-5)
20 The next big 4 building material that lacks the silent part of knowledge. (4)
21 Of French mistake that puts contractors in the wrong. (7)
22 A bear grit wrongly will get a good deal! (9)
24 Part of the coffee culture creates the return. (3)
25 A good part of cleansing a pore leads to a PASLA event. (9)
27 A vulnerable position frowned upon by the authorities! (5)
29 Does it sound like the top of the range sporty version of arachnoids? No,
rather ten and real treats initially to be invested. (3)
31 A local mismatch to a later redesign provides a safeguard. (10)
32 and 35 Your ultimate return on your investment. (5,8)
33 Toy cenotaph when mixed with the periodic table’s main element and me
provides a way to get more out of it. (13)
34 A large but vertically challenged novel approach to selling securities? (3,3,5)
35 See 32
Down
2 A motorised caravan reversed around an article is a risky proposition. (3)
3 LA spice turned around to give the hottest deal. (7)
5 Bad spin with Europe in other words creates a similar type of asset. (2,6)
6 It sounds like Mr Fawlty is involved as well, this time in Switzerland. (5,2)
7 Rag top automobile that doubles as an equity stake, eventually. (11)
8 Where Don Johnson meets the financing crowd this year. (5)
11 How much is employed may be a useful metric. (11)
12 An important firm announcement made by an LP in the diary? (6,4)
13 The yield gets bigger and better! (11)
14 Have your assets broken the law? They are kept here until they need to be
sent elsewhere. (7)
16 Cyrillic Russia without a hundred leads to a medium through which to trade. (3)
19 This method of trading is certainly above board! (3)
23 I heard a maiden strike a light to get a different maturity. (8)
26 Not one for democracy, I am telling you how to vote! (5)
28 Echo, tango, foxtrot? (3)
30 Beater redefined to give you your money back. (6)

The Long & Short of It | Securities Lending Market Review 49

 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

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