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Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
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Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Contents
Features
Beneficial Owner & Pension Fund
Securities Lending
Handbook 2011 2 The Securities Lending Landscape
Craig McGlashan examines how the last two years have shaped
securities lending
Risk Return
GSL
Global
Securities
Lending
Manging director:
20 Collateral Management, Efficiency and Optimisation
Jon Hewson How technology can play a role in ensuring efficient and
(jon.hewson@2i.tv)
optimised collateral management, with SunGard
Publisher:
Mark Latham
(mark.latham@2i.tv)
22 The Securities Lending Industry Awards 2010
Round-up of the 2010 Awards and the ceremony at the Dorchester,
2i Media
London in July
One Angel Wharf
Eagle Wharf Road
24 GSL Summits Road Report
London N1 7ER
T: +44 (0) 20 7183 8470 26 Beneficial Owners’ Guide to Securities Lending
F: +44 (0) 20 7250 0350
W: www.ISJ.tv in association with Data Explorers
© 2010 2i Media 40 Market Leader Profiles
All rights reserved.
No part of this publication may An alphabetical directory of the best pactitioners:
be reproduced, in whole or in
part, without prior written BBH, CITI, Comit, Deutsche Bank, eSecLending, ING, JP Morgan, RBC
permission from the publishers.
ISSN 1744-151X. Dexia, SecFinex, State Street, Sungard
4
Introduction to Securities Lending Course
Securities Lending has been acknowledged by regu- Book your place online or call us
lators around the world as an important part of the today on:
capital markets. Over the past two years investors, + 44 (0)8452 30 30 65
regulators and the media have dug deeper into this
critical component of the securities trading universe.
WHAT YOU WILL LEARN
FinTuition will inform delegates on the pro-
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nues for investors and other market participants.
» Trading Strategies
» Risks involved with Securities
A 100% course satisfaction, rated “Excellent” by our
Lending
recent delegates in July 2010.
» Collateral Management
Course details »» » Routes to Market
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Introduction to Securities Lending on the business
» New and Emerging Lending Markets
Where: » Central Counter Party
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Course fee for ISLA members: .........................................................
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Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
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Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
8
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
9
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
is a front office activity. Beneficial owners STAUNTON: That’s a good question, and it
choosing securities lending programmes is one of education. If you’ve appointed an
with cash reinvestment need to apply the agent lender for a specific role, that lender
same due diligence process and monitoring should have the capability to manage,
of managers to cash reinvestment funds calculate and record risk and provide a
that they apply to other manager mandates. very good and professional level of cash
I would encourage all owners lending reinvestment as good as any money manager.
securities against cash to view their lending I think there are players who can do that very
programme as a cash fund investment, with well. As a firm we have that capability so we
all the same risk and return considerations as agree with the statement – it is a front office
any other money market fund investment. I function.
would also encourage all beneficial owners I would go a step further too: because
lending against cash to reflect whether they it’s defined as front office it needn’t go to
really consider that the additional revenues a traditional fund
On loan versus cashmanagement
collateral ($m) firm – if
they may receive if they lend against cash you have the capability in-house it’s a good
$1,000,000
$700,000
The graphs below show the slight decline in the use of cash$600,000
collateral over the past year. Figures are for
Q209 and Q210 and come courtesy of the Risk Management Association. 2009 Cash
$500,000 2009 Non-cash
2010 Cash
Key figures: 2009 Total securities on loan ($m) $400,000
Equities: $518,070 2010 Non-cash
$1,000,000 100%
$900,000 90%
$800,000 80%
$700,000 70%
$600,000 60%
2009 Cash 2009 Cash
$500,000 50%
2009 Non-cash 2009 Non-cash
2010 Cash 2010 Cash
$400,000 40%
2010 Non-cash 2010 Non-cash
$300,000 30%
$200,000 20%
$100,000 10%
2009 Cash
$0 0%
Equities Bonds Totals
2009 Non-cash
Equities Bonds Totals
10
80% 2010 Cash
I have multiple
systems that don’t
talk to each other
SECURITIES FINANCE
©2010 SunGard.
Trademark Information: SunGard, the SunGard logo and the products listed in this document are trademarks or registered trademarks of SunGard Data
Systems Inc. or its subsidiaries in the U.S. and other countries. All other trade names are trademarks or registered trademarks of their respective holders.
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Short of Demand?
Short of Demand?
Short selling, a key source of demand for securities lending, has come
under scrutiny from regulators across the globe - here we look at the
actions taken by the US Securities and Exchange Commission
It is probably not essential for beneficial Importantly, it offers no exemption for
owners to understand the details of short- market-makers. Also, companies will be
selling. But it could well help them in required to have written procedures in
making a decision on whether to facilitate place to prevent the execution or display
the practice by lending the stock that of prohibited short-selling transactions.
enables short-sellers to go about their Not a complete prohibition
business. And to understand just why Robert Colby, deputy director of trading
this often controversial practice attracts and markets division at law firm Davis Polk
such attention in difficult markets. and Wardwell says: “It is not a complete
The Securities and Exchange Commission prohibition. It means that a short-seller can’t
(SEC) has been under pressure to introduce execute at the bid price. This means they
new rules on short-selling for some can’t chip away at the price people are willing
time. Approximately 4,400 companies to buy. If, for example, a stock is trading at
have petitioned the SEC to clamp down, 105-110 and a trader was trying to short-
with industry heavyweights such as John sell and it triggered the circuit breaker, they
Mack, chairman of Morgan Stanley, could no longer sell at 105. They could only
blaming short-sellers for perilously say that they were willing to sell at 106 up to
driving down company share prices in 110 and wait for people to come to them.”
2008. The new rules have finally emerged. The SEC is clear in its intent. SEC
What impact are they likely to have? chairman Mary L Schapiro says that the
The SEC’s new rules aim to ‘promote ruling recognises that short-selling can have
market stability and preserve investor both a beneficial and a harmful impact on
confidence’ by placing restrictions on selling the market. She continues: “It is important
stock short if a company is experiencing for the Commission and the markets to have
significant downward price pressure on in place a measure that creates certainty
their share price. The ‘alternative uptick about how trading restrictions will operate
rule’ will restrict short-sellers from driving during periods of stress and volatility.”
down the price of a stock that has dropped There has been considerable debate as
more than 10% in one day. Once this to whether the new rule will achieve its
‘circuit breaker’ is triggered, holders of goal of greater stability. The Securities
the stock will be first in line and can sell Traders’ Association issued a lengthy
their shares before any short sellers. response to the SEC’s regulations, suggesting
Once the circuit breaker has been that they were based on “inadequate
triggered, the rule applies to short sale analysis, a lack of empirical data, and
orders for the remainder of the day’s questionable rationale by the SEC”.
trading, plus that of the following day. It It also accuses the SEC of not being
applies to all equities listed on a national consistent. It says in its letter to the SEC:
securities exchange, whether they are “This inadequacy was noted by SEC
traded on an exchange or over-the-counter. Commissioner Paredes in his opening
12
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Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Short of Demand?
statement... there is an insubstantial “This will impact all international hedgers
empirical basis to support the commission operating in US markets. It will limit their
in adopting the rule, especially in light ability to make profits in falling stocks.
of the rigorous economic analysis that That said, it doesn’t kick in until there has
led the SEC to repeal the ‘original’ uptick been a 10% drop, which is relatively rare,
rule in 2007 after years of study. The but if you sell stock with small volumes
commission bears the burden to justify its it could happen a lot faster. Therefore
rules. It has not done so in this instance.” mid and small cap managers may find
The regulations were voted through the themselves disproportionately affected.”
SEC on a paper-thin 3-2 majority. It is difficult to see how the new
The STA suggests that the new regulation regulations will act to stop additional market
will not resolve the issue of manipulative abuse. The SEC had already introduced
short-selling that it was designed to address. changes to tackle manipulative and naked
As such, it cannot bring about the ‘investor short selling. In normal circumstances, if
trust’ as intended. It will also have significant RBS looks over-valued, the short-sellers
implementation costs. Many broker dealers, move in and create a temporary fall in the
for example, will need to upgrade their share price, but then the shorts go too far
computer systems to ensure that they can and the long investors come in and scoop
distinguish between short-sellers and those up value. Black suggests that much of the
investors who hold stock and wish to sell.
“It is important for the Commission
Exemption sought and the markets to have in
In particular, the STA requested that the
regulator make an exemption for options place a measure that creates
market makers, saying: “The nature of certainty about how trading
the derivatives market is such that market restrictions will operate during
makers must be able to hedge their positions
easily and cheaply to reduce trading costs. periods of stress and volatility”
Failure to do so would cause a decoupling of
prices in the options markets from the prices
Mary L Schapiro, SEC chairman
of the underlying instruments. This would criticism of short selling should properly be
result in reduced liquidity and wider spreads directed at market abuse; for example the
to the detriment of individual investors.” spreading of negative rumours to artificially
The group believes that the regulations depress prices accompanied by short selling.
may be counter-productive, resulting The goal of ‘strengthening public
in less liquidity, greater volatility, and confidence’ is sufficiently nebulous to
wider bid-ask spreads, none of which is make any real judgement on the success of
conducive to boosting investor confidence. the rules difficult. With a relatively small
Furthermore, a short sale restriction majority in favour of the new regulations
that makes it more costly for investors to at the SEC, there may be room for a re-
manage their risk by hedging can hinder examination of the rules on market-makers
the ability of companies to raise capital. and possibly for a full change of heart if the
With the two sides clearly delineated, rules are found to create additional volatility.
what do industry participants believe will Lussan sums up the view of many when he
be the likely outcome of the regulations? concludes: “This is the least bad alternative.
Jerome Lussan, managing director of hedge The market was expecting something
fund consultancy Laven Partners, says: and was afraid it could be worse.” n
14
C E L E B R AT I N G
10 YEARS
eSecLending Delivers
Exchange-traded funds
Exchange-traded funds
Exchange-traded funds, now more than 10 years old, are beginning to offer
a new source of supply for the securities lending and borrowing industry
Exchange-Traded Funds, better known the underlying, because when you go in
as ETFs, celebrate their 10th anniversary the market and buy and sell underlying
in Europe this year. The product has found securities, you’ve got tracking error,
its way from the U.S. into Europe and has execution risk - many problems from
seen impressive growth in virtually every buying those underlying securities.
category: assets managed, funds offered, These ETFs seek to replicate market
traded volumes as well as the number of performance by holding a basket of
issuers, exchanges and user groups involved. securities along with a swap agreement with
Exchange traded funds are low-cost, a third party – often a brokerage – which
tax-efficient investment vehicles that will agree to pay the performance of the
passively track indexes and can be traded index. It is the that ETF holds an exposure
like shares. The fund, which may contain to the market: if the market goes up under
assets such as stocks or bonds, trade at the swap contract, the swap company pays
approximately the same price as the net the ETF company the performance; if it
asset value of its underlying assets. goes down, the ETF pays the swap company.
They are similar to traditional mutual They still have total market exposure,
funds in giving investors an undivided but one had the underlying securities as
interest in a pool of securities. However, assets and one has the swap as the asset.
ETFs do not sell or redeem individual Given the chance of default of the third
shares at net asset value. Instead, financial party, there is a greater concern around
institutions purchase and redeem ETF shares counterparty risk for swap-backed ETFs,
directly from the ETF in the form of units. although UCITS ruling limits this loss to
An in-specie ETF will buy up the 10% of the value of the ETF. The advantage
underlying securities in an index. A of doing a swap back is you get the absolute
company writing an ETF on the FTSE performance of the underlying market.
will go into the market and buy all the The investment bank, which has provided
underlying components of the FTSE shares. a swap has to hedge itself, has written out
These shares are ring-fenced into separate the performance of the FTSE, for example.
accounts, meaning that there is no risk of To hedge itself, the bank would go and
default from a counterparty. Further, there buy all the underlying components of
is full disclosure of the fund’s holdings. that market in the same way that a bank
Within the securities lending world, has bought the underlying securities.
the basic premise is that you have to buy Further, investors can actually buy an
the underlying securities and lend them ETF that gives you the short exposure
out. There is some difficulty in buying to an underlying index. So in the case
16
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Exchange-traded funds
of a FTSE ETF short, if the FTSE goes There are two ways to lend with ETFs: the
down, the ETF increases in value. So underlying shares themselves, or the units.
to do that, the investment bank has to Owners of a unit may lend it themselves,
right short performance swap to the ETF. giving direct potential profit to the owner.
It’s already got the stock, because it’s In Europe, currently over $200bn is
already written a long exposure because invested in ETFs, and an increasing number
it’s already holding the inventory. of issuers and investors are asking for
So, within the swap it can charge a stock options on those underlyings, adds Ralf
loan fee, and charge 100% of the dividend. Huesmann, who works in the Product
It’s like shorting itself but is instead Development Department of Eurex in
‘netting off ’. If you are writing the exposure London, focussing on index products. To
of a 150 million long position and $100 meet market needs, Eurex Exchange,one
million short position, to hedge that of the world’s leading derivatives
position all you have to do is buy $50 exchanges, has extended its ETF segment
million worth of securities - that’s the by launching new options. In May 2010,
difference between the two. But in the three options on ETFs by Deutsche Bank
swap, you are charging one dividend rate were launched, more precisely on the
on the whole $150 million long, and on db x-trackers MSCI Emerging Markets,
the short you are charging a different MSCI Europe and MSCI World.
rate on the whole $100 million short. Only a few weeks later, Eurex added
17
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Exchange-traded funds
options on seven ETFs listed by Source, it on the index itself and then struggle to
focussing on their STOXX Europe get the hedging right. ETF options could
600 Optimised sector ETFs. It is very therefore pave the way for exchanges to
likely that further options on ETFs will cover more markets with liquid options.
follow soon, also on other issuers. In return, the ETF issuers, who often act
ETFs provide investors with an as liquidity providers, can expect positive
opportunity to trade broader indexes in effects on the assets under management.
just one single trade, similar to trading A look into the U.S. market reveals the
shares. Before ETFs were made available potential of ETF options. For the first
to the market, indexes were tradable either time, the number of ETF options being
via basket trades (with more transactions traded on eight different U.S. option
involved), index swaps and structured exchanges exceeded one billion in 2008. It
products (including counterparty risk) is interesting to see that the growing use of
or futures (for which a margin account ETF options has no negative influence on
is necessary). Against this backdrop it the corresponding cash-settled options on
becomes clear why the emergence of ETFs the same underlying. In fact, the opposite
substantially facilitated index trading. is the case: cash-settled options have
With the growing amount of money flourished after ETF options on the same
invested in ETFs and the increased trading underlyings had been listed in parallel.
18
Flexible, customised
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to meet your changing needs
State Street Global Markets is the investment research and trading arm of
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Collateral Management
Efficiency and Optimisation
How technology can play a role in ensuring efficient and
optimised collateral management, with SunGard
Over the past few years, there has been effort to process cash mark agreement and
heightened interest in collateral management, due collection. Adding to this are the increasing
in part to internal risk management sensitivities complexities of non-cash collateral management,
and impending external regulatory pressures. It so it is no surprise that processes are typically
has been widely recognized that the bi-lateral highly manual and people dependent. As a result,
collateral and margin management associated firms are constantly looking to increase operational
with OTC transactions can be fraught with efficiency, streamlined processing and risk control.
issues and challenges. This is compounded by In addition to the collateral management aspect
the fact that there may be multiple business of our securities finance solutions, SunGard also
areas within a firm that carry out this processing offers a sophisticated solution for OTC derivatives
independently, making it nearly impossible to collateral management, featuring automated,
see a single exposure with a counterparty, or exception based, end-to-end workflow. This
benefit from the cross-margining opportunities solution is used by one of the major custodian
that exist. The recent Bank of International banks as its derivatives collateral management
Settlements (BIS) report on “The role of margin offering, and is recognized as a leading solution
requirements and haircuts in “procyclicality” to handle the more specific and complex ISDA/
made a number of observations regarding the CSA requirements. With SunGard’s strong history
management of collateral for both securities in collateral management and the increasing
financing and OTC derivate transactions. The demand for a more holistic solution across
report recommends enhancements to haircut- different product types, we have been exploring
setting and margining practices to dampen the new ways to address the requirement for a cross-
build-up of leverage in good times and soften the asset collateral management solution. One thing
system-wide effects during a market downturn.” is clear: collateral management requirements
Collateral management is a core capability vary, depending on the firm type and structure.
of all SunGard’s securities finance solutions, From the treasurer’s point of view, the
including functionality within each that addresses firm’s inventory must be most effectively used.
the challenges associated with daily collateral and Collateral management groups already have
margin management for stock borrow loan and basic collateral management functions, and they
repo transactions. Although already flexible, this now want to further optimize their operations
functionality continues to be expanded in response and drive out even more efficiencies, particularly
to new customer needs, and made available around inter-market-participant communications.
through standard releases. In the US stock loan Hedge funds or institutional investors want to
market, where cash is currently the primary independently compute and compare margin
form of collateral, there is an enviable degree requirements against their broker’s records. At
of automation provided by Loanet’s automated SunGard, we are pulling together the relative
mark service. Loanet instigates marks based strengths of the different solutions to enable us
on agreed independent pricing, and acts as a to offer a solution that not only addresses the
communication hub for the generation of the mark nuances of the SBL, repo and OTC derivatives
transactions and the cash charge to DTCC. There markets, but also optimizes the use of collateral
is no equivalent service available for international assets and improves workflow efficiencies with
business, and still requiring considerable manual maximum STP and exception processing. n
20
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Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
The
Securities
Lending
Industry
Awards
2010 GSL
This year saw the inaugural Securities Year. Several other firms also received “highly
Lending Industry Awards take place. commended” certificates.
The Awards differ from the usual format by The culmination of the Awards was the
inviting those who work within the industry Ceremonial Dinner, held on 1st July at the
to vote for the winners, ensuring the Awards Dorchester London.
are “for the industry, by the industry”. The event was held in support of Wooden
Deutsche Bank was the big winner on the Spoon, the Children's Charity of Rugby,
night, scooping three awards, including Best and featured an auction hosted by BBC
Equity Trading Capability – Multi-location Sport's Ian Robertson (pictured below), who
Borrower. entertained the audience with his showbiz
Other success stories included eSecLending, anecdotes.
UBS, Barclays Capital and Nomura, which A full list of winners can be found on the
each picked up two awards. next page.
The remaining prizes were shared between For full listings, including highly
11 firms with one a piece, including SunGard commended firms in each category, please
which was named Technology Provider of the visit www.GSL.tv/Awards
22
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Award Winner
Overall Awards
Multi Location Lender eSecLending
Single Location Lender UBS
23
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
GSL Summit |
Global
Securities
Lending
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Deutsche Bank
Direct Securities Services
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matter of record only. The services described in this advertisement are provided by Deutsche Bank AG or by its subsidiaries and/or affiliates in
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available to clients who satisfy the regulatory criteria to be a professional client, set out in the Authority‘s rules and this communication is
directed only at such persons. Copyright © 2010 Deutsche Bank AG.
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
collateral that the fees remain largely the attractions of repo and
Initial margin: The margin static but that borrowers swaps is the transactional
required at the outset of a are more prepared to deal certainty on offer from a
transaction with a flexible lender and counterpart
Maintenance margin: The therefore balances and Certainty: There are
minimum margin level to overall revenue rise. trading and arbitrage
be maintained throughout opportunities, the
the transaction The agreement on a fee profitability of which
Concentration limits: is reached between the revolves around the
The maximum percentage parties and would typically making of specific
of any issue to be take into account the decisions. If a lender can
acceptable, e.g. less than following factors: - guarantee a certain course
5% of daily traded volume of action, this may mean it
The maximum percentage Demand and supply: The can negotiate a higher fee
of collateral pool that can less of a security available,
be taken against the same other things being equal, Fees vary from security to
issuer, i.e. the cumulative the higher the fee a lender security and over time.
effect where collateral in can obtain
the form of letters of credit, Collateral flexibility: See (b) Transactions
CD, equity, bond and above – the cost to a collateralised with cash
convertible may be issued borrower of giving different Cash collateral is, and
by the same firm types of collateral varies has been for many
In a large number of significantly, so that they years, an integral part
securities lending might be more willing to of the securities lending
transactions, collateral is pay a higher fee if the business, particularly
held by a Tri Party Agent. lender is more flexible in the United States.
This specialist agent Dividend issues: The The lines between two
(typically a large custodian size of the manufactured distinct activities -
bank or International dividend required to Securities lending and
Central Securities compensate the lender Cash reinvestment - have
Depository) will receive for the post-tax dividend become blurred; and
only eligible collateral from payment that it would have to many US investment
the borrower and hold it received had it not lent the institutions securities
in a segregated account security: Different lenders lending is virtually
to the order of the lender. have varying tax liabilities synonymous with cash
The Tri Party Agent will on income from securities; reinvestment. This is
mark this collateral to the lower the manufactured much less the case
market, with information dividend required by the outside the United States
distributed to both lender lender, the higher the fee it but consolidation of the
and borrower. Typically the can negotiate custody business and
borrower pays a fee to the The term of a transaction: the important role of US
Tri Party agent. Securities lending custodian banks in the
transactions can be open market means that this
There is debate within the to recalls or fixed for a practice is becoming more
industry as to whether specified term; there prevalent internationally.
lenders that are flexible is much debate about
in the range of non-cash whether there should be a The importance of this
collateral they are willing premium paid or a discount point lies in the very
to receive are rewarded for certainty. If a lender different risk profiles
with correspondingly can guarantee a recall-free of these increasingly
higher fees. Some argue loan then a premium will intertwined activities.
that they are, others claim be forthcoming. One of Crucially, cash
27
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
accounting and start up has entered into with the A cautious approach to
assistance have now been hedge funds, for example, counterpart selection
added: to cover short positions. (AAA only) and restrictive
But it is internalised within collateral guidelines (G7
Services provided by prime the prime broker and less Bonds) will limit lending
brokers obvious to the client. volumes.
• Profitable activities Beneficial owners 2. Portfolio characteristics
• Part of the cost of
being in business Those beneficial owners (a) Size
• Securities lending with securities portfolios Other things being equal,
• Clearance of sufficient size to borrowers prefer large
• Leverage of financing make securities lending portfolios.
provision worthwhile include: (b) Holdings size
• Custody • Pension funds Loan transactions generally
• Trade execution • Insurance and exceed $250,000. Lesser
• Reporting assurance cos holdings are of limited
• Mutual funds/unit appeal to direct borrowers.
Securities lending is one trusts Holdings of under
of the central components • Endowments $250,000 are probably
of a successful prime best deployed through an
brokerage operation, with When considering whether agency programme, where
its scale depending on the and how to lend securities, they can be pooled with
strategies of the hedge beneficial owners need other inventories.
funds for which the prime first to consider the
broker acts. Two strategies characteristics of their (c) Investment strategy
that are heavily reliant organisations and portfolio. Active investment
on securities borrowing strategies increase the
are long/short equity and 1. Organisation likelihood of recalls,
convertible bond arbitrage. characteristics making them less attractive
than passive portfolios.
The cost associated with (a) Management motivation
the establishment of a Some owners lend (d) Diversification
full service prime broker securities solely to offset Borrowers want portfolios
is steep and recognised custody and administrative where they need liquidity.
providers have a significant costs. Others are seeking A global portfolio offers
advantage. Some of the more significant revenue. the greatest chance of
newer entrants have been generating a fit. That said,
using total return swaps, (b) Technology investment there are markets that are
contracts for difference Lenders vary in their particularly in demand
and other derivative willingness to invest in from time to time and there
transaction types to technological infrastructure are certain borrowers that
offer what has become to support securities have a geographic or asset
known as “synthetic lending. class focus.
prime brokerage”. Again
securities lending remains (c) Credit risk appetite (e) Tax jurisdiction and
a key component of the The securities lending position
service as the prime broker market consists of Borrowers are responsible
will still need to borrow organisations with a wide for “making good”
securities in order to hedge range of credit quality any benefits of share
the derivatives positions it and collateral capabilities. ownership (excluding
32
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
voting rights) as if the option for a beneficial portfolio will require and
securities had not owner, especially a new who will provide it.
been lent. They must one. They will already have
“manufacture” (i.e. pay) made a major decision in (e) Selecting one principal
the economic value of selecting an appropriate borrower
dividends to the lender. An custodian. This route also Many borrowers effectively
institution’s tax position poses few barriers to act as wholesale
compared to that of getting started quickly. intermediaries and
other possible lenders is have developed global
therefore an important (c) Appointing a third-party franchises using their
consideration. If the cost of specialist as agent expertise and capital
manufacturing dividends or A beneficial owner who has to generate spreads
coupons to a lender is low decided to outsource may between two principals
then its assets will be in decide it does not want to that remain unknown
greater demand. use the supplier’s asset to one another. These
manager(s) or custodian(s), principal intermediaries
(f) Inventory attractiveness and instead appoint a are sometimes separately
“Hot” securities are third-party specialist. This incorporated organisations,
those in high demand route may mean getting but, more frequently,
whilst general collateral to know and understand are parts of larger
or general collateral a new provider prior banks, broker-dealers
securities are those that to getting started. The or investment banking
are commonly available. opportunity cost of any groups. Acting as principal
Needless to say, the delay needs to be factored allows these intermediaries
“hotter” the portfolio, the into the decision. to deal with organisations
higher the returns from that the typical beneficial
lending it. (d) Auctioning a portfolio to owner may choose to
borrowers avoid for credit reasons
Having examined the Borrowers bid for a e.g. hedge funds.
organisation and portfolio lender’s portfolio by
characteristics of the offering guaranteed (f) Lending directly to
beneficial owner, we must returns in exchange for proprietary principals
now consider the various gaining exclusive access. Sometimes after a period
possible routes to market. There are several different of activity in the lending
permutations of this market using one of the
The possible routes to the auctioning route: above options, a beneficial
securities lending market Do-it-yourself auctions owner that is large enough
Assisted auctions in its own right, may wish
(a) Using an asset manager Agent assistance to explore the possibility
as agent Consultancy assistance of establishing a business
A beneficial owner may Specialist “auctioneer” “in house”, lending directly
find that the asset manager assistance to a selection of principal
they have chosen, already borrowers that are the end-
operates a securities This is not a new users of their securities.
lending programme. This phenomenon but one that The proprietary borrowers
route poses few barriers to has gained a higher profile include broker-dealers,
getting started quickly. in recent years. A key issue market makers and hedge
for the beneficial owner funds. Some have global
(b) Using a custodian as considering this option borrowing needs while
agent is the level of operational others are more regionally
This is the least demanding support that the auctioned focused.
33
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
36
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
37
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
38
Structuring securities lending
WWW.BBH.COM/SECURITIESLENDING
Contact us to learn more about what makes the BBH program unique: Custody
Asia: Richard Meek +852 3756 1686 richard.meek@bbh.com Accounting
Europe: Keith Haberlin +44 (0) 207 614 2165 keith.haberlin@bbh.com Administration
US: Andrew Pettit +1 617 772 6553 andrew.pettit@bbh.com Transfer Agency
Securities Lending
Foreign Exchange
Brokerage
Fund Distribution
©2010 Brown Brothers Harriman & Co.
This information is targeted at Professional Clients and Eligible Counterparties only. Outsourcing
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Company Profile
Christine Donovan is
a managing director
within BBH’s Investor
Services Division.
A global leader with close to 200 years of our clients’ long term best interests.
experience, Brown Brothers Harriman is a • History of no losses, liquidity restrictions
privately-held financial services firm that or collateral impairment.
helps many of the world’s most sophisticated • 100% client referenceability.
institutional investors achieve their inter-
national business objectives. BBH Global EXPERTISE: BBH Global Securities Lending
Securities Lending leverages our firm’s is run by a management team with over 20
resources to achieve customized solutions years of diversified experience navigating a
and optimized performance for every client, variety of market conditions.
providing third party and custodial lending • Consistent management team has been
services via traditional agency and agency structuring transactions that combine
exclusive arrangements. optimized intrinsic value with conservative
collateral parameters since our program’s
PERFORMANCE: BBH works with our inception.
clients to achieve superior securities lending • Dedicated traders in North America, Eu-
returns both in absolute financial and risk rope, and Asia have diversified backgrounds,
adjusted terms. with experience in agency lending, broker/
• Customized trading solutions encompass- dealer financing and hedge fund trading.
ing a broad range of inputs, including invest- • Dedicated tax, regulatory, legal and risk
ment strategy, performance goals and risk management resources provide expertise
tolerance. across global markets, client domiciles and
• Continuous portfolio analysis designed to entity types.
recommend the optimal trading strategy or
route to market, based on market conditions
and client goals.
• Flexible and prudent collateral offerings Key Contacts:
which support an intrinsic value strategy.
Asia: Richard Meek, +852.3756.1686
TRUST: BBH has proven that our philoso-
phy of partnership and client protection EMEA: Keith Haberlin, +44(0)207.614.2165
delivers both outstanding performance and
robust risk management. US: Andrew Pettit, +1.617.772.6553
• Independent, privately-held structure al-
lows us to maintain an unwavering focus on
40
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Company Profile
Citi
Clients around the world turn to Citi® high net worth and separately managed
Investor Services, for a range of securities accounts.
finance capabilities that few organizations To learn how we can design a securities
can match. Our solutions include agency finance program that meets your needs,
and principal programs in either a custody please contact:
or non-custody capacity as well as prime
brokerage, collateral management, and Citi’s Securities Finance global product team
liquidity management solutions. Through a
coordinated global approach and securities Americas, Laurie Zeppieri
lending trading capability strategically laurie.zeppieri@citi.com
available in New York, London, Hong Kong
Melbourne and Toronto, we provide 24-hour Asia, Lawrence Komo
coverage to help our clients maximize their lawrence.komo@citi.com
portfolios’ use.
EMEA, Brian Staunton
We can fulfill the borrowing requirements brian.staunton@citi.com
of over 100 top banks, broker-dealers and
other financial institutions worldwide. Our
on-the-ground presence in the 38 markets
where we lend securities is second to none
and we can help you stay current with local
market changes.
Company Profile
Comit
42
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Company Profile
Deutsche Bank
Direct Securities Services
43
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Company Profile
Key Locations:
Boston
175 Federal Street, 11th Floor
eSecLending Boston, MA 02110
United States of America
+1 617 204 4500
With 10 years of experience, eSecLending is
a full-service global securities lending agent London
providing customized securities lending 10 King William Street, 1st Floor
solutions for sophisticated institutional London, EC4N 7TW
investors worldwide. The company’s United Kingdom
approach has introduced investment +44 (0) 20 7469 6000
management practices to the securities
lending industry, offering beneficial owners Sydney
an alternative to the custodial lending 19-29 Martin Place, Level 56
model. Their philosophy is focused on Sydney, NSW 2000
providing clients with complete program Australia
customization, optimal intrinsic returns, +61 (0) 2 9220 3610
high touch client service and comprehensive
risk management. Their differentiated
process combines agency exclusives and
discretionary routes to market to achieve Key Contacts:
best execution while providing clients with
greater transparency and control, allowing Christopher Jaynes
them to more effectively monitor and Co-Chief Executive Officer
mitigate risks. cjaynes@eseclending.com
+1 617 204 4500
Karen O’Connor
Co-Chief Executive Officer
koconnor@eseclending.com
+1 617 204 4500
www.eseclending.com
44
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Company Profile
Company Profile
J.P. Morgan
J.P. Morgan Worldwide Securities Services The firm’s global banking and asset servic-
(WSS) is a premier securities servicing ing franchise provides clients with one stop
provider that helps institutional investors, access to world markets, knowledgeable risk
alternative asset managers, broker dealers management and investment support, and
and equity issuers optimize efficiency, miti- best-in-class operations.
gate risk and enhance revenue. A division of
J.P. Morgan Chase Bank, N.A. (NYSE: JPM),
WSS leverages the firm’s unparalleled scale,
leading technology and deep industry exper- Key Locations & Contacts:
tise to service investments around the world.
It has $15.3 trillion in assets under custody Americas:
and $6.5 trillion in funds under adminis- William Smith
tration. For more information, go to www. at william.z.smith@jpmchase.com
jpmorgan.com/visit/wss. or + 1 212 552 8075
J.P. Morgan helps institutions enhance their Europe, Middle East and Africa:
portfolio performance, increase efficiency Paul Wilson
and mitigate risk through customized secu- at paul.uk.wilson@jpmorgan.com
rity lending programmes. J.P. Morgan offers or + 44 207 7420249
clients separate managed cash collateral
accounts, tailoring each account to a client’s Asia:
unique risk profile, investment needs and Andrew Cheng
collateral guidelines, and empowering clients at andrew.cheng@jpmorgan.com
with full account transparency and control. or + 852 2800 1809 x 21809
As a premier agent lender, we offer full-ser-
vice capabilities: J.P. Morgan as agent, client Australia and Japan:
directed, auctions and exclusives, designed Stewart Cowan
to meet the risk and reward needs of our at stewart.t.cowan@jpmorgan.com
sophisticated client base. or + 61-2 92504647
46
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Company Profile
Company Profile
Company Profile
49
Beneficial Owner & Pension Fund | Securities Lending Handbook 2011
Company Profile
SunGard
50
Market-driven forces. Investor-driven solutions.
To more effectively manage your firm’s business in quickly evolving markets requires
uncommon insight and on-the-ground expertise.
At Citi, we’ll partner with you to design solutions that deliver efficiencies, transparency
and help mitigate risk — whether you’re entering new markets, launching new strategies or
introducing new instruments. And our modular approach, robust operational support and
unmatched global presence provide you with a rare combination of flexibility and scale.
That’s why firms worldwide partner with Citi. And that’s why Citi never sleeps.
© 2010 Citibank, N.A. All rights reserved. Arc Design, Citi and Arc Design and Citi Never Sleeps are
trademarks and service marks of Citigroup Inc., used and registered throughout the world.
ready for your future needs
Finace is currently the only fully integrated solution which supports the future business models within the
area of Securities Finance and Collateral Management. The architecture of Finace is based on a stable,
leading edge technology platform which was developed with performance and robustness as the focus of
design. With flexibility at its core, customer-driven extensions and modifications can be quickly and easily
applied to the standard component set.