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SLTSECURITIESLENDINGTIMESsecuritieslendingtimes.com

ISSUE06611.12.2012 TU

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UCITS funds to experience total repo-call

In a statement that was released at the time, the Interna-tional Securities Lending Association’s chief executive, Kevin McNulty, sought to clarify the situation, saying that there is nothing in the guidance that precludes a securi-ties lending agent from charging a commercial fee for their services.

An ESMA spokesperson confirmed that all net revenue must be returned, but this does not include the cost of running a securities lending programme.

ESMA published the final repo and reverse repo guide-lines on 4 December following a consultation period.

Under the guidelines, UCITS funds should be able to recall assets that are subject to repo arrangements at any time, while those that are engaged in reverse repo should be able to recall the full amount of cash at any time on either an accrued or mark-to-market basis.

readmore p2

PARIS 10.12.2012

UCITS funds should only enter into repo and reverse repo agreements if they are able to recall assets or cash at any time, according to the European Securities and Markets Authority’s (ESMA’s) latest guidelines.

The guidelines come as ESMA attempts to fulfill its man-date to enhance the protection of investors and reinforce stable and well-functioning financial markets in the EU.

It published proposals for UCITS funds entering into repo and reverse repo agreements in July as a part of its controversial guidelines on exchange-traded funds (ETFs) and other UCITS issues that affect securities lending.

ESMA’s guidelines on ETF and other UCITS caused confusion when they were published, leading some commentators to believe that under the guidelines all revenue that would be from securities lending would have to be returned to a UCITS fund and its investors.

Wells Fargo renames Merlin Securities

Wells Fargo Securities, the capital markets and investment banking busi-ness of Wells Fargo & Company, has rebranded recently acquired Merlin Securities to Wells Fargo Prime Services.

readmore p2

Latest newsSunGard releases Apex Prime to as-sist prime service providers

p3

Latest newsCIBC Mellon to provide Horizons ETFs with securities lending services

p5

Latest newsNorthern Trust Hedge Fund Servic-es plucked by CarVal for collateral management mandate

p7

Risk mitigationSaheed Awan discusses Euroclear’s global Collateral Highway

p12

Data analysisMarkit’s Simon Colvin wades through the Muddy Waters allegations p14

People movesHartropp moves from Goldman Sachs to Nomura, Solway goes to BNY Mellon and more

p16

UBS and HSBC conduct first ever renminibi triparty repoUBS London and HSBC Hong Kong have completed their first renminbi (RMB) triparty repo using Euroclear Bank and the Hong Kong Monetary Authority (HKMA) as collateral management agents.

readmore p2

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UCITS funds to experience total repo-callContinued from page 1

ESMA originally proposed allowing a proportion of assets “to be non-recallable at any time at the initiative of the UCITS”, and then only assets in overnight repo and reverse repo arrangements would be recallable at any time.

But its guidelines now apply to all fixed-term repo and reverse repo agreements that do not exceed seven days.

The guidelines will be translated into the lan-guages of all EU members and incorporated into ESMA’s guidelines on ETFs and other UCITS issues. The combined guidelines will en-ter into force two months after the translations are published.

UBS and HSBC conduct first ever renminbi triparty repoContinued from page 1

The bilateral agreement between HKMA and Euroclear Bank has allowed the transfer of securities as collateral from UBS London’s account in Euroclear bank—via Euroclear’s global collateral highway—to the HSBC Hong Kong branch’s account in HKMA to support the RMB repo. The joint service has been initiated to enable international financial institutions to use securities held with Euroclear Bank as collateral in tri-party repo transactions with members of the HKMA, to access liquidity from Hong Kong in renminbi and other currencies.

Justin Chan, deputy head of global markets APAC and head of Hong Kong trading at HSBC, said: “[Our firm] estimates that by the end of 2015, the level of RMB deposits in Hong Kong will increase to a total of 30 percent from the current 9 percent of all Hong Kong deposits.”

“Firms that manage these growing RMB re-serves will naturally seek to optimise their cash

balances through the repo markets with an in-ternational counterparty base. It was easy and efficient to finalise the repo with UBS AG Lon-don, working through our local CSD account, operated by the HKMA.”

Olivier Grimonpont, general manager and regional head for APAC at Euroclear, said: “The HKMA and Euroclear Bank are pleased to serve the needs of domestic and international market participants in managing their collateral for RMB and other types of repo and securities lending deals.”

“Working successfully with HSBC and UBS to fulfil their collateral management require-

ments proves that together we can source and maintain collateral from Hong Kong, Lon-don or almost anywhere else to sustain vital liquidity channels.”

Wells Fargo renames Merlin Securities Continued from page 1

Wells Fargo Securities purchased Merlin Secu-rities—a San Francisco- and New York-based prime brokerage services and technology pro-vider—in April this year. Terms of the agreement were not disclosed.

Asset servicing | Asset MAnAgeMent | WeAlth MAnAgeMent

© 2012 Northern Trust Corporation. The Northern Trust Company, London Branch (reg. no. BR001960), Northern Trust Global Investments Limited (reg. no. 03929218) and Northern Trust Global Services Limited (reg. no. 04795756) are authorisedand regulated by the Financial Services Authority. Northern Trust (Guernsey) Limited, Northern Trust Fiduciary Services (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 Central Bank of Ireland. Northern Trust Global Services Limited has a Netherlands branch which 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. Northern Trust Global Investments Limited has a Netherlands branch which is authorised by the Financial Services Authority and subject to regulation

in the Netherlands by the Autoriteit Financiële Markten. Northern Trust Global Investments Limited has a Sweden branch which is authorised by the Financial Services Authority and subject to regulation in Sweden by the Finansinspektionen.

For your securities lending business, rely on Northern Trust’s unique global integration, exceptional capital strength and time-tested risk management. To find out more, visit northerntrust.com/securitieslending or call George Trapp at +1 312 444 3126 or Sunil Daswani at +44 (0)20 7982 3850.

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Merlin’s web-based suite of prime brokerage technology solutions, which are known as Mer-linPRIME, MerlinSHARP and MerlinCOMPASS, have been renamed Wells Fargo PRIME, Wells Fargo SHARP and Wells Fargo COMPASS.

John Shrewsberry, head of Wells Fargo Securi-ties, said: “Wells Fargo Prime Services fills an important niche in our product set.”

“The addition of prime services enhances our ability to meet client needs and generate earn-ings for our shareholders; all the while adhering to our disciplines of prudent risk management and controlled growth.”

Stephan Vermut, co-head of Wells Fargo Prime Services, said: “Our new name rein-forces Wells Fargo’s commitment to providing superior prime brokerage services and indus-try-leading technology to the alternative invest-ment community.”

“We look forward to continuing to provide fi-nancial and technology solutions while grow-ing our product offerings to meet the needs of the marketplace.”

SunGard launches Apex Prime

SunGard has released Apex Prime, a global solution to help new and established prime service providers manage their day-to-day client processing and improve client ser-vices by maximising transparency, control and efficiency.

The Apex Prime technology solution, which offers prime services providers a single view of all hedge fund client activity, helps firms to efficiently manage trade exceptions, view se-curity and cash positions in real time, calcu-late financing costs and generate automated client reporting.

SunGard’s newest solution comes at a time when “funds are varying their prime brokers and looking for ways to diversify their risk, minimise costs and gain more visibility into the operation-al processes around the management of their

Omgeo dishes out ProtoColl improvementOmgeo’s automated collateral management so-lution ProtoColl has been enhanced to help us-ers meet new US Commodity Futures Trading Commission (CFTC) reporting requirements.

Under new CFTC business conduct rules, which were adopted in response to the Dodd-Frank Act, swap dealers and major swap participants must begin daily mark-to-market reporting for many of their open derivative positions.

assets,” said a recent statement from the firm.Craig Costigan, executive vice president in SunGard’s capital markets business, said: “The hedge fund industry’s increased use of multiple prime brokers has created business opportuni-ties for new market participants including prime custodians and those with boutique prime ser-vices offerings.”

“SunGard’s Apex Prime can help new and es-tablished prime services providers deliver the global, real-time, cross-product service their cli-ents demand with a low total cost of ownership and short time to market.”

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ProtoColl’s storage and distribution capability can help clients to comply with these new daily mark-to-market reporting mandates. The solu-tion allows required reports to be created quick-ly, drawing on user firms’ existing data.

“Shortened windows between the finalisa-tion of regulations and required compliance are straining firms’ ability to meet deadlines,” said Ted Leveroni, executive director of de-rivatives strategy at Omgeo. “When dealing with organisations maintaining multiple sys-tems, it can be challenging to react rapidly to all of the new regulations surrounding OTC transactions. With an automated solution like ProtoColl, firms are better prepared to meet this challenge.”

Omgeo ProtoColl’s workflow capabilities man-age daily activity and track all progress during the day. It supports automatic portfolio genera-tion and reporting, calculation and posting of collateral requirements, and the subsequent processing of initial and variation margin move-ments across asset classes.

CIBC Mellon to provide Horizons ETFs with sec lendingHorizons Exchange Traded Funds and its as-sociate AlphaPro Management—jointly known as Horizons ETFs—has appointed CIBC Mel-lon to provide custody and securities lending services for its actively managed exchange-traded funds (ETFs).

It will also provide Horizons ETFs with fund ac-counting and administration services.

The COO of Horizons ETFs, Kevin Beatson, said: “We conducted an extensive due diligence process on our custodial needs. We found that CIBC Mellon offered the best combination of price and service.”

“CIBC Mellon is a world-renowned custodial service provider and we are very confident in their ability to deliver best-in-class services which allow us to better serve our industry part-ners and ETF unit holders.”

PEAK6 Advisors as a client and to meet their requirements for a flexible, multi-asset solu-tion that integrated seamlessly with their pro-prietary technology.”

“By implementing Paladyne FastStart, new fund managers are able to significantly re-duce cost, introduce immediate operational efficiency and control, minimise risk, and address the due diligence requirements of institutional investors.”

Collateral optimisation important to sell side, says SunGardCollateral optimisation appears relatively more important to the sell side, perhaps reflecting the broader range of collateral-absorbing activities that are undertaken compared to the initial mar-gining process that is so important to the buy side, found a recent survey.

The research, which examined global collateral management in buy- and sell-side firms, also found that central clearing and reconciliation were rated highly across both, with 69 percent of sell-side respondents saying that a central-ised front-office funding function across prod-ucts and locations is fundamental to effectively optimising funding costs.

“This is an interesting parallel with the rise of CVA trading functions to optimise the cost of credit risk in many sell-side institutions,” said SunGard.

The research also found that 69 percent of firms have built their cleared OTC collateral manage-ment capabilities out of their existing bilateral collateral management function, “probably due to the inherent flexibility required by an OTC de-rivatives platform to be able to handle a wide variety of products and agreements.”

“Very few respondents (10 percent) feel that their systems and processes are fully complete in their ability to support the combined cleared/non-cleared model for processing collateral. The major gaps identified relate to achieving full automation, both on cleared and non-cleared processes.”

Ronald Landry, executive director of ETF ser-vices at CIBC Mellon, said: “CIBC Mellon is committed to providing Canada’s best ETF servicing solution.”

“This appointment highlights our ability to work with our clients to help them better serve their investors. We look forward to working with Horizons ETFs as they continue to ex-pand their business and deliver great results to their clients.”

PEAK6 picks Paladyne Paladyne FastStart will support the launch of a multi-asset class hedge fund from investment advisory firm PEAK6 Advisors.

The new fund will be led by Joseph Scoby, who is CEO of PEAK6 Advisors and chief investment officer of the fund.

Paladyne FastStart, which will be a part of the fund’s institutional grade investment manage-ment platform, combines Paladyne’s technology platform with a selection of operational, market data and IT support services.

PEAK6 Advisors has also implemented Pala-dyne’s Security Master to manage the fund’s securities terms and conditions, corporate ac-tions and market reference data.

Scoby said: “Picking the right technology partner has enabled our firm to launch with a comprehensive and cost-effective trading and portfolio management system that meets our multi-asset requirements and easily integrates with our proprietary investment and risk man-agement platform.”

“After an extensive evaluation of the various vendors in the industry, we selected Paladyne based on their comprehensive multi-asset class support, open architecture and customer-fo-cused service model.”

Sameer Shalaby, president of Paladyne Systems, said: “We are pleased to welcome

Contact Amanda Sayers for more informationamanda.sayers@anetics.com a 413.395.9500

Argent is a service mark of Anetics, LLC, Pittsfield, MA, USA

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CarVal selects Northern Trust for collateral management

Northern Trust Hedge Fund Services will pro-vide alternative investment manager CarVal Investors with middle office and administration services including collateral management and profit and loss reporting.

The partnership provides CarVal Investors with a combined operations and technology plat-form to support investment teams and strate-gies worldwide.

CarVal Investors CFO Peter Vorbrich said: “As CarVal continues to grow its global franchise, this relationship allows us to scale our operations while controlling costs and maintaining focus on our value investment discipline.”

“Northern Trust Hedge Fund Services brings deep operational expertise around alternative investments and market-leading technology created specifically for the needs of funds like ours. Above all, we selected Northern Trust because their commitment to client service and integrity will help to drive sustainable growth at CarVal.”

Peter Sanchez, CEO of Northern Trust Hedge Fund Services, said: “We are proud that CarVal has chosen us as their service provider, and we look forward to helping this premier investment firm extend its global reach.”

“Our services are designed to help firms like CarVal achieve high levels of efficiency and processing control, even though they trade in a diverse range of asset classes and employ complex strategies and capital structures. This relationship demonstrates the range of our plat-form, which can support the full lifecycle of vir-tually any strategy or asset class employed by alternative funds today.”

Finextra said: “CCPs can potentially pose sig-nificant systemic risk to the market, with the concentrated risk that they take on. There have been heated discussions about the vulnerability of CCPs in distressed market situations.”

“Some even start to apply the term ‘too big to fail’ to CCPs. How do CCPs usually manage their risk and what is the sequence of events when a participating member defaults?”

The firm explained: “To cover the induced loss from the default member, the CCP’s first recourse

CCPs could be ‘too big to fail’

Even though the market has not witnessed a meltdown of central counterparties (CCPs) and its paralysing effect, regulators are taking pre-cautions, according to Finextra.

In a blog post, the firm discussed the various merits and downfalls of CCPs, stating that ben-efits such as lower settlement costs and re-duced risk offset their vulnerability, so long as they are properly managed and well capitalised.

DORMANT ASSETS IN GERMAN FUNDS?

www.comyno.com/securitiesfinance

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is to seize the default member’s resources, in-cluding the collateral it pledged for margins and its contribution to the default fund. If the above resources are not sufficient to cover the loss, the CCP will look to its own capital reserved for this purpose and then the remaining default fund contributed by members still in good standing.”

Finextra predicted that even though the mar-ket has not witnessed CCP failure as of yet, regulators will step up their game to avoid a CCP meltdown.

OCC’s sec lending loans up 38 percent

OCC securities lending central counterparty (CCP) activities saw a 38 percent increase in new loans year-on-year with 72,740 transac-tions in November.

Year-to-date stock loan activity is also up 27 percent from 2011 with 886,690 new loan trans-actions in 2012.

Futures cleared by OCC reached 3,679,054 con-tracts in November, a 67 percent increase year-on-year. Equities futures reached 481,724 contracts this month, up 35 percent from November 2011.

Exchange-listed options trading volume reached 335,527,473 contracts in Novem-ber, a 3 percent decrease year-on-year. Equity options trading volume also fell 4 percent from the previous November with 304,256,176 contracts.

Index options trading volume rose 16 percent from November 2011 with 31,271,297 contracts. Year-to-date total options trading volume is down 13 percent with 3,691,342,837 contracts in 2012.

OneChicago’s trading volume increases

Equity finance exchange OneChicago has re-leased its November 2012 figures, revealing that volume of 481,724 was up 13 percent over October 2012.

Other November highlights included 464,923 exchange futures for physicals (EPFs) blocks traded, with EPFs and blocks activity represent-ing $1.7 billion in notional value.

Fifty percent of November 2012 month-end open interest was in OCX.NoDivRisk products. In the same month, open interest stood at 532,597 contracts on the equity finance exchange, up 9 percent compared with October 2012.

Finally, 61,094 of November 2012 futures val-ued at more than $281 million were taken to delivery, emphasising the use of single stock futures as an equity finance product.

Eurex Repo, which operates Swiss Franc Repo, Euro Repo and GC pooling markets, reported in November 2012 for all Eurex Repo markets an average outstanding volume of €226.4 billion, down €42.3 billion year-on-year.

The secured money market GC Pooling record-ed an average outstanding volume of €154.2 billion, an increase of 4 percent year-on-year.

Finally, the Euro Repo Market reached an aver-age outstanding volume of 36.5 billion, up 3.3 billion year-on-year. The Swiss Franc Repo market reached €35.7 billion.

Repo up and single stock down for Deutsche Börse

Deutsche Börse Group has released its No-vember 2012 figures that saw the equity derivatives (equity options and single stock futures) segment of Eurex Exchange dipped to 25.1 million contracts, down by 1.8 million contracts year-on-year.

Equity options totalled 18.4 million con-tracts and single sock futures equalled 6.7 million contracts.

MXCorner

www.mxcs.co.uk | contact@mxcs.co.uk

is translating the guidelines into the re-quired languages.

The risk is that, just as the market partici-pants are uncertain about the interpreta-tion of some aspects of the guidelines, so might the local regulators. Some may absorb the guidelines verbatim into regu-lation, leaving the problem with market participants and others to make their own interpretations. This means that subtle dif-ferences between jurisdictions may occur and the job of the compliance teams is made more difficult.

Of course, regardless of the interpreta-tion issues, the key concern is that some of the guidelines are so difficult to meet (such as combined stress testing across securities lending and OTC derivative transactions) that some UCITS funds may decide that the returns from lend-ing is simply not sufficient to warrant the additional cost and complexity that the guidance will impose. So just when the markets needs the stable liquidity that these funds offer, the regulations may make it too difficult for them to stay ac-tive. UCITS funds represent a significant part of the lending markets and access to their portfolios—particularly where they are invested in sovereign and AAA cor-porate debt—is more important than ever in meeting future collateral requirements.

Swings and roundabouts

Sarah Nicholson, senior partnerMX Consulting Services

The European Securities and Markets Au-thority (ESMA) has finally published the last piece of its guidance for UCITS and ex-change-traded funds (ETFs), which covers securities lending and repo as a form of ‘ef-ficient portfolio management’. The main part of the guidance was published in July and this final piece of the jigsaw relates to repo and reverse repo, and considers whether these transactions can be undertaken on a term basis.

Most of the main guidance is both predict-able and ultimately sensible, and in real-ity many market participants have already implemented their own standards on a vol-untary basis over the last few years that will either meet or are close to meeting the guidelines—such as better transparency and reporting to underlying investors. But some of it is difficult to interpret or apply, such as counterparty limits across securities lending and OTC derivatives transactions.

The additional guidance notes for repo and reverse repo state that only overnight repo can be undertaken, but then goes on to de-scribe seven-day term transactions as being considered overnight, which at least gives a little flexibility.

The next stage will be for local regula-tors to implement these guidelines into regulations and they have two months af-ter the final publication of the guidelines on the ESMA website. It is yet not clear when this will be but expect it imminently, as the only further requirement for ESMA

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IndustryInsight

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NewsInBrief

SLT talks to Sunil Daswani of Northern Trust for his view on the global securities lending equity markets

Situation sensitive

Which areas and types of trades have risen or fallen over the last year?

We continue to see heightened interest from borrowers for equity securities in certain sec-tors. The key sectors where we see heightened demand typically are alternative energy, finan-cials and exchange-traded funds (ETFs).

The general theme in Asia has been the direc-tional trading interest that is associated with an anticipated slowdown in the Chinese economy as perceptions of a possible ‘hard landing’ emerged in mid-2011. This manifested in Hong Kong, particularly for Chinese H-shares, which gave investors exposure to mainland companies given a restriction of offshore investor access to A-shares. Popular sectors included autos, con-struction, commodities, gaming, luxury goods, property and retail. Within the emerging market space, directional trading strategies have also dominated demand in markets such as South Korea and Taiwan, particularly for technology stocks as broader concerns of growth have led to a negative outlook for exporters.

In Europe, a key factor driving hedge fund demand has been the increase in capital raising that has taken place over the last one to two years. The introduction of new legislation requiring finan-cial institutions to hold higher levels of Tier 1 capital has resulted in wide spread capital rais-ing, especially within Europe’s peripheral banking sectors as firms have looked to strengthen their balance sheets. This has typically been achieved through the issuance of new share capital at a discounted price, usually via a rights issue. Natural price arbitrage opportunities created by these events has driven demand from hedge funds and elevated spreads. Europe has also seen a steady reduction in alternative energy tax credits, which has created short demand

ticularly for high frequency-type trading that is focused on smaller cap securities. However, a short-sale ban on financial securities continues to hamper growth. In Malaysia, recently amend-ed securities lending rules have attracted lend-ers to the possibility of launching in an offshore market. Given the size of the Chinese market, we believe that this will continue to draw interest from offshore participants, although an offshore model appears to still be in development.

In Europe, Russia represents one of the most exciting new frontiers with compelling spread opportunities potentially available. Russia rep-resents the largest and most active of the MSCI emerging markets, with more than $2 billion of liquidity being traded across the MICEX ex-change each day.

Turkey is another compelling European emerg-ing market from a securities lending revenue perspective, with robust hedge fund activity, which continues. SLT

for alternative energy companies such as solar and wind.

In the Americas, the Brazilian market contin-ues to generate interest, but some unique as-pects of the market with respect to the central counterparty (CCP) model and collateral still have not led to many clients engaging in lending activities in Brazil for now.

How much or little uniformity is there between the Americas, Eu-rope and Asia within the securities lending markets?

Overall, there is uniformity in the general pro-cess of lending across these markets. The continued success of trading platforms such as the most recently introduced Equilend Bondlend platform has increased standardi-sation of automation across the regions. How-ever, each region obviously has significant nuances in terms of settlement, collateral preference and trading strategies. For exam-ple, the US remains high volume and collat-eral remains focused on accepting or pledging cash. In Europe, different forms of non-cash collateral continue to expand. In Asia, ac-cepted collateral is also varied but perhaps less pertinent given the focus on high intrinsic value lending of emerging market equities.

What opportunities exist in theemerging markets?

Taiwan remains the most compelling of emerg-ing markets in Asia from a revenue standpoint, and despite recent regulatory constraints, offers attractive spreads that are driven by a lack of supply. South Korea also continues to remain a very attractive market for participants, par-

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Nick Davis of J.P. Morgan gives SLT the low-down on the FTT, short selling regulations and what lies ahead in 2013

Inside story

France’s FTT does not apply direct-ly to securities lending, but what are its indirect effects? Securities lending is not affected, but the trades that drive securities lending are, for ex-ample, short selling. So the tax increases the cost of these trades, which may lead to a re-duction in activity, especially for high frequency / quant strategies.

What about the European Court of Justice’s 2011 ruling that France’s 25 percent tax on dividends paid to for-eign investors was discriminatory? How could France’s July 2012 deci-sion to instead impose a 3 percent tax on companies that pay the dividends affect dividend arbitrage as a revenue stream for securities lending busi-nesses, particularly if this is adopted in other European countries? Harmonisation of tax rates has led to a reduc-tion in the supply of tax-disadvantaged stock available to lend, including the recent events in France. The 3 percent would be taken into ac-count when company dividends are announced or the company may issue a scrip option back to

What are the up-and-coming forms of business in France, and how could future regulatory initiatives affect the possible popularity of these? We expect to do more scrips in 2013 instead of cash dividends. We are also hopeful of more deal activity to help with the revenue stream. However, we also need to wait and see what the outcome is on the first collection of the FTT. SLT

its shareholders. Scrips are exempt from the 3 percent tax levy and the revenue is significantly lower than doing the cash dividend trade over record date. One thing to note is that it is very dependent on the wording that each country will use when announcing the financial transaction tax (FTT). If the FTT is for all transactions and there are no exemptions, then it may have a se-vere impact on the market. ESMA’s short selling regulations came into effect on 1 November—how will these affect business in France and will their introduction be positively received?

From a lending perspective, the short selling regulations do not have any direct impact, although we have seen an increase in short coverage. But there are broader market con-cerns around the disclosure rules and market-maker exemptions. Yield enhancement trading is pop-ular in France—how has this fared in 2012?

Yield enhancement trading was very volatile due to the introduction of the FTT but demand was constant throughout.

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©2012 SunGard. Trademark Information: SunGard, and the SunGard logo are trademarks or registered trademarks of SunGard or its subsidiaries in the U.S. and other countries. All other trade names are trademarks or registered trademarks of their respective holders.

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RiskMitigation

What is Euroclear’s global Collateral Highway and what does it do?

One of the consequences of the financial crisis is a distinct change in market behaviour and regula-tor focus on mitigating risk. The use of securities as collateral is and will continue to play a key role in accomplishing this objective and in the recovery of our financial markets. Basel III, Solvency II, the US Dodd-Frank Act and the European Market In-frastructure Regulation (EMIR) will impose tough risk management requirements, which will only increase demand for collateral. There is, however, a limited amount of available collateral. As a result, there is a predicted collateral shortfall, which early estimates put as high as $6 trillion.

tive of time zones. These securities are then au-tomatically routed via the Collateral Highway to the right place at the right time, whether it is to a central bank, a central counterparty (CCP) or to another counterparty to cover exposures aris-ing from a repo or derivatives trade. We have developed sophisticated technology to track, transform and mobilise collateral across geo-graphic locations.

Important features of the Collateral Highway are its flexibility, open nature and proven capabili-ties. It is designed based on Euroclear Bank’s existing collateral management infrastructure, so it has been quick to deliver while minimising development costs.

Euroclear Bank is opening its infrastructure to help the market efficiently manage collateral flows while anticipating the challenges ahead for the market in managing potential collateral shortages. Whether or not there will be short-ages, we already know that collateral manage-ment could be more efficient. Market partici-pants too often find that the right collateral is in the wrong place when they need it.

Euroclear’s global ‘Collateral Highway’ sources securities to be used as collateral from multi-ple locations, which are the Collateral Highway entry points, including Euroclear Bank, all of the Euroclear central securities depositories (CSDs), agent banks and other CSDs, irrespec-

As financial institutions brace themselves for hard times ahead, SLT talks to Saheed Awan of Euroclear about a road they will have to travel sooner or later

The hitchhiker’s guide to collateral

MARK DUGDALE REPORTS

13 www.securitieslendingtimes.com

RiskMitigation

You mentioned ‘transformation’ of collateral—what is this and why it is so important?

Banks are facing two big challenges: first, many sovereign debt issues are being downgraded, so the securities that are held by banks are also losing their quality status; and second, the move to a centrally cleared OTC derivatives market is driving collateral demand upwards, meaning that banks with previously adequate collateral re-serves may no longer be equipped with enough of the right collateral to cover their daily activities.

Collateral transformation enables banks and other financial institutions that do not have the appropriate type of collateral in their portfolios to borrow high-grade securities from institutions that actually have stockpiles of such assets, using their lower grade securities as collateral. Sovereign debt, corporate bonds and equities are increasingly used to guarantee the loan.

Collateral transformations make sense for both sides of the deal. For example, cash-rich institu-tions are depositing their cash balances with a network of banks, but usually only to the maxi-mum amount that is guaranteed by the local au-thorities. In some markets, negative interest rates mean that they are actually paying the bank to hold on to their cash. An attractive alternative for such institutions is to enter the world of collateral transformation, offering part of their cash reserves or high-grade securities in exchange for lower-grade collateral at an attractive rate of return.

What would you say is the main driver behind Euroclear’s Collateral Highway?

There are two drivers. One is the changing na-ture of how financial institutions trade with each other. After the experiences of Lehman Brothers and MF Global, the level of confidence and trust between banks and other financial institutions has diminished considerably, which we have seen in the shift from unsecured to secured transactions. On top of this, the increased use of CCPs is adding to demand for collateral to cover initial and variation margins.

The second driver is regulation. Regulators on both sides of the Atlantic are pushing through ambitious legislative changes that will affect the way that financial firms do business. For some, it will mean a complete reassessment of their busi-ness models. A common theme resulting from the proposed legislation is the increased need for collateral to comply with the new regulations.

As mentioned previously, there may be a collat-eral shortage, which we are anticipating. How-ever, the need to optimise the use of collateral for a growing number of purposes is already very important to our clients. Today, for any giv-en firm, collateral is spread across various de-positories and agents, as well as geographic lo-cations. So, while the market needs fast access to quality collateral, it is not easy to mobilise the right collateral to the right place because of col-

Which firms are connected to the Collateral Highway and what are your aspirations for it?Discussions are still ongoing with a number of in-vestment banks and capital market infrastructure providers, but there have already been several successful agreements with financial firms re-garding the use of our global Collateral Highway. For example, BNP Paribas Securities Services became the first agent bank to join the Collateral Highway in Europe. This type of cooperation is likely to be more prevalent for our industry in the future as it offers mutual clients a greater level of collateral optimisation by combining the best of both worlds—in this case, Euroclear Bank’s tri-party collateral management services accessed via the Collateral Highway and BNP Paribas’s in-house collateral management offer.

Further afield in Asia, the Central Money Markets Unit of the Hong Kong Monetary Authority has also joined the Collateral Highway. In this instance, it was a case of the domestic market needing to expand across borders to access foreign trading counterparties—something that has facilitated the expansion of cross-market renminbi funding ac-tivities and further strengthened Hong Kong’s role as the global hub for offshore renminbi business. Here, Euroclear’s Collateral Highway was a perfect way to align domestic needs with the increasing in-ternational appetite for renminbi activity. If we look across the Atlantic, the Federal Reserve Bank in the US is also on board, using the Collateral High-way to take on collateral from commercial banks, thus helping to manage liquidity in the market.

The future looks bright for the Collateral High-way. Central banks and CCPs are expected to continue to be the biggest consumers of securi-ties collateral, and given the amounts of collater-al that are required, it is important that the market has a systemic and open solution to maximise collateral availability and mobility across borders 24 hours per day. As Euroclear already has a proven collateral management infrastructure, re-lationships with more than 90 central banks and CCPs, and the ability to facilitate the transforma-tion of ineligible collateral into central bank and CCP-eligible collateral, our Collateral Highway can be leveraged easily and efficiently. SLT

lateral fragmentation within various silos. The Collateral Highway alleviates this challenge.

Do you believe there will be a collat-eral shortage or is it overstated?

There is no certainty regarding future collateral scarcity. But the risk of insufficient supply of the right collateral is real. We wouldn’t be surprised to see the quality criteria of CCP-acceptable col-lateral potentially being relaxed in the near future. In fact, there are already two examples of this trend this year, which suggests that the market is aware of the potential high-grade collateral short-fall. The CME decided in April 2012 to increase individual clearing member collateral allowances for “(A-)” rated corporate bonds from $300 million to $3 billion. In the same month, LCH.Clearnet announced that it would be taking on Ginnie Mae mortgage-backed securities as collateral.

Today, we believe that a sufficient amount of collateral exists to meet current demands, but finding and mobilising the right collateral to the right place at the right time can be a Herculean task. We strongly believe the market would ben-efit from a global infrastructure serving as the backbone to source, transport and transform, if needed, securities from pools of collateral that are held anywhere and everywhere.

Why don’t banks create their own infrastructures and collateral management capabilities?

Many firms already manage collateral them-selves, and are using triparty agents to optimise their use of collateral. However, as collateral demands increase, the complexity of tracking, sourcing, mobilising and transforming collateral cannot be understated. Only the biggest global banks and international central securities de-positories (ICSDs) have the infrastructure to manage this process efficiently.

The alternative of purchasing a software suite from one of the software providers remains an option. But the budget that banks will need to spend is considerable. The most basic of these solutions will cost in the region of €300,000. If a bank wants more advanced or sophisticated op-erating features, the price is rapidly going to rise to between €800,000 and €1 million. And again, this is just for the software licence.

Integration of the software into the bank’s ex-isting systems also costs money. The software will need to interact with trade capture systems, reference data systems, agreement repositories (GMRAs and so on.), to name but a few. Esti-mates suggest that full integration of the soft-ware suite can cost up to ten times the initial cost of the software itself. So, for a top-end sys-tem, plus integration and staffing, a bank would be looking at €10 million.

Banks selecting this option would still need to plan how to move collateral seamlessly across borders and to various collateral takers on a timely basis. Sa

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DataAnalysis

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Famous short seller Muddy Waters remains in the news in the wake of most recent target Olam. We use securities lending data to assess the market reaction in the eight firms about which Muddy Waters raised allegations of impropriety.

The Financial Times recently summarised the quandary about the practices of Carson Block and his Muddy Waters outfit. “In seeking to expose often ill-understood and opaque emerging market companies to detailed levels of scrutiny, Muddy Waters is performing a valuable service to inves-tors … The concerns stem from the fact that Mud-dy Waters funds its research by taking positions in the target’s equity ahead of publication. The worry is that this can create perverse incentives.”

Spike in short interest Looking at the eight Muddy Waters disclosures so far, we see the company has had mixed for-tunes when calling out frauds and this holds particularly true since Sino Forest.

The firms targeted by Muddy Waters have seen their shares experience strong interest from short sellers in the weeks leading up to the date the Muddy Waters allegations were made pub-lic. On average, these firms have seen a 37 per-cent rise in short interest in the month leading up to a research report coming to light.

This comes as no surprise as Block makes no secret that he trades on his research.

Short interest on the day of the announcement also tended to be above average with 11 percent of shares out on loan on average across the eight firms. It is worth noting that this ranges from 0.6 per-cent for the company’s first research note on Orient Paper to a 34 percent rise in the case of Sino Forest.

Falling share pricesIn terms of the share price reaction, on average shares in the eight companies fell 32 percent in

weeks, settling on a 24 percent reduction in the month following the initial allegations. It is inter-esting that the private equity firm Carlyle Group offered to buy the company at $27—a $1.5 pre-mium on the level at which the firm traded prior to the Muddy Waters allegations.

New Orient Education also saw a double-digit fall in its share price in the week following Muddy Waters going public, yet only posted a 7 percent one-month fall. New Orient did see its share price fall nearly 40 percent in the week leading up to the Muddy Waters report, but this also came off the heels of disappointing earnings.

Both New Orient and Focus Media also saw less short interest on the date of disclosure than the other Muddy Waters’s targets with 7.6 percent and 7.8 percent of their shares out on loan respectively.

OlamOlam is the third largest company that has come to Muddy Waters’ attention—and the least affected by the firm’s research.

While Olam’s share price has fallen 7 percent since Muddy Waters went public with its alle-gations, the percentage of shares on loan has declined by 4 percent to 13.3 percent of the total shares.

However, the Financial Times LEX column highlights the interesting defence tactics that were deployed by Olam. It has drawn on the support of Singapore’s state investment agen-cy Temasek to underwrite warrants that are issued by the company. LEX notes “subscrib-ers for the warrants will have to recall shares loaned to shorts, squeezing Olam’s critics where it hurts … For now, the plan seems to have worked. Olam’s debt and equity have ral-lied. Muddy Waters says the move only post-pones Olam’s collapse”. SLT

the week following Muddy Waters going public with its allegations.

Again, there has been a wide disparity across the group with price falls ranging from 7 percent in the case of Olam to a 73 percent fall in Sino Forest shares.

Most of the price declines were confined to the initial week following the disclosure of Muddy Waters’s allegations. The average share price declines were a modest 2 percent on average in the following three weeks.

Long-term outlookWhile allegations that were made by Muddy Waters have been instrumental in a number of companies either being delisted or filing for bankruptcy, the markets have not always agreed with Muddy Waters.

Its allegations on Sino Forest were by far and away the company’s largest target. It is no se-cret that the company has filed for bankruptcy.

Prior to Sino Forest, the Muddy Waters’s four reports may have been instrumental in three of the targets subsequent delistings. Ori-ent Paper is the only company still trading on its original exchange. The shares are 77 percent below their value prior to the Muddy Waters allegations.

Muddy Waters changed tack following the Sino Forest report, targeting relatively larger firms—and not just Chinese companies. Judging by the share price reactions in these companies following the Muddy Waters allegations, the markets have been less willing to jump on Block’s bandwagon.

Focus Media initially saw its shares fall in line with the peer average after Muddy Waters went pub-lic with its allegations. However, the share price staged a partial recovery in the subsequent three

Markit Securities Finance analyst Simon Colvin wades through securities lending data to assess the effect of the Muddy Waters allegations

Muddying the waters

15

IndustryPeople

Meet Sébastien Bietho, a business-driven professional with a solid back-ground in the securities lending and repo industry

Sébastien Bietho

types—GC, specials, dividend enhancements and collateral upgrades.

Throughout my career, and specifically at Fortis Investments where I was responsible for the en-tire securities lending business, I had the oppor-tunity to broaden my expertise of our industry by covering the full spectrum of the securities lending and repo businesses: legal negotiation, fiscal issues, regulation, risk management, col-lateral management, control and compliance, budgeting, and counterparty and client relation-ship management.

I was then assigned to the dealing desk where I had access to the most senior management of Fortis Investments. I had a central posi-tion interacting with the cash trading desks and collaborating with our operations. We achieved a net return increase of 53 percent on the full programme.

What was your last role in the in-dustry and what did you enjoy most about it?

My last position in the industry was with the agency lending team at BNP Paribas Securities Services where I ran the Paris desk. If I had to pick one element, I think the most satisfactory thing was, as an agent, the relationship with the beneficial owners and the market counterpar-ties, and the ability to structure a solution for both sides that fits their needs and constraints while optimising the return for my clients. This is a very interesting exercise that requires an un-derstanding of both sides in terms of their oper-ational structures, their legal and fiscal statuses, and the regulatory framework under which they operate, as well as their return, risk profile and trade objectives.

How did you find working through the industry’s biggest ever crisis?

At the time, I was managing the securities lend-ing business at Fortis Investments and my man-date was to expand and secure our business. Doing so, we were in a situation where our col-lateral management process was sturdy, as well as our risk management structure and legal set-up, and we were ready to work within the new environment. We went through the crisis with comfort and were confident with the robustness of our securities lending programme.

While a number of lenders withdrew from the market, our set-up put us in a good position to seize the market opportunities that came out of it. That allowed us to significantly increase our clients’ returns while managing risks.

Although the environment was pretty tense, I thought that it was a very interesting period.

What are your ambitions?

I am looking to fit into a securities lending and repo trading business. There is a lot of activ-

ity in and around the securities finance mar-ket at the moment and the industry needs to adapt to the new environment. The regulatory changes that are coming will create opportu-nities and reshape the market. This is a chal-lenging time and developing securities lend-ing and repo businesses in this environment is very exciting for me. I feel the need to be an active contributor in this evolution and engage with our professional organisations as well as with regulators.

In the current context, the skills that I have de-veloped around regulatory frameworks, legal structures, control and compliance, and risk and collateral management will be beneficial to any securities lending business—on top of a high level of practical dealing expertise and knowl-edge of the securities financing markets.

I have also had the opportunity to lead and participate in the implementation of sev-eral projects where I gained in-depth under-standing of operational processes—systems change, collateral management models and operations enhancement.

As I mentioned above, I am a passionate per-son and can therefore contribute leadership skills, an appetite for success and new ideas.

What do you feel the industry needs most?

The industry is under a high level of scrutiny and regulatory pressure is increasing with mul-tiple bodies being involved. On the other hand, beneficial owners are looking for returns and require that we offer the neccessary products to achieve their objectives. At the other end of the spectrum, Europe’s Basel III, the US Foreign Account Tax Compliance Act, the US Dodd-Frank Act, European short-selling regulations and fiscal changes are modifying the way that we are generating profit and liquidity profiles. The industry needs to restructure itself and adapt to the new rules. SLT

Tell us a little about yourself

I am dedicated to my work and passionate about the financial industry, which I embraced 14 years ago, and I have developed a core exper-tise in the securities finance industry. I am often described as a self-starter but I am also a keen learner, digging up every piece of information to get the full picture while trying to step back and build my own views and consider every aspect of a situation. This includes regulations, legal, fiscality, risk management, collateral manage-ment, operations, and of course, return.

I am excited by financial theory and concerned about promoting securities lending. This year engaged in endorsing securities lending in the French financial press, as I feel that there is a lack of education outside of our industry.

Also, from an academic point of view, I decided it was time for me to work on the CFA, and I passed Level 1 in June of this year.

What about your career to date?

I have covered a wide range of businesses in the industry. I have managed securities lending and repo desks at a hedge fund—ADI Alterna-tive Investments—Fortis Investments and BNP Paribas Securities Services. As a result, I have been both on the supply and demand sides of the market, as well as an agent, generating re-turn for my clients.

Through these experiences, I have traded equi-ties, fixed income and exchange-traded funds in most markets—the US, Europe, Asia and emerging markets—and in most transaction Con

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Editor: Mark Dugdaleeditor@securitieslendingtimes.comTel: +44 (0)20 8289 2405

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Industry appointmentsJon Hartropp has moved to Nomura after spending 10 years at Goldman Sachs.

He joined Nomura on 19 November as vice president, focusing on hedge fund client rela-tionships and reporting to Phil Morgan, head of prime sales.

Hartropp spent his decade-long career at Gold-man Sachs in its hedge fund financing team.

Israel A Englander & Co (IAE) has hired Fredrick Scuteri as COO of its prime services division.

Scuteri joins Brett Yarkon as co-head of the firm’s business unit. Both report to president and CEO of IAE, Stephen Tobias. Scuteri moves to the firm from Thomson Reuters where he held the role of managing director and global head of its hedge fund strategy group.

Tobias said: “We are extremely excited to bring in a person with Scuteri’s vast experience and deep industry knowledge.”

“As we continue to expand our capabilities, Scuteri will be growing our product offering and streamline the operational workflow.”

ABN AMRO Clearing has made Robbert Booij managing director of its UK office.

Booij is joining the firm’s London office from Amster-dam, where he held the role of global head of en-terprise risk management for ABN AMRO Clearing.

Booij joined Fortis in 2007 and was deputy head of business control at Fortis Clearing from 2008, before Fortis Bank Nederland was merged into the new ABN AMRO in 2010.

The Conifer Group—a provider of fund adminis-tration, middle office, trading and prime broker-age services to the hedge fund industry—has promoted Howard Eisen to head of business development alongside naming Manish Garg as the firm’s chief information officer.

Eisen, who joined Conifer as managing direc-tor in 2012, will report to Jack McDonald, Coni-

fer’s president and CEO. Before joining the firm, Eisen held positions in corporate finance and credit for a variety of New York banks.

Prior to joining Conifer, Garg held positions in IT consulting and software engineering for firms including Wells Fargo, Accenture and Charles Schwab. Garg, who has been acting head of technology at Conifer, will report to the firm’s COO, Sal Campo.

David Mudie will lead the new London-based operation of US independent futures broker-age and clearing firm RJ O’Brien & Associates, which was established earlier this year, as CEO.

Mudie has held multiple prime brokerage roles throughout his career. Between 2009 and 2010, he worked as head of fixed in-come prime brokerage at MF Global UK in London, and between 2006 and 2009, he was senior vice president in the derivatives product group on the prime brokerage side at Newedge in New York.

Before that, Mudie ran European prime broker-age for Refco Overseas in London.

Mudie most recently served as European head of institutional and retail sales for marketing and ex-ecution at Penson Financial Services in London.

Paul Solway has been appointed as BNY Mel-lon’s managing director and regional head of equity finance for Asia-Pacific, confirming a story that SLT reported in early October.

Based in Hong Kong, Solway will report to Robert Chiuch, managing director and global head of equity finance in New York. Before joining BNY Mellon, Solway held po-sitions at several other financial institutions including Macquarie Bank, HSBC Securities and Nomura International.

Mary Schapiro, who is one of the longest-serv-ing US SEC chairpersons, has resigned.

“I’ve been so amazed by how hard the men and women of the to get the job done,” said

Schapiro. “So often they stay late or come in on weekends to polish a legal brief, review a corporate filing, write new rules, or reconstruct trading events. And despite the complexity and the intense scrutiny, they always excel at what they do.”

As a result of the Dodd-Frank Act, the agency has implemented a new whistleblower pro-gramme, strengthened regulation of asset-backed securities, laid the foundation for an entirely new regulatory regime for the deriva-tives market, and required advisers to hedge funds and other private funds to be subject to SEC rules. SLT

17

IndustryPeople

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PeopleMoves

SLT and Mike de Beauvesier Wat-son, a senior securities lending trader at Robeco Securities Lend-ing BV, catch up after the 2012 RMA Securities Lending conference to talk Miami, securities lending, and 1980s disco

...Mike de Beauvesier

Watson

To what extent has working in finance met your expectations?

From the universe I am in, I have seen mul-tiple angles that gave great joy. Products such as trading bonds (cash and repo), futures and money market had different coverage by the broker-dealers. The lack of cross selling led to speaking to various desks at the same bank. Contacts with salespeople, speaking to traders directly or making use of interdealer brokers helped in price discovery.

There was no screen trading at that time. It was a wide horizon that you could not over-see at the start, so the expectations were met big time.

Regulations are the bane of the industry, if you could drop one regulation, what would it be and why?

The CSSF (Commission de Surveillance du Secteur Financier) in Luxembourg has is-sued regulation for UCITS. What is impor-tant is the protection of the retail customer investing in mutual funds. The law allows funds to do unsecured deposits and other money market assets that create 100 per-cent direct credit risk. The law contains un-necessary hurdles for repo.

In reverse repo, the securities that are pur-chased must be in accordance with the in-vestment policy and must, together with the other securities that are held in the portfo-lio, comply with the investment restrictions of the UCITS. Reverse repo can be seen as a collateralised deposit. From my viewpoint, the retail customer is better off with a re-verse repo than an uncollateralised deposit.

Collateral offsets counterparty exposure while earning yield. A solid line of defense is created with almost zero percent direct credit risk, and the recovery value is much higher when the counterparty goes into default. Why make it difficult to provide client protection using repo while allowing instruments with 100 percent direct credit risk? The law has existed for a while and has gone to a Euro-pean level by the European Securities and Markets Authority. It’s now that I see ruling bodies asking for clarification and context ex-planation, which is good.

Apart from that, what else would you change about the industry?

It’s not so much that I wish for changes in the industry. What the industry can use is recogni-tion from the outside world. Securities finance is the pure oil in the mechanics of world markets. The importance of securities finance is underes-

timated in the media. Regulation is a fair point, but the world needs the securities finance in-dustry. Liquidity is key.

Do you have any role models in the industry who have helped or inspired you?

I had a lot of help understanding the repo prod-uct from Credit Suisse First Boston. All repo documentation was about the ‘know your coun-terparty’ rule—secured versus unsecured and limit your counterparty risk. I was amazed to learn that one of the key repo parties back then was ‘over exposed’ versus LTCM (Long Term Capital Management) due to lack of collateral or not enough collateral.

What are your ambitions?

I would like to bring our unit capabilities to the forefront and combine them with the fund man-agement toolset. Securities lending is no longer just an extra yield-adding product. It brings solu-tions and knowledge for funds and their clients, including trading and collateral management skills, and understanding the legal framework. The building blocks are there!

If you were not in the industry, what would you be doing?

I always found it interesting to explore import/ export opportunities. I would probably have started a small international business that was not focused on one particular product.

What are your hobbies and interests?

I play golf but most of my activity is in Kyo-kushin karate from sosai Mas Oyama. I also love watching and listening to YouTube music videos and concert pieces of early 1980s disco, reggae and rock. SLT

How did you find Miami and what was the best bit about the RMA conference?

It was my first time visiting the US and so my first conference there. What I found best was the le-gal and regulatory run down from Debevoise & Plimpton LLP—it was the US regulation jungle explained. The panelists and moderators un-derlined the importance of a “we are all in this together” mindset that could make people join forces to face the challenges of implementing the US Dodd-Frank Act and Basel III. Happily for me, it was said that there is a similar land-scape across the pond. European guidelines are hitting banks as well as the fund industry, which could lead to a gap between demand and quality supply from beneficial owners, for ex-ample. Closing that will have its price—lenders accepting lower quality collateral for providing the required quality assets.

How did you get into the securi-ties lending industry?

I began in 1995 trading repo for Robeco, man-aged fixed income funds, after working for around two years in the settlement and report-ing teams. The launch of the current profit centre Robeco Securities Lending BV in 1998 brought equity lending and the bond activity together.

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