Securities Lending

SecuritiesLending & Repo markets

Overview of the securities financing market

Definition, characteristics and comparison of main instruments used

Brief history

Standard agreements

Securities lending & repo market size and features in geographical regions

Disparate regulation, a challenge for the business

Heterogeneous tax frameworks but an on-going harmonisation in Europe

Operational efficiency and transparency

Mastering collateral management in an evolving environment

Risk versus return

Challenges & opportunities

Main players and arrangements in securities lending

Main users of repos and arrangements

Electronic trading platforms and Central Clearing Counterparts (CCPs)

Main players and arrangements

A practical guide

Canada

United States

Bermuda

Ireland

Belgium

France

Switzerland Luxembourg

Germany

Netherlands

Hong Kong

Profile

CACEIS is a global player committed to designing reliable, cutting-edge services and building long-lasting relationships with clients.A member of the Crédit Agricole Group, CACEIS is rated AA-/A-1+ by S&P, which reflects the financial support of its principal shareholder.Through offices across Europe, North America and Asia, CACEIS delivers a comprehensive set of high quality core services covering depositary/ trustee and custody, clearing, transfer agency, fund administration and issuer services. CACEIS also provides a broad range of additional high-value services, notably forex, treasury and securities lending operated from CACEIS’s own independent dealing desk. Other high-value services include collateral management, OTC derivatives administration, middle-office outsourcing, private equity fund administration and cross-border fund distribution support. As at December 2009, CACEIS ranked 1st among fund administrators in Europe with €1,060bn in assets under administration and 9th among custodians worldwide with €2,330bn assets under custody.The 3,500 highly experienced employees of CACEIS are committed to upholding quality of service in terms of responsiveness, accuracy and expertise.

Our clientsAsset managersMutual fundsInsurance CompaniesPension fundsCentral banks & Sovereign institutions Hedge fundsDistributorsBroker-dealersBanksCorporates

DEPOSITARY/TRUSTEENo.1 in Europe

No.1 in France

No.4 in Germany

€665bn

CUSTODY

No.9 Worldwide

€2,330bn

FUND ADMINISTRATIONNo.1 in Europe

No.1 in France

No.4 in Luxembourg

No.5 worldwide

€1,060bn 8,370 funds

figures as at 31 December, 2009

A top-ranking banking Group specialised in asset servicing

AA-/A-1+

http://www.caceis.com

GLOBALCUSTODY

SECURITIES LENDING & REPO

CASH REINVESTMENT

COLLATERAL MANAGEMENT

ON-LINEREPORTING

Integrated & complementary liquidity management, the best way to manageyour liquidity

Our integrated forex, treasury (including repo) and securities lending services simplify your liquidity management and minimise risk as CACEIS remains the legal counterpart. It also replies to your securities financing needs.

Dedicated experts & robust capabilities to serve you

Equipped with state-of-the-art trading technology, our dealers are highly-trained and experienced experts, with deep-seated knowledge of the financial markets and different instruments used. As they trade for CACEIS clients only, they aim to offer the most competitive rates, working in their best interests.Our liquidity management and securities financing activities are supported by solid and integrated back office capabilities to manage all operational aspects, as well as by sophisticated IT systems.

Generating value in a risk-controlled

environmentLiquidity management & securities financing

Solid rating S&P AA-/A-1+

Optimised portfolio performance

Flexibility with fully-customised programs

Special emphasis on risk control

Integrated front-to-end process

CACEIS provides direct access to financial markets for a broad range of instruments, combined with integrated post-execution processing

Foreign Exchange

Money Market & Fixed Income

Structured products

Securities Lending

At CACEIS, we strive for the highest level of risk-adjusted return and work hard to provide you with new opportunitiesin a smooth manner

Acting as Principal or Agent, CACEIS provides a full securities lending offer, from dealing to operational processing

Our services cover:• Transaction dealing with first-rate borrowers• Trade settlement within our global custody network• Collateral management with daily mark-to-market• Automatic initiation and handling of margin calls• Daily follow-up of dividend payments and corporate events• Recall of securities• Calculation and payment of commissions

Key benefits of CACEIS Principal program

• Lending for European domiciled funds• Dedicated front and back-office teams with longstanding experience

• No impact on availability of securities• No additional notification requirements from the asset manager• CACEIS manages the whole operational process from trade dealing to trade settlement

FINANCIAL INSTITUTIONS

LENDERS

CACEIS

AGENT OR PRINCIPAL

FIRST-RATECOUNTERPARTS

BORROWERS

1. Securities Lent

4. Enhanced Returns

2. Securities Lending & Repo

3. Diversified Collateral

FULLY INTEGRATED & SECURED FRONT-TO-END PROCESSING

O

PTIM

ISED

RETURNS AT MINIMUM

RISK

SPECIALISATION

SEE

MLE

SS IMPLEMENTATION

C

ACEIS, A SINGLE COUNTERPARTY


A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

FOREWORD

Continuing our series of academic guides*, we are pleased to present you our latest publica-tion dedicated to the securities lending and repo markets.

Today securities lending and repo markets are a vital component of domestic and interna-tional financial markets, providing liquidity and greater flexibility to securities, cash and deriva-tives markets. They notably improve the functioning of securities markets by allowing sellers immediate access to securities needed to settle transactions where those securities are not available, by offering an efficient means of financing securities portfolios and by support-ing participants’ investment and trading strategies. As such, they play a core role for asset managers, pension funds, insurance companies, investment banks, central banks, sovereign funds, broker-dealers and hedge funds.

The past 3 years have been challenging for the securities lending and repo markets on a global scale, as the industry experienced unprecedented events in financial markets world-wide: A credit crunch, impaired liquidity in cash collateral vehicles, the bankruptcy of a major global investment bank, increasing scrutiny from regulators and politicians, the introduction of temporary short-selling bans, and more recently sovereign risk concerns. These events ob-viously created uncertainty and many beneficial owners allocated a significant amount of time reflecting on the lessons learnt from the crisis, reviewing their securities lending programs and looking for greater transparency and control of risks. Meanwhile, the financial turmoil further enhanced the importance of the repo market and secured funding.

As the worst of the economic downturn appears now to have abated, we can assert that the securities lending and repo business has proved resilient. We are confident in the future of the industry, which is likely to remain an important element of modern financial markets. Besides, the latest industry statistics available confirm a rebound of the market from a low point in 2008.

Since clients are eager to capture the opportunities the securities lending and repo markets can bring to the table, but they need guidance so that they can do so in an environment that they are comfortable with, this publication aims to act as a reference handbook. CACEIS is an experienced player, providing asset managers, other institutional investors, broker-dealers, central banks and sovereign funds with full securities lending/borrowing and repo services from dealing to operational processing on main international markets. It is this experience, expertise and know-how gained through supporting various clients over the years that we share once again in this brochure.

You will find hereafter a comprehensive overview of the securities financing market (main instruments and standard agreements used, history, securities lending and repo market size and features), a description of the various market participants and their motivations, as well as of the main arrangements set up. The guide also discusses a number of significant challenges for the market players: Regulation and taxation, operational efficiency and trans-parency, collateral management, risk versus return. Finally it reminds the importance of ap-pointing a proven specialist to conduct this business.

We trust this publication will reply to the numerous questions you may have and that you will find it both relevant and informative.

*Cross-border distribution of UCITS, A thorough understanding of private equity

Securities Lending & Repo markets | page 3

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

EXECUTIVE SUMMARY

SECTION I – OVERVIEW OF THE SECURITIES FINANCING MARKET

The securities financing market encompasses two main types of instruments: Repo and securities loan transactions.

• Repos are a key product for market participants in search of liquidity or specific securities. As a fund-raising tool,

they are an alternative to unsecured loans and the issuance of short-term securities. They are also an essential

instrument used by central banks to manage their open-market operations in the implementation of monetary

policies.

• Securities lending provides lenders of securities with a low risk yield enhancement to their investment portfolios,

while enabling borrowers to cover failed trades or short positions.

Although these instruments may have their own specific legal, accounting and regulatory characteristics, as well as

different tax treatment, economic considerations are similar. We can distinguish securities-driven transactions, in

which parties seek to gain temporary access to specific securities against collateral, from cash-driven transactions,

in which parties seek to post securities as collateral to obtain secured cash financing.

Two main standard agreements govern the international securities lending and repo industry: The Global Master

Securities Lending Agreement (GMSLA) and the Global Master Repurchase Agreement (GMRA). In order to mini-

mise legal risks, it is highly recommended to sign such standard agreements, which clearly set out the rights and

obligations of the counterparties during the life of the transaction.

In recent years, new financial structures (total return swaps, contracts for difference, equity swaps) have emerged

as alternative securities financing instruments. These substitutes are especially useful in emerging markets where

securities lending/repo is limited to a few selected participants and where a local securities lending/repo infrastruc-

ture has not been fully developed.

The repo and securities lending business, which really developed in the United States in the 1960s before spreading

into Europe in the 1980s, has expanded rapidly in the last two decades, being now a 24-hour global activity. The fi-

nancial market turmoil that began in August 2007 with the subprime crisis and led to the collapse of Lehman Brothers

in mid-September 2008, affected the repo and securities lending markets in several ways. The importance of col-

lateral management as an as an essential tool for managing counterparty risk, in particular, was highlighted, as well

as the need for much more transparency. In the context of the crisis, regulators began looking at securities lending

and repos with greater scrutiny and short selling restrictions were put in place by a number of them worldwide.

In terms of geographical market size and features, the US global lending market is a large mature market. The US

equity lending market was until recently the largest in the world, comfortably exceeding the European and the Asian

Pacific markets. The treasuries/bonds US lending market is also very significant. In Europe, France and Germany are

the most active equities lending markets. Furthermore, the German sovereign bonds are particularly desirable as

they are considered high quality and liquid collateral. In Asia Pacific, the Japanese equities lending market is the

larger, in front of the Hong Kong and Australian markets.

The European repo market is much bigger in size than the European securities lending market, since repo has be-

come the main refinancing product in Europe. Despite its late start, the European repo market is now larger than its

US equivalent.

SECTION II – MAIN PLAYERS AND ARRANGEMENTS

Lenders are primarily institutional investors owning on a long-term basis securities portfolios of sufficient size. They

are typically asset managers, mutual funds/unit trusts, pension funds, insurance companies, endowments, etc. Their

main motivation is to get additional revenue obtained at relatively low risk on assets that would otherwise have re-

mained dormant in the securities accounts. They have various possible routes to enter the securities lending busi-

ness, direct or intermediated.

The most active borrowers of specific securities are typically major securities dealers, broker-dealers, hedge

funds, prime brokers and investment banks. They seek to borrow securities in circumstances where they do not

currently have possession of those securities. Other motivations include trading strategies requiring short posi-

tions or financing.

If theorically securities lending can take place directly between beneficial owners (lenders) and borrowers, in prac-

| Securities Lending & Repo markets


tice a number of layers of intermediaries, whether acting as agent or principal, are often involved. This can be ex-

plained by the fact that securities lending involves a variety of complex administrative, operational, accounting and

risk management activities, including credit evaluation and cash management, which may be better handled by

specialists in that field. The relationship that custodian banks have with their clients puts them in a strong position

to participate as principal or agent lender.

With regard to repo, the bilateral market must be distinguished from the tri-party market. In the bilateral market, ac-

tive repo users fall into three main categories (banks and broker-dealers, investors, central banks), all of them oper-

ating on both the cash-taking and the cash-providing sides of the market. In the tri-party arrangement, buyers and

sellers outsource the management of the collateral to a tri-party agent and there tends to be a clearer segmentation

between cash-takers and cash providers. Cash-takers are traditionally institutions such as investment banks, bro-

ker-dealers, hedge funds or prime brokers who have a constant thirst for the cheapest and most reliable sources of

liquidity in order to finance their trading activities or their investment portfolios, whereas cash-providers are typi-

cally central banks, supra-nationals, commercial banks, asset managers and other institutional investors or agent

lenders, who are looking to re-invest their cash in exchange for acceptable collateral.

In the repo market as in the securities lending market, the business is heavily relationship-driven and the majority of

transactions are still performed out of electronic trading platforms, on a voice-brokered and bilateral trading basis.

Moreover, central clearing counterparties are far from enjoying a significant market share and are the hottest point

of debate in the industry.

SECTION III – CHALLENGES & OPPORTUNITIES

In the current environment, where regulators are looking at securities lending and repos with greater scrutiny, one

of the biggest challenges facing the industry is regulation. Short-selling in particular remains a concern. Further-

more, disparate regulation and taxation among various jurisdictions is a key issue when conducting cross-border

transactions. These aspects obviously need to be taken into account as they may create restrictions of investment.

Some strategies focus on these taxation gaps to enhance yields. However, as tax harmonisation spreads, opportuni-

ties decrease.

Other challenges include operational complexity in terms of clearing and settlement for cross-border transactions

due to the fragmentation of infrastructures and the lack of automation, but also in terms of collateral valuation and

management, corporate actions and income collection processing, etc., as well as the need for highly sophisticated

collateral management and risk management infrastructures.

The risks involved in repo and securities lending should neither be under- nor over-estimated. However, they are

quantifiable and, if properly understood and monitored, manageable through a broad range of mitigation techniques.

Collateral is an essential component of securities lending and repo transactions and is the key factor which makes

them attractive secured financing instruments, compared to other products. However, one should keep in mind the

importance of selecting high-quality and liquid collateral. The United States continue to be predominantly a cash

collateral market whereas overall in Europe, non-cash collateral has historically been the collateral of choice.

Post-crisis, many beneficial owners are looking for greater transparency, control and customised lending solutions

built around their risk/return parameters and objectives. They have put greater restrictions on their programs, limit-

ing how much they will lend, what type and quality of collateral are acceptable, as well as being more selective in

who they do business with. They are increasingly requiring more information from their lending agents so that they

can better understand and evaluate the risk, returns and exposures in their programs.

Among the beneficial owners, we also witness the re-emergence of the intrinsic value model of securities lend-

ing which produces returns based upon the securities loan itself, with little incremental benefit from collateral

reinvestments.

As a conclusion, securities lending and repo are complex markets where business expertise and the right capa-

bilities are of paramount importance to succeed. Additionally, securities financing and liquidity management re-

quire a professional approach and scale capabilities.

A glossary is provided in appendix, as well as a copy of the GMSLA and GMRA standard agreements respectively used for securities lending and repo transactions in international markets.



OVERVIEW OF THE SECURITIES FINANCING MARKET ....................................................................... 9

1.1 Definition, characteristics and comparison of main instruments used ............................ 9

1.1.1 Repurchase agreements (repos) ............................................................................................. 9

1.1.2 Securities loans .............................................................................................................................. 13

1.1.3 Comparison of both instruments........................................................................................... 16

1.1.4 Alternative securities financing instruments ................................................................... 17

1.2 Brief history ................................................................................................................................................ 18

1.2.1 Early stages of securities lending and repo markets .................................................. 18

1.2.2 The 1960s and 1970s: The development of securities lending

and repo markets ......................................................................................................................... 19

1.2.3 The 1980s and 1990s: The globalisation of securities lending

and repo markets ........................................................................................................................ 19

1.2.4 The 2000s before the financial crisis: Growth of emerging markets,

development of new transaction types and arrangements ..................................... 20

1.2.5 2007-2010: The credit crunch and the Lehman collapse ...................................... 20

1.3 Standard agreements ............................................................................................................................. 21

1.3.1 The GMSLA ...................................................................................................................................... 21

1.3.2 The GMRA ........................................................................................................................................ 22

1.3.3 The EMA ............................................................................................................................................ 23

1.4 Securities lending & repo market size and features in geographical regions ............. 24

1.4.1 Analysis of RMA data (global lending market) ................................................................. 24

1.4.2 Analysis of ICMA data (European repo market) ............................................................. 27

MAIN PLAYERS AND ARRANGEMENTS ................................................................................................. 31

2.1 Main players and arrangement in securities lending .............................................................. 31

2.1.1 Lenders (Beneficial owners) ..................................................................................................... 31

2.1.2 Borrowers......................................................................................................................................... 33

2.1.3 Intermediaries ................................................................................................................................ 34

2.2 Main users of repos and arrangements ........................................................................................ 38

2.2.1 Bilateral repo market .................................................................................................................. 38

2.2.2 Tri-party repo market .................................................................................................................. 39

2.3 Electronic trading platforms and Central Clearing Counterparts (CCPs) ..................... 40

2.3.1 Electronic trading platforms .................................................................................................... 40

2.3.2 Central Clearing Counterparties (CCPs) ............................................................................ 41

CHALLENGES & OPPORTUNITIES .............................................................................................................. 43

3.1 Disparate regulation, a challenge for the business ................................................................... 43

3.1.1 General points ................................................................................................................................. 43

3.1.2 Recent developments.................................................................................................................. 43

3.2 Heterogeneous tax frameworks but an on-going harmonisation in Europe .................. 44

3.2.1 Current tax framework in main countries ......................................................................... 44

3.2.2 Recent developments.................................................................................................................. 49

3.3 Operational efficiency and transparency ........................................................................................ 50

3.3.1 Clearing and settlement challenges ..................................................................................... 50

3.3.2 Other operational challenges .................................................................................................. 50

3.3.3 Investors’ focus on transparency .......................................................................................... 51

3.4 Mastering collateral management in an evolving environment ........................................... 52

3.4.1 Reminder of basic collateral principles ............................................................................... 52

3.4.2 Marking collateral to market and collateral optimisation, 2 key challenges ..... 52

3.4.3 The importance of high-quality and liquid collateral ...................................................... 53

3.4.4 An overview of assets used as collateral in securities lending

and major trends........................................................................................................................... 54

3.4.5 Cash collateral reinvestment in securities lending programs ................................. 55

1.

2.

3.



3.5 Risk versus return ..................................................................................................................................... 55

3.5.1 Risk management considerations ........................................................................................ 55

3.5.2 Securities lending returns mechanisms ............................................................................ 57

3.5.3 New model of returns towards intrinsic value ................................................................ 57

CONCLUSION ....................................................................................................................................................... 59

BIBLIOGRAPHY ................................................................................................................................................................ 60

GLOSSARY ............................................................................................................................................................. 61

APPENDIX – GMSLA AND GMRA STANDARD AGREEMENTS ................................................... 71



INDEX OF FIGURES

FIGURE TITLE PAGE

1 Illustration of a standard repo transaction 10

2 Valuated example of a repo transaction 11

3 Repo transaction lifecycle 11

4 Illustration of a standard securities lending transaction 13

5 Valuated example of a securities loan transaction 14

6 Securities lending transaction lifecycle 15

7 Comparison of repo and securities loan instruments 16

8 Illustration of a financing arrangement combining securities lending and repo 16

9 How total return swaps (TRS) work 17

10 Evolution of securities lending and repo markets across time 18

11 Aggregate total of lendable assets and total on loan worldwide (Q2 2010) 24

12 Total on loan, breakdown by geographical region in USDMM and in % (Q2 2010) 24

13 Lendable assets and total on loan, North America (Q2 2010) 25

14 Lendable assets and total on loan, Europe (Q2 2010) 26

15 European equities on loan, breakdown by country (Q2 2010) 26

16 Lendable assets and total on loan, Asia Pacific (Q2 2010) 27

17 European repo market size from 2001 to 2009 28

18 Cash currency analysis in the European repo market as at December 2009 28

19 Collateral analysis in the European repo market as at December 2009 29

20 Main players involved in securities lending transactions 31

21 Illustration of a typical “Principal borrower” model offered by a custodian bank 32

22 Illustration of trading strategies relying on securities borrowing 33

23 Illustration of a typical “lender agent” model offered by a custodian bank 34

24 Benefits for beneficial owners when employing an agent lender 35

25 Tri-party collateral management arrangement 36

26 Illustration of a typical tri-party arrangement 39

27 Automatic trading systems market share in the European repo market as at December 2009 41

28 Illustration of an arrangement with a CCP 41

29 Tax framework in North America (based on information current as at 01/01/2010) 45

30 Tax framework in Europe (based on information current as at 01/01/2010) 46

31 Tax framework in Asia Pacific (based on information current as at 01/01/2010) 48

32 An overview of the most important changes related to new FATCA Act in the US 49

33 IIllustration of a typical arrangement to optimise collateral management 53

34 % of collateral taken as cash in securities lending transactions 54

35 Illustration of the cash collateral reinvestment process 55

36 Identification of risks in repo & securities lending and means of mitigation 56



OVERVIEW OF THE SECURITIES FINANCING MARKET

Definition, characteristics and comparison of main instruments used

The securities financing market encompasses two main types of instruments: Repo and

securities loan transactions. Although these instruments may have their own specific le-

gal, accounting and regulatory characteristics, as well as different tax treatment, economic

considerations are similar.

We can distinguish securities-driven transactions, in which parties seek to gain temporary

access to specific securities against collateral, from cash-driven transactions, in which

parties seek to post securities as collateral to obtain secured cash financing. In general

securities loan is more likely to be securities-driven whereas repo is rather cash-driven.

Repurchase agreements (repos)

Repo is the generic term for repurchase agreement.

It is one of the most widely used securities financing instruments and has become a key

source of capital market liquidity, through the lending of securities against cash. Repos

are integral components of the banking industry’s treasury, liquidity and assets/liabilities

management disciplines. They are also an essential transaction used by central banks for

the management of open market operations.

A repo transaction involves a short-term sale of securities by a seller (cash-taker) versus a

transfer of cash by a buyer (cash-provider), with a simultaneous agreement for the seller to

repurchase the same or similar securities at a future date or on demand at an agreed upon

price (equal to the original sale price plus a return on the use of the sale proceeds during

the term of the repo transaction).

The maturity of a repo can be one day (overnight repo) or a longer term (typically from 2

days to 3 months).

The assets temporarily sold in a repo on the purchase date are held as collateral by the

counterpart. Thus, the seller is also called collateral-provider, while the buyer is called

collateral-taker.

These assets held as collateral are a form of protection in the event the seller is not able to

return the borrowed cash at the end of the repo agreement. Indeed, if the seller defaults, the

buyer can liquidate the collateral in order to recover its cash. In addition, if the issuer of the

collateral defaults, the buyer can secure fresh collateral from the seller by making a margin

call. Both events of default are possible but are unlikely to occur at the same time, provided

the issuer of the collateral and the counterparty are sufficiently independent entities and

their credit risks have a low correlation.

Settlement of a repo transaction involves the delivery of the securities and the transfer

of funds between the buyer and seller. In a classic repo, both legs of trade settle delivery

versus payment (DVP).

1.

1.1

1.1.1

OVERVIEW OF THE SECURITIES

FINANCING MARKETS

1.1

1Source: Euroclear, “Understanding repo and the repo market”, March 2009



At the beginning of a transaction, securities are valued and sold at the prevailing “dirty”

market price (including any coupon that has accrued), also called “all in price”.

Between the sale and the repurchase:

> The seller gets the use of the cash proceeds of the sale of the assets.

> The buyer gets legal title to the assets received in exchange for the cash it has paid. If

the seller defaults on the repurchase, the buyer can liquidate the assets to recover some

or all of its cash. In addition, as the buyer owns the collateral assets, he can re-use them

during the term of the repo by selling the assets outright, “repoing” them or pledging them

to a third party. The buyer must buy back the assets by the end of the repo in order to be

able to sell them back to the seller.

> Any coupon or dividend paid to the buyer during the term of the transaction is immediate-

ly passed through to the original owner of the securities (i.e. the seller). This equivalent

payment made by the buyer to the seller is called manufactured payment or manufac-

tured dividend.

Upon termination of the repo, the securities are returned to the initial seller and the cash

investor receives back the original sale price plus a previously agreed upon interest rate

(the repo rate), as illustrated by figure 1.

The repo rate can be fixed or floating (e.g. indexed to EONIA).

In securities-driven transactions (where the motivation is not simply financing) the repo

rate is typically set at a lower rate than prevailing money market rates to reward the “lend-

er” who will invest the funds in the money markets and thereby seek a return. The “lender”

often receives a margin by pricing the securities above their market level.

In cash-driven transactions, the repurchase price will typically be agreed at a level close to

current money market yields, as this is a financing rather than a security specific transac-

tion. The right to substitute “repoed” securities as collateral is agreed by the parties at the

outset. A margin is often provided to the cash “lender” by reducing the value of the trans-

ferred securities by an agreed “haircut” or discount.

OVERVIEW OF THE SECURITIES FINANCING MARKETS

Party ASELLER/CASH-TAKER

Securities (€50M worth)

Securities

Cash (€50M)

REPO TRADE INITIATION Both parties agree to a repo rate Party A sells €50M worth of securities to Party B against the transfer of €50M in cash from Party B

REPO TRADE TERMINATION Party B returns the securities to Party A against the payment of the original €50M in cash + the repo interest earned for the period

Party A

Party BBUYER/CASH-PROVIDER

Party B

Cash (€50M + repo interest)

Repo transaction characteristicsTrade dateSettlement dateSeller identityBuyer identityMaturity Collateral name and IDNominal valueRepo rateSettlement instructions

Figure 1: Illustration of a standard repo transaction

Copyright CACEIS, 2010



Figure 2 displays a valuated example of a repo transaction

If rights of substitution of collateral have been negotiated up-front between the parties, the

seller can get back the securities before the termination of the repo and substitute them

with other securities of at least equal quality and value, acceptable to the buyer.

Furthermore, a repo transaction can generally be terminated by the parties involved with a

24- or 48-hour advance notice (call).

Such rights of substitution and 24- or 48-hours calls give sellers flexibility in managing their

securities portfolios.

Figure 3 schematises the typical lifecycle of a repo transaction, from its initiation to its termination.


FINANCING MARKETS

1.1

Figure 2: Valuated example of a repo transaction

Trade date 16/09/2010

Settlement date 20/09/2010Termination date 20/10/2010Term 30 days

Seller Firm B

Buyer Firm ASecurity Bund DBR 4% 4/1/18Nominal amount €10,000,000.00Clean price 112.550685Accrued interest 2.8493All in price 115.40Cash payment (purchase price) €11,540,000.00Repo rate 0.40% per year

On termination, Firm A returns the securities to Firm B on a DVP basis and the Firm B re-pays Firm A the original cash amount of €11,540,000.00 plus 30 days’ return on that cash at the agreed repo rate of 0.40% per year. The return is calculated as follows:€11,540,000.00 x 0.40% x 30/360 = €3,846.67


For clarity, processes have been simplified.

REPO INITIATION

2 - NEGOTIATION OF TERMS BETWEEN THE PARTIES Nature of collateral delivered against cash, duration, rates

3 - CONFIRMATION OF PURCHASE TRANSACTION

Written or electronic confirmation issued on the day of the trade, including contract and settlement dates, details of repoed securities, identities of buyer and seller, haircut, term, rates, bank & settlement a/c details of the buyer & seller

4 - SETTLEMENT Delivery of the securities and transferof funds between the buyer and seller (DVP)

5 - DAILY MARK TO MARKET

Daily mark to market to ensure that the cash received matches the daily market value of the securities sold in repo. Margin callsoccur between the buyer and the seller

6 - POSSIBLE EVENTS: Collateral substitution (if right of substitution)

Re-pricingCorporate action on the securitiessold in repoProrogation of term

7 - REPURCHASE OF SECURITIES BY SELLER, PAYMENT OF CASH + INTEREST

At the end of the repo (pre-defined term or on seller’s recall for open repos), the buyer resells the securities to the seller and deliver them via its custodian bank/sub-custodian network or ICSD). At the same time, the seller returns the funds to the buyer plus an interest calculated according to the repo rate negotiated up-front.

REPO IN PROGRESS

REPO TERMINATION

> > >

>

1 - MEETING OF THE FINANCING NEEDS

>

>

A seller needs cash/ wants to finance its securities available

A buyer wants to remunerate its cash available in a secured manner

Figure 3: Repo transaction lifecycle




• GC versus Specials The general motivation for repos is financing, i.e. the need to borrow or lend cash. Such

repos are called “General Collateral (GC) repos” and constitute the bulk of the repo market.

With GC repos, the buyer does not insist on the seller providing a particular securities

issue as collateral but will accept any of a range of similar quality issues

However, repos can also be used to borrow securities in order to cover short positions. In

that case, buyers will seek a specific security as collateral in the repo market. Such repos

are called “specials” and are comparable to securities lending. The interest given up by

the buyer of a special in the repo market is equivalent to the fee paid by the borrower

of the same securities in the securities lending market. The repo rate for a security in

demand is generally below the GC repo rate.

• Reverse repo A reverse repo is the mirror image of a repo (buyer’s viewpoint). It involves the short-term

purchase of securities versus a transfer of cash, with a simultaneous agreement to resell

the securities at a future date at an agreed-upon price. Reverse repos may be used to

borrow specific securities in order to cover short positions, to finance a new purchase or

meet short-term cash needs.

• Credit repo The bulk of collateral in most repo markets is comprised of domestic government bonds, gen-

erally considered as free of default risk and liquid.

An alternative collateral repo market – called “credit repo” and including instruments such as

covered bonds, other Mortgage-Backed Securities (MBSs), other Asset-Backed Securities

(ABSs), Collateral Debt Obligations (CDOs) or unsecured corporate bonds – also exists but is

much smaller and was set back by the recent crisis.

• Equity repo In addition to traditional government bonds repos that have been around for many years, it

should be noted that there is a growing but still fairly new equity repo market. In the past,

equity repo was not popular because fixed income assets were considered the most safe, but

with the collapse in the structured products market and as modern markets have expanded,

banks and broker-dealers have sought to increase their financing capabilities by using alter-

native forms of repo collateral, such as equities. Equity repo has become a strong component

of the overall repo market because of the benefits provided by transparent pricing, which is a

more dependant book of liquidity, and reduced execution risk. Adding equity repo to a portfo-

lio disaggregates risk and makes it more transparent. Simply put, equity repo is a repurchase

agreement, which uses various types of equities as collateral2.

The repo market is currently a key tool for market participants in search of liquidity or

specific securities. As a fund-raising tool, repos are an alternative to unsecured loans

and the issuance of short-term securities. Originally confined to the back-office, repo

has gradually grown in importance and is now considered as an integral liquidity man-

agement tool for all financial institutions across the industry. Repo is also an essential

tool used by central banks to manage their open-market operations in the implementa-

tion of monetary policies. With unsecured financing no longer an option beyond the very

short term, the repo market has become increasingly attractive.


2Source: Investor Services Journal, “Securities Lending Market Guide 2009”, 2009



Securities loans

Securities loan refers to a transaction in which one party (the lender) transfers to another

party (the borrower) securities (equities, bonds), often against the transfer of collateral in

order to protect the lender against the possible default of the borrower, with the simulta-

neous agreement by the borrower to transfer to the lender equivalent securities on a fixed

date or on demand (open), against the transfer to the borrower by the lender of assets

equivalent to such collateral.

Open term loans, which can be recalled at any time with a minimal notice period, are more

commonly used than fixed term. Indeed, they provide flexibility as they enable the lender to

exit the securities lending transaction on demand and sell at any time the concerned securi-

ties. Thus, in a deteriorating credit environment a lender can reduce his exposure to, or even

cease trading with, a counterpart in very short order.

Throughout the life of the loan, the market value of the lent securities and of the collateral (if

securities collateral) will fluctuate. To maintain sufficient levels of collateralisation, a daily (or

even intraday) mark to market is typically done and margin calls are exchanged accordingly

between the parties.

The borrower pays the lender a fee for the use of the borrowed securities, paid monthly or at

the termination of the transaction (in fine). This fee takes into account factors such as demand

and supply (the more sought-after on the market securities are, the higher the fee a lender

can obtain) or collateral flexibility.

In case of cash collateral, the securities lender pays the borrower an interest rate calculated

on the cash collateral received (rebate rate). A rebate rate of interest implies a fee for the loan

of securities and is therefore regarded as a discounted rate of interest.

Figure 4 illustrates the characteristics and the main flows of a standard securities lending

transaction, while figure 5 shows a valuated example of securities loan transaction.


FINANCING MARKETS

1.1.2

1.1

Party A«LENDER»

Securities lending

Collateral delivery (Cash/Securities)

Margin calls

Lending fee

Possible interest on cash collateral (rebate)

Party B«BORROWER»

Party B

Securities lending transaction characteristicsTrade dateSettlement dateLender identityBorrower identityMaturity (open/fixed)Security name and IDDividend entitlementQuantity lentLoan market valueLending feeNature of collateral(cash/securities)Margin required Amount of collateral requiredSettlement instructions

Figure 4: Illustration of a standard securities lending transaction




Securities lending involves the absolute transfer of title to both the securities lent and the

collateral taken, from the lender to the borrower3 :

> The borrower can re-sell the securities borrowed.

> Any voting rights are transferred along with title. Securities must therefore be recalled

by the lender, or collateral substituted by the borrower, if they wish to exercise the voting

rights attached to equities.

> Although the borrower, as owner of the securities, is entitled to the possible economic

benefits associated with ownership such as dividends and coupons, he is under a con-

tractual obligation to make equivalent payments of all distributions, if any, paid during the

term of the trade, to the lender. This payment pass-through by the borrower to the lender

is known as a “manufactured” payment or dividend.

Figure 6 illustrates the typical lifecycle of a securities lending transaction, from its initiation

until its termination.


3Source: Source : Bank of England & the Securities Lending and Repo Committee (SLRC),

“Securities borrowing and Lending Code of Guidance”, July 2009

Figure 5: Valuated example of a securities loan transaction

Trade date 02/08/2010

Value date 03/08/2010Termination date 10/08/2010Lender Firm A

Borrower Firm B

Securities lent Credit Agricole SA (shares - ISIN FR0000045072)Quantity of securities lent 1,000,000.00 (shares)Market value per share €10.90Total market value €10,900,000.00Lending fee 20 bps p.a.Payment of fee in fine Securities collateral FRANCE OAT FRTR 3 ½ 04/15 (ISIN FR0010163543)Collateralisation level 105%Dirty price of FRANCE OAT (rounded) 108%

Firm A agrees to lend 1,000,000.00 shares of Credit Agricole equities for a period of 7 days to Firm B against French Government bonds as collateral:> The collateralisation level required being 105%, the need in collateral is €10,900,000.00 x 105% =

€11,445,000.00. > The dirty price of the FRANCE OAT FRTR 3 ½ 04/15 collateral being 108%, the nominal amount of

FRANCE OAT FRTR 3 ½ 04/15 required is €11,445,000 /108% = €10,597,222.00 (rounded to €10,600,000.00)

On the value date, Firm A delivers to Firm B a quantity of 1,000,000 of Credit Agricole equities and Firm B delivers to Firm A FRANCE OAT FRTR 3 ½ 04/15 collateral for a nominal amount of €10,600,000.00.For simplification purposes, let’s consider that the market value of the securities lent remain steady during the term of the transaction and that no margin call is operated between both parties.

At the termination of the transaction:> On re-delivery of the Credit Agricole equities, Firm B will pay Firm A a lending fee of 20bps on the

€10,900,000.00 securities value borrowed for 7 days, i.e. 0.2% x 10,900,000.00 x 7/360 = €423.89> Firm A will re-deliver the securities collateral received to Firm B.



A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010OVERVIEW OF

THE SECURITIES FINANCING MARKETS

It should be noted that constraints such as accepted types of securities, loan periods, coun-

terparties, collateral, limits per issue, per fund and per counterparty often make each trade

a specific transaction.

The reasons why a borrower needs to temporarily borrow securities vary but generally the

securities lent are needed to support a trading strategy or a settlement obligation. These

motivations are further analysed in section II.

• GC versus Specials As for repos, the securities lending market makes the distinction between GC and Specials.

> The General Collateral (GC) market is composed of securities that are not in high demand by

the market, i.e. commonly and largely available securities.

> On the contrary, Specials – also called “hot” securities or “specifics”- refers to securities

that are specifically located and highly demanded in the market. The “hotter” the portfolio,

the higher the returns to lending.

Securities lending provides lenders of securities with a low risk yield enhancement

to their investment portfolios, while enabling borrowers to cover failed trades or

short positions.

Today modern securities lending is a specialised activity, which can significantly con-

tribute to the generation of alpha and the overall performance of investment funds.

1.1

For clarity, processes have been simplified. Direct lending model (no intermediary)

LOAN INITIATION

5 - DAILY MARK TO MARKET The lender performs daily mark to market to ensure that the collateral is adjusted based on the daily market value of the securities lent. Margin calls occur between the lenderand the borrower

6 - POSSIBLE EVENTS: Collateral substitution Portfolio substitution Re-rate Re-pricing Corporate action on the securities lent Prorogation of term

LOAN IN PROGRESS

LOAN TERMINATION

> > > >

> >

1 - MEETING OF THE SUPPLY & DEMAND> A borrower needs a particular security> A beneficial owner wants to place its securities available for loan

4 - COLLATERAL DELIVERYThe borrower delivers cash or securities collateral to the lender (e.g. 105% of the loan value). In case of pre-collateralisation, collateral is delivered before securities

4 bis - SECURITIES DELIVERYSettlement through the lender’s and the borrower’s custodian banks, sub-custodian networks or ICSD (intruction to deliver vs instruction to receive)

2 – NEGOTIATION OF TERMS BETWEEN THE PARTIES > Quantity of securities lent, duration, rates, collateral

3 - CONFIRMATION OF TRANSACTIONWritten or electronic confirmation issued on the day of the trade, including contract and settlement dates, details of lent securities, identities of borrower and lender, acceptable collateral and margin %, term, rates, bank & settlement a/c details of the lender & borrower

7- RETURN OF SECURITIES TO LENDERAt the end of the loan (pre-defined term or on lender’s recall for open loans), the borrower returns the securities to the lender via its custodian bank/sub-custodian network or ICSD

7bis - RETURN OF COLLATERALAt the end of the loan, the lender returnsthe collateral taken to the borrower

8- PAYMENT OF LENDING FEESAt the end of the loan, the borrower pays lending fees to the lender

Figure 6: Securities lending transaction lifecycle




Comparison of both instruments

For the purpose of clarity, the following table sums up the main differences between repos

and securities loans.

It should be noted that both instruments can be combined and used one after the other as

illustrated in figure 8; Instead of directly going to the repo market, dealers may in a first step

go to the securities lending market to exchange lesser rated securities or equities against

securities easier to finance on the repo market such as government bonds, and in a second

step go to the repo market to exchange the government bonds obtained against cash.


1.1.3

Figure 8: Illustration of a financing arrangement combining securities lending and repo

Party ALENDER

Lending of lesser rated securities or equities

Receipt of government bonds as securities collateral (or cash)

Party ASELLER

Party BBORROWER

Party CBUYER

Cash

1 - SECURITIES LOAN

2 - REPO

Sale of the government bonds in the framework of a repo transaction (Collateral)


Figure 7: Comparison of repo and securities loan instruments

Repo Securities loan

General motivation> The need to borrow and lend cash > The need to borrow and lend

securities

Parties involved > Buyer and seller > Lender and borrower

Maturity

> Overnight> Term With a right of exit (24- or 48- hours call) and/or a right of substitution, depending on conditions agreed between the parties

> Term> Open

With a right of recall of securities during the term of the transaction by the lender

Form of exchange> Cash against securities collateral > Securities against securities

collateral or cash collateral

Asset type

> Mainly bonds > But an increasing equity repo market

> Mainly equities> Bonds

Returns

> Difference between sale price and repurchase price, quoted as separate repo rate

> Fees for securities lent> Interest on cash collateral

Coupon/dividend payment on the underlying security

> Coupon or dividend passed on immediately by the buyer to the seller of the security

> Coupon or dividend manufactured by the borrower to the lender

Main legal documentation used in international markets

> GMRA standard agreement > GMSLA standard agreement




Alternative securities financing instruments

Although the most common, repo and securities loan are not the only securities finance

instruments. In recent years, new financial structures, such as total return swaps (TRSs) –

see illustration figure 9 -, contracts for differences (CFDs) and equity swaps, have been de-

veloped and increasingly become an alternative to the classic securities lending and repo

instruments described in the previous sections. These synthetic or swap transactions have

the same economic effect as securities lending/repo but do not involve an actual exchange

of securities and are treated as off-balance sheet transactions. They are typically governed

by ISDA international standard agreements.

These substitutes are especially useful in emerging markets where securities lending/repo

is limited to a few selected participants and where a local securities lending/repo infra-

structure has not been fully developed.

They also gives access to the securities lending/repo markets to additional entities that

may not have the infrastructure to monitor fees and rebates or are not permitted to conduct

securities lending/repo transactions under regulatory guidelines but can trade options.

Furthermore, they can be attractive to counterparties that want to avoid the operational

burden of securities settlement or that face tax obstacles to securities lending.

In Taiwan for example, where securities lending is complicated by the combined influence

of a tax on earnings and different settlement timetables for purchases and sales, offshore

synthetic transactions have provided a convenient alternative to the onshore market4.

1.1.4


FINANCING MARKETS

1.1

Figure 9: How total return swaps (TRS) work

1 – Institution sells security (e.g. bond) at market price

2 – Institution executes a swap transaction for a fixed term, exchanging the total return on the security for an agreed rate on the relevant cash amount

In theory, each leg can be executed separately with different parties but in reality trade is bundled together and so economically identical to a repo.

The bond trader will receive the “total return” on the bonds, which means that:> if bond rises in value, trader pays the difference in value to the counterparty.> if bond falls in value, the trader will receive the difference from the counterparty.

As part of the swap, trader pays for example Libor +/- swap on the cash proceeds.

The cash investor counterparty has full title and can sell securities in the open market at termination.

Dealer has no legal obligation to repurchase the bonds.

The trade will take bonds off dealer’s balance sheet, which may be desired if a year-end is approaching.

3 – On maturity of the swap, institution repurchases security at the market price


4Source: JP Morgan, “Securities lending as an asset management technique”, 2010



1.2.

1.2.1


Brief history5

The repo and securities lending business, which really developed in the United States in

the 1960s before spreading into Europe in the 1980s, has expanded rapidly in the last two

decades, being now a 24-hour global activity.

This sub-section relates the history of securities lending and repo markets from the 19th

century until today. Figure 10 displays the main events which formed the industry across

time.

Early stages of securities lending and repo markets

Securities lending began with the development of securities trading markets and can be

traced back to the 19th century in the United Kingdom, where specialist intermediaries

sourced gilts for the jobbers or market makers. Collateral, typically non-cash, passed be-

tween the parties at the end of the trading day and offered protection for the lenders. A two-

tier market quickly emerged: A security specific or “special” market and a more generic

financing or “general” market.

Repos were introduced later on, with the first developed repo market created by the US

Federal Reserve in 1918, to give effect to the Federal Reserve’s open market operations.

6Source:

Euroclear, “Understanding repos

and the repo markets”,

March 2009

Global Custodian, “Collateral:

Securities Lending, Repo, OTC

Derivatives and the Future of

Finance”, 2007

Spitafields Advisors, “An intro-

duction to Securities Lending”,

Third edition, 2006

IOSCO, “Securities lending trans-

actions: Market development and

implications”, July 1999

Figure 10: Evolution of securities lending and repo markets across time

Depo

sito

ry/

Cent

ral a

dmin

TIM

ELIN

EM

AIN

EVE

NTS

Fund raising

Early stagesThe development of securities lending and repomarkets

The globalisation of securities lending and repo markets

The credit crunch and the Lehman collapse

Growth of emerging markets, development of new transaction types and arrangements

19th century and first half of the 20th

1960s &1970s 1980s &1990s The 2000s before the financial crisis

2007-2010

Beginning of securities lending in the 19th century

Development of an active inter-dealer market in stock loans in the US in the 1960s

Development of a financing market in US treasury bonds in the US in the 1960s

1st cross-border or international sec. lending transactions in the 1970s

US custodian banks began securities lending programsin the 1970s

The US treasury bond repo market becomes a key part of the money market in the 1970s

Development of modern repo in the US in the 1980s

Importation of repos into Europe by US investment banks during the 1980s

Sharp increase of sec.lending volumes, supported by hedging and trading strategies

Repo adopted by Eurosystem as a key instrument

Rising hedge fund industry and prime brokerage arrangements

Growth of sec. lending emerging markets

Subprime crisis in August 2007

Lehman collapse in September 2008

Short-selling restrictions put in place by many regulators worldwide

Removal of many regulatory, tax and structural barriers to sec. lending throughout the world in the 1990s

Rapid growth of the European repo market

Asian crisis in 1997

Launch of the euro in 1999

Creation of the 1st developed repo market in the US in 1918

Repo-related events

Securities lending-related events

Events impacting both repo & securities lending


1.2



1.2.2

1.2.3


FINANCING MARKETS

The 1960s and 1970s: The development of securities lending and repo markets

As the US securities trading markets expanded, so did the securities lending markets from

the 1960s, with the development of an active inter-dealer market in stock loans in the United

States during this decade, which was associated with increased short-selling activity and

a rising incidence of settlement fails. Separately, a financing market developed in US Treas-

ury bonds to enable dealers to finance their inventory through repo transactions with cash

lenders such as banks and corporations.

The first cross border or international securities lending transactions took place in the

1970s. During that time, US custodian banks began to lend specific securities to broker-

dealers on behalf of their clients such as insurance companies, endowment funds and cor-

porate investment portfolios. Meanwhile, the US treasury bond repo market became a key

part of the money market, as an alternative to interbank deposit and bill/CD markets.

The 1980s and 1990s: The globalisation of securities lending and repo markets

The modern repo developed in the United States in the 1980s, driven by securities firms

which lacked access to retail or interbank deposits. Without repo, such firms had to borrow

in the unsecured market by issuing commercial papers and taking loans, both financed by

commercial banks. The cost of such unsecured funds to securities firms was high, reflect-

ing the highly leveraged and risky nature of their business. The collateralised nature of repo

allowed securities dealers to benefit from a reduction in the cost of funding and an increase

in leverage. Direct access to end-investors also did away with the need of third-party inter-

mediaries such as the commercial banks.

The European repo market development has been heavily influenced by the major US in-

vestment banks, who imported the repos into Europe during the 1980s to make up for the

lack of securities lending markets in countries such as Italy and to support trading in bund

futures from 1988.

In 1981, the Employee Retirement Income Security Act (ERISA), a US law governing private

US pension plan activity, was amended to permit plans to lend securities in accordance

with specific guidelines. This amendment led growth in securities lending.

In 1982, the collapse of Drysdale Securities, a US securities firm, had a profound impact on

the securities lending and repo industry. It led to the standardisation of contracts, collateral

margin requirements being specified, coupon accrual being established and more careful

scrutiny of counterparties and their balance sheets.

Securities lending volumes increased sharply in the 1980s and 1990s, supported by hedging

and trading strategies, as well as by the removal of many regulatory, tax and structural bar-

riers to securities lending throughout the world during the 1990s. The activity also became

increasingly international and the large US custodian banks began to run their securities

lending businesses on a global basis from hubs in Europe, Japan and North America.

In 1991, legislation in the United Kingdom reinstated the ability of British investors to lend non-

UK assets. Further regulatory changes permitted British unit trusts to lend their securities.

Meanwhile the European repo market also grew at a dramatic pace, interrupted occasion-

ally by market crises. By the early 1990s, most of the major European banks had followed



the US pioneers into the nascent European repo market. The reform of the French market

in 1994 and the creation by the Bank of France of a group of repo primary dealers known

as “Spécialistes en pensions sur valeurs de Trésor (SPVTs)”, as well as the opening of a

sterling repo market in the United Kingdom in 1996 and a change in regulation in Germany

the same year to exempt repos from the minimum reserve requirement, played a key role

in the take-off of the European repo market. Other key drivers included regulatory capital

pressure on unsecured lending and the rapid growth of hedge funds and proprietary trading

in fixed income.

In 1997, the industry was marked by the Asian crisis, when liquidity really dried up. This was

the first elevation of the business – so far considered as a back-office activity mainly used

for settlement coverage and not properly recognised as a business in its own right - with se-

curities lending and repo being used to protect liquidity; It was no longer just an operational

business but a funding business.

The rising hedge fund industry and the increasing use of prime brokerage arrangements

were key factors in the more recent growth of securities lending and repos.

The growth of securities lending itself also further fueled repo market volumes as the lend-

ers often turned to the repo markets to reinvest the cash collateral received.

The 2000s before the financial crisis: Growth of emerging markets, deve-lopment of new transaction types and arrangements

With the start of European Monetary Union in January 1999, the Eurosystem adopted repos

as a key instrument and in the 2000s, central banks began using repo more widely, not only

as a liquidity management instrument, but also as an efficient way of funding investments

and investing their growing pools of reserves. Meanwhile, the market became more seg-

mented, with specialist regional players developing and outsourcing developing (e.g. third

party securities lending agents). New securities lending markets such as Brazil, India, Korea

or Taiwan emerged, as well as new transaction types (e.g. equity repo, contracts for diffe-

rences, total return swaps).

The rising hedge fund industry and the increasing use of prime brokerage arrangements

were key factors in the more recent growth of securities lending and repos.

The growth of securities lending itself also further fueled repo market volumes as the len-

ders often turned to the repo markets to reinvest the cash collateral received.

2007-2010: The credit crunch and the Lehman collapse

The financial market turmoil that began in August 2007 with the subprime crisis and led to

the collapse of Lehman Brothers in mid-September 2008, affected the repo and securities

lending markets in several ways. Below are a few – non exhaustive – illustrations of major

impacts faced by the industry:

> During the liquidity crisis, a global shift from unsecured to secured financing was expe-

rienced. Unsecured money market models collapsed and the markets in general were

looking for deeper protection. In this difficult context, securities lending and repo instru-

ments provided a secured option to market participants. As the ability of banks and other

institutions to borrow in the interbank market was severely constrained, repos offered an

alternative form of financing to market participants.

1.2.4

1.2.5


1.3


A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010OVERVIEW OF

THE SECURITIES FINANCING MARKETS

1.3

1.3.1

Since then the market has been facing a huge liquidity surplus, which had again a signifi-

cant impact on the securities lending and repo industry as key liquidity management tools.

> After the collapse of Lehman Brothers, who was a major borrower, the market partici-

pants had to experience the liquidation processes in real-life. Fortunately, the majority

of lenders closed out successfully and did not lose out, demonstrating the solidity of the

securities lending business for beneficial owners. However, the importance of collat-

eral management as an essential tool for managing counterparty risk was highlighted,

as well as the need for much more transparency, especially in the United States where

some breach of trust relating to cash collateral reinvestment programs were put under

the spotlight.

> In the context of the crisis, regulators began looking at securities lending and repos with

greater scrutiny and short selling restrictions were put in place by a number of them

worldwide, generating negative impact on the business and creating uncertainty. Some

restrictions are still in force at the time of writing.

Standard agreements

Two main standard agreements govern the international securities lending and repo in-

dustry: the Global Master Securities Lending Agreement (GMSLA) and the Global Master

Repurchase Agreement (GMRA). Another option in Europe consists in using the European

Master Agreement (EMA). All these agreements are described hereafter.

In order to minimise legal risks in repo and securities lending transactions, it is highly recom-

mended to sign such standard agreements, which clearly set out the rights and obligations

of the counterparties during the life of the transaction and in the event of a problem arising

(e.g. default by one of the parties). It should be noted that in the context of the Lehman

default, these contracts have proven to be robust when enforced in a real default scenario.

The GMSLA

The Global Master Securities Lending Agreement (GMSLA), issued by the International Se-

curities Lending Association (ISLA), is the standard agreement for securities lending in the

international market.

Signed between the lender and the borrower of securities, it defines the terms and condi-

tions governing the securities lending transactions operated between both parties through-

out the contract lifecycle:

> Loans of securities ;

> Delivery ;

> Collateral (including acceptable form of collateral and margin) ;

> Distribution and corporate actions ;

> Rates applicable to loaned securities and cash collateral ;

> Delivery of equivalent securities ;

> Failure to deliver ;

> Events of default and consequences ;

> Taxes ;

> Lender and borrower’s warranties ;

> Interest on outstanding payments ;

> Termination of the agreement.



Following a counterparty failure, under a robust legal agreement such as the GMSLA, a

lender is only exposed to loss if the value of collateral held is insufficient to cover the repur-

chase of the lent securities (together with any outstanding dividend and corporate action

proceeds). This might occur because of large market movements in the intervening period

between the lender’s last margin call, and the point at which the lender is able to liquidate

his collateral. Lenders may also be exposed if the markets for either the collateral taken

or the lent securities are illiquid at the time of the default. To minimise this risk, however,

counterparts can define their acceptable collateral parameters to ensure that only liquid

securities are used. Secondly, they can employ “haircuts” to ensure that they hold a buffer

of collateral over and above the value of the lent securities. Risk management considera-

tions are further examined in section 3.5.

Originally published in 2000, the GMSLA has been adopted by many market participants in

Europe and Asia.

It was updated in July 2009, with the following objectives:

> To reflect changes in law, tax, market practice and issues arising since 2000;

> To address some of the amendments that lenders and borrowers were commonly making

to the GMSLA bilaterally using a side letter;

> To identify all likely events that may have a tax consequence and identify the party that will

bear the associated tax risk;

> To use, where appropriate, the same language and form as the Global Master Repo Agree-

ment (GMRA – see below).

As a result of the Lehman default, the July 2009 version of the GMSLA namely introduced

key changes to the way in which securities are valued post-default and a party’s remedies

following a failure by the other party to re-deliver securities or collateral.

Further minor amendments were made in January 2010 by ISLA, in response to a number of

concerns being voiced in the market.

The latest version of the GMSLA is available in Appendix.

The GMRA

The Global Master Repurchase Agreement (GMRA) is the standard agreement for repos

in the international market. It is jointly produced by ISMA (International Securities Market

Association) and TBMA (The Bond Market Association, formerly PSA – Public Securities

Association, a US-based industry organisation of participants involved in certain sectors of

the bond markets).

The GMRA sets out the relationships between parties and general positions applicable to

all repo transactions in terms of definition, delivery and payment obligations of the parties,

margin mechanics, rights of substitution, treatment of income on securities involved, notice

provisions etc. The agreement also seeks to specify clearly the events of default and the

consequential rights and obligation of the counterparties.

The first version of the GMRA was published in 1992 and was followed by a substantially

revised version in 1995. In October 2000 was released the third version, reflecting market

developments since 1995. Since 1992, a number of annexes to the GMRA adapting it to suit

different jurisdictions and markets have been produced.

The latest version of the GMRA is available in Appendix.

1.3.2


1.3



The EMA

The European Master Agreement (EMA) was released in 1999 by the European Banking

Federation in co-operation with the European Savings Banks Group. The EMA aimed to

consolidate into a single set of harmonised documents, various master agreements used

within the euro zone and certain neighbouring countries, particularly for repurchase trans-

actions and securities lending. At the same time, parties to the EMA are able to choose the

applicable law, jurisdiction and contractual language and can take into account various

specific national legal requirements.

The EMA was primarily designed to replace master agreements existing under the laws

of various continental European countries, which were used predominantly (though not

exclusively) in a domestic context. It should also be suitable, however, for cross-border

transactions.

The EMA is a multi-jurisdictional and multi-product agreement:

> Multi-jurisdictional: It is intended to be used in different jurisdictions under the laws of

different jurisdictions in different languages, particularly within the EU;

> Multi-product: It enables market participants to document potentially all trading transac-

tions under a single master agreement, including repurchase transactions and securities

loans. The structure of the agreement is open for new product annexes to be added in

order to expand the scope of the agreement to include other financial transactions, such

as FX, swaps and options6.

In the framework of arrangements involving an agent or principal intermediary, it

is highly recommended to sign an operating memorandum between the beneficial

owner and this intermediary (e.g. custodian bank), in addition to these standard

agreements. This document should describe in detail all processes from the nego-

tiation to the termination of the transaction.

> Thus, the arrangements to be followed in the event of a rights issue or other cor-

porate action should be clearly established by all parties before a security loan is

made, with due recognition of local market rules and practice and any deadlines

imposed by the various parties’ local agents or custodians. Moreover, lenders

need to be aware that if they lend their entire holding of a particular security, they

may cease to receive information about corporate events in relation to it.

> In the context of securities recall or collateral substitution, the rights and obliga-

tions of each party, as well as the procedure to follow and the time period allow-

able for the return of securities, should be clearly established.

1.3.3


FINANCING MARKETS

6Source : European Savings Banks Group, Press Release: “European Master Agreement is published”, 29 October 1999



Securities lending & repo market size and features in geographical regions

It should be noted that definitive and internationally comparable statistics on the types of

transactions traded (securities loans, repos, other) and the associated amounts are not

readily available, all the more as securities lending and repo transactions are typically OTC

trades, often conducted outside a central electronic trading system.

However, estimations of global securities finance market size can be made based on peri-

odic market participant surveys such as the European repo market survey conducted every

six months since 2001 by the International Capital Market Association (ICMA) among 58

major financial institutions (central bank excluded) and the quarterly aggregate data survey

conducted among 16 major lending banks since 1999 by the Securities Lending Commit-

tee of The Risk Management Association (RMA). The full size of the market is obviously

somewhat larger than the samples surveyed. Thus the ICMA and RMA figures displayed

hereafter should be considered only for information.

Analysis of RMA data (global lending market)

According to the latest RMA survey, the aggregate total lendable assets worldwide reached

USDMM 8,882,551 at the end of Q2 2010 against a total on loan of USDMM 1,151,578, that

is to say 13% of lendable assets. Figure 11 displays the split between bonds and equities,

whereas figure 12 shows the breakdown of total on loan by geographical region.

1.4

1.4.1


Figure 11: Aggregate total of lendable assets and total on loan worldwide (Q2 2010)

Figure 12: Total on loan, breakdown by geographical region in USDMM and in % (Q2 2010)

Lendable assets (USDMM) Total on loan (USDMM) Total on loan (%)

Total equities 5,445,088 485,647 9%

Total bonds 3,437,462 665,930 19%

Totals 8,882,551 1,151,578 13%Source: RMA quaterly aggregate data survey, Q2 2010

NORTH AMERICA6,175,070

EUROPE1,552,842

ASIA PACIFIC658,613

OTHER496,026

70%

6%

17%

7%

Source: RMA quaterly aggregate data survey, Q2 2010

1.4



The following sub-sections further analyse the market with a focus on North America, Eu-

rope and Asia Pacific.

> North America

The US global lending market is a large mature market. Its liquidity, depth and breadth con-

tribute to ensure an efficient market.

Although badly hit by a reduction in size and not as profitable as it had been before the

crisis, the US equity lending market has remained so far the largest in the world, reaching

USD344bn in terms of lendable assets in Q2 2010, that is to say 65% of global equity lend-

ing. It comfortably exceeds the European equity lending market (USD111bn) and the Asian

Pacific one (USD66bn).

The treasuries/bonds US lending market is also very significant, with USD251bn in terms of

lendable assets in Q2 2010, split into US treasuries/UST strips, US agencies, US mortgage

backed securities and US corporate bonds.

Table 13 displays detailed figures of lendable assets and total on loan in the United States

and in Canada, with the breakdown between treasuries/bonds and equities.

The Canadian market size is quite small compared to the giant US, with only USD13bn of

equities lendable assets and USD9bn of bonds lendable assets in Q2 2010. It has weathered

the storm well, with conservative programs structured more towards realising the intrinsic

value of the loan as opposed to relying on the earnings from additional spreads from an ag-

gressive cash reinvestment program like in the US and the UK markets. One of the unique

characteristics of the Canadian market is that there is very little third party lending done in

Canada, compared with the United States and the United Kingdom; 85 to 90% of the lending

activity is handled through custodians7.

> Europe

As displayed in figure 14, the European bonds lendable assets reached USD44bn in Q2 2010

for a total on loan of USD14bn. It is a very active market with a ratio of “total on loan/lend-

able assets” of 31% (against only 19% in North America). The German sovereign bonds are


FINANCING MARKETS

7Source : Global Investor magazine, “Canadian market forum”, June 2010

Figure 13: Lendable assets and total on loan, North America (Q2 2010)


North American treasuries/bonds

2,601,635 487,290 19%

> US 2,508,102 472,060 19%

> Canadian 93,533 15,230 16%

North American equities

3,573,435 296,682 8%

> US 3,439,616 283,410 8%

> Canadian 133,819 13,272 10%




particularly desirable, as they are considered high quality and highly liquid collateral. Both

UK gilt government bonds and equities continue to have the largest lendable pool of assets

compared to their European peers.

With regard to the European equities lending market, lendable assets reached USD111bn

in Q2 2010 for a total on loan of USD14bn. France and Germany are the most active equities

lending markets in Europe, with respective market shares of 26 and 22% in terms of value of

equities on loan in Q2 2010 (see pie chart below). Both countries, as well as Italy, enjoy high

“total on loan/lendable assets” ratios (22 to 23%).


Figure 14: Lendable assets and total on loan, Europe (Q2 2010)


European bonds 444,166 137,075 31%

> French sovereign 68,154 17,417 26%

> German sovereign 104,844 41,359 39%

> Italian sovereign 48,371 5,571 12%

> Spanish sovereign 17,331 3,728 22%

> Other € sovereign 58,767 13,020 22%

> UK gilts 146,700 55,980 38%

European equities 1,108,676 135,796 12%

> French 152,910 35,822 23%

> German 133,800 29,194 22%

> Italian 46,410 10,071 22%

> UK 418,843 19,391 5%

> Scandinavian 97,212 15,854 16%

> Other European 259,500 25,464 10%



Figure 15: European equities on loan, breakdown by country (Q2 2010)

FRANCE26%19%

12%

22% GERMANY

OTHER

14%

7%

ITALY

UK

SCANDINAVIA

1.4



> Asia Pacific

As displayed in figure 16, the Asia Pacific equities lendable assets reached USD66bn in Q2

2010 for a total on loan of USD4bn. If compared with Europe, it is not a very active market

with an average ratio of “total on loan/lendable assets” of only 6%.

With USD28bn of lendable assets and a USD1.6bn total on loan in Q2 2010, the Japanese

equities lending market remains the largest in Asia, accounting for 37% of equities lent in

value. Despite a 28% decline compared to Q2 2009 (USD21.6bn on loan), the Japanese equi-

ties lending market still comfortably exceeds both the Hong Kong and Australian markets.

The Australian compulsory superannuation scheme is an important driver for growth on the

supply side of securities lending in Australia. It was introduced in 1992 and began as a 3%

compulsory superannuation contribution by the employer of any worker in the country. Over

the years it has grown to 9% where it currently stands today. These massive superannua-

tion funds represent a very large and growing pool of assets, and one that has historically

engaged in securities lending8.

The expansion of securities lending and borrowing into new markets

Continuing deregulation and tax changes make possible the establishment of new se-

curities lending markets. The list of new markets continues to grow. Latin America for

example, in particular Brazil, continues as a promising and yet largely under-penetrated

region for borrowing and lending.

Other markets to watch include Eastern Europe, Israel and a few in Asia. General

themes in these markets include the potential to earn significant spreads in the early

stages, often less-developed legal, tax and regulatory regimes, and a shortened market

development cycle9.

Analysis of ICMA data (European repo market)

In terms of market size, the European repo market is much bigger than the European secu-

rities lending market, since repo has become the main refinancing product in Europe. As

the unsecured money markets get more limited and expensive, the secured repo product

became the way that banks managed liquidity and collateral and is now the predominant

method. The last survey conducted by ICMA shows in Europe a proportion of 85% for repos

and 15% only for securities lending as at December 2009.

1.4.2


FINANCING MARKETS

8Source : Australian Securities Lending Association (ASLA)9Source : Investor Services Journal, ”Securities Lending Market Guide 2009”, 2009

Figure 16: Lendable assets and total on loan, Asia Pacific (Q2 2010)

Lendable assets (USD MM) Total on loan (USD MM) Total on loan (%)

Asia Pacific bonds Non available Non available Non available

Asia Pacific equities 658,613 41,820 6%

> Japanese 283,275 15,612 6%

> Hong Kong 140,219 12,034 9%

> Australia 135,592 7,792 6%

> Other Asia Pacific 99,527 6,382 6%




According to ICMA, the European repo market reached €€5,582bn in December 2009 in terms

of outstanding contracts. Despite its late start, the European repo market is now larger than

its US equivalent.

Figure 17 displays the evolution of the European market size between 2001 and 2009, with

a bounce in December 2009 after a significant decrease at the end of 2008 in the middle of

the financial crisis.

The need to move to from unsecured lending to collateralised financing is the central driv-

ing force of the repo market. The growing trend of the market is likely to continue unabated

under Basel II.

In terms of cash currency, a large majority of repos in Europe are in euro (65.6% as at De-

cember 2009 according to ICMA’s survey), US dollar and pounds sterling coming well behind

(see figure 18).


December 2001

December 2002

December 2003

December 2004

December 2005

December 2006

December 2007

December 2008

December 2009

In €

bn

0

1000

2000

3000

4000

5000

6000

7000

8000

2,298

3,3773,788

5,000

5,8836,430 6,382

4,633

5,582

Figure 17: European repo market size from 2001 to 2009

Source: 18th ICMA survey, March 2010

Figure 18: Cash currency analysis in the European repo market as at December 2009


EUR65.6%

OTHER 0.5%

CHF 0.5%

JPY2.7%

DKK,SEK2.4%

GBP12.3%

USD15.9%

1.4



In terms of collateral analysis, as displayed in the following pie chart, the share of German

securities arrives first (26.4% as at December 2009 according to ICMA’s survey), followed by

UK collateral (12.4%) and Italy (10.9%).

As already mentioned, German government bonds are considered high quality and highly

liquid collateral and are very desirable. There is a lot of activity surrounding them and in-

creasingly so in a market dominated by a desire for high quality assets10.


FINANCING MARKETS

10 Source : Securities Lending Times, “Country focus – Germany”, Issue 002, June 2010

Figure 19: Collateral analysis in the European repo market as at December 2009


Germany26.4%

UK12.4%

Denmark & Sweden 2.2%

US 3.1%

Italy10.9%

France8.7%Belgium

1.7%Spain4.2%

Other eurozone9.4%

Japan 2.1%

Other OECD 10.5%

Others 8.4%



INDUSTRY OVERVIEW

2.1



MAIN PLAYERS AND ARRANGEMENTS


This second section describes the participants in securities lending and repo markets, their

role and their motivations. It also examines the main existing arrangements.

Main players and arrangement in securities lending

If in theory lending can take place directly between beneficial owners and borrowers, in

practice a number of layers of intermediaries are often involved, as displayed in figure 20.

The importance of intermediaries in the market partly reflects the fact that securities lend-

ing is not a core activity for many of the beneficial owners and underlying borrowers.

Lenders (Beneficial owners)

Lenders, also called beneficial owners, are primarily institutional investors owning on a

long-term basis securities portfolios of sufficient size. They are typically asset managers,

mutual funds/unit trusts, pension funds, insurance companies, endowments, etc.

The main motivation of lenders is to get additional revenue obtained at relatively low risks

on assets that would otherwise be dormant in the securities accounts. These earnings can

enhance the portfolio performance and offset custody fees if the securities lending program

is managed by a custodian bank as agent lender or principal.

It should be noted that a cautious approach of lenders to counterpart selection and restric-

tive collateral guidelines will limit lending volumes.

Furthermore, the securities portfolios of lenders can be more or less attractive for interme-

diaries and borrowers, depending on the presence of securities in high demand (known as

specials or “hot” securities) or not.

2

2.1

2.1.1

Figure 20: Main players involved in securities lending transactions

LENDERS(Beneficial owners)

BORROWERS

INTERMEDIARIES

- Bridge

> Asset managers> Mutual funds/Unit trusts> funds> Insurance companies> Endowments> etc.

> Broker-dealers> Market makers> Hedge funds> Investment banks> Prime brokers> etc.

A - Agent intermediaries> Custodian banks> Third-party agents

B- Principal intermediaries> Custodian banks> Investment banks> Broker-dealers> Prime brokers> Specialist intermediaries




Beneficial owners have various possible routes to enter the securities lending business, direct

or intermediated:

> In the direct lending model, the lender will run its own securities lending program and will be

responsible for revenue generation, risk management and operations. As this model requires

having the necessary infrastructure in-house in place and sophisticated risk management to

work with a broad range of counterparts, it generally concerns funds of a certain size which

have an interest in getting control over the activity and can afford the cost.

> In the intermediated model, beneficial owners can:

• use their custodian bank or third party lenders to enter the securities lending market;

• grant exclusive access to a part or the totality of their portfolios to a single borrower, either

directly or through an auction (in that case, borrowers will bid for the lender’s portfolios by

offering guaranteed returns in exchange for gaining exclusive access);

• lend directly their portfolios but outsource to third parties collateral management and/or all

the necessary administrative support (settlement instructions, corporate actions manage-

ment, fee calculation and payment, etc.).

Selecting one principal borrower will allow beneficial owners to avoid dealing and contracting

with a vast number of counterparts. Then the principal borrower will be responsible for revenue

generation, risk management and operations. He or she will also carry the counterpart risk

when the securities of the beneficial owner are re-lent to the market. This model, illustrated in

figure 21, is offered by many custodian banks to their clients under custody. It notably enables

asset managers and other institutional investors to exchange potentially lucrative but unknown

opportunities in the future for the certainty of an up-front fee.

It should be noted that lenders can use a combination of different models across their port-

folios and the various markets. However, only the largest institutional lenders with the most

valuable and diversified portfolios would make use of all of the options described above.


Figure 21: Illustration of a typical “Principal borrower” model offered by a custodian bank

LENDERS(Beneficial owners)

e.g. Asset manager or Institutional investorhaving their assets under custody with the Principal borrower

PRINCIPAL BORROWER

e.g. Custodian bank ofthe beneficial owner ofsecurities

LENDER


BORROWERS

Securities lending market

- Bridge

CASH & COLLATERALMANAGEMENT

BORROWERS

market

Securities lending

Collateraldelivery

Securities lending

Collateral re-investmentin secure instruments

> Beneficial owners have only one counterpart: their custodian bank

>The custodian bank carries all the market & regulatory risks in the securities lending transaction

>The custodian bank operating as a principal borrower is remunerated by a split of the revenues generated by the loan of the beneficial owner’s securities (e.g. 70% for the beneficial owner and 30% for the custodian bank


2.1




Borrowers

The most active borrowers of specific securities are typically major securities dealers, bro-

ker-dealers, hedge funds, prime brokers and investment banks. Since 2008, the borrower

global landscape has dramatically changed, with the disappearance of major players such

as Lehman Brothers and Bear Stearns.

Securities borrowers seek to borrow securities in circumstances where they do not cur-

rently have possession of those securities, for example:

> When they need to cover a failed transaction in the course of their trading activity;

> When they have put on a short position;

> When they need to deliver securities they have not yet purchased against the exercise of

a derivatives contract;

> When they want to raise specific collateral, perhaps for another securities lending

transaction.

Their motivation can also stem from trading strategies requiring short positions, as those

displayed in the following table.

Other borrowing motivation includes financing, i.e. borrowing as part of a financing trans-

action motivated by the desire to lend cash. In the case of bonds, the typical financing

transaction will be a repo whereas in the case of equities, both securities lending and repo

may be used.

2.1.2

Figure 22: Illustration of trading strategies relying on securities borrowing

Trading strategy Definition and objectives

Directional short-selling strategy

Borrowing of securities that one does not own, with the aim of realising a profit from an expected fall in the security price.

Someone sells a security and simultaneously borrows the same quantity of the security to deliver to the purchaser, in the hope he will be able to buy back the security once the price has fallen. The security bought back is then used to unwind the securities borrowing trade.

Market neutral short-selling strategy

Profiting from the relative price movements of specific securities irrespective of broader market movements (e.g. pairs trading)

Hedging strategy Borrowing securities as a defensive measure against market movements (e.g. using short positions to gain protection against long exposures)

Arbitrage strategy Exploiting a price difference between two instruments that should have identical values (e.g. buying a security at low price in one market and simultaneously shorting the same security in another market at a higher price)

Common forms of arbitrage transactions involving securities borrowing are convertible bond arbitrage, index arbitrage or yield enhancement





It should be noted that borrowing securities for the specific purpose of influencing a sharehold-

er vote (as a reminder, the borrower of securities obtains the right to vote in AGMs/EGMs) is

not regarded as an acceptable market practice. This corporate governance issue has been ad-

dressed by the industry associations as well as by regulators for a few years. Thus, the French

Financial Market Authority (AMF) is currently contemplating enforcing disclosure requirements

for firms borrowing significant amounts of securities just before an AGM. Besides, a new joint

ISLA/ICGN (International Corporate Governance Network) Code on securities lending and vot-

ing is being developed at the time of writing (initial target was June 2010).

Intermediaries

The level of sophistication and the infrastructure required can make the direct lending model

cost prohibitive for the smaller players. Furthermore, securities lending involves a variety of

complex administrative, operational, accounting and risk management activities, including

credit evaluation and cash management, which may be better handled by specialists in that

field. Additionally, loan transactions generally exceed USD250,000 and lesser holdings are of

limited appeal to direct borrowers. Holdings of small size are best deployed through intermedi-

aries who can pool these holdings with other inventories. All these barriers can drive beneficial

owners to use intermediaries to enter the securities lending business. These intermediaries

can be of different nature, as described hereafter. They are typically remunerated by the split of

the securities lending revenues with lenders.

A - Agent intermediaries (lending agents)

Agent intermediaries include custodian banks lending securities as agents on behalf of benefi-

cial owners, alongside the other services provided to these clients. Some specialist securities

lending agents (third-party agents) have also emerged.

In an agency model, the intermediary facilitates securities lending on behalf of the ben-

eficial owner. He is responsible for revenue generation, risk management and operations

but not for counterparty risk, which remains carried by the beneficial owner himself. The

beneficial owner retains full responsibility for deciding to which borrowers their securities

may be lent to by the agent. Figure 23 illustrates a typical lender agent model offered by a

custodian bank to its clients.

2.1.3

Source: EMPEA (Emerging Markets Private Equity Association), October 2009

Figure 23: Illustration of a typical “lender agent” model offered by a custodian bank

LENDER(Beneficial owner)

e.g. Asset manager or Institutional investorhaving their assets under custody with the Lender agent

LENDER AGENT

BORROWERS

Securities lending market - Bridge

CASH & COLLATERAL MANAGEMENT

BORROWERS

market

Collateraldelivery

Securities lending

Collateral re-investmentin secure instruments>The custodian bank operating as a

lender agent is only an intermediary, lending the securities of the beneficial owner to agreed borrowers, on behalf of the beneficial owner

> The beneficial owner carries all the market & regulatory risks in the securities lending transaction

> The custodian bank operating as a lender agent is remunerated by a split of the revenues generated by the loan of the beneficial owner’s securities



2.1



The lender agent model brings various benefits to the beneficial owners who use it, as

displayed in figure 24:

> The scale of the lending business of the agent gives them advantages compared with

owners lending securities directly themselves;

> The efficiency of the agent’s systems allows them to make loans that would be too short

term, small or poorly compensated to be worthwhile for the owner to do so;

> Agents are more likely to know or have access to brokers who know of a borrower for any

particular security;

> Agents’ specialised knowledge of the market means that they are more likely to know the

true value of any particular security;

> If the agents are a custodian, then they may have late access to the settlement system

that enable them to provide last-resort loans late in the day at emergency rates11;

> Agents can also offer lenders who do not wish to reveal their identity (e.g. sovereign insti-

tutions, central banks) a measure of anonymity.

• Custodian banks

The history of securities lending is inextricably linked with custodian banks. As custodian banks

are able to mobilise large pools of securities available for lending, thanks to their large number

of institutional clients, most of them have integrated securities lending to their core businesses

with flexible agent and/or principal lending programs providing an access point to the market

for their clients, as well as other services such as foreign exchange. Owners and agents split

the revenues, which are based on many factors, such as the service level and provision. Secu-

rities lending is often part of a much bigger relationship and the split negotiation can become

part of bundled approach to the pricing of a wide range of services.


11 Source: Global Custodian, “Collateral: Securities Lending, Repo, OTC Derivatives and the Future of

Finance”, 2007

Figure 24: Benefits for beneficial owners when employing an agent lender

Relationship with brokers, access to a large

pool of borrowers

Efficiency of

systems

Lending business

scale

Anonymity for lenderswho do not wish to reveal

their identity (e.g. supranationals)

Late access to settlement

systems (if agentis a custodian)

Specialisedmarket

knowledge





Custodian banks have taken advantage of several factors to develop their securities finance

business:

> The existing banking relationship with their customers;

> Scale capabilities, as well as their investment in technology and global coverage of markets

arising from their custody business;

> Their asset-servicing capabilities such as income collection (crucial in yield enhancement

securities lending strategy) or corporate actions processing;

> The ability to pool assets from many smaller underlying funds, insulating borrowers from the

administrative inconvenience of dealing with many small funds and providing borrowers with

protection from recalls;

> Experience in developing and in developed markets;

> The capability to provide indemnities and manage cash collateral efficiently.

Custodian banks can provide beneficial owners with seamless lending activity, managing cli-

ent’s collateral in accordance with their investment guidelines, while ensuring risk management

controls, commitment, global reach, and the added security of indemnification.

Having access to a large number of clients with well diversified portfolios is crucial. With

their large number of asset manager and other institutional clients, the major custodians

such as CACEIS have that advantage of scale.

Furthermore, the integrated approach of custodial lending offers to beneficial owners a

conservative and streamlined means of combining custody, securities lending and cash

management through one provider.

Some custodians can provide not only agency or principal lending programs for clients with

securities already held in custody in-house, but can also act as a third party agent for portfolios

not under custody, in particular in the framework of tri-party collateral management.

In this arrangement, collateral is held by a tri-party agent, typically a large custodian bank or an

international central securities depository (ICSD). This tri-party agent receives only eligible col-

lateral from the borrower and holds it in a segregated account to the order of the lender. It also

marks this collateral to market, with information distributed to both lender and borrower. A fee is

paid by the borrower to the tri-party agent. Figure 25 illustrates this arrangement.

Figure 25: Tri-party collateral management arrangement

LENDER BORROWER

- Bridge

BORROWERS

market

Non-cash Collateral delivery

Securities lending

Reporting


TRI-PARTY AGENT

LENDER BORROWER

Collateral

Securities


TRI-PARTY AGENT

SECURITIES LENDING TRADE INITIATION

SECURITIES LENDING TRADE TERMINATION


2.1



• Third-party agents

Advances in technology and operational efficiency have made it possible to separate the

administration of securities lending from the provision of basic custody services, and a

number of specialist third-party agency lenders have established themselves as an alterna-

tive to the custodian banks. Their market share is growing from a relatively small base. Their

focus on securities lending and their ability to deploy new technology without reference to

legacy systems can give them flexibility.

B - Principal intermediaries

Another category of intermediaries are dealers trading as principals. We can distinguish

five broad types of principal intermediaries: Custodian banks, investment banks, broker-

dealers, prime brokers and specialist intermediaries. In contrast to the agent intermediar-

ies, they can assume principal risk, offer credit intermediation and take a position in the

securities they borrow. Indeed, they intermediate between lenders and borrowers but they

also use the market to finance their own wider securities trading activities and may seek

higher returns by additional risks (collateral risk, counterpart risk, credit risk, liquidity risk).

Through their prime brokerage operations, they also meet the needs of hedge funds and the

borrowing of securities to finance their positions has grown rapidly.

Principal intermediaries match the supply of beneficial owners who have large stable port-

folios with those that have a high borrowing requirement. They also distribute securities to a

wider range of borrowers than underlying lenders, who may not have the resources to deal

with a large number of counterparts.

• Broker-dealers

Broker-dealers are the most important intermediaries in the securities lending markets and

provide a wide range of services as well as trading in their own right. First, they act as prin-

cipal intermediaries between the ultimate borrowers and suppliers of funds or securities.

Running repo books, dealers use their capital and market-making capabilities to interpose

themselves between two counterparties, earning a spread on the trade. This can offer the

lender a measure of protection against an unknown counterparty and anonymity to a se-

curities borrower who does not wish to reveal his identity. Secondly, broker-dealers offer

exclusive securities lending programs or agency lending services to institutional investors,

similar to those traditionally provided by custodian banks12.

Many broker-dealers combine their securities lending activities with their prime brokerage

operation to achieve significant efficiency and cost benefits.

• Prime brokers

Prime brokers serve the needs of hedge funds and other alternative investment manag-

ers. Securities lending is one of the central components of a successful prime brokerage

operation, with its scale depending on the strategies of the hedge funds for which the prime

broker acts. Both long/short equity and convertible bond arbitrage strategies heavily rely on

securities borrowing.


12 Source: Global Custodian, “Collateral: Securities Lending, Repo, OTC Derivatives and the Future of

Finance”, 2007



Main users of repos and arrangements13

Bilateral repo market

In the bilateral market, active repo users fall into three main categories, all of them operat-

ing on both the cash-taking and the cash-providing sides of the market:

> Banks and broker-dealers

> Investors

> Central banks

One advantage of repo for cash-givers is to get higher and safer returns on their cash bal-

ances than those found on other money market instruments. Moreover, the repo market is

liquid and flexible, facilitating liquidity management by specifying the start and the repay-

ment dates. Thus, repos involved reduced credit and liquidity risks. In addition, because

repo is less risky, regulations such as the Basle Accords require institutions lending cash

through repo to hold less regulatory risk capital than unsecured lending. Repo is therefore

an ideal tool for cash investors with limited risk tolerance, including money market mutual

funds and agent lenders in the securities lending markets.

• Banks and broker-dealers

Broker-dealers are heavy users of repo as a financing tool.

Dealers trade with each other as well as their customers. Their profit comes from trading

the bid-ask spreads and by taking proprietary speculative positions on the term structure of

interest rates in the repo market. By matching or mismatching maturities, rates, currencies

or margins, the repo trader takes on market risk in search of returns.

In Europe, the major repo dealers include most of the primary dealers in the European gov-

ernment bond markets, other regional and commercial banks, as well as the largest securi-

ties broker-dealers.

In the United States, the major repo dealers are the 22-odd primary dealers in the Treasury

securities market plus another dozen or so that act as major dealers in repos but who have

chosen not to formally register as a primary dealer in Treasury securities.

• Investors

This category gathers institutional money managers, insurance companies, pension funds,

mutual funds, regional banks, foreign banks, hedge funds and other speculators, leveraged

investors and non-financial corporations who are actively managing their cash balances.

Investors use repo to finance hefty bond inventories and leverage up investments, as well

as using reverse repos to put surplus cash to work. They either look to the repo market for

returns on their cash balances that are higher and safer than those found on other money

market instruments, or to borrow at cheaper interest rates than they would achieve in un-

secured markets. In particular, fund managers generally use repos to manage their cash

flows, as they have severe constraints in terms of credit risk on their lending activities.

For all investors, the main benefit of the repo market is its security, liquidity and flexibility,

which enables them to closely manage their funds.

2.2

2.2.1


13 Source: Global Custodian, “Collateral: Securities Lending, Repo, OTC Derivatives and the Future of Finance”, 2007

2.2



• Central banks

The primary role of a central bank is to manage the cost and quantity of credit in an econ-

omy in order to control economic growth and the rate of inflation. They control the supply

of liquidity, i.e. the deposits held by banks with the central bank, mostly by means of open

market operations. Most central banks intervene in the money markets in order to influence

very short-term interest rates.

Repo has become the preferred tool of central bank intervention around the world in open

market operations to control short-term interest rates, because of the size of the repo mar-

ket, its role in funding other financial markets and the fact that repo reduces credit risk

being taken with public funds.

Tri-party repo market

In a tri-party repo, the two parties (buyer and seller) outsource the management of the col-

lateral to a tri-party agent, generally an International Central Securities Depository (ICSD

such as Euroclear Bank or Clearstream Banking) or a custodian bank, based upon a pre-

defined set of rules and criteria agreed by both parties, namely the collateral eligibility crite-

ria (asset type, issuer, currency, domicile, credit rating, maturity, index, issue size, average

daily traded volume, etc.). The tri-party agent acts as an intermediary between the two par-

ties to the repo and is responsible for the administration of the transaction including collat-

eral allocation, marking to market and substitution of collateral. This arrangement can offer

economies of scale to its users and enable the repo buyer and seller to avoid the adminis-

trative burden of bilateral repos. Figure 26 illustrates a typical tri-party repo arrangement.

In tri-party repo, fees are traditionally charged to the collateral-giver (cash-taker). Cash-

providers trade in the tri-party market for free.

Tri-party repo was introduced in the United States in the 1980s but only in 1992 in Europe.

These two markets remain very different; whereas the bulk of repo is settled by tri-party

agents in the United States, less than one-eighth of repo is tri-party in Europe14. High trans-

action costs, difficulties in integrating tri-party transactions into both banks’ infrastructures

and the fragmented European clearing and settlement infrastructure (by comparison with

the integrated infrastructure that enjoy the United States) can explain the relatively low

level of take-up of tri-party in Europe15. In the old continent, tri-party repo is particularly

used for difficult-to-manage collateral such as ABS and corporate bonds.

2.2.2


15Source: Euroclear, “Understanding repo and the repo markets”, March 2009 16Source: Global Custodian, “Collateral: Securities Lending, Repo, OTC Derivatives and the Future of Finance”, 2007

Figure 26: Illustration of a typical tri-party arrangement

PART ACash provider

(Collateral taker)

- Bridge

BORROWERS

market

SecuritiesCash

Negotiation of repo transaction

Information & reporting

TRI-PARTY AGENT

PART BCash taker

(Collateral giver)

Tri-partyaccountParty A

Tri-partyaccountParty B

Cash

Collateral

> Securities valuation and eligibility check> Automatic selection of securities> Settlement delivery versus payment (DVP)> Daily mark-to-market and reporting> Collateral optimisation throughout the day




Furthermore, in the tri-party market there tends to be a clearer segmentation between cash

takers and cash providers than there is in the bilateral market. Few tri-party market par-

ticipants are active on both sides of the market. Furthermore, this market is highly concen-

trated, with relatively few cash takers compared to the number of cash providers16.

• Cash-takers

Cash-takers are traditionally institutions such as investment banks, broker-dealers, hedge

funds or prime brokers who have a constant thirst for the cheapest and most reliable sourc-

es of liquidity in order to finance their trading activities or their investment portfolios.

• Cash providers

Cash providers are typically central banks, supra-nationals, commercial banks, asset man-

agers and other institutional investors or agent lenders, who are looking to re-invest their

cash in exchange for acceptable collateral.

Electronic trading platforms and Central Clearing Counterparts (CCPs)

Electronic trading platforms

In the repo market as in the securities lending market, the business is heavily relation-

ship-driven and the majority of transactions are still performed out of electronic trading

platforms, on a voice-brokered and bilateral trading basis. Transactions are typically ne-

gotiated between counterparts on the phone and followed up with written or electronic

confirmations.

The growing consensus is that both the voice-brokered and direct trading markets will

continue to play significant roles, accounting for the bulk of more complex and long-term,

higher-value tickets17.

However, over the last decade, some electronic trading platforms have emerged, which pro-

gressively gain ground, especially for short-term transactions and General Collateral (GC):

> BrokerTec, Eurex repo and MTS in the European repo market;

> Equilend, SecFinex, ISec and eSecLending in the securities lending market.

These specialised trading platforms change the way players work and support the growth

and demands of the industry, providing more precise portfolio information, increasing mar-

ket efficiency and trading volumes, improving process standards and reducing operational

risks. However, each platform is specialised within a specific market, making it difficult to

find cross-industry standardisation.

According to the latest ICMA’s survey conducted among 58 institutions, as at December

2009 in Europe the electronic repo trading had a market share of only 27.5%, against 18.5%

for voice-brokers and 54% for direct (see figure 27).

2.3

2.3.1


16-17Source: Global Custodian, “Collateral: Securities Lending, Repo, OTC Derivatives and the Future of Finance”, 2007

2.3




Central Clearing Counterparties (CCPs)

As displayed in figure 28, a CCP can interpose itself between the parties involved in a repo

or securities loan transaction, that is to say between the seller and the buyer or between

the lender and the borrower.

In Europe, two principal CCPs are present in the repo market:

> LCH.Clearnet, with its RepoClear service introduced in late 1999 which offers multi-

lateral netting facility for European government and non-government debt repos and

cash bond transactions;

> Eurex Clearing, a subsidiary of Eurex Repo created in 2005, which offers CCP services for all

Eurex Repo euro-denominated trades.

With regard to securities lending, SecFinex launched with LCH.Clearnet in mid-2009 a CCP serv-

ice dedicated to loans made on equities of the Euronext zone. It should be noted that this initia-

tive has met little commercial success so far, with only a few members at the time of writing.

Today CCPs are far from enjoying a significant market share in the securities finance markets

and are the hottest point of debate in the industry.

2.3.2

Figure 27: Automatic trading systems market share in the European repo market

as at December 2009


DIRECT54%

27.5%

18.5%VOICE-BROKERS

ELECTRONIC REPO TRADING

Figure 28: Illustration of an arrangement with a CCP

PARTY A

- Bridge

BORROWERS

market

Bilateral trade

Trade with a CCP

CCP

PARTY B

PARTY A PARTY B

In clearing a trade, the CCP becomes couterpart to, and responsible for, the corresponding trade obligations arising from the original bilaterally negotiated trade. This principle is know as novation, this is the same role that the clearing house performs for the clearing members of derivatives exchanges. The CCP calculates exposure and calls margin in order to protect itself from market and credit risks.





After the 2007-2008 crisis, regulators have been keen to see CCPs taking on an increasing role

in the repo and securities lending markets, as in other financial markets such as OTC deriva-

tives, considering that the CCP model offers a relative transparency compared to OTC products.

However, the market participants overall, both lenders and borrowers, remain strongly reluctant

to such an initiative. If they agree to support any initiative to increase efficiency and reduce risk,

they argue that simply shifting the risk to another party (the CCP) does not necessarily mean

reduced risk. Furthermore, there are many types of assets used in repos and securities lending

and managing multiple risks across a wide range of financial products may diminish CCP ef-

fectiveness. They also argue that CCP will need to gain very specific expertise for these markets

and that access to CCP services may include membership requirements, which could represent

a barrier of entry for some categories of market players and could inhibit market growth18.

Last but not least, the non-standardisation of securities lending and collateral management pro-

grams is a significant barrier for central counterparties. If a CCP brings risk mitigation benefits,

it could also bring complications from an operational perspective. Where central counterparties

have been successful in others markets, those markets have not had the lifecycle complications

of securities finance, say some industry players19.

In the future, CCPs will definitively have to develop a thorough understanding from market partic-

ipants – especially prime brokers and agent lenders-, as to how this model will work in practice

and in identifying the inherent risks within the context of a securities lending and repo environ-

ment, if they want to truly become successful.

18 Source: Euroclear, “Steering a new course for the repo market”, 201019 Source: Investor Services Journal, “Securities lending market guide 2010”, 2010

3.1



CHALLENGES & OPPORTUNITIES


This section provides an insight into the main issues arising when conducting repo and se-

curities lending transactions. Regulatory, tax, operational, collateral management and risk

versus return aspects are examined hereafter.

Disparate regulation, a challenge for the business

General points

The regulatory framework relevant to securities loans and repos may vary significantly from

a jurisdiction to another one. These aspects obviously need to be taken into account be-

fore conducting business. Cross-border securities lending and repo transactions raise even

more complex legal issues, as they involve several jurisdictions.

One should keep in mind that in some countries, there may be restrictions on lending by

insurance companies, mutual funds or other institutional investors.

Even if they are permitted to lend the assets they manage, there may be a restriction on the

percentage of their assets that may be lent or on the exposure to a given issuer.

> As an example, the German lending market is fairly restricted. The German Investment

Act, article 56, does not allow asset managers – known as Kapital Anlage Gesselschaft

(KAG), to lend more than 10% of their holdings to any one counterpart. KAGs have to find

10 separate counterparts to lend out a full portfolio. An exception to this rule, however,

is that if KAGs lend through a BaFin qualified “organised system”, which will make sure

at any given time that a loan is sufficiently collateralised to prevent default risk, they can

lend beyond the 10% limit. Clearstream Banking Frankfurt is the only company to have

been awarded this official stamp at the time of writing20.

Market authorities in certain jurisdictions can also:

> Restrict the type of securities that may be used for the purposes of a securities loan or

a repo;

> Impose restrictions on permissible types of collateral (e.g. in the United States, many

types of investors are not allowed to take equity collateral;

> Impose restrictions and/or disclosure requirements on short selling.

Participants in the securities lending markets are also affected by regulatory capital rules

such as Basle II.

Recent developments

The reactions and policy adoption in various countries around the world in the past two

years have clearly had an impact on levels of securities lending related activity and more

importantly are likely to affect future activity.

In the current environment, where regulators are looking at securities lending and repos

with greater scrutiny, one of the biggest challenges facing the industry is regulation. It is

not easy to predict the outcome.

Although there continues to be some uncertainty surrounding pending regulatory changes,

certain positive developments have emerged. Across many jurisdictions there has been a

significant increase in the level of dialog between regulators and securities lending market

3

3.1

3.1.1

3.1.2

20 Source: Securities Lending Times, “Country focus – Germany”, Issue 002, June 2010




3.2

3.2.1

participants. The improved flow of information and engagement should serve to reduce the

opportunity for ‘unintended consequences’ of new regulation. Another example of a posi-

tive development stemming from US regulators is the impact of the SEC’s Rule 204, which

mandates the closeout of failed sale transactions. This rule led to a significant drop-off in

the number of failed deliveries since its introduction21.

Short-selling in particular remains a concern, reinforced by the recent Greek crisis. Driven

by the wish to promote market stability and preserve investor confidence, regulators are

discussing how to control short-selling and in particular naked short-selling. Whereas the

Committee of European Securities Regulators (CESR) and the UK Financial Services Author-

ity (FSA) are focusing on public disclosure and the ability to intervene in an emergency

rather than any generalised restrictions, in the United States restrictions rules on short-

selling were introduced in February 2010 by the Securities and Exchange Commission (SEC)

with no exemption to market-makers22. In Europe, following a series of consultations with

market participants, the European Commission adopted a proposal for a regulation on short

selling on 15 September 2010. Under the draft legislation, short sellers will have to disclose

their net short positions to regulators once they reach 0.2% of issued share capital and to

the market when they reach 0.5% of issued share capital. National regulators will also be

given the authority to restrict or ban short selling in coordination with the new pan-Euro-

pean regulatory body for securities trading, the European Securities and Markets Authority

(ESMA), which is expected to come into being in Q1 2011. The proposal will now pass to the

European Parliament and the EU member states for consideration. Once adopted, the short

selling rule would apply from 1st July 2012.

Disparate regulation is a real challenge for the business. The US is by far the most regulated

market with 15c3-3, RegSHO, Rule 402, Agency Lending disclosure, Rule 2a-7 and the more

recently introduced short sale circuit breaker. In the rest of the world, the problem is in

some ways more complex in that regulations vary by jurisdiction as already mentioned. The

recent attempt by CESR to set standard guidelines for new post-crisis regulation seemed

somewhat undermined by the German regulator’s variation from the “standards”23.

Heterogeneous tax frameworks but an on-going harmonisation in Europe

Current tax framework in main countries

The tax treatment of securities lending and repo transactions is largely determined by

whether the transaction is deemed to be a secured loan or a sale and repurchase of the

securities and whether these transactions receive beneficial tax treatment in the relevant

jurisdiction. Tax authorities may treat securities loans and repos differently despite the simi-

larities in their economic consequences.

The income attached to securities (coupon, dividend) may also be taxed differently from one

jurisdiction to another and depending on the investor’s tax residency. Accounting standards

may also vary from one jurisdiction to another.

We thought it would be interesting to insert hereafter a description of the current tax land-

scape in North America, Europe and Asia Pacific. The following tables examine the general

tax framework, direct tax considerations, as well as other taxes and considerations in the

main countries of business as at 1st January 2010.

21 Source: Goldman Sachs,

“Securities lending: New

priorities”, April 201022Source: Global Securities

Lending magazine, “Still

under siege?”, Issue 08,

Q2 201023 Source: Global Securities

Lending magazine, Issue 08

Q2 2010

Source: LFF-ALFI, 2009

3.2




Figure 29: Tax framework in North America (based on information current as at 01/01/2010)

GENERAL DIRECT TAX CONSIDERATIONS OTHER TAXES AND CONSIDERATIONS

Canada The Canadian Income Tax Act contains rules governing the tax treatment of securities lending arrangements (“SLA”). Arrangements that would be considered securities lending commercially, as well as repos and reverse repos, will generally be SLAs for tax purposes, if entered into between arm’s length parties. Certain lending arrangements between non-arm’s length persons will also be SLAs.

Payments made to a non-resident of Canada under an SLA may be subject to withholding tax at 25% (this rate may be reduced under an applicable double tax treaty). Lending fees paid to a non-resident lender are treated as interest and should not be subject to withholding tax if paid to an arm’s length person. Compensating payments paid to a non-resident lender will either be treated as interest or retain the original character of the income from the borrowed security (e.g., dividends on a share) depending upon the legal nature of the borrowed security and the extent of the collateralisation of the loan. Any interest earned by a non-resident borrower in respect of the collateral on an SLA should not be subject to withholding tax.

Where the borrower/lender is a resident of Canada, the deductibility of the compensating payments and the treatment of compensating payments will be determined under general concepts.

The SLA rules deem the lender to not have disposed of the security and to continue to be the owner for tax purposes, thus no capital gains tax implications would apply on the transfer of the security. However, the Act is silent regarding the borrower – so first principles apply – and legally a securities loan is a disposition so the borrower would also be considered to own the borrowed security for tax purposes. For a securities lending arrangement that is not an SLA, the borrower would be considered to have disposed of the security for tax purposes and reacquired it later and thus could realise a gain or loss on the initial borrowing.

No indirect or transfer taxes should apply to securities lending arrangements.

USA Section 1058 of the U.S. Internal Revenue Code specifically deals with the U.S. taxation of securities lending arrangements and states that no gain or loss should be recognised on the transfer of securities in exchange for an obligation under such a lending agreement, subject to the following conditions:

> The borrower must return to the lender securities identical to those originally transferred;

> During the period of the lending arrangement the borrower must make payments to the lender equivalent to any interest, dividends or other distributions that the lender is entitled to;

> The lending agreement must not reduce the risk of loss or opportunity for gain for the lender;

> The arrangements must meet any such future requirements as the U.S. Treasury Secretary may prescribe by regulation.

U.S. tax may arise in the event that securities are transferred under an arrangement that was intended to comply with the requirements of Section 1058 but subsequently failed to do so.

In general, if the borrower is a U.S. person, borrow fees are treated as U.S. source and subject to 30% U.S. withholding tax unless an applicable income tax treaty reduces such withholding to zero under relevant paragraphs concerning ‘other income’ or business profits’. Rebate fees, i.e., interest income on cash collateral (deposits) posted with a U.S lender would be subject to 30% U.S. withholding tax unless U.S. domestic law or an applicable income tax treaty reduces such withholding under relevant paragraphs concerning interest.

Substitute payments made to the lender under a securities lending arrangement would retain the character and sourcing of the underlying payments (i.e., treated as interest or dividends depending on the security involved). Therefore, payments made to nonresidents with respect to borrowed U.S. securities would be subject to U.S. withholding tax generally at a rate of 30% (or lower if an income tax treaty applies). Please note that Notice 97-66 is currently still applicable to dividend substitute payments made under a typical lending arrangement involving U.S. securities.

There is currently no indirect or transfer tax regime in the U.S applicable to securities lending arrangements. In addition, pursuant to the US Senate Permanent Subcommittee on Investigation’s report on Dividend Tax Abuse,

Notice 97-66 which currently regulates foreign to foreign lending, is to be revoked and replaced by the Foreign Account Compliance

Act of 2009 (contained within the Tax Extender Act 2009).

Source:Deloitte (extract from Data Explorers Securities Lending Yearbook, 2009-2010)




Source: NVCA (National Venture Capital Association - United States), 2009

Figure 30: Tax framework in Europe (based on information current as at 01/01/2010)


UK Generally under UK tax rules, full beneficial and legal ownership is transferred to enable the borrower to sell the securities and purchase replacement securities at a later date to fulfil its obligations. However, the lender retains economic ownership and should continue to recognise the securities in the financial statements.

As the title of the securities are transferred, dividends or interest would be received by the borrower. UK legislation provides that any capital gain that arises on the initial lending and the final transfer back to the lender (provided that the securities returned are in the same quantities and nominal value,) is disregarded for the purposes of Capital Gains Tax unless the lender requires the return to be paid in cash. In such a case the proceeds of redemptions would fall under the CGT legislation.

There are tax rules in place to prevent lenders from receiving a return from the borrowers in non taxable form and legislation in the event a borrower fails to return the securities. The legislation stipulates that where it becomes apparent that the borrower will fail to return the securities, the borrower is deemed for capital gains purposes as acquiring them at that time and the lender disposing of them at market value. Following the collapse of Lehman Brothers, an exception to this rule was included in legislation where default is due to the insolvency of the borrower and the lender uses collateral provided to acquire replacement securities.

Collateral from the borrower typically takes the form of cash or other securities. The UK has legislation in place to prevent agreements whereby no manufactured dividends are provided but instead replaced by interest income that has arisen on the collateral received. Further anti avoidance legislation is also in place to prevent the lender or borrower from substituting a non taxable or lowly taxed income in place of existing taxable income stream.

An important feature of the UK lending market is the complex Manufactured Overseas Dividends (‘MOD’) rules operated by the UK tax authorities (‘HMRC’). The MOD regime regulates the securities lending industry and aims to put the UK lender of securities in the same position, from a tax perspective, as if the securities loan had not been made (i.e. tax neutrality). This tax neutral treatment is implemented via the imposition of a ‘relevant withholding tax’. To facilitate the regime, financial intermediaries may assume, by application to HMRC, tax designations of Approved UK Intermediary (‘AUKI’) or Approved UK Collecting Agent (‘AUKCA). Complex rules exist to enable the disapplication by AUKIs/AUKCAs of the relevant withholding tax.

Relief from stamp duty and SDRT is available in respect of stock loans or recall where there is an arrangement for transfer and return of the same kind and amount of securities. An appropriate flag on the CREST system is used to effect this. Generally, the non-return of securities under a lending arrangement triggers SDRT on the borrower. In Finance Bill 2009, legislation was introduced to provide relief from taxes where one of the parties to a stock lending or repo arrangement becomes insolvent before the arrangement is completed by the return of the securities originally lent or sold. The relief applies to the recipient of the securities, covering any securities provided as collateral and subsequent purchases of securities by the solvent party to replace those not returned.

GERMANY German GAAP and tax accounting rules do not provide for specific accounting rules for securities lending arrangement (Wertpapierleihe). Under the applicable general accounting rules the loaned securities are transferred from the lender’s balance sheet to the borrower’s balance sheet as not only the legal ownership but – according to the prevailing interpretation - also the economic ownership of the securities is transferred to the borrower during the lending period. However, given the nature of the security lending arrangement as a loan in kind (Sachdarlehen) the transfer of the securities doesn’t lead to a realisation of any hidden profits as a corresponding claim to re-transfer the securities to the lender is accounted for in the balance sheets.

Non-German resident lenders/ borrowers are only subject to German non-resident taxation with certain income deriving from German sources. Any lending fees and the manufactured dividends are not subject to German non-resident taxation and therefore basically also not subject to German withholding tax.

Interest income on any cash collateral received by a non-German resident lender is not subject to German non-resident taxation unless the loan is collateralised with German real estate and the right to tax such interest is not attributed to the state of residence under an applicable double tax treaty.

For German resident lenders/ borrowers: Any dividends received by a resident borrower during the loan term of loaned equities are subject to the German participation exemption rules, i.e. the dividends are effectively 95% tax exempt as 5% of the gross dividends received are treated as non-deductible business expenses. The participation exemption rules do not apply to banks and financial institutions holding the equities as current assets as well as to life and health insurance companies. The resident borrower is entitled to deduct German dividend withholding tax on the dividends received from the loan securities from its own tax liability.

Any lending fees as well as the manufactured payments received by the lender are fully taxable (the German participation exemption rules do not apply to manufactured dividends).

Lending fees as well as manufactured payments are tax deductible for the borrower for German tax purposes. However, effective as of 2007 an anti-avoidance regulation has been introduced under which a deduction is not available where (1) the equities are lent from the current assets of a German resident bank or financial institution as well as from a German life and health insurance company, (2) the borrower is entitled to the benefits of the German dividend participation exemption and (3) the equities are lent over the dividend payment date.

Lending fees and the manufactured dividends remain tax deductible as long as the manufactured dividend has been subject to a withholding tax. Basically, no dividend withholding tax applies on manufactured dividends. However, a 15% withholding tax applies to lending fees and manufactured dividends paid to certain German public bodies and tax exempt corporations.

Interest income on any cash collateral received by the lender is fully taxable in Germany

Germany does not levy any indirect (VAT) or transfer taxes on securities lending transactions.

>>>>>>

3.2




FRANCE Securities lending arrangements in France are normally structured as two sales and are accordingly fully taxable transactions.

However, there are two main types of securities lending transactions which benefit from a favorable French corporate income tax regime (no taxation of capital gains):

> “prêt de titres”, i.e. a securities lending agreement;

> “pension livrée”, equivalent to a “repo” contract.

The following conditions need to be met to benefit from the capital gains neutral tax regime on these transactions: > Securities cannot be subject to “pension livrée” or “prêt de titres” if,

during the lending period, a dividend giving rise to a foreign tax credit is distributed, or interest subject to withholding tax or giving rise to a foreign tax credit is paid;

> The securities must actually be returned at the end of the lending period. In this respect, this condition will be met, even if the securities returned to the lender are not the same as the securities originally lent, provided that they are fungible with the original securities.

The remuneration paid by the borrower to the lender would be tax deductible for the borrower (under the general deductibility conditions and in particular provided it complies with the arm’s length principle) and fully taxable for the lender (treated as interest) if they are resident in France. Dividends received by a French resident borrower and paid on to a French resident lender should not benefit from the French parent/ subsidiary regime and accordingly, should be taxable at the standard CIT rate (effective rate of 34.43% in 2010). This should apply whether the lending transactions benefit from one of the tax favorable specific lending regimes described above, or not. A tax deduction should be available for the manufactured dividend provided it meets the general tax deductibility criteria. Where there is a non-resident lender and a resident borrower, the manufactured dividend paid by the borrower to the lender would be within the scope of French withholding tax. However, from a French legal and tax perspective, it is uncertain as to whether the manufactured dividend will be deemed to be (a) consideration for services (domestic withholding tax equal to 1/3 of the gross amount paid, subject to applicable tax treaties), (b) interest (unlikely, no domestic withholding tax as from March 1, 2010, if not paid to an entity located in a tax haven) or (c) an additional part of the purchase price paid by the borrower for the securities (not subject to French withholding tax except if the lender owns more than 25% of the shares). This would primarily depend on the documentation entered into for the lending transaction.

Finally, transfer tax on the sale of securities should apply to securities lending arrangements (at the rate of 3% or 5%, with potential capping to €5,000 per transaction depending on the nature of the security), except for “pensions livrées” that benefit from a specific exemption.

ITALY There are no specific rules for securities lending arrangements in Italy and the parties are free to agree terms and conditions of the relevant arrangement.

In principle, proceeds (i.e. lending fees) deriving from securities lending which have been realised by non-resident entities are subject to withholding tax at the rate of 12.5% (or the reduced rate provided for by the applicable tax treaty, if any) except for manufactured dividends which are subject to withholding tax at the rate of 27% (or the reduced rate provided for by the applicable tax treaty). Note that since April 2009, new Italian legislation applies such that dividends received by the borrower under securities lending arrangements would be essentially subject to the relevant tax implications applicable to the lender, as if the securities had not been lent. Accordingly consideration to these rules should be given in the case of cascading trades. Non-resident entities may benefit from a domestic withholding tax exemption which may apply to proceeds from securities lending except for manufactured dividends. The exemption applies to entities resident in Countries allowing an adequate exchange of information with the Italian tax authorities to the extent that a proper documental procedure has been implemented. Certain anti-abuse provisions are in place for non-resident entities. Should the Borrower be a resident company, proceeds from securities lending would be included within the overall taxable income (without being subject to withholding tax) subject to corporate income tax at the rate of 27.5%. Proceeds realised by banks, financial institutions and insurance companies would also be subject to local income tax at the rate of 3.9 % up to 4.82%.

Securities lending arrangements are exempt from VAT. Registration tax is due on the relevant agreement at the flat rate of €168.00 in case of use. There is no transfer taxes/stamp duty on securities lending transactions.

SPAIN From a Spanish standpoint, there is a Special Tax Regime that may be applicable for two types of securities loans in: (i) securities listed on a Spanish securities market exchange and (ii) securities listed on market exchanges and other organised markets (subject to certain conditions).In general terms, the purpose of the borrowing must be to fulfil a sale order, for onward lending, to post as collateral in a financial transaction, or to participate in a corporate action (eg. rights issue).Additionally, there are a number of other conditions to qualify as a stock loan, including the requirement to return equivalent securities, to make payments to the lender to deliver the economics rights (eg. income) from the securities, and the loan term should not exceed one year and be made or implemented with the involvement of certain Spanish financial institutions.

For a Spanish lender, no capital gain/loss would arise from the delivery or the repayment of the securities on loan. Fees received by the lender would be taxable as returns obtained on the assignment of capital at the general corporate rate of 30%. The borrower would be required to withhold on income paid to the lender, except where the lender is a credit institution registered with the Bank of Spain (Banco de España). If a credit institution was an intermediary in the security loan, the credit institution would be required to withhold.

For a resident borrower, income derived from securities borrowed would be taxed at the corporate rate of 30% as income derived from holdings in the equity (e.g. dividends). Manufactured dividends would be assessed as interest/ financial expense, and would be tax deductible according to the Spanish Tax legislation.

Both the transfer and the acquisition of securities by the borrower or the sale of borrowed securities, are exempt from Value Added Tax, Capital Duty and Stamp Duty.






Figure 31: Tax framework in Asia Pacific (based on information current as at 01/01/2010)


JAPAN There are no specific provisions in Japan dealing with securities lending arrangements, and accordingly, income and expenses related to securities lending transactions are subject to general taxation regulations. As such, income should be recognised on an accruals basis. In general, expenses should be recorded in the period when, the underlying obligation is fixed, events that directly trigger the payments with respect to the obligation have occurred, and the amount of the expense is reasonably determinable.

For Japanese tax purposes, a lending fee for bonds issued by the Japanese government, municipalities or domestic corporation is treated as Japan source income taxable to a non-resident taxpayer (i.e., business income from assets held in Japan) whether or not the taxpayer has a permanent establishment (PE) in Japan. This may be exempt by an applicable tax treaty. The tax rate for a foreign company with no PE in Japan would be the national corporate tax rate of 30%. (Domestic companies and foreign companies with a PE are also subject to local taxes, resulting in an effective tax rate of approximately 41%.) Manufactured payments are generally not treated as dividends. Rather, unless otherwise classified as the lending fees mentioned above, they are treated as payments under contract, and as such, non resident lenders that do not have a permanent establishment in Japan are not subject to any corporate income tax or withholding tax on manufactured payments. Interest paid to non-residents that do not have a permanent establishment in Japan is subject to withholding tax at 20%. This may be reduced by an applicable tax treaty. For resident counterparties, the withholding tax treatment would be the same as above, although many financial institutions involved in the stock lending/borrowing business may enjoy an exemption from withholding tax on interest. The key difference for resident companies would be that they would have to include any income and expenses earned through the stock lending/borrowing business in calculating their taxable income. For Japanese tax purposes, the lender would not treat the securities loan as a sale, but rather a financing transaction, debiting the collateral received to cash and crediting a payable to the borrower. Accordingly, no capital gains tax implications should arise.

Lending fees should not be subject to Consumption Tax. Documentation signed in Japan in respect of securities lending arrangements should generally be subject to stamp taxes, at a minimal rate (JPY200).

AUSTRALIA Eligible SLAs are specifically dealt with in Australia under section 26BC of the Income Tax Assessment Act 1936. A number of criteria need to be satisfied for section 26BC to apply to the borrower and lender, including a written SLA agreement under which the replacement securities must be provided to the lender less than 12 months after the securities were borrowed, and any distributions during the payment must be paid to the lender.Recently introduced provisions dealing with the tax timing of income and deductions for financial arrangements would also require consideration.

The effect of section 26BC is to reflect commercial practice, which treats SLAs as loans. Section 26BC allows the lender and borrower to ignore the sale and repurchase of the securities for tax purposes. Accordingly, no taxable gain or loss is deemed to arise on the SLA.If section 26BC does not apply, the transfer of title to the borrowed securities would usually give rise to a taxable gain or loss for the lender and transfer of title to the replacement securities would usually give rise to a taxable gain or loss for the borrower. For Australian tax residents borrowers and lenders, and non-residents from a country with which Australia has a tax treaty that engage in SLAs through a permanent establishment in Australia, fees receivable/payable, distributions (or compensatory payments) paid to the lender and interest on cash collateral provided under the SLA would be assessable/deductible under ordinary rules. Non-residents from a country with which Australia does not have a tax treaty that engage in SLAs would be subject to tax in Australia on lending fees, distributions (or compensatory payments) received or profits from SLAs on revenue account, if the SLA activities have an Australian source. Interest paid to a non-resident on cash collateral may, however, be subject to interest withholding tax.

Germany does not levy any indirect (VAT) or transfer taxes on securities lending transactions.

HONG KONG

Hong Kong domestic legislation provides for an exemption from Hong Kong profits tax for stock borrowing and lending transactions by allowing disposals and reacquisition of “specified securities” (e.g. listed debt or equity securities) under certain stock borrowing and lending agreements to be disregarded for Hong Kong profits tax purposes.

Certain conditions must be met for the exemption to apply. Broadly, the borrowed stock under a lending agreement must be used by the borrower for a “specified purpose” (e.g. settling a sale) and stock of the same description must be returned to the lender within a specified period. Further, the lender must be compensated for any distributions received by the borrower. Both the borrower and lender should be dealing with each other at arm’s length and the transaction must not be entered into with the purpose of avoiding or deferring amounts which would otherwise be chargeable to profits tax.

The Hong Kong tax system is based on a territorial concept and not residency. Accordingly, only Hong Kong sourced profits derived from a trade, profession or business in Hong Kong are subject to profits tax. For borrowers and lenders who are not considered as carrying on business in Hong Kong, no taxes should fall due as a result of lending transactions on lending fees, rebates or manufactured payments. For lenders or borrowers who carry on a business in Hong Kong, the general principle (e.g. based on location of services for lending fees and other specified rules for interests for manufactured payments arising from such distribution) would apply to determine the profits tax.

However, the receipt of a dividend distribution by a borrower and manufactured dividends to the lender should be ignored for tax purposes because dividends are generally exempt from tax in Hong Kong.

Where specific conditions are satisfied, stock lending arrangements are not treated as transactions which will give rise to stamp duty. However, it is important to note that this concession only applies to the sale and purchase of Hong Kong stock which is subject to the rules and practices of the Stock Exchange of Hong Kong Limited. In other words, shares in private companies do not fall within the scope of the relief.


3.2




Recent developments

• The progressive disappearance of tax-driven arbitrage opportunities

As for regulation, disparate taxation is a challenge for the business but it has also offered

so far many opportunities for market players. Indeed, in securities lending as in repo, some

strategies may focus on these taxation gaps to enhance yields.

However, it should be underlined that a variety of tax initiatives, including withholding tax re-

lief at source, the renegotiation of double taxation treaties on more favorable terms and the

tax harmonisation drive led by the European Commission, today pose an existential threat

to the yield enhancement transactions on which equity lending has traditionally thrived.

In the repo market as in the securities lending market, arbitrage opportunities are progres-

sively disappearing as tax harmonisation occurs. A number of European Court of Justice

cases have emerged in recent years which successfully challenged the withholding rules

applied to dividend payment arising from various member states. The most recent case, the

Aberdeen decision, was in line with the Denkavit and Amurta decisions which dealt with tax

discrimination in regards to withholding taxes on outbound dividends. These cases have

provided the basis for reclaim of withholding taxes by investors on the grounds that rules

applied by some member states result in a different treatment between domestic and over-

seas recipients of dividends. The issue of whether and how the case law should apply for

entities making claims to recover withholdings taxes on manufactured payments on certain

stocks (rather than actual dividends) raises fundamental questions around the impact on

securities lending agreements, including the pricing of contracts. We would expect some of

these issues to be further explored in the coming months24.

• The impact of the new FATCA Act in the United States

FATCA, the Foreign Account Tax Compliance Act which came into effect on 18 March 2010,

will have a considerable impact on the financial sector, as it forces financial institutions all

over the world to submit detailed information on their customers to the US tax authority (IRS)

which goes far beyond the current Qualified Intermediary (QI) regime. The new rules will

apply to payments from the start of 2013 and to some dividend-equivalent payments even as

early as autumn 2010. In particular, total return swaps and securities lending, among others,

are affected25.

The following table provides an insight of the most important changes to come.

3.2.2

24 Source : Deloitte, “A taxing year for the lending industry ”, 201025 Source: Ernst & Young, “Foreign Account Tax Compliance Act (FATCA), Mastering the challenges of the new US

regulation”, 2010

Figure 32: An overview of the most important changes related to new FATCA Act in the US

> Foreign financial institutions are required to enter into an agreement with the IRS; Otherwise they will force imposition of a 30% withholding tax

> The withholding tax is set at 30% and shall apply as of 2013 to interest, dividends and sales returns paid to uncooperative institutions and customers from US sources

> Products previously exempt from withholding tax, such as total return swaps or securities lending, which are referenced to US securities, now qualify as US source payments

> Foreign (non-US) securities held directly or indirectly by US persons are now also included in reportings

> The definition of foreign financial institutions (FFIs) is wide-ranging, such that FATCA applies to between 50,000 and 100,000 institutions

> Completely new reporting and withholding obligations in addition to (and further-reaching than) those of the existing QI regime

> Identification and documentation of customers becomes considerably more laborious, whereby the burden of proof partly resides with the financial institutions

> Annual (very detailed) reporting to the IRS

Source: Ernst & Young, 2010




Operational efficiency and transparency

Operational efficiency is an increasingly significant contributor to overall fund performance.

Clearing and settlement challenges

If operational risk is inherent in any financial activity, it is of particular importance in the

case of securities loans and repos. Indeed, these transactions involve complex operational

activities, especially when conducting business in foreign markets, whether because they

are low automated or because they have fragmented securities clearing and settlement

infrastructures. As mentioned in section 2.3., the majority of transactions are still performed

out of electronic trading platforms and CCPs.

Ensuring effective and timely settlements is a challenge in securities lending and repo mar-

kets. Yet, failed trades are not uncommon in securities lending markets, especially on re-

calls in cross-border transactions.

The fragmentation of the securities clearing and settlement infrastructures in Europe

remains a core issue because of the difficulty of mobilising collateral held in domestic

CSDs for financing purposes when settlement procedures and timetables remain dif-

ferent between markets.

As long as settlement remains fragmented, transfers between separate systems will

remain more complex and therefore more expensive than domestic transfers.

It should be noted that the ICMA’s European Repo Council has recently released a white

paper on the operation of the European repo market, the problem of settlement failures and

the need for reform of the market infrastructure. This paper, which pays particular attention

to fails in repo settlement, sets out the fundamental nature of the barriers to effective clear-

ing and settlement of repo transactions and proposes solutions and recommendations for

creating a robust European infrastructure26.

Other operational challenges

Securities lending and repo business also implies working with a broad range of counter-

parts, processing and checking transactions, managing efficiently cash and/or securities

collateral with frequent margin calls or substitution of collateral, reinvesting cash collateral

to enhance returns, being able to recall securities on time to avoid buy-ins, processing cor-

porate actions and income collection, allocating lending revenues, measuring exposures

and risks.

The increased interest of beneficial owners to customise their lending programs under de-

fined parameters such as restrictions on markets, portfolios and asset types as well as

authorisation of borrowers and collateral options, makes it even more difficult from an op-

erational viewpoint and impossible to fully automate processes.

3.3.

3.3.1

3.3.2

26 Source : ICMA, “A white paper on the operation of the European repo market, the role of short-selling, the problem

of settlement failures and the need for reform of the market infrastructure”, 13 July 2010

3.3




As a consequence, having the right capabilities in terms of infrastructure, processes and

procedures, sub-custodian network (to have a global coverage of markets) and expert re-

sources (for the trading side as well as for the administrative side) is crucial.

Sophisticated risk management and collateral management infrastructures are no longer a

“nice to have” but really a “must have” for market participants to remain competitive and

to be able to generate value in a risk-controlled environment. Both aspects are examined

further in sub-sections 3.4 and 3.5.

Investors’ focus on transparency

Another operational challenge for agent lenders today consists in satisfying the benefi-

cial owner’s need for transparency which emerged after the Lehman collapse, fueled by

increased regulatory scrutiny and changing views and expectations of beneficial owners.

Indeed, after this major default event, many beneficial owners asked themselves about their

lending programs. The most common questions raised were the followings:

> Do we fully understand the risks of our lending program?

> Do we have the tools and reporting to adequately monitor and manage those risks?

> Who else in the organisation should be apprised of our securities lending program and

its activities?

They now want to see where returns are being generated and what risks they are taking to

achieve these returns. They also want to ensure that earnings are being allocated appropri-

ately and not subsidising other clients’ accounts.

This new focus on transparency requires the ability of agent lenders to produce sophisti-

cated reporting on the securities lending activity conducted on behalf of their clients and to

give them access to this information on a daily basis or even in real-time.

Even five years ago, it was unusual for any meaningful information to be available for lend-

ers, and retrospective reports on positions and earnings were delivered perhaps once a

month. That time is definitively gone. Today, securities lenders can see information in most

asset classes on a daily basis, and some of them require information in real-time. They

also have access to full details of assets on loan, the proportion of a portfolio on loan,

and the risks to which they are exposed through counterparts and collateral, across all

of the routes they take to market. The more sophisticated provider platforms even offer

current and historical performance measurement analysis. Besides, some lenders now

require reports to be disseminated more broadly in their organisation, while the oversight

and management of lending was previously the sole responsibility of the Operations or

Treasury group27.

3.3.3

27 Source : JP Morgan, « Securities lending as an asset management technique », 2010




Mastering collateral management in an evolving environment

Reminder of basic collateral principles

In securities lending as in repo transactions, the collateral received by the lender/seller is a

kind of insurance against the borrower/buyer default.

The eligible collateral (taking into account criteria such as credit rating, market, type of

security, country, etc.) is agreed between the parties, as well as other parameters linked

to collateral:

> Notional limits, i.e. the absolute value of any asset to be accepted as collateral;

> Concentration limits, i.e. the maximum percentage of any issue to be acceptable, for ex-

ample less than 5% of daily traded volume, or the maximum percentage of collateral pool

that can be taken against the same issuer.

> Margin or haircut, i.e. the amount of over-collateralisation required by the cash seller

(repo) or the securities lender (securities lending) to protect itself from the price volatility

of the underlying securities and the counterparty risk. This amount varies with the size

and term of the transaction, the securities type and maturity, as well as with the counter-

party creditworthiness.

> Initial margin, i.e. the margin required at the outset of a transaction;

> Maintenance margin, i.e. the minimum margin level to be maintained throughout the

transaction; It involves the regular and frequent revaluation of collateral.

Throughout the term of the transaction, the market value of securities and collateral may

fluctuate. That is why a regular marking-to-market (daily or even intraday) is carried out to

monitor the margin calls that the parties exchange between themselves in order to maintain

sufficient levels of collateralisation and mitigate market and credit risk.

Collateral can be managed in pool (in that case, there is a global margin call for a given

counterpart for n transactions, for a given investor) or on a unitary basis (in that case, mar-

gin calls are processed transaction by transaction).

Before the crisis, there were recognised benchmarks for margins (e.g. 2% for eurozone

government bonds in the European market and 5% or more for equities) but things have

changed and some margins are higher today. In addition to increased haircuts, investors

have also tightened their collateral schedules and excluded certain collateral. They devel-

oped more conservative approach to market procedures, collateral evaluation, collateral

correlation and concentration of collateral.

Marking collateral to market and collateral optimisation, 2 key challenges

The responsibilities of valuing the collateral daily, of issuing collateral margin calls or re-

turning excess collateral, as well as making substitutions when securities used as collateral

are needed to fulfil trading obligations or before a corporate action, can be cumbersome

3.4

3.4.1

3.4.2

3.4




and time-consuming. It also requires having the appropriate collateral and risk manage-

ment capabilities.

Furthermore, as the nature of collateral assets evolves and activity expands, marking to

market becomes a crucial valuation challenge. This requires investment in both theoretical

valuation algorithms and multiple internal and external sources of current and historical

prices and volatilities to feed them. Prices have to be sourced from data providers such as

Reuters, Bloomberg or Markit, but also from electronic trading platforms, investment banks

and inter-dealer brokers.

Players such as custodian banks or tri-party agents have integrated these aspects well and

offer outsourcing services of collateral management to their clients, so that they can focus

on their core business.

Outsourcing collateral management to expert service providers is often more ef-

ficient for asset managers and institutional investors from an operational and eco-

nomic viewpoint.

Additionally, collateral optimisation and management efficiency can be achieved by cen-

tralising collateral and managing it from a pool of assets spanning various types of securi-

ties, markets and transactions, such as repos, securities loans, OTC derivatives, cash and

forex, as illustrated in figure 33. A trend also well integrated by major market participants.

The importance of high-quality and liquid collateral

Collateral is an essential component of securities lending and repo transactions and is

the key factor which makes them attractive secured financing instruments, compared to

other products.

However, what collateral one accepts and how it performs is of critical importance, espe-

cially when things go wrong, as in the case of Lehman.

Securing transactions through collateralisation is necessary but, on its own, no longer

sufficient. Cash investors have understood, sometimes the hard way, that collateral

selection and the spread on financing transactions should take into consideration the

liquidity factor of assets taken as collateral.

The trend in the market today is towards high quality collateral that is liquid in the secondary

market, so that in case of counterparty default, players are able to execute the collateral

received in the markets.

3.4.3

Figure 33: Illustration of a typical arrangement to optimise collateral management

REPO OTC DERIVATIVES

SECURITIESLENDING

FOREX CASH

Pool of collateral COLLATERAL MANAGEMENT OPTIMISATION

BORROWERS

market


An overview of assets used as collateral in securities lending and major trends

As already mentionned, in securities lending transactions collateral can theorically be cash or

securities.

Non-cash collateral is typically drawn from:

> Government bonds;

> Corporate bonds;

> Convertible bonds;

> Equities of specified indexes, mainly large caps;

> Letters of credit from banks of a specified credit quality;

> Certificates of deposit drawn on institutions of a specified credit quality;

> Other money market instruments.

The bulk of the non-cash collateral market is made of highly rated government bonds, such as

German Bunds, French OAT, UK Gilts or US Treasury bonds.

Yet, equities, in particular blue-chip stocks in indices, account for a growing weight of non-cash

collateral, due to their inherent advantages of liquidity, transparency and ready available pric-

ing information. In addition, equities collateral offers good correlation when the securities lent

are also equities and potential diversification of risks. The predominance of non-cash collat-

eral, such as equities, has served lenders outside the US well during the recent credit crunch.

However, it should be noted that in the United States, many types of beneficial owners would

be unable to take equity collateral without regulatory change.

The overall securities lending market, which has for a long time been a cash collateral market, is

now progressively moving towards a non-cash collateral market (from 67% of cash collateral in

early 2007 to 57% in early 2010 according to Data Explorers information), as displayed in figure 34.

Overall in Europe, non-cash collateral has historically been the collateral of choice, with high

quality government and supranational bonds being the most popular forms of collateral. Today

cash collateral accounts for only about 20% of the European market.

By contrast, the United States continue to be predominantly a cash market, with cash col-

lateral accounting for 95% of the US market. The variety of habits around the world in terms

of nature of collateral used reflects historical legislation and tax incentives. Thus, US pension

funds regulated by the Department of Labour for example are not allowed to take securities as

collateral, whereas in the United Kingdom, until the mid 1990s, the manner in which reinvest-

ment earnings were taxed made cash collateral unattractive and pushed market participants

to adopt non-cash collateral.


3.4.4

page 54 | Securities Lending & Repo markets


Figure 34: % of collateral taken as cash in securities lending transactions

Jan. 2007 Jan. 2008 Jan. 2009 Jan. 2010

Overall 67% 59% 59% 57%

Australia 75% 66% 85% 79%

Canada 37% 24% 20% 20%

Netherlands 48% 44% 50% 35%

Sweden 76% 55% 71% 75%

United Kingdom 18% 12% 15% 21%

United States 96% 92% 95% 95%

Source: Data Explorers, 2010

3.5



It should be noted that contrary to the securities lending market, the OTC derivatives mar-

ket is still predominantly cash collateral orientated, with rates ranging from 80 to 90% of

cash collateral. ISDA’s latest estimations state that the collateral value in the OTC market is

USD3.2tr. If this market moves away from cash, then there will be a demand on the GC col-

lateral, which will undoubtely benefit to the securities lending and repo market.

Cash collateral reinvestment in securities lending programs

In the case of cash collateral, securities lending transactions and cash collateral reinvest-

ment are often closely linked together. Indeed, a lender taking cash as collateral pays rebate

interest to the securities borrower, so the cash must be reinvested at a higher rate to make

any net return on the collateral. Typically lenders delegate reinvestment to their agents.

This process is illustrated in figure 35.

Cash collateral reinvestment obviously offers more attractive investment opportunities in

the context of low money market yields, as it is the case today.

Furthermore, reinvesting cash collateral in assets that carry a higher credit risk expects

higher returns.

Hence it is crucial that the beneficial owners understand the risk/rewards attached to any

cash program and customise their reinvestment program to match their level of risk toler-

ance. In other words, beneficial owners must ask themselves what they expect from cash

collateral: Only an insurance or an insurance plus an opportunity to make more money?

Risk versus return

Risk management considerations

The risks involved in repo and securities lending should neither be under- nor over-estimat-

ed. However, they are quantifiable and, if properly understood and monitored, manageable.

An outcome of the financial crisis from a lender perspective is the realisation that

risk needs to be identified, understood and controlled. Risk management is more im-

portant than ever.

The following table sums up the main risks which can occur in repo and securities lending,

splitting them in three distinct categories - market-related risks including counterparty and col-

lateral-related risks, operational risks and legal risks -, and the best practices to mitigate them:

3.4.5

3.5

3.5.1

FISCAL ANDOPERATIONAL ISSUES

Figure 35: Illustration of the cash collateral reinvestment process

LENDER

LENDER AGENT

BORROWER

MONEY MARKETINSTRUMENTS

BORROWERS

market

Cash collateral delivery

Securities lending

Cash collateral

re-investment

SPREAD BETWEEN INTEREST RATE PAID AND INTEREST RATE

RECEIVED

Interest rate

received




The management of each of these risks must involve a detailed set of disciplines

throughout the lifecycle of a loan/repo transaction, using the different means of mitiga-

tion described above.


Figure 36: Identification of risks in repo & securities lending and means of mitigation

POSSIBLE RISK DEFINITION BEST PRACTICES TO MITIGATE RISK

MARKET-RELATED RISKS > Counterparty or credit risk : Risk that can arise when a counterpart defaults on its obligations (e.g. in a securities lending transaction, the borrower does not return the loaned securities and there is insufficient collateral to buy in the securities)

> Mismatch risk between the securities lent and the collateral (securities lending) or between the securities sold in repo and the cash received (repo transaction): Risk that can arise in case of price volatility, market liquidity and exchange rate fluctuations if the market price of the underlying securities or the collateral move adversely in a short period of time, so that the value of collateral accounts for less than the value of the securities lent (sec. lending) / of the cash received (repo)

> Collateral reinvestment risk: Risk that can occur in securities lending when the collateral received is reinvested into assets of lower quality or in instruments of non-diversified issuers

> Liquidity risk: Risk that the counterparty cannot settle an obligation for the full value when it is due, for any reason (e.g. demand for large quantities of securities or funds that renders the counterparty unable to meet its obligations when due, counterparty’s unability to unwind its short outright position)

> Credit evaluation: Careful analysis, selection and on-going monitoring of participating borrowers/buyers

> Indemnification insurance for borrower/buyer default

> Comprehensive legal documentation including collateral schedule, re-pricing and default processes

> Securities lending: Maintenance of sufficient margin levels and collateral types depending on the assets on loan, with continuous monitoring of collateral levels (daily mark-to-market for securities collateral) and timely margin calls

> Repo: Marking-to-market (re-pricing) on a daily basis to revalue repos using current market prices, reflect changes and re-calculate exposures. Mark-to-market margining allows repo buyers to call for additional cash or securities assets from the seller

> Credit quality, maturity, liquidity and diversification of eligible collateral

> Loan and collateral correlation

> VaR analysis

> Over-collateralisation to cover market fluctuations (current market practice dictates collateral to be at least 105% of the market value of the loaned securities)

> Strong procedures and control systems

> Securities lending: Collateral reinvestment guidelines reflecting the beneficial owner’s risk and reward objectives

> Use of buffer securities (e.g. a higher buffer for less liquid issues) or reserve cash

OPERATIONAL RISK > Delivery risk: Risk that can occur when:

- securities have been lent and collateral has not been received at the same time or prior to the loan

or - collateral is being returned but the loan

return has not been received

- settlement fails

> Other operational risks: Risk that deficiencies in information systems, manual processes or internal controls could result in an unexpected loss or in penalties imposed by a counterparty. Risks that can arise when the securities lending/repo players have not the adequate infrastructure (e.g. manual interventions) and processes in place to cope with the business rules (e.g. recall in time to enable a sale of the securities lent). Operational risks may be greatest when conducting securities lending/repo in foreign markets.

> Delivery Versus Payment (DVP) or Delivery Versus Delivery (DVD) processes

> Pre-collateralisation (collateral received in advance of delivering the loan securities)

> Use of triparty collateral agents

> Data granularity and quality to cope with the business rules

> Straight Through Processing (STP)

> Use of intermediaries having the right infrastructure, high levels of automation and efficient processes (e.g. corporate actions, recalls/security substitutions)

LEGAL RISK > Risk of loss because of the unexpected application of a law or regulation, or because a contract cannot be enforced

> In the case of cross-border trades, risk of not being compliant with the laws and regulations of the counterparty’s, asset or intermediary’s jurisdictions

> Written contract in the form of a robust standard master agreement, addressing the various legal aspects of securities lending/repo and clarifying the roles and responsibilities of the participants, as well as the legal framework in a particular jurisdiction (e.g. GMSLA, GMRA)


3.5



Securities lending returns mechanisms

Securities lending returns comprise two components:

> Securities lending return to lendable (the intrinsic value of the securities lending rate);

> Reinvestment return to lendable (coming from the collateral reinvestment side).

The sum of these returns is called Total return to lendable.

In the United States where cash collateral has historically been predominant, a greater

proportion of the returns come from reinvestment rather than securities lending itself.

As should be expected, returns from securities lending programs increase in proportion to:

> Firstly, the interaction of demand and supply;

- Demand for any given security will vary from time to time; whilst ‘general collateral’

securities, for which there is low demand and excess supply, will afford lenders lower

returns, securities subject to greater demand will offer significantly higher returns.

> Secondly the amount of risk a lender is willing to assume;

- Lenders willing to take a wider range of collateral securities than the safest government

bonds will have higher lending balances and therefore higher revenue. Those prepared

to take cash collateral and reinvest in the money markets also have the opportunity to

earn additional returns.

Other factors influencing returns include the nature and size of the securities portfolios

available for lending and the stability of the portfolio, as well as the tax status of the lender

(in the context of tax-driven arbitrage strategies).

New model of returns towards intrinsic value

The recent crisis and the Lehman default have raised for lenders awareness of risk versus

return within the global securities lending markets, all the more as in the United States

some aggressive cash reinvestment programs have been finger pointed after losses notably

related to substantial reinvestment in asset-back securities and in funds of long maturity.

However, it is important not to paint all cash reinvestment programs with the same brush, as

certain providers fared very well.

Cash collateral is not intrinsically safer or riskier than securities collateral but if a

lender accepts cash collateral, their cash reinvestment parameters must be clearly

defined: Which approach? Conservative or not? For what duration? In what instru-

ments? On a segregated or pooled basis? Etc.

More than ever, it is crucial that the risk return profile is understood and profession-

ally managed.

Beneficial owners reacted to the crisis with a range of different responses. They started

to put into question their existing lending programs and ask themselves questions such as:

> If we accept cash collateral, how much liquidity should we have, and are the reinvestment

guidelines consistent with our objectives?

> What new parameters, if any, should we consider for the lending program?


3.5.2

3.5.3



Ultimately, a few lenders suspended their programs or withdrew entirely from the mar-

ket. However, the majority continued to lend, with some introducing additional restric-

tions and controls.

After experiencing losses on collateral pools or ‘near misses’, some lenders have decided

to move towards an intrinsic value lending orientation, which produces returns based upon

the securities loan itself, with little incremental benefit from collateral reinvestments. These

beneficial owners have questioned the risk/reward trade-off of GC lending. This is a thin

spread/high volume product which is often dependent on collateral reinvestment returns.

By limiting activity to those loans with adequate intrinsic value, the importance of the rein-

vestment return is reduced. This view is reinforced by the current lack of attractive money

market reinvestment opportunities and has manifested itself in the following two ways:

Firstly through more conservative reinvestment guidelines and secondly by the implemen-

tation of minimum spread parameters for certain programs28.

This trend consisting in shifting from volume lending of low margin securities towards value

lending of higher margin securities is expected to continue according to market specialists.

Instead of taking credit or duration risk with collateral to generate additional return, the

emphasis is now back on the primary purpose of collateral, namely to protect principal and

secure the loan with the emphasis on stability and liquidity.


28 Source: Goldman Sachs, “Securities lending: new priorities”, April 2010



CONCLUSION

CONCLUSION

Securities lending and repo are complex markets where business expertise

and the right capabilities are of paramount importance to succeed. Addition-

ally, securities financing and liquidity management require a professional ap-

proach and scale capabilities.

As we have seen, today market players have to face key challenges:

> Disparate regulations and heterogeneous tax frameworks among various

jurisdictions, in the context of an increasing globalisation of the business;

> Operational complexity in terms of clearing and settlement for cross-border

transactions due to the fragmentation of infrastructures and the lack of

automation, but also in terms of collateral management, corporate actions

and income collection processing, etc.;

> Need for highly sophisticated collateral management and risk management

infrastructure.

They also have to adapt to an evolving environment, with new regulations and

requirements.

Yet, it would be a shame not to seize the great opportunities offered by the

securities lending and repo markets, in particular the opportunity to gener-

ate value in a risk-controlled environment and enhance portfolios perform-

ance by activating inactive capital.

Now more than ever, appointing a service provider, whether acting as agent

lender or principal borrower and equipped with integrated front-to-end capa-

bilities, is highly recommended.

However, not all service providers are alike. You need a proven player with

specialised market knowledge and efficient infrastructure, that under-

stands its clients’ business, who is focused on the safety of their assets

and on achieving optimal risk-adjusted returns and last but not least, who

is flexible enough to set up a program which meets their unique and evolv-

ing requirements.

BIBLIOGRAPHY



Australian Securities Lending Association (ASLA), website

Bank of England & the Securities Lending and Repo Committee (SLRC),

”Securities borrowing and Lending Code of Guidance”, July 2009

Data Explorers, “Securities Lending Yearbook, 2009-2010”, 2010

Deloitte, “A taxing year for the lending industry”, 2010

Ernst & Young, “Foreign Account Tax Compliance Act (FATCA), Mastering the challenges

of the new US regulation”, 2010

Euroclear

> “Steering a new course for the repo market”, 2010

> “Understanding repo and the repo market”, March 2009

European Savings Banks Group, Press Release: “European Master Agreement is

published”, 29 October 1999

Global Custodian, “Collateral: Securities Lending, Repo, OTC Derivatives and the Future of

Finance”, 2007

Global Investor magazine, ”Canadian market forum”, June 2010

Global Securities Lending magazine, “Still under siege?”, Issue 08, Q2 2010

Goldman Sachs, “Securities lending: New priorities”, April 2010

ICMA

> “18th ICMA survey”, March 2010

> “A white paper on the operation of the European repo market, the role of short-selling,

the problem of settlement failures and the need for reform of the market infrastructure”,

13 July 2010

Investor Services Journal

> “Securities lending market guide 2010”, 2010

> “Securities Lending Market Guide 2009”, 2009

IOSCO, “Securities lending transactions: Market development and implications”, July 1999

ISLA, “ISLA international lending conference”, June 2010

JP Morgan, “Securities lending as an asset management technique”, 2010

RMA, “RMA quaterly aggregate data survey”, Q2 2010

Securities Lending Times, ”Country focus – Germany”, Issue 002, June 2010

Spitafields Advisors, “An introduction to Securities Lending”, Third edition, 2006



GLOSSARY

An entity, such as a fund manager or a custodian, that undertakes

a securities loan and negotiates the terms with the borrower on

behalf of a customer-owner.

Profiting from a difference in price when the same security, cur-

rency or commodity is traded on two or more markets.

Australian Securities Lending Association

One one-hundreth of a percentage, or 0.01%

In the context of securities lending, owner of securities portfolios,

i.e. the lender

Entitlement to receive some or all of the benefits of ownership of a

security or financial instrument (e.g. income, stock splits, power to

transfer). Beneficial ownership is usually distinguished from “legal

ownership” of a security or financial instrument.

A person or firm sometimes acting as broker and sometimes as

principal intermediary in securities transactions. A broker is a firm

that communicates bid and ask levels to potential principals and

otherwise arranges transactions as agent for a fee, without acting

as counterparty in the transactions.

The party to a repo that purchases collateral on the purchase date

and commits to sell back equivalent collateral on the repurchase

date or on demand, in the case of open repo. The lender of cash.

The practice whereby a lender of securities or its agent enters

the open market to buy securities to replace those that have not

been returned by the borrower in accordance with the terms of the

transaction (e.g. on the settlement date). All costs are borne by the

borrower in this case.

Transactions motivated by the wish to borrow/invest a cash

amount through a repo (or loan) of securities.

An institution for holding securities, which enables securities

transactions to be processed by means of book entries. Physical

securities may be immobilised by the depository or securities may

be dematerialised (so that they exist only as electronic documents).

The term “clearing” has two meanings in the securities markets.

It may mean the process of calculating the mutual obligations of

market participants, usually on a net basis, for the exchange of

securities and money. It may also signify the process of transfer-

ring securities on the settlement date, and in this sense the term

“clearing system” is sometimes used to refer to securities settle-

ment systems.

Agent

Arbitrage

ASLA

Basis point (bp)

Beneficial owner

Beneficial ownership/

interest

Broker-dealer

Buyer

Buy-in

Cash-driven securities

lending transactions

Central securities

depository (CSD)

Clearing



GLOSSARY

A department of an exchange or a separate legal entity that pro-

vides a range of services related to the clearance and settlement

of trades and the management of risks associated with the result-

ing contracts. A clearing house is often central counterparty to all

trades to be settled through the clearing house, that is, the buyer to

every seller and the seller to every buyer.

An arrangement to settle all existing obligations to and claims on

a counterparty by one single net payment, immediately upon the

occurrence of a defined event of default.

The second leg of a pair of transactions in the same securities, i.e. a

securities lending transaction – one for a near value date, the other

for a value date further into the future. See opening (or front) leg.

In a securities loan, securities or cash delivered by the borrower

to the lender to secure the transaction. In a repo transaction, the

securities accepted by the cash-giver to secure the transaction.

Collateral arrangements may take different legal forms; collateral

may be obtained using the method of title transfer or pledge.

The procedure for verifying trade details with a counterparty. This

is generally done by exchanging via fax or mail a document (i.e. a

confirmation) identifying the trade details and any governing legal

documentation and verifying the accuracy of the information pro-

vided by the counterparty (i.e. matching).

A financial contract in which the difference between the agreed

fixed price of an asset and its prevailing market price is periodi-

cally credited to the counterparty in the money. Since there is no

transfer of principal, a CFD covers hedging or speculative needs.

Limits set by a trading party to restrict the largest amount of its

credit exposures to different counterparties.

The risk that a counterparty will not settle an obligation for full val-

ue, either when due or at any time thereafter. Credit risk includes

replacement cost risk, principal risk and cash deposit risk.

An entity, often a bank, that safe-keeps and administers securi-

ties for its customers and that may provide various other services,

including clearing and settlement, cash management, foreign ex-

change and securities lending.

The risk of loss of securities held in custody occasioned by the in-

solvency, negligence or fraudulent action of the custodian or of a

sub-custodian.

The period in the day when one party to a trade has a temporary

credit exposure to the other due to one party having settled before

the other (e.g. in a securities loan, it could happen if the loan had

settled but the delivery of collateral would settle at a later time).

Clearing house

Close-out netting

Closing (or back) leg

Collateral

Confirmation

Contract for difference

(CFD)

Counterparty

credit limits

Credit (or Counterparty)

risk

Custodian

Custody risk

Daylight exposure



GLOSSARY

Failure to complete a funds or securities transfer according to its

terms for reasons that are not technical or temporary, usually as a

result of bankruptcy. Default is usually distinguished from a “fail”.

A link between two securities transfer (settlement) systems that

ensures that a delivery occurs if, and only if, another delivery oc-

curs and vice versa.

A mechanism in some settlement systems to assist a participant to

borrow money from or lend money to another participant against

collateral held in the system. The system will select and deliver

securities (based on the preset specifications of the giver and the

taker) to the appropriate party and arrange that equivalent securi-

ties be returned the following business day.

A link between a securities transfer system and a funds transfer

system that ensures that delivery occurs if, and only if, payment

occurs.

The elimination of physical certificates or documents of title which

represent ownership of securities so that securities exist only as

accounting records.

A financial contract the value of which depends on the value of one

or more underlying reference assets, rates or indices.

A term meaning that the securities or collateral returned must be of

an identical type, nominal value, description and amount to those

originally provided.

Standard agreement used at the European level for securities lend-

ing and repos.

An event stipulated in an agreement as constituting a default. Gen-

erally, the occurrence of a failure to pay or deliver on the due date,

breach of agreement and insolvency are events of default.

A failure to settle a cash or securities transaction on the contrac-

tual settlement date, usually because of technical or temporary dif-

ficulties. Fail is usually distinguished from “default.”

A repurchase agreement in which the repo rate is linked to an in-

dex such as EONIA and is accordingly periodically re-fixed. The

rate may incorporate a spread under or over the index (e.g. EONIA

minus 3 basis points).

Delivery of securities with no corresponding payment of funds.

Securities that are not special in the market, i.e. which are not in

particular demand.

Default

Delivery versus delivery

(DVD)

Delivery by value (DBV)

Delivery versus

payment (DVP)

Dematerialisation

Derivative

Equivalent (securities

or collateral)

European Master

Agreement (EMA)

Event of default

Fail (or failed

transaction/delivery)

Floating-rate repo

Free-of-payment

delivery

General Collateral (GC)




GLOSSARY

United Kingdom government bonds

A custodian that provides its customers with custody services in

respect of securities traded and settled not only in the country in

which the custodian is located but also in numerous other coun-

tries throughout the world.

International market standard agreement for securities lending

International market standard agreement for repos.

> A percentage subtracted from the market value of a security to

give its value when used as collateral. The haircut is intended

to protect a lender of funds or securities from losses owing to

declines in collateral values.

> Initial margin on a repo transaction.

A private investment fund, often leveraged, and often engaging

in active trading strategies (including arbitrage). Hedge funds are

typically subject to limited regulatory oversight.

An arrangement under which securities (collateral) are not physi-

cally delivered to the borrower (lender) but are simply segregated

by the lender (borrower) in an internal customer account.

Also called hard stock. See Specials.

International Capital Market Association

An agreement to compensate for damage or loss. Custodians

sometimes offer it to lending customers in a variety of forms (see

indemnity).

The excess of the value of collateral over the purchase price on

the purchase date of a repo. Initial margin is usually intended to

protect the buyer against the illiquidity of collateral and the credit

risk on the seller.

A form of guarantee or insurance, frequently offered by agents.

Terms vary significantly and the value of the indemnity does also.

Agent or intermediary that is paid a commission to bring buyers

and sellers together. The broker’s commission may be paid either

by the initiator of the transaction or by both counterparts.

In securities lending, a party that borrows a security in order to

re-deliver it to a client, rather than borrowing it for its own-house

needs.

Gilts

Global custodian

Global Master

Securities Lending

Agreement (GMSLA)

Global Master

Repurchase Agreement

(GMRA)

Haircut

Hedge fund

Hold in Custody

Hot stock

ICMA

Indemnification

Initial margin

Indemnity

Interdealer broker

Intermediary



GLOSSARY

A central securities depository that settles trades in international

securities and in various domestic securities, usually through di-

rect or indirect (through local agents) links to local CSDs.

International Swaps and Derivatives Association

International Securities Lending Association

Recognition in law as the owner of a security or financial instru-

ment. It is usually represented by holding “legal title” and some-

times distinguished from beneficial ownership/interest. See legal

title and beneficial ownership.

The risk of loss because of the unexpected application of a law or

regulation or because a contract cannot be enforced.

One recognisable or enforceable in law or one which is complete

and perfect as regards the apparent right of ownership, and pos-

session, which may carry no beneficial interest.

The risk that a counterparty will not settle an obligation for full val-

ue when due, but on some unspecified date thereafter.

A condition that the buyer or holder of securities owns more secu-

rities than it contracts to deliver. See short sale.

An equivalent payment made by the borrower (buyer) of securi-

ties to the lender (seller) in lieu of actual dividends or other income

earned on the securities (net of any applicable taxes), which the

lender (seller) would have received if it had not lent (sold) the se-

curities.

The amount or percentage by which the collateral value exceeds

the value of securities (funds) on loan (e.g. 2%, 5%, etc). It some-

times refers to the total value of the collateral as a percentage

of the loan value (e.g. 102%, 105%, etc). Margin serves to reduce

replacement cost exposures resulting from changes in market

prices. Initial margin is deposited at the start of the transaction. On

the other hand, variation margin is called to deposit following the

revaluation, through marking to market, of securities or financial

instruments that are subject of unsettled transactions.

A demand for additional funds or collateral, following the marking

to market of a securities lending transaction, if the market value

of underlying collateral falls below a certain level relative to the

loaned asset. Similarly, if the value of the underlying collateral as-

sets, following their revaluation, were to exceed the agreed mar-

gin, the return of collateral may be required.

International central

securities depository

(ICSD)

ISDA

ISLA

Legal ownership

Legal risk

Legal title

Liquidity risk

Long position

Manufactured payment/

dividend

Margin

Margin call



GLOSSARY

The risk of losses in on- and off-balance sheet positions arising

from movements in market prices.

The practice of revaluing the securities collateral in a repo or the

securities lending transaction using current market prices. Stand-

ard practice is to mark-to-market daily.

An agreement that sets forth the standard terms and conditions

applicable to all or a defined subset of transactions that the parties

may enter into from time to time, including the terms and conditions

for close-out netting.

Portfolio of assets and portfolio of liabilities having equal maturities.

The term is used most often in reference to money market instru-

ments and money market liabilities. In reference to securities lend-

ing, this entails borrowing securities and then relending the same

securities for an equivalent period for the purpose of borrowing

and lending money at a locked-in rate. In contrast, an unmatched

book refers to borrowing and lending of the same securities for dif-

ferent maturities to take a short or long interest rate position.

The process for comparing the trade or settlement details provided

by counterparties to ensure that they are in accordance with re-

spect to the terms of the transaction.

A settlement in which a number of transactions between or among

counterparties are settled on a net basis.

To borrow a security from one party and then lend the same secu-

rity to another party.

First leg of a pair of transactions in the same securities, i.e. a secu-

rities lending transaction – one for a near value date, the other for a

value date further into the future. See closing (back) leg.

Transactions with no fixed maturity date, with the possibility of ter-

minating the transaction or refixing its terms or substituting col-

lateral daily.

The risk of loss because of human error or a breakdown of some

component of the hardware, software or communications systems

that are crucial to trading, risk monitoring or settlement.

A method of trading that does not involve an exchange. In the

over-the counter markets, participants trade directly, sometimes

through brokers, with each other, typically by telephone or com-

puter links.

Market risk

Mark-to-market

Master agreement

Matched book

Matching

(or comparison)

Net settlement

Onlend

Opening (or front) leg

Open transactions

Operational risk

Over-the-counter (OTC)



GLOSSARY

A delivery of property to secure the performance of an obligation

owed by one party (debtor/pledgor) to another (secured party). A

pledge creates a security interest (lien) in the property so deliv-

ered. See security interest.

The provision by firms (e.g. large securities houses) of credit, clear-

ing, securities lending, financing arrangements and other services

to clients (typically hedge funds).

A party to a transaction that acts on its own behalf. In acting as

a principal, a firm is buying/selling (or lending/borrowing) from its

own account for position and risk, expecting to make a profit. A

lender institution offering customers’ securities on an undisclosed

basis may also be considered to be acting as principal.

The risk that the seller of a security delivers a security but does not

receive payment or that the buyer of a security makes payment but

does not receive delivery. In this event, the full principal value of

the securities or funds transferred is at risk.

A generic term that refers to the exclusive right or interest of pos-

sessing, enjoying and disposing of a specific property.

Trading in securities or derivatives for the account of a firm itself,

rather than on behalf of clients.

In a repo transaction, the value date, i.e. when the purchase price

and collateral are exchanged by the buyer and the seller.

In a repo transaction, the amount of cash paid by the buyer to the

seller on the purchase date in exchange for collateral. The pur-

chase price is net of any initial margin or haircut.

The continuous (real-time) settlement of funds or securities trans-

fers individually on an order-by-order basis (without netting).

The interest rate that a securities lender pays the borrower on cash

collateral. A rebate rate of interest implies a fee for the loan of se-

curities and is therefore regarded as a discounted rate of interest.

A demand by a securities lender for the return of securities from

the borrower where they are lent on an open transaction.

The listing of ownership of securities in the records of the issuer or

its transfer agent/registrar.

The risk that a counterparty to an outstanding transaction for com-

pletion at a future date will fail to perform on the settlement date.

The resulting exposure is the cost of replacing, at current market

prices, the original transaction. See credit risk.

Pledge

Prime brokerage

Principal

Principal risk

Property interest

Proprietary (trading)

Purchase date

Purchase price

Real-time gross

settlement (RTGS)

Rebate rate

Recall

Registration

Replacement cost risk

GLOSSARY

The act of marking to market.

A contract with a counterparty to sell and subsequently repur-

chase securities at a specified date and price.

Repurchase agreement. Generic term for a sale of collateral and

a simultaneous agreement to repurchase equivalent assets on a

future date or on demand (open repo), for the same value plus the

payment of a return on the use of the purchase price during the

term of the transaction.

The return earned on a repo transaction expressed as an interest

rate on the cash side of the transaction.

Occurs when the market value of a security in a repo or a securi-

ties lending transaction changes and the parties to the transaction

agree to adjust the amount of securities or cash in a transaction to

the correct margin level.

See repo.

The maturity date of a repo.

In a repo transaction, the amount of cash paid by the seller to the

buyer on the repurchase date in exchange for equivalent collat-

eral. The repurchase price includes the return on the cash.

Occurs when the borrower of securities returns them to the lender.

A contract with a counterparty to buy and subsequently resell se-

curities at a specified date and price, the mirror image of a repo.

In a repo transaction, the right that may be given by the buyer to

the seller during the negotiation of the repo, for the seller to recall

equivalent collateral during the term of the transaction and substi-

tute collateral of equal quality and value. The substitute collateral

must be considered reasonably acceptable to the buyer.

To renew a trade at its maturity.

A situation in which settlement of securities transactions takes

place each day, the settlement of an individual transaction taking

place a given number of days after the deal has been

struck. This is in contrast to a situation in which settlement takes

place only on certain days – for example, once a week or once a

month – and the settlement of an individual transaction takes place

on the next settlement day (or sometimes the next but one settle-

ment day) following the day the deal is struck.

Re-pricing/revaluation

Repurchase agreement

(repo)

Repo

Repo rate

Re-pricing (Revaluation)

Repurchase agreement

Repurchase date

Repurchase price

Return

Reverse repurchase

agreement

(reverse repo)

Right of substitution

Roll

Rolling settlement





GLOSSARY

Trading conducted through a network of electronic terminals.

Transactions whose motivation lies in borrowing/lending specific

securities via a repo or securities loan. See cash-driven securities

lending transactions (repos).

A loan of specific securities to a borrower, usually against collat-

eral (cash or securities).

A system in which the settlement of securities takes place.

A form of interest in property that provides that the property may

be sold on default in order to satisfy the obligation covered by the

security interest.

Transactions that have the same economic effect and intent as a

repurchase agreement and which consist of two distinct simulta-

neous purchase and sale transactions for different value dates –

one for immediate settlement and the other for forward settlement.

Typically sell-buybacks do not allow for marking to market and

margin calls.

In a repo transaction, the party that sells the collateral for cash on

the purchase date and commits to buy back equivalent collateral

on the repurchase date or on demand in the case of open repo. The

borrower of cash.

The completion of a transaction, wherein the seller transfers secu-

rities or financial instruments to the buyer and the buyer transfers

money to the seller. A settlement may be final or provisional.

The amount of time that elapses between the trade date (T) and the

settlement date typically measured relative to the trade date, e.g. if

three days elapse, the settlement interval is T+3.

General term used to designate the risk that settlement in a trans-

fer system will not take place as expected. This risk may comprise

both credit and liquidity risk.

A sale of securities which the seller does not own and thus must

be covered by the time of delivery; a technique used (1) to take

advantage of an anticipated decline in the price or (2) to protect a

profit in a long position.

In securities lending and repos, a particular security that is in high

demand in relation to its availability in the market and thus relatively

expensive to borrow/purchase (as opposed to General Collateral).

Screen-based trading

Securities-driven

securities lending

transactions

Securities loan/

Securities lending

Securities settlement

system (SSS)

Security interest

Sell-buybacks

(or buy-sellbacks)

Seller

Settlement

Settlement interval

Settlement risk

Short sale

(or short position)

Specials

GLOSSARY

A tax in the form of the cost of stamps which are required to be af-

fixed to legal documents such as certificates, receipts and the like.

Recalling the securities lent from a borrower and replacing them

with other securities of

equivalent market value during the life of the lending.

The risk that the inability of one institution to meet its obligations

when due will cause other institutions to be unable to meet their

obligations when due.

Transactions with a fixed end or maturity date.

Arrangement whereby an institution lends directly to a borrower

and retains decision making power, while all administration (set-

tlement, collateral management, monitoring, etc.) is handled by a

third-party, such as a global custodian.

Conveyance of the ownership interest in property from a counter-

party to another. Title transfer is used as one method of collaterali-

sation. The title transfer method employs an outright transfer of the

ownership interest in property serving as collateral.

An OTC swap with a fixed maturity, in which a dealer agrees to

receive the total return on the shares of stock sold to the cash in-

vestor, counterparty of the swap, and in exchange to pay a floating

rate of interest for the maturity to the counterparty. Payment to the

cash investor at the termination of the swap is therefore the float-

ing rate of interest plus any fall in the share price or minus any rise

in the share price; on the other hand the cash investor sells the

shares to get back his investment in the market. The end result of

this arrangement is that the dealer borrowed cash at the floating

rate for a set period of time, using his equity position as collateral.

The total return swap is combined with an outright sale of stock in

this way where the dealer is looking to finance an equity position

and functions economically similarly to securities lending.

The provision of collateral management services, including mark-

ing to market repricing and delivery, by a third-party, such a custo-

dian bank or an ICSD.

Repo in which bonds and cash are delivered by the trading coun-

terparty to an independent custodian bank or ICSD (the tri-party

agent) that is responsible for ensuring the maintenance of ad-

equate collateral value during the life of the transaction.

A tax on income deducted at source, which a paying agent is le-

gally obliged to deduct from its payments of interest on deposits,

securities or similar financial instruments.

Stamp duty

Substitution

Systemic risk

Term transactions

Third-party lending

Title transfer

Total return swap

Tri-party

Tri-party repo

Withholding tax

Source: International Organisation of Securities Commissions (IOSCO) & the Securities Lending and Repo Committee (SLRC)page 70 | Securities Lending & Repo markets


ABOUT THE AUTHORS

Maxime BIANCONI

44 years old, is an Investment Portfolio Manager within CACEIS Luxembourg’s Trading Room and has 18 years of experience in treasury and portfolio management. He joined the Crédit Agricole Group in 1995, after

2 years spent with Kredietbank Luxembourg as a Sales person on the bond market. +352 4767 2367 [email protected]

Nathalie COLLOT

37 years old, is a Product Manager at CACEIS in Paris since 2008. She started her career working for HSBC Global Asset Management in Paris, before joining JP Morgan Futures & Options Brokerage business

in London. She then worked as a management consultant on numerous projects in the asset management, securities services and investment banking fields during a 7-year period. + 33 1 57 78 12 [email protected]

Guy KNEPPER

42 years old, Head of the securities lending desk joined CACEIS LuxembourgTrading Room in early 2008. He started his career in Luxembourg with Kredietbank S.A where he remained 18 years as Head of

International Securities Lending & Repo.+ 352 4767 [email protected]

1-3 place Valhubert 75206 Paris Cedex 13

5 Allée Scheffer, L-2520 Luxembourg

www.caceis.com

This document is an official publication of CACEIS.CACEIS cannot be held responsible for any inaccuracy or interpretation error it may contain. All rights reserved. No part of this document may be reproduced in any form or by any means without written permission of the publisher.

mailto:[email protected]






| Global master repurchase agreement - October 2000 | Securities Lending & Repo markets | Appendix

APPENDICE I

GLOBAL MASTER REPURCHASE AGREEMENT (GMRA)

October 2000 version

Source: TBMA/ISMA


2000 VERSION

TBMA/ISMA GLOBAL MASTER REPURCHASE AGREEMENT

Dated as of _________________

Between:

______________________ («Party A»)

and

______________________ («Party B»)

1. Applicability

(a) From time to time the parties hereto may enter into transactions in which one party, acting through a Designated Office, («Sel-ler»)agrees to sell to the other, acting through a Designated Office, («Buyer») securities and financial instruments («Securities») (subject to paragraph 1(c), other than equities and Net Paying Securities) against the payment of the purchase price by Buyer to Seller, with a simultaneous agreement by Buyer to sell to Seller Securities equivalent to such Securities at a date certain or on demand against the payment of the repurchase price by Seller to Buyer.

(b) Each such transaction (which may be a repurchase transaction («Repurchase Transaction») or a buy and sell back transaction («Buy/Sell Back Transaction»)) shall be referred to herein as a «Transaction» and shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto, unless otherwise agreed in writing.

(c) If this Agreement may be applied to -

(i) Buy/Sell Back Transactions, this shall be specified in Annex I hereto, and the provisions of the Buy/Sell Back Annex shall apply to such Buy/Sell Back Transactions;

(ii) Net Paying Securities, this shall be specified in Annex I hereto and the provisions of Annex I, paragraph 1(b) shall apply to Transactions involving Net Paying Securities.

(d) If Transactions are to be effected under this Agreement by either party as an agent, this shall be specified in Annex I hereto, and the provisions of the Agency Annex shall apply to such Agency Transactions.

2. Definitions

(a) «Act of Insolvency» shall occur with respect to any party hereto upon -

(i) I ts making a general assignment for the benefit of, entering into a reorganisation, arrangement, or composition with credi-tors; or

(ii) Its admitting in writing that it is unable to pay its debts as they become due; or

(iii) Its seeking, consenting to or acquiescing in the appointment of any trustee, administrator, receiver or liquidator or analo-gous officer of it or any material part of its property; or

(iv) The presentation or filing of a petition in respect of it (other than by the counterparty to this Agreement in respect of any obligation under this Agreement) in any court or before any agency alleging or for the bankruptcy, winding-up or insolvency of such party (or any analogous proceeding) or seeking any reorganisation, arrangement, composition, re-adjustment, admi-nistration, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such petition (except in the case of a petition for winding-up or any analogous proceeding, in respect of which no such 30 day period shall apply) not having been stayed or dismissed within 30 days of its filing; or

(v) The appointment of a receiver, administrator, liquidator or trustee or analogous officer of such party or over all or any mate-rial part of such party’s property; or


(vi) The convening of any meeting of its creditors for the purposes of considering a voluntary arrangement as referred to in se tion 3 of the Insolvency Act 1986 (or any analogous proceeding);

(b) «Agency Transaction», the meaning specified in paragraph 1 of the Agency Annex;

(c) «Appropriate Market», the meaning specified in paragraph 10;

(d) «Base Currency», the currency indicated in Annex I hereto;

(e) «Business Day» -

(i) In relation to the settlement of any Transaction which is to be settled through Clearstream or Euroclear, a day on which Clearstream or, as the case may be, Euroclear is open to settle business in the currency in which the Purchase Price and the Repurchase Price are denominated;

(ii) In relation to the settlement of any Transaction which is to be settled through a settlement system other than Clearstream or Euroclear, a day on which that settlement system is open to settle such Transaction;

(iii) In relation to any delivery of Securities not falling within (i) or (ii) above, a day on which banks are open for business in the place where delivery of the relevant Securities is to be effected; and

(iv) In relation to any obligation to make a payment not falling within (i) or (ii) above, a day other than a Saturday or a Sunday on which banks are open for business in the principal financial centre of the country of which the currency in which the payment is denominated is the official currency and, if different, in the place where any account designated by the parties for the making or receipt of the payment is situated (or, in the case of a payment in euro, a day on which TARGET operates);

(f) «Cash Margin», a cash sum paid to Buyer or Seller in accordance with paragraph 4;

(g) «Clearstream», Clearstream Banking, société anonyme, (previously Cedelbank) or any successor thereto;

(h) «Confirmation», the meaning specified in paragraph 3(b);

(i) «Contractual Currency», the meaning specified in paragraph 7(a);

(j) «Defaulting Party», the meaning specified in paragraph 10;

(k) «Default Market Value», the meaning specified in paragraph 10;

(l) «Default Notice», a written notice served by the non-Defaulting Party on the Defaulting Party under paragraph 10 stating that an event shall be treated as an Event of Default for the purposes of this Agreement;

(m) «Default Valuation Notice», the meaning specified in paragraph 10;

(n) «Default Valuation Time», the meaning specified in paragraph 10;

(o) «Deliverable Securities», the meaning specified in paragraph 10;

(p) «Designated Office», with respect to a party, a branch or office of that party which is specified as such in Annex I hereto or such other branch or office as may be agreed to by the parties;

(q) «Distributions», the meaning specified in sub-paragraph (w) below;

(r) «Equivalent Margin Securities», Securities equivalent to Securities previously transferred as Margin Securities;

(s) «Equivalent Securities», with respect to a Transaction, Securities equivalent to Purchased Securities under that Transaction. If and to the extent that such Purchased Securities have been redeemed, the expression shall mean a sum of money equivalent to the proceeds of the redemption;

(t) Securities are «equivalent to» other Securities for the purposes of this Agreement if they are: (i) of the same issuer; (ii) part of the


same issue; and (iii) of an identical type, nominal value, description and (except where otherwise stated) amount as those other Securities, provided that -

(A) Securities will be equivalent to other Securities notwithstanding that those Securities have been redenominated into euro or that the nominal value of those Securities has changed in connection with such redenomination; and

(B) Where Securities have been converted, subdivided or consolidated or have become the subject of a takeover or the holders of Securities have become entitled to receive or acquire other Securities or other property or the Securities have become subject to any similar event, the expression «equivalent to» shall mean Securities equivalent to (as defined in the provisions of this definition preceding the proviso) the original Securities together with or replaced by a sum of money or Securities or other property equivalent to (as so defined) that receivable by holders of such original Securities resulting from such event;

(u) «Euroclear», Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System or any succes-sor thereto;

(v) «Event of Default», the meaning specified in paragraph 10;

(w) «Income», with respect to any Security at any time, all interest, dividends or other distributions thereon, but excluding distribu-tions which are a payment or repayment of principal in respect of the relevant securities («Distributions»);

(x) «Income Payment Date», with respect to any Securities, the date on which Income is paid in respect of such Securities or, in the case of registered Securities, the date by reference to which particular registered holders are identified as being entitled to payment of Income;

(y) «LIBOR», in relation to any sum in any currency, the one month London Inter Bank Offered Rate in respect of that currency as quoted on page 3750 on the Bridge Telerate Service (or such other page as may replace page 3750 on that service) as of 11:00 a.m., London time, on the date on which it is to be determined;

(z) «Margin Ratio», with respect to a Transaction, the Market Value of the Purchased Securities at the time when the Transaction was entered into divided by the Purchase Price (and so that, where a Transaction relates to Securities of different descriptions and the Purchase Price is apportioned by the parties among Purchased Securities of each such description, a separate Margin Ratio shall apply in respect of Securities of each such description), or such other proportion as the parties may agree with res-pect to that Transaction;

(aa) «Margin Securities», in relation to a Margin Transfer, Securities reasonably acceptable to the party calling for such Margin Transfer;

(bb) «Margin Transfer», any, or any combination of, the payment or repayment of Cash Margin and the transfer of Margin Securities or Equivalent Margin Securities;

(cc) «Market Value», with respect to any Securities as of any time on any date, the price for such Securities at such time on such date obtained from a generally recognised source agreed to by the parties (and where different prices are obtained for different delivery dates, the price so obtainable for the earliest available such delivery date) (provided that the price of Securities that are suspended shall (for the purposes of paragraph 4) be nil unless the parties otherwise agree and (for all other purposes) shall be the price of those Securities as of close of business on the dealing day in the relevant market last preceding the date of suspension) plus the aggregate amount of Income which, as of such date, has accrued but not yet been paid in respect of the Securities to the extent not included in such price as of such date, and for these purposes any sum in a currency other than the Contractual Currency for the Transaction in question shall be converted into such Contractual Currency at the Spot Rate prevailing at the relevant time;

(dd) «Net Exposure», the meaning specified in paragraph 4(c);

(ee) The «Net Margin» provided to a party at any time, the excess (if any) at that time of (i) the sum of the amount of Cash Margin paid to that party (including accrued interest on such Cash Margin which has not been paid to the other party) and the Market Value of Margin Securities transferred to that party under paragraph 4(a) (excluding any Cash Margin which has been repaid to the other party and any Margin Securities in respect of which Equivalent Margin Securities have been transferred to the other party) over (ii) the sum of the amount of Cash Margin paid to the other party (including accrued interest on such Cash Margin which has not been paid by the other party) and the Market Value of Margin Securities transferred to the other party


under paragraph 4(a) (excluding any Cash Margin which has been repaid by the other party and any Margin Securities in respect of which Equivalent Margin Securities have been transferred by the other party) and for this purpose any amounts not denominated in the Base Currency shall be converted into the Base Currency at the Spot Rate prevailing at the relevant time;

(ff) «Net Paying Securities», Securities which are of a kind such that, were they to be the subject of a Transaction to which para-graph 5 applies, any payment made by Buyer under paragraph 5 would be one in respect of which either Buyer would or might be required to make a withholding or deduction for or on account of taxes or duties or Seller might be required to make or account for a payment for or on account of taxes or duties (in each case other than tax on overall net income) by reference to such payment;

(gg) «Net Value», the meaning specified in paragraph 10;

(hh) «New Purchased Securities», the meaning specified in paragraph 8(a);

(ii) «Price Differential», with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction (on a 360 day basis or 365 day basis in accordance with the applicable ISMA convention, unless otherwise agreed between the parties for the Transaction), for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of calculation or, if earlier, the Repurchase Date;

(jj) «Pricing Rate», with respect to any Transaction, the per annum percentage rate for calculation of the Price Differential agreed to by Buyer and Seller in relation to that Transaction;

(kk) «Purchase Date», with respect to any Transaction, the date on which Purchased Securities are to be sold by Seller to Buyer in relation to that Transaction;

(ll) «Purchase Price», on the Purchase Date, the price at which Purchased Securities are sold or are to be sold by Seller to Buyer;

(mm) «Purchased Securities», with respect to any Transaction, the Securities sold or to be sold by Seller to Buyer under that Tran-saction, and any New Purchased Securities transferred by Seller to Buyer under paragraph 8 in respect of that Transaction;

(nn) «Receivable Securities», the meaning specified in paragraph 10;

(oo) «Repurchase Date», with respect to any Transaction, the date on which Buyer is to sell Equivalent Securities to Seller in relation to that Transaction;

(pp) «Repurchase Price», with respect to any Transaction and as of any date, the sum of the Purchase Price and the Price Differen-tial as of such date;

(qq) «Special Default Notice», the meaning specified in paragraph 14;

(rr) «Spot Rate», where an amount in one currency is to be converted into a second currency on any date, unless the parties othe-rwise agree, the spot rate of exchange quoted by Barclays Bank PLC in the London inter-bank market for the sale by it of such second currency against a purchase by it of such first currency;

(ss) «TARGET», the Trans-European Automated Real-time Gross Settlement Express Transfer System;

(tt) «Term», with respect to any Transaction, the interval of time commencing with the Purchase Date and ending with the Repur-chase Date;

(uu) «Termination», with respect to any Transaction, refers to the requirement with respect to such Transaction for Buyer to sell Equivalent Securities against payment by Seller of the Repurchase Price in accordance with paragraph 3(f), and reference to a Transaction having a «fixed term» or being «terminable upon demand» shall be construed accordingly;

(vv) «Transaction Costs», the meaning specified in paragraph 10;

(ww) «Transaction Exposure», with respect to any Transaction at any time during the period from the Purchase Date to the Repur-chase Date (or, if later, the date on which Equivalent Securities are delivered to Seller or the Transaction is terminated under


paragraph 10(g) or 10(h)), the difference between (i) the Repurchase Price at such time multiplied by the applicable Margin Ratio (or, where the Transaction relates to Securities of more than one description to which different Margin Ratios apply, the amount produced by multiplying the Repurchase Price attributable to Equivalent Securities of each such description by the applicable Margin Ratio and aggregating the resulting amounts, the Repurchase Price being for this purpose attributed to Equivalent Securities of each such description in the same proportions as those in which the Purchase Price was apportioned among the Purchased Securities) and (ii) the Market Value of Equivalent Securities at such time. If (i) is greater than (ii), Buyer has a Transaction Exposure for that Transaction equal to that excess. If (ii) is greater than (i), Seller has a Transaction Exposure for that Transaction equal to that excess; and

(xx) Except in paragraphs 14(b)(i) and 18, references in this Agreement to «written» communications and communications «in wri-ting» include communications made through any electronic system agreed between the parties which is capable of reproducing such communication in hard copy form.

3. Initiation; Confirmation; Termination

(a) A Transaction may be entered into orally or in writing at the initiation of either Buyer or Seller.

(b) Upon agreeing to enter into a Transaction hereunder Buyer or Seller (or both), a shall have been agreed, shall promptly deliver to the other party written confirmation of such Transaction (a «Confirmation»). The Confirmation shall describe the Purchased Securities (including CUSIP or ISIN or other identifying number or numbers, if any), identify Buyer and Seller and set forth -

(i) The Purchase Date;

(ii) The Purchase Price;

(iii) The Repurchase Date, unless the Transaction is to be terminable on demand (in which case the Confirmation shall state that it is terminable on demand);

(iv) The Pricing Rate applicable to the Transaction;

(v) In respect of each party the details of the bank account[s] to which payments to be made hereunder are to be credited;

(vi) Where the Buy/Sell Back Annex applies, whether the Transaction is a Repurchase Transaction or a Buy/Sell Back Tran-saction;

(vii) Where the Agency Annex applies, whether the Transaction is an Agency Transaction and, if so, the identity of the party which is acting as agent and the name, code or identifier of the Principal; and

(viii) Any additional terms or conditions of the Transaction; and may be in the form of Annex II hereto or may be in any other form to which the parties agree.

The Confirmation relating to a Transaction shall, together with this Agreement, constitute prima facie evidence of the terms agreed between Buyer and Seller for that Transaction, unless objection is made with respect to the Confirmation promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, the Confirmation shall prevail in respect of that Transaction and those terms only.

(c) On the Purchase Date for a Transaction, Seller shall transfer the Purchased Securities to Buyer or its agent against the payment of the Purchase Price by Buyer.

(d) Termination of a Transaction will be effected, in the case of on demand Transactions, on the date specified for Termination in such demand, and, in the case of fixed term Transactions, on the date fixed for Termination.

(e) In the case of on demand Transactions, demand for Termination shall be made by Buyer or Seller, by telephone or otherwise, and shall provide for Termination to occur after not less than the minimum period as is customarily required for the settlement or delivery of money or Equivalent Securities of the relevant kind.

(f) On the Repurchase Date, Buyer shall transfer to Seller or its agent Equivalent Securities against the payment of the Repurchase Price by Seller (less any amount then payable and unpaid by Buyer to Seller pursuant to paragraph 5).


4. Margin Maintenance

(a) If at any time either party has a Net Exposure in respect of the other party it may by notice to the other party require the other party to make a Margin Transfer to it of an aggregate amount or value at least equal to that Net Exposure.

(b) A notice under sub-paragraph (a) above may be given orally or in writing.

(c) For the purposes of this Agreement a party has a Net Exposure in respect of the other party if the aggregate of all the first par-ty’s Transaction Exposures plus any amount payable to the first party under paragraph 5 but unpaid less the amount of any Net Margin provided to the first party exceeds the aggregate of all the other party’s Transaction Exposures plus any amount payable to the other party under paragraph 5 but unpaid less the amount of any Net Margin provided to the other party; and the amount of the Net Exposure is the amount of the excess. For this purpose any amounts not denominated in the Base Currency shall be converted into the Base Currency at the Spot Rate prevailing at the relevant time.

(d) To the extent that a party calling for a Margin Transfer has previously paid Cash Margin which has not been repaid or delivered Margin Securities in respect of which Equivalent Margin Securities have not been delivered to it, that party shall be entitled to re-quire that such Margin Transfer be satisfied first by the repayment of such Cash Margin or the delivery of Equivalent Margin Se-curities but, subject to this, the composition of a Margin Transfer shall be at the option of the party making such Margin Transfer.

(e) Any Cash Margin transferred shall be in the Base Currency or such other currency as the parties may agree.

(f) A payment of Cash Margin shall give rise to a debt owing from the party receiving such payment to the party making such pay-ment. Such debt shall bear interest at such rate, payable at such times, as may be specified in Annex I hereto in respect of the relevant currency or otherwise agreed between the parties, and shall be repayable subject to the terms of this Agreement.

(g) Where Seller or Buyer becomes obliged under sub-paragraph (a) above to make a Margin Transfer, it shall transfer Cash Margin or Margin Securities or Equivalent Margin Securities within the minimum period specified in Annex I hereto or, if no period is there specified, such minimum period as is customarily required for the settlement or delivery of money, Margin Securities or Equivalent Margin Securities of the relevant kind.

(h) The parties may agree that, with respect to any Transaction, the provisions of subparagraphs (a) to (g) above shall not apply but instead that margin may be provided separately in respect of that Transaction in which case -

(i) That Transaction shall not be taken into account when calculating whether either party has a Net Exposure;

(ii) Margin shall be provided in respect of that Transaction in such manner as the parties may agree; and

(iii) Margin provided in respect of that Transaction shall not be taken into account for the purposes of sub-paragraphs (a) to (g) above.

(i) The parties may agree that any Net Exposure which may arise shall be eliminated not by Margin Transfers under the preceding provisions of this paragraph but by the repricing of Transactions under sub-paragraph (j) below, the adjustment of Transactions under sub-paragraph (k) below or a combination of both these methods.

(j) Where the parties agree that a Transaction is to be repriced under this sub-paragraph, such repricing shall be effected as follows-

(i) The Repurchase Date under the relevant Transaction (the «Original Transaction») shall be deemed to occur on the date on which the repricing is to be effected (the «Repricing Date»);

(ii) The parties shall be deemed to have entered into a new Transaction (the «Repriced Transaction») on the terms set out in (iii) to (vi) below;

(iii) The Purchased Securities under the Repriced Transaction shall be Securities equivalent to the Purchased Securities under the Original Transaction;

(iv) The Purchase Date under the Repriced Transaction shall be the Repricing Date;

(v) The Purchase Price under the Repriced Transaction shall be such amount as shall, when multiplied by the Margin Ratio


applicable to the Original Transaction, be equal to the Market Value of such Securities on the Repricing Date;

(vi) The Repurchase Date, the Pricing Rate, the Margin Ratio and, subject as aforesaid, the other terms of the Repriced Transac-tion shall be identical to those of the Original Transaction;

(vii) The obligations of the parties with respect to the delivery of the Purchased Securities and the payment of the Purchase Price under the Repriced Transaction shall be set off against their obligations with respect to the delivery of Equivalent Securities and payment of the Repurchase Price under the Original Transaction and accordingly only a net cash sum shall be paid by one party to the other. Such net cash sum shall be paid within the period specified in sub-paragraph (g) above.

(k) The adjustment of a Transaction (the «Original Transaction») under this sub-paragraph shall be effected by the parties agreeing that on the date on which the adjustment is to be made (the «Adjustment Date») the Original Transaction shall be terminated and they shall enter into a new Transaction (the «Replacement Transaction») in accordance with the following provisions -

(i) The Original Transaction shall be terminated on the Adjustment Date on such terms as the parties shall agree on or before the Adjustment Date;

(ii) The Purchased Securities under the Replacement Transaction shall be such Securities as the parties shall agree on or before the Adjustment Date (being Securities the aggregate Market Value of which at the Adjustment Date is substantially equal to the Repurchase Price under the Original Transaction at the Adjustment Date multiplied by the Margin Ratio appli-cable to the Original Transaction);

(iii) The Purchase Date under the Replacement Transaction shall be the Adjustment Date;

(iv) The other terms of the Replacement Transaction shall be such as the parties shall agree on or before the Adjustment Date; and

(v) The obligations of the parties with respect to payment and delivery of Securities on the Adjustment Date under the Original Transaction and the Replacement Transaction shall be settled in accordance with paragraph 6 within the minimum period specified in sub-paragraph (g) above.

5. Income Payments

Unless otherwise agreed -

(i) Where the Term of a particular Transaction extends over an Income Payment Date in respect of any Securities subject to that Transaction, Buyer shall on the date such Income is paid by the issuer transfer to or credit to the account of Seller an amount equal to (and in the same currency as) the amount paid by the issuer;

(ii) Where Margin Securities are transferred from one party («the first party») to the other party («the second party») and an Income Payment Date in respect of such Securities occurs before Equivalent Margin Securities are transferred by the se-cond party to the first party, the second party shall on the date such Income is paid by the issuer transfer to or credit to the account of the first party an amount equal to (and in the same currency as) the amount paid by the issuer;

and for the avoidance of doubt references in this paragraph to the amount of any Income paid by the issuer of any Securities shall be to an amount paid without any withholding or deduction for or on account of taxes or duties notwithstanding that a payment of such Income made in certain circumstances may be subject to such a withholding or deduction.

6. Payment and Transfer

(a) Unless otherwise agreed, all money paid hereunder shall be in immediately available freely convertible funds of the relevant currency. All Securities to be transferred hereunder (i) shall be in suitable form for transfer and shall be accompanied by duly executed instruments of transfer or assignment in blank (where required for transfer) and such other documentation as the transferee may reasonably request, or (ii) shall be transferred through the book entry system of Euroclear or Clearstream, or (iii) shall be transferred through any other agreed securities clearance system or (iv) shall be transferred by any other method mutually acceptable to Seller and Buyer.

(b) Unless otherwise agreed, all money payable by one party to the other in respect of any Transaction shall be paid free and clear


of, and without withholding or deduction for, any taxes or duties of whatsoever nature imposed, levied, collected, withheld or assessed by any authority having power to tax, unless the withholding or deduction of such taxes or duties is required by law. In that event, unless otherwise agreed, the paying party shall pay such additional amounts as will result in the net amounts re-ceivable by the other party (after taking account of such withholding or deduction) being equal to such amounts as would have been received by it had no such taxes or duties been required to be withheld or deducted.

(c) Unless otherwise agreed in writing between the parties, under each Transaction transfer of Purchased Securities by Seller and payment of Purchase Price by Buyer against the transfer of such Purchased Securities shall be made simultaneously and trans-fer of Equivalent Securities by Buyer and payment of Repurchase Price payable by Seller against the transfer of such Equivalent Securities shall be made simultaneously.

(d) Subject to and without prejudice to the provisions of sub-paragraph 6(c), either party may from time to time in accordance with market practice and in recognition of the practical difficulties in arranging simultaneous delivery of Securities and money waive in relation to any Transaction its rights under this Agreement to receive simultaneous transfer and/or payment provided that transfer and/or payment shall, notwithstanding such waiver, be made on the same day and provided also that no such waiver in respect of one Transaction shall affect or bind it in respect of any other Transaction.

(e) The parties shall execute and deliver all necessary documents and take all necessary steps to procure that all right, title and interest in any Purchased Securities, any Equivalent Securities, any Margin Securities and any Equivalent Margin Securities shall pass to the party to which transfer is being made upon transfer of the same in accordance with this Agreement, free from all liens, claims, charges and encumbrances.

(f) Notwithstanding the use of expressions such as «Repurchase Date», «Repurchase Price», «margin», «Net Margin», «Margin Ratio» and «substitution», which are used to reflect terminology used in the market for transactions of the kind provided for in this Agreement, all right, title and interest in and to Securities and money transferred or paid under this Agreement shall pass to the transferee upon transfer or payment, the obligation of the party receiving Purchased Securities or Margin Securities being an obligation to transfer Equivalent Securities or Equivalent Margin Securities.

(g) Time shall be of the essence in this Agreement.

(h) Subject to paragraph 10, all amounts in the same currency payable by each party to the other under any Transaction or otherwise under this Agreement on the same date shall be combined in a single calculation of a net sum payable by one party to the other and the obligation to pay that sum shall be the only obligation of either party in respect of those amounts.

(i) Subject to paragraph 10, all Securities of the same issue, denomination, currency and series, transferable by each party to the other under any Transaction or hereunder on the same date shall be combined in a single calculation of a net quantity of Securi-ties transferable by one party to the other and the obligation to transfer the net quantity of Securities shall be the only obligation of either party in respect of the Securities so transferable and receivable.

(j) If the parties have specified in Annex I hereto that this paragraph 6(j) shall apply, each obligation of a party under this Agreement (other than an obligation arising under paragraph 10) is subject to the condition precedent that none of those events specified in paragraph 10(a) which are identified in Annex I hereto for the purposes of this paragraph 6(j) (being events which, upon the serving of a Default Notice, would be an Event of Default with respect to the other party) shall have occurred and be continuing with respect to the other party.

7. Contractual Currency

(a) All the payments made in respect of the Purchase Price or the Repurchase Price of any Transaction shall be made in the cur-rency of the Purchase Price (the «Contractual Currency») save as provided in paragraph 10(c)(ii). Notwithstanding the foregoing, the payee of any money may, at its option, accept tender thereof in any other currency, provided, however, that, to the extent permitted by applicable law, the obligation of the payer to pay such money will be discharged only to the extent of the amount of the Contractual Currency that such payee may, consistent with normal banking procedures, purchase with such other currency (after deduction of any premium and costs of exchange) for delivery within the customary delivery period for spot transactions in respect of the relevant currency.

(b) If for any reason the amount in the Contractual Currency received by a party, including amounts received after conversion of any recovery under any judgment or order expressed in a currency other than the Contractual Currency, falls short of the amount in the Contractual Currency due and payable, the party required to make the payment will, as a separate and independent obliga-


tion, to the extent permitted by applicable law, immediately transfer such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall.

(c) If for any reason the amount in the Contractual Currency received by a party exceeds the amount of the Contractual Currency due and payable, the party receiving the transfer will refund promptly the amount of such excess.

8. Substitution

(a) A Transaction may at any time between the Purchase Date and Repurchase Date, if Seller so requests and Buyer so agrees, be varied by the transfer by Buyer to Seller of Securities equivalent to the Purchased Securities, or to such of the Purchased Securities as shall be agreed, in exchange for the transfer by Seller to Buyer of other Securities of such amount and description as shall be agreed («New Purchased Securities») (being Securities having a Market Value at the date of the variation at least equal to the Market Value of the Equivalent Securities transferred to Seller).

(b) Any variation under sub-paragraph (a) above shall be effected, subject to paragraph 6 (d), by the simultaneous transfer of the Equivalent Securities and New Purchased Securities concerned.

(c) A Transaction which is varied under sub-paragraph (a) above shall thereafter continue in effect as though the Purchased Secu-rities under that Transaction consisted of or included the New Purchased Securities instead of the Securities in respect of which Equivalent Securities have been transferred to Seller.

(d) Where either party has transferred Margin Securities to the other party it may at any time before Equivalent Margin Securities are transferred to it under paragraph 4 request the other party to transfer Equivalent Margin Securities to it in exchange for the transfer to the other party of new Margin Securities having a Market Value at the time of transfer at least equal to that of such Equivalent Margin Securities. If the other party agrees to the request, the exchange shall be effected, subject to paragraph 6(d), by the simultaneous transfer of the Equivalent Margin Securities and new Margin Securities concerned. Where either or both of such transfers is or are effected through a settlement system in circumstances which under the rules and procedures of that settlement system give rise to a payment by or for the account of one party to or for the account of the other party, the parties shall cause such payment or payments to be made outside that settlement system, for value the same day as the payment made through that settlement system, as shall ensure that the exchange of Equivalent Margin Securities and new Margin Securities effected under this sub-paragraph does not give rise to any net payment of cash by either party to the other.

9. Representations

Each party represents and warrants to the other that -

(a) It is duly authorised to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to per-form its obligations hereunder and thereunder and has taken all necessary action to authorise such execution, delivery and performance;

(b) It will engage in this Agreement and the Transactions contemplated hereunder (other than Agency Transactions) as principal;

(c) The person signing this Agreement on its behalf is, and any person representing it in entering into a Transaction will be, duly authorised to do so on its behalf;

(d) It has obtained all authorisations of any governmental or regulatory body required in connection with this Agreement and the Transactions contemplated hereunder and such authorisations are in full force and effect;

(e) The execution, delivery and performance of this Agreement and the Transactions contemplated hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected;

(f) It has satisfied itself and will continue to satisfy itself as to the tax implications of the Transactions contemplated hereunder;

(g) In connection with this Agreement and each Transaction -

(i) Unless there is a written agreement with the other party to the contrary, it isnot relying on any advice (whether written or oral) of the other party, other than the representations expressly set out in this Agreement;


(ii) It has made and will make its own decisions regarding the entering into of any Transaction based upon its own judgment and upon advice from such professional advisers as it has deemed it necessary to consult;

(iii) It understands the terms, conditions and risks of each Transaction and is willing to assume (financially and otherwise) those risks; and

(h) At the time of transfer to the other party of any Securities it will have the full and unqualified right to make such transfer and that upon such transfer of Securities the other party will receive all right, title and interest in and to those Securities free of any lien, claim, charge or encumbrance.

On the date on which any Transaction is entered into pursuant hereto, and on each day on which Securities, Equivalent Securi-ties, Margin Securities or Equivalent Margin Securities are to be transferred under any Transaction, Buyer and Seller shall each be deemed to repeat all the foregoing representations. For the avoidance of doubt and notwithstanding any arrangements which Seller or Buyer may have with any third party, each party will be liable as a principal for its obligations under this Agreement and each Transaction.

10. Events of Default

(a) If any of the following events (each an «Event of Default») occurs in relation to either party (the «Defaulting Party», the other party being the «non-Defaulting Party») whether acting as Seller or Buyer -

(i) Buyer fails to pay the Purchase Price upon the applicable Purchase Date or Seller fails to pay the Repurchase Price upon the applicable Repurchase Date, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(ii) If the parties have specified in Annex I hereto that this sub-paragraph shall apply, Seller fails to deliver Purchased Securities on the Purchase Date or Buyer fails to deliver Equivalent Securities on the Repurchase Date, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(iii) Seller or Buyer fails to pay when due any sum payable under sub-paragraph (g) or (h) below, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(iv) Seller or Buyer fails to comply with paragraph 4 and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(v) Seller or Buyer fails to comply with paragraph 5 and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(vi) An Act of Insolvency occurs with respect to Seller or Buyer and (except in the case of an Act of Insolvency which is the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party in which case no such notice shall be required) the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(vii) Any representations made by Seller or Buyer are incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(viii) Seller or Buyer admits to the other that it is unable to, or intends not to, perform any of its obligations hereunder and/or in respect of any Transaction and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(ix) Seller or Buyer is suspended or expelled from membership of or participation in any securities exchange or association or other self regulating organisation, or suspended from dealing in securities by any government agency, or any of the assets of either Seller or Buyer or the assets of investors held by, or to the order of, Seller or Buyer are transferred or ordered to be transferred to a trustee by a regulatory authority pursuant to any securities regulating legislation and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or

(x) Seller or Buyer fails to perform any other of its obligations hereunder and does not remedy such failure within 30 days after notice is given by the non- Defaulting Party requiring it to do so, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; then sub-paragraphs (b) to (f) below shall apply.

(b) The Repurchase Date for each Transaction hereunder shall be deemed immediately to occur and, subject to the following pro-


visions, all Cash Margin (including interest accrued) shall be immediately repayable and Equivalent Margin Securities shall be immediately deliverable (and so that, where this sub-paragraph applies, performance of the respective obligations of the parties with respect to the delivery of Securities, the payment of the Repurchase Prices for any Equivalent Securities and the repayment of any Cash Margin shall be effected only in accordance with the provisions of sub-paragraph (c) below).

(c) (i) The Default Market Values of the Equivalent Securities and any Equivalent Margin Securities to be transferred, the amount of any Cash Margin (including the amount of interest accrued) to be transferred and the Repurchase Prices to be paid by each party shall be established by the non-Defaulting Party for all Transactions as at the Repurchase Date; and

(ii) On the basis of the sums so established, an account shall be taken (as at the Repurchase Date) of what is due from each party to the other under this Agreement (on the basis that each party’s claim against the other in respect of the transfer to it of Equivalent Securities or Equivalent Margin Securities under this Agreement equals the Default Market Value therefor) and the sums due from one party shall be set off against the sums due from the other and only the balance of the account shall be payable (by the party having the claim valued at the lower amount pursuant to the foregoing) and such balance shall be due and payable on the next following Business Day. For the purposes of this calculation, all sums not denominated in the Base Currency shall be converted into the Base Currency on the relevant date at the Spot Rate prevailing at the relevant time.

(d) For the purposes of this Agreement, the «Default Market Value» of any Equivalent Securities or Equivalent Margin Securities shall be determined in accordance with sub-paragraph (e) below, and for this purpose -

(i) The «Appropriate Market» means, in relation to Securities of any description, the market which is the most appropriate market for Securities of that description, as determined by the non-Defaulting Party;

(ii) The «Default Valuation Time» means, in relation to an Event of Default, the close of business in the Appropriate Market on the fifth dealing day after the day on which that Event of Default occurs or, where that Event of Default is the occurrence of an Act of Insolvency in respect of which under paragraph 10(a) no notice is required from the non-Defaulting Party in order for such event to constitute an Event of Default, the close of business on the fifth dealing day after the day on which the non-Defaulting Party first became aware of the occurrence of such Event of Default;

(iii) «Deliverable Securities» means Equivalent Securities or Equivalent Margin Securities to be delivered by the Defaulting Party;

(iv) «Net Value» means at any time, in relation to any Deliverable Securities or Receivable Securities, the amount which, in the reasonable opinion of the non-Defaulting Party, represents their fair market value, having regard to such pricing sources and methods (which may include, without limitation, available prices for Securities with similar maturities, terms and credit characteristics as the relevant Equivalent Securities or Equivalent Margin Securities) as the non-Defaulting Party considers appropriate, less, in the case of Receivable Securities, or plus, in the case of Deliverable Securities, all Transaction Costs which would be incurred in connection with the purchase or sale of such Securities;

(v) «Receivable Securities» means Equivalent Securities or Equivalent Margin Securities to be delivered to the Defaulting Party; and

(vi) «Transaction Costs» in relation to any transaction contemplated in paragraph 10(d) or (e) means the reasonable costs, com-mission, fees and expenses (including any mark-up or mark-down) that would be incurred in connection with the purchase of Deliverable Securities or sale of Receivable Securities, calculated on the assumption that the aggregate thereof is the least that could reasonably be expected to be paid in order to carry out the transaction;

(e) (i) If between the occurrence of the relevant Event of Default and the Default Valuation Time the non-Defaulting Party gives to the Defaulting Party a written notice (a «Default Valuation Notice») which –

(A) States that, since the occurrence of the relevant Event of Default, the non-Defaulting Party has sold, in the case of Re-ceivable Securities, or purchased, in the case of Deliverable Securities, Securities which form part of the same issue and are of an identical type and description as those Equivalent Securities or Equivalent Margin Securities, and that the non-Defaulting Party elects to treat as the Default Market Value -

(aa) In the case of Receivable Securities, the net proceeds of such sale after deducting all reasonable costs, fees and expenses incurred in connection therewith (provided that, where the Securities sold are not identical in amount to the Equivalent Securities or Equivalent Margin Securities, the non-Defaulting Party may either (x) elect to treat such


net proceeds of sale divided by the amount of Securities sold and multiplied by the amount of the Equivalent Secu-rities or Equivalent Margin Securities as the Default Market Value or (y) elect to treat such net proceeds of sale of the Equivalent Securities or Equivalent Margin Securities actually sold as the Default Market Value of that proportion of the Equivalent Securities or Equivalent Margin Securities, and, in the case of (y), the Default Market Value of the balance of the Equivalent Securities or Equivalent Margin Securities shall be determined separately in accordance with the provisions of this paragraph 10(e) and accordingly may be the subject of a separate notice (or notices) under this paragraph 10(e)(i)); or

(bb) In the case of Deliverable Securities, the aggregate cost of such purchase, including all reasonable costs, fees and expenses incurred in connection therewith (provided that, where the Securities purchased are not identical in amount to the Equivalent Securities or Equivalent Margin Securities, the non-Defaulting Party may either (x) elect to treat such aggregate cost divided by the amount of Securities sold and multiplied by the amount of the Equivalent Securities or Equivalent Margin Securities as the Default Market Value or (y) elect to treat the aggregate cost of pur-chasing the Equivalent Securities or Equivalent Margin Securities actually purchased as the Default Market Value of that proportion of the Equivalent Securities or Equivalent Margin Securities, and, in the case of (y), the Default Market Value of the balance of the Equivalent Securities or Equivalent Margin Securities shall be determined separately in accordance with the provisions of this paragraph 10(e) and accordingly may be the subject of a separate notice (or notices) under this paragraph 10(e)(i));

(B) States that the non-Defaulting Party has received, in the case of Deliverable Securities, offer quotations or, in the case of Receivable Securities, bid quotations in respect of Securities of the relevant description from two or more market makers or regular dealers in the Appropriate Market in a commercially reasonable size (as determined by the non-Defaulting Party) and specifies -

(aa) The price or prices quoted by each of them for, in the case of Deliverable Securities, the sale by the relevant market marker or dealer of such Securities or, in the case of Receivable Securities, the purchase by the relevant market maker or dealer of such Securities;

(bb) The Transaction Costs which would be incurred in connection with such a transaction; and

(cc) That the non-Defaulting Party elects to treat the price so quoted (or, where more than one price is so quoted, the arithmetic mean of the prices so quoted), after deducting, in the case of Receivable Securities, or adding, in the case of Deliverable Securities, such Transaction Costs, as the Default Market Value of the relevant Equivalent Securities or Equivalent Margin Securities; or

(C) States –

(aa) That either (x) acting in good faith, the non-Defaulting Party has endeavoured but been unable to sell or purchase Securities in accordance with sub-paragraph (i)(A) above or to obtain quotations in accordance with sub-paragraph (i)(B) above (or both) or (y) the non-Defaulting Party has determined that it would not be commercially reasonable to obtain such quotations, or that it would not be commercially reasonable to use any quotations which it has obtained under sub-paragraph (i)(B) above; and

(bb) That the non-Defaulting Party has determined the Net Value of the relevant Equivalent Securities or Equivalent Mar-gin Securities (which shall be specified) and that the non- Defaulting Party elects to treat such Net Value as the Default Market Value of the relevant Equivalent Securities or Equivalent Margin Securities, then the Default Market Value of the relevant Equivalent Securities or Equivalent Margin Securities shall be an amount equal to the Default Market Value specified in accordance with (A), (B)(cc) or, as the case may be, (C)(bb) above.

(ii) If by the Default Valuation Time the non-Defaulting Party has not given a Default Valuation Notice, the Default Market Value of the relevant Equivalent Securities or Equivalent Margin Securities shall be an amount equal to their Net Value at the Default Valuation Time; provided that, if at the Default Valuation Time the non-Defaulting Party reasonably determines that, owing to circumstances affecting the market in the Equivalent Securities or Equivalent Margin Securities in question, it is not possible for the non-Defaulting Party to determine a Net Value of such Equivalent Securities or Equivalent Margin Securities which is commercially reasonable, the Default Market Value of such Equivalent Securities or Equivalent Margin Securities shall be an amount equal to their Net Value as determined by the non-Defaulting Party as soon as reasonably practicable after the Default Valuation Time.


(f) The Defaulting Party shall be liable to the non-Defaulting Party for the amount of all reasonable legal and other professional expenses incurred by the non-Defaulting Party in connection with or as a consequence of an Event of Default, together with interest thereon at LIBOR or, in the case of an expense attributable to a particular Transaction, the Pricing Rate for the relevant Transaction if that Pricing Rate is greater than LIBOR.

(g) If Seller fails to deliver Purchased Securities to Buyer on the applicable Purchase Date Buyer may -

(i) If it has paid the Purchase Price to Seller, require Seller immediately to repay the sum so paid;

(ii) If Buyer has a Transaction Exposure to Seller in respect of the relevant Transaction, require Seller from time to time to pay Cash Margin at least equal to such Transaction Exposure;

(iii) At any time while such failure continues, terminate the Transaction by giving written notice to Seller. On such termination the obligations of Seller and Buyer with respect to delivery of Purchased Securities and Equivalent Securities shall terminate and Seller shall pay to Buyer an amount equal to the excess of the Repurchase Price at the date of Termination over the Purchase Price.

(h) If Buyer fails to deliver Equivalent Securities to Seller on the applicable Repurchase Date Seller may -

(i) If it has paid the Repurchase Price to Buyer, require Buyer immediately to repay the sum so paid;

(ii) If Seller has a Transaction Exposure to Buyer in respect of the relevant Transaction, require Buyer from time to time to pay Cash Margin at least equal to such Transaction Exposure;

(iii) At any time while such failure continues, by written notice to Buyer declare that that Transaction (but only that Transaction) shall be terminated immediately in accordance with sub-paragraph (c) above (disregarding for this purpose references in that sub-paragraph to transfer of Cash Margin and delivery of Equivalent Margin Securities and as if references to the Re-purchase Date were to the date on which notice was given under this subparagraph).

(i) The provisions of this Agreement constitute a complete statement of the remedies available to each party in respect of any Event of Default.

(j) Subject to paragraph 10(k), neither party may claim any sum by way of consequential loss or damage in the event of a failure by the other party to perform any of its obligations under this Agreement.

(k) (i) Subject to sub-paragraph (ii) below, if as a result of a Transaction terminating before its agreed Repurchase Date under pa-ragraphs 10(b), 10(g)(iii) or 10(h)(iii), the non-Defaulting Party, in the case of paragraph 10(b), Buyer, in the case of paragraph 10(g)(iii), or Seller, in the case of paragraph 10(h)(iii), (in each case the «first party») incurs any loss or expense in entering into replacement transactions, the other party shall be required to pay to the first party the amount determined by the first party in good faith to be equal to the loss or expense incurred in connection with such replacement transactions (including all fees, costs and other expenses) less the amount of any profit or gain made by that party in connection with such repla-cement transactions; provided that if that calculation results in a negative number, an amount equal to that number shall be payable by the first party to the other party.

(ii) If the first party reasonably decides, instead of entering into such replacement transactions, to replace or unwind any he-dging transactions which the first party entered into in connection with the Transaction so terminating, or to enter into any replacement hedging transactions, the other party shall be required to pay to the first party the amount determined by the first party in good faith to be equal to the loss or expense incurred in connection with entering into such replacement or unwinding (including all fees, costs and other expenses) less the amount of any profit or gain made by that party in connec-tion with such replacement or unwinding; provided that if that calculation results in a negative number, an amount equal to that number shall be payable by the first party to the other party.

(l) Each party shall immediately notify the other if an Event of Default, or an event which, upon the serving of a Default Notice, would be an Event of Default, occurs in relation to it.


11. Tax Event

(a) This paragraph shall apply if either party notifies the other that -

(i) Any action taken by a taxing authority or brought in a court of competent jurisdiction (regardless of whether such action is taken or brought with respect to a party to this Agreement); or

(ii) A change in the fiscal or regulatory regime (including, but not limited to, a change in law or in the general interpretation of law but excluding any change in any rate of tax), has or will, in the notifying party’s reasonable opinion, have a material adverse effect on that party in the context of a Transaction.

(b) If so requested by the other party, the notifying party will furnish the other with an opinion of a suitably qualified adviser that an event referred to in sub-paragraph (a)(i) or (ii) above has occurred and affects the notifying party.

(c) Where this paragraph applies, the party giving the notice referred to in sub-paragraph (a) may, subject to sub-paragraph (d) below, terminate the Transaction with effect from a date specified in the notice, not being earlier (unless so agreed by the other party) than 30 days after the date of the notice, by nominating that date as the Repurchase Date.

(d) If the party receiving the notice referred to in sub-paragraph (a) so elects, it may override that notice by giving a counter-notice to the other party. If a counter-notice is given, the party which gives the counter-notice will be deemed to have agreed to indem-nify the other party against the adverse effect referred to in sub-paragraph (a) so far as relates to the relevant Transaction and the original Repurchase Date will continue to apply.

(e) Where a Transaction is terminated as described in this paragraph, the party which has given the notice to terminate shall in-demnify the other party against any reasonable legal and other professional expenses incurred by the other party by reason of the termination, but the other party may not claim any sum by way of consequential loss or damage in respect of a termination in accordance with this paragraph.

(f) This paragraph is without prejudice to paragraph 6(b) (obligation to pay additional amounts if withholding or deduction required); but an obligation to pay such additional amounts may, where appropriate, be a circumstance which causes this paragraph to apply.

12. Interest

To the extent permitted by applicable law, if any sum of money payable hereunder or under any Transaction is not paid when due, interest shall accrue on the unpaid sum as a separate debt at the greater of the Pricing Rate for the Transaction to which such sum relates (where such sum is referable to a Transaction) and LIBOR on a 360 day basis or 365 day basis in accordance with the applicable ISMA convention, for the actual number of days during the period from and including the date on which payment was due to, but excluding, the date of payment.

13. Single Agreement

Each party acknowledges that, and has entered into this Agreement and will enter into each Transaction hereunder in conside-ration of and in reliance upon the fact that all Transactions hereunder constitute a single business and contractual relationship and are made in consideration of each other. Accordingly, each party agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, and (ii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transac-tions hereunder.

14. Notices and Other Communications

(a) Any notice or other communication to be given under this Agreement -

(i) Shall be in the English language, and except where expressly otherwise provided in this Agreement, shall be in writing;

(ii) May be given in any manner described in sub-paragraphs (b) and (c) below;


(iii) Shall be sent to the party to whom it is to be given at the address or number, or in accordance with the electronic messaging details, set out in Annex I hereto.

(b) Subject to sub-paragraph (c) below, any such notice or other communication shall be effective -

(i) If in writing and delivered in person or by courier, at the time when it is delivered;

(ii) If sent by telex, at the time when the recipient’s answerback is received;

(iii) If sent by facsimile transmission, at the time when the transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender’s facsimile machine);

(iv) If sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), at the time when that mail is delivered or its delivery is attempted;

(v) If sent by electronic messaging system, at the time that electronic message is received; except that any notice or commu-nication which is received, or delivery of which is attempted, after close of business on the date of receipt or attempted delivery or on a day which is not a day on which commercial banks are open for business in the place where that notice or other communication is to be given shall be treated as given at the opening of business on the next following day which is such a day.

(c) If -

(i) There occurs in relation to either party an event which, upon the service of a Default Notice, would be an Event of Default; and

(ii) The non-Defaulting Party, having made all practicable efforts to do so, including having attempted to use at least two of the methods specified in sub-paragraph (b)(ii), (iii) or (v), has been unable to serve a Default Notice by one of the methods specified in those sub-paragraphs (or such of those methods as are normally used by the non-Defaulting Party when com-municating with the Defaulting Party), the non-Defaulting Party may sign a written notice (a «Special Default Notice») which

(aa) Specifies the relevant event referred to in paragraph 10(a) which has occurred in relation to the Defaulting Party;

(bb) States that the non-Defaulting Party, having made all practicable efforts to do so, including having attempted to use at least two of the methods specified in sub-paragraph (b)(ii), (iii) or (v), has been unable to serve a Default Notice by one of the methods specified in those sub-paragraphs (or such of those methods as are normally used by the non-Defaulting Party when communicating with the Defaulting Party);

(cc) Specifies the date on which, and the time at which, the Special Default Notice is signed by the non-Defaulting Party; and

(dd) States that the event specified in accordance with sub-paragraph (aa) above shall be treated as an Event of Default with effect from the date and time so specified. On the signature of a Special Default Notice the relevant event shall be treated with effect from the date and time so specified as an Event of Default in relation to the Defaulting Party, and accordingly references in paragraph 10 to a Default Notice shall be treated as including a Special Default Notice. A Special Default Notice shall be given to the Defaulting Party as soon as practicable after it is signed.

(d) Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it.

15. Entire Agreement; Severability

This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for Transac-tions. Each provision and agreement herein shall be treated as separate from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement.


16. Non-assignability; Termination

(a) Subject to sub-paragraph (b) below, neither party may assign, charge or otherwise deal with (including without limitation any dealing with any interest in or the creation of any interest in) its rights or obligations under this Agreement or under any Transac-tion without the prior written consent of the other party. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns.

(b) Sub-paragraph (a) above shall not preclude a party from assigning, charging or otherwise dealing with all or any part of its inte-rest in any sum payable to it under paragraph 10(c) or (f) above.

(c) ither party may terminate this Agreement by giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding.

(d) All remedies hereunder shall survive Termination in respect of the relevant Transaction and termination of this Agreement.

(e) The participation of any additional member State of the European Union in economic and monetary union after 1 January 1999 shall not have the effect of altering any term of the Agreement or any Transaction, nor give a party the right unilaterally to alter or terminate the Agreement or any Transaction.

17. Governing Law

This Agreement shall be governed by and construed in accordance with the laws of England. Buyer and Seller hereby irrevocably submit for all purposes of or in connection with this Agreement and each Transaction to the jurisdiction of the Courts of England.

Party A hereby appoints the person identified in Annex I hereto as its agent to receive on its behalf service of process in such courts. If such agent ceases to be its agent, Party A shall promptly appoint, and notify Party B of the identity of, a new agent in England.

Party B hereby appoints the person identified in Annex I hereto as its agent to receive on its behalf service of process in such courts. If such agent ceases to be its agent, Party B shall promptly appoint, and notify Party A of the identity of, a new agent in England.

Each party shall deliver to the other, within 30 days of the date of this Agreement in the case of the appointment of a person identi-fied in Annex I or of the date of the appointment of the relevant agent in any other case, evidence of the acceptance by the agent appointed by it pursuant to this paragraph of such appointment.

Nothing in this paragraph shall limit the right of any party to take proceedings in the courts of any other country of competent ju-risdiction.

18. No Waivers, etc.

No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such modification, waiver or consent shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to paragraph 4(a) hereof will not constitute a waiver of any right to do so at a later date.

19. Waiver of Immunity

Each party hereto hereby waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, attachment (both before and after judgment) and execution to which it might otherwise be entitled in any action or proceeding in the Courts of England or of any other country or jurisdiction, relating in any way to this Agreement or any Transaction, and agrees that it will not raise, claim or cause to be pleaded any such immunity at or in respect of any such action or proceeding.

20. Recording

The parties agree that each may electronically record all telephone conversations between them.


21. Third Party Rights

No person shall have any right to enforce any provision of this Agreement under the Contracts (Rights of Third Parties) Act 1999.

[Name of Party] [Name of Party]

By By

Title Title

Date Date


ANNEX I

Supplemental Terms or Conditions

Paragraph references are to paragraphs in the Agreement.

1. The following elections shall apply -

[(a) Paragraph 1(c)(i). Buy/Sell Back Transactions [ may/ may not] be effected under this Agreement, and accordingly the Buy/Sell Back Annex [ shall/ shall not] apply.]*

[(b) Paragraph 1(c)(ii). Transactions in Net Paying Securities [may/may not] be effected under this Agreement, and accordingly the provisions of sub-paragraphs (i) and (ii) below [ shall/ shall not] apply.

(i) The phrase «other than equities and Net Paying Securities» shall be replaced by the phrase «other than equities».

(ii) In the Buy/Sell Back Annex the following words shall be added to the end of the definition of the expression «IR»: «and for the avoidance of doubt the reference to the amount of Income for these purposes shall be to an amount paid without withholding or deduction for or on account of taxes or duties notwithstanding that a payment of such Income made in certain circumstances may be subject to such a withholding or deduction».]*

[(c) Paragraph 1(d). Agency Transactions [ may/ may not] be effected under this Agreement, and accordingly the Agency Annex [ shall/ shall not] apply.]*

(d) Paragraph 2(d). The Base Currency shall be: _____.

(e) Paragraph 2(p). [list Buyer’s and Seller’s Designated Offices]

(f) Paragraph 2(cc). The pricing source for calculation of Market Value shall be: _____.

(g) Paragraph 2(rr). Spot rate to be: _____.

(h) Paragraph 3(b). [Seller/Buyer/both Seller and Buyer]* to deliver Confirmation.

(i) Paragraph 4(f). Interest rate on Cash Margin to be [ ]% for _____ currency.

[ ]% for _____ currency.

Interest to be payable [payment intervals and dates].

(j) Paragraph 4(g). Delivery period for margin calls to be: _____.

[(k) Paragraph 6(j). Paragraph 6(j) shall apply and the events specified in paragraph 10(a) identified for the purposes of paragraph 6(j) shall be those set out in sub paragraphs [ ] of paragraph 10(a) of the Agreement.]*

[(l) Paragraph 10(a)(ii). Paragraph 10(a)(ii) shall apply.]*

(m) Paragraph 14. For the purposes of paragraph 14 of this Agreement -

(i) Address for notices and other communications for Party A - Address: Attention: Telephone: Facsimile: Telex: Answerback: Other:


(ii) Address for notices and other communications for Party B - Address: Attention: Telephone: Facsimile: Telex: Answerback: Other:

[(n) paragraph 17. For the purposes of paragraph 17 of this Agreement -

(i) Party A appoints [ ] as its agent for service of process;

(ii) Party B appoints [ ] as its agent for service of process.]*

2. The following supplemental terms and conditions shall apply -

[Existing Transactions

(a) The parties agree that this Agreement shall apply to all transactions which are subject to the PSA/ISMA Global Master Repur-chase Agreement between them dated _____ and which are outstanding as at the date of this Agreement so that such transac-tions shall be treated as if they had been entered into under this Agreement, and the terms of such transactions are amended accordingly with effect from the date of this Agreement.]*

[Forward Transactions

(b) The parties agree that Forward Transactions (as defined in sub-paragraph (i)(A) below) may be effected under this Agreement and accordingly the provisions of sub-paragraphs (i) to (iv) below shall apply.

(i) The following definitions shall apply -

(A) « Forward Transaction», a Transaction in respect of which the Purchase Date is at least [three] Business Days after the date on which the Transaction was entered into and has not yet occurred;

(B) «Forward Repricing Date», with respect to any Forward Transaction the date which is such number of Business Days before the Purchase Date as is equal to the minimum period for the delivery of margin applicable under paragraph 4(g).

(ii) The Confirmation relating to any Forward Transaction may describe the Purchased Securities by reference to a type or class of Securities, which, without limitation, may be identified by issuer or class of issuers and a maturity or range of maturities. Where this paragraph applies, the parties shall agree the actual Purchased Securities not less than two Business Days before the Purchase Date and Buyer or Seller (or both), as shall have been agreed, shall promptly deliver to the other party a Confirmation which shall describe such Purchased Securities. *

(iii) At any time between the Forward Repricing Date and the Purchase Date for any Forward Transaction the parties may agree either –

(A) to adjust the Purchase Price under that Forward Transaction; or

(B) to adjust the number of Purchased Securities to be sold by Seller to Buyer under that Forward Transaction.

(iv) Where the parties agree to an adjustment under paragraph (iii) above, Buyer or Seller (or both), as shall have been agreed, shall promptly deliver to the other party a Confirmation of the Forward Transaction, as adjusted under paragraph (iii) above.

(c) Where the parties agree that this paragraph shall apply, paragraphs 2 and 4 of the Agreement are amended as follows.

(i) Paragraph 2(ww) is deleted and replaced by the following -

«(ww) «Transaction Exposure» means -


(i) With respect to any Forward Transaction at any time between the Forward Repricing Date and the Purchase Date, the difference between (A) the Market Value of the Purchased Securities at the relevant time and (B) the Purchase Price;

(ii) With respect to any Transaction at any time during the period (if any) from the Purchase Date to the date on which the Purchased Securities are delivered to Buyer or, if earlier, the date on which the Transaction is terminated under para-graph 10(g), the difference between (A) the Market Value of the Purchased Securities at the relevant time and (B) the Repurchase Price at the relevant time;

(iii) With respect to any Transaction at any time during the period from the Purchase Date (or, if later, the date on which the Purchased Securities are delivered to Buyer or the Transaction is terminated under paragraph 10(g)) to the Repurchase Date (or, if later, the date on which Equivalent Securities are delivered to Seller or the Transaction is terminated under paragraph 10(h)), the difference between (A) the Repurchase Price at the relevant time multiplied by the applicable Margin Ratio (or, where the Transaction relates to Securities of more than one description to which different Margin Ratios apply, the amount produced by multiplying the Repurchase Price attributable to Equivalent Securities of each such description by the applicable Margin Ratio and aggregating the resulting amounts, the Repurchase Price being for this purpose attributed to Equivalent Securities of each such description in the same proportions as those in which the Purchase Price was apportioned among the Purchased Securities) and (B) the Market Value of Equivalent Securities at the relevant time.

In each case, if (A) is greater than (B), Buyer has a Transaction Exposure for that Transaction equal to the excess, and if (B) is greater than (A), Seller has a Transaction Exposure to Buyer equal to the excess.»

(ii) In paragraph 4(c) -

(aa) The words «any amount payable to the first party under paragraph 5 but unpaid» are deleted and replaced by «any amount which will become payable to the first party under paragraph 5 during the period after the time at which the calculation is made which is equal to the minimum period for the delivery of margin applicable under paragraph 4(g) or which is payable to the first party under paragraph 5 but unpaid»; and

(bb) The words «any amount payable to the other party under paragraph 5 but unpaid» are deleted and replaced by «any amount which will become payable to the other party under paragraph 5 during the period after the time at which the calculation is made which is equal to the minimum period for the delivery of margin applicable under paragraph 4(g) or which is payable to the other party under paragraph 5 but unpaid».]

* Delete as appropriate


ANNEX II

Form of Confirmation

To: ____________________________

From: __________________________

Date: ___________________________

Subject: [ Repurchase][ Buy/Sell Back]* Transaction

(Reference Number: )

Dear Sirs, The purpose of this [ letter]/ facsimile]/ telex], a «Confirmation» for the purposes of the Agreement, is to set forth the terms and conditions of the above repurchase transaction entered into between us on the Contract Date referred to below. This Confirmation supplements and forms part of, and is subject to, the Global Master Repurchase Agreement as entered into between us as of [ ] as the same may be amended from time to time (the «Agreement»). All provisions contained in the Agreement govern this Confirmation except as expressly modified below. Words and phrases defined in the Agreement and used in this Confirmation shall have the same meaning herein as in the Agreement.

1. Contract Date:

2. Purchased Securities [state type[s] and nominal value[s]]:

3. CUSIP, ISIN or other identifying number[s]:

4. Buyer:

5. Seller:

6. Purchase Date:

7. Purchase Price:

8. Contractual Currency:

[9. Repurchase Date]:*

[10. Terminable on demand]:*

11. Pricing Rate:

[12. Sell Back Price:]*

13. Buyer’s Bank Account[s] Details:

14. Seller’s Bank Account[s] Details:

[15. The Transaction is an Agency Transaction. [Name of Agent] is acting as agent for

[name or identifier of Principal]]:*

[16. Additional Terms]:*

Yours faithfully,


| Global master securities lending agreement - January 2010 | Securities Lending & Repo markets | Appendix

APPENDICE II

GLOBAL MASTER SECURITIES LENDING AGREEMENT (GMSLA)

January 2010 version

Source: ISLA


GLOBAL MASTER SECURITIES LENDING AGREEMENT

AGREEMENT

Between:

(Party A) a company incorporated under the laws of acting through one or more Designated Offices; and

(Party B) a company incorporated under the laws of acting through one or more Designated Offices.

1. Applicability

1.1 From time to time the Parties acting through one or more Designated Offices may enter into transactions in which one party (Lender) will transfer to the other (Borrower) securities and financial instruments (Securities) against the transfer of Collateral (as defined in paragraph 2) with a simultaneous agreement by Borrower to transfer to Lender Securities equivalent to such Securities on a fixed date or on demand against the transfer to Borrower by Lender of assets equivalent to such Collateral.

1.2 Each such transaction shall be referred to in this Agreement as a Loan and shall be governed by the terms of this Agreement, including the supplemental terms and conditions contained in the Schedule and any Addenda or Annexes attached hereto, unless otherwise agreed in writing. In the event of any inconsistency between the provisions of an Addendum or Annex and this Agreement, the provisions of such Addendum or Annex shall prevail unless the Parties otherwise agree.

1.3 Either Party may perform its obligations under this Agreement either directly or through a Nominee.

2. Interpretation

2.1 In this Agreement:

Act of Insolvency means in relation to either Party:

(a) Its making a general assignment for the benefit of, or entering into a reorganisation, arrangement, or composition with creditors; or

(b) Its stating in writing that it is unable to pay its debts as they become due; or

(c) Its seeking, consenting to or acquiescing in the appointment of any trustee, administrator, receiver or liquidator or analogous officer of it or any material part of its property; or

(d) The presentation or filing of a petition in respect of it (other than by the other Party to this Agreement in respect of any obligation under this Agreement) in any court or before any agency alleging or for the bankruptcy, winding-up or insolvency of such Party (or any analogous proceeding) or seeking any reorganisation, arrangement, composition, re-adjustment, administration, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such petition not having been stayed or dismissed within 30 days of its filing (except in the case of a petition for winding-up or any analogous proceeding in respect of which no such 30 day period shall apply); or

(e) The appointment of a receiver, administrator, liquidator or trustee or analogous officer of such Party over all or any material part of such Party’s property; or

(f) The convening of any meeting of its creditors for the purpose of considering a voluntary arrangement as referred to in Section 3 of the Insolvency Act 1986 (or any analogous proceeding);

Agency Annex means the Annex to this Agreement published by the International Securities Lending Association and providing for Lender to act as agent for a third party in respect of one or more Loans;

Alternative Collateral means Collateral having a Market Value equal to the Collateral delivered pursuant to paragraph 5 and provided by way of substitution in accordance with the provisions of paragraph 5.3;


Applicable Law means the laws, rules and regulations (including double taxation conventions) of any relevant jurisdiction, including published practice of any government or other taxing authority in connection with such laws, rules and regulations;

Automatic Early Termination has the meaning given in paragraph 10.1(d);

Base Currency means the currency indicated in paragraph 2 of the Schedule;

Business Day means:

(a) In relation to Delivery in respect of any Loan, a day other than a Saturday or a Sunday on which banks and securities markets are open for business generally in the place(s) where the relevant Securities, Equivalent Securities, Collateral or Equivalent Collateral are to be delivered;

(b) In relation to any payments under this Agreement, a day other than a Saturday or a Sunday on which banks are open for business generally in the principal financial centre of the country of which the currency in which the payment is denominated is the official currency and, if different, in the place where any account designated by the Parties for the making or receipt of the payment is situated (or, in the case of a payment in euro, a day on which TARGET operates);

(c) In relation to a notice or other communication served under this Agreement, any day other than a Saturday or a Sunday on which banks are open for business generally in the place designated for delivery in accordance with paragraph 3 of the Schedule; and

(d) In any other case, a day other than a Saturday or a Sunday on which banks are open for business generally in each place stated in paragraph 6 of the Schedule;

Buy‑In means any arrangement under which, in the event of a seller or transferor failing to deliver securities to the buyer or transferee, the buyer or transferee of such securities is entitled under the terms of such arrangement to buy or otherwise acquire securities equivalent to such securities and to recover the cost of so doing from the seller or transferor;

Cash Collateral means Collateral taking the form of a transfer of currency;

Close of Business means the time at which the relevant banks, securities settlement systems or depositaries close in the business centre in which payment is to be made or Securities or Collateral is to be delivered;

Collateral means such securities or financial instruments or transfers of currency as are referred to in the table set out under paragraph 1 of the Schedule as being acceptable or any combination thereof as agreed between the Parties in relation to any particular Loan and which are delivered by Borrower to Lender in accordance with this Agreement and shall include Alternative Collateral;

Defaulting Party has the meaning given in paragraph 10;

Delivery in relation to any Securities or Collateral or Equivalent Securities or Equivalent Collateral comprising Securities means:

(a) In the case of Securities held by a Nominee or within a clearing or settlement system, the crediting of such Securities to an account of the Borrower or Lender, as the case may be, or as it shall direct, or,

(b) In the case of Securities otherwise held, the delivery to Borrower or Lender, as the case may be, or as the transferee shall direct of the relevant instruments of transfer, or

(c) By such other means as may be agreed,

and deliver shall be construed accordingly;

Designated Office means the branch or office of a Party which is specified as such in paragraph 6 of the Schedule or such other branch or office as may be agreed to in writing by the Parties;


Equivalent or equivalent to in relation to any Loaned Securities or Collateral (whether Cash Collateral or Non-Cash Collateral) provided under this Agreement means Securities or other property, of an identical type, nominal value, description and amount to particular Loaned Securities or Collateral (as the case may be) so provided. If and to the extent that such Loaned Securities or Collateral (as the case may be) consists of Securities that are partly paid or have been converted, subdivided, consolidated, made the subject of a takeover, rights of pre-emption, rights to receive securities or a certificate which may at a future date be exchanged for Securities, the expression shall include such Securities or other assets to which Lender or Borrower (as the case may be) is entitled following the occurrence of the relevant event, and, if appropriate, the giving of the relevant notice in accordance with paragraph 6.7 and provided that Lender or Borrower (as the case may be) has paid to the other Party all and any sums due in respect thereof. In the event that such Loaned Securities or Collateral (as the case may be) have been redeemed, are partly paid, are the subject of a capitalisation issue or are subject to an event similar to any of the foregoing events described in this paragraph, the expression shall have the following meanings:

(a) In the case of redemption, a sum of money equivalent to the proceeds of the redemption;

(b) In the case of a call on partly-paid Securities, Securities equivalent to the relevant Loaned Securities or Collateral, as the case may be, provided that Lender shall have paid Borrower, in respect of Loaned Securities, and Borrower shall have paid to Lender, in respect of Collateral, an amount of money equal to the sum due in respect of the call;

(c) In the case of a capitalisation issue, Securities equivalent to the relevant Loaned Securities or Collateral, as the case may be, together with the securities allotted by way of bonus thereon;

(d) In the case of any event similar to any of the foregoing events described in this paragraph, Securities equivalent to the Loaned Securities or the relevant Collateral, as the case may be, together with or replaced by a sum of money or Securities or other property equivalent to that received in respect of such Loaned Securities or Collateral, as the case may be, resulting from such event;

Income means any interest, dividends or other distributions of any kind whatsoever with respect to any Securities or Collateral;

Income Record Date, with respect to any Securities or Collateral, means the date by reference to which holders of such Securities or Collateral are identified as being entitled to payment of Income;

Letter of Credit means an irrevocable, non-negotiable letter of credit in a form, and from a bank, acceptable to Lender;

Loaned Securities means Securities which are the subject of an outstanding Loan;

Margin has the meaning specified in paragraph 1 of the Schedule with reference to the table set out therein;

Market Value means:

(a) in relation to the valuation of Securities, Equivalent Securities, Collateral or Equivalent Collateral (other than Cash Collateral or a Letter of Credit):

(i) Such price as is equal to the market quotation for the mid price of such Securities, Equivalent Securities, Collateral and/or Equivalent Collateral as derived from a reputable pricing information service reasonably chosen in good faith by Lender; or

(ii) If unavailable the market value thereof as derived from the mid price or rate bid by a reputable dealer for the relevant instrument reasonably chosen in good faith by Lender,

in each case at Close of Business on the previous Business Day, or as specified in the Schedule, unless agreed otherwise or, at the option of either Party where in its reasonable opinion there has been an exceptional movement in the price of the asset in question since such time, the latest available price, plus (in each case):

(iii) The aggregate amount of Income which has accrued but not yet been paid in respect of the Securities, Equivalent Securities, Collateral or Equivalent Collateral concerned to the extent not included in such price,


provided that the price of Securities, Equivalent Securities, Collateral or Equivalent Collateral that are suspended or that cannot legally be transferred or that are transferred or required to be transferred to a government, trustee or third party (whether by reason of nationalisation, expropriation or otherwise) shall for all purposes be a commercially reasonable price agreed between the Parties, or absent agreement, be a price provided by a third party dealer agreed between the Parties, or if the Parties do not agree a third party dealer then a price based on quotations provided by the Reference Dealers. If more than three quotations are provided, the Market Value will be the arithmetic mean of the prices, without regard to the quotations having the highest and lowest prices. If three quotations are provided, the Market Value will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest or lowest price, then one of such quotations shall be disregarded. If fewer than three quotations are provided, the Market Value of the relevant Securities, Equivalent Securities, Collateral or Equivalent Collateral shall be determined by the Party making the determination of Market Value acting reasonably;

(b) In relation to a Letter of Credit the face or stated amount of such Letter of Credit; and

(c) In relation to Cash Collateral the amount of the currency concerned;

Nominee means a nominee or agent appointed by either Party to accept delivery of, hold or deliver Securities, Equivalent Securities, Collateral and/or Equivalent Collateral or to receive or make payments on its behalf;

Non‑Cash Collateral means Collateral other than Cash Collateral;

Non‑Defaulting Party has the meaning given in paragraph 10;

Notification Time means the time specified in paragraph 1.5 of the Schedule;

Parties means Lender and Borrower and Party shall be construed accordingly;

Posted Collateral has the meaning given in paragraph 5.4;

Reference Dealers means, in relation to any Securities, Equivalent Securities, Collateral or Equivalent Collateral, four leading dealers in the relevant securities selected by the Party making the determination of Market Value in good faith;

Required Collateral Value has the meaning given in paragraph 5.4;

Sales Tax means value added tax and any other Tax of a similar nature (including, without limitation, any sales tax of any relevant jurisdiction);

Settlement Date means the date upon which Securities are due to be transferred to Borrower in accordance with this Agreement;

Stamp Tax means any stamp, transfer, registration, documentation or similar Tax; and

Tax means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) imposed by any government or other taxing authority in respect of any transaction effected pursuant to or contemplated by, or any payment under or in respect of, this Agreement.

2.2 Headings

All headings appear for convenience only and shall not affect the interpretation of this Agreement.

2.3 Market terminology

Notwithstanding the use of expressions such as “borrow”, “lend”, “Collateral”, “Margin” etc. which are used to reflect terminology used in the market for transactions of the kind provided for in this Agreement, title to Securities “borrowed” or “lent” and “Collateral” provided in accordance with this Agreement shall pass from one Party to another as provided for in this Agreement, the Party obtaining such title being obliged to deliver Equivalent Securities or Equivalent Collateral as the case may be.


2.4 Currency conversions

Subject to paragraph 11, for the purposes of determining any prices, sums or values (including Market Value and Required Collateral Value) prices, sums or values stated in currencies other than the Base Currency shall be converted into the Base Currency at the latest available spot rate of exchange quoted by a bank selected by Lender (or if an Event of Default has occurred in relation to Lender, by Borrower) in the London inter-bank market for the purchase of the Base Currency with the currency concerned on the day on which the calculation is to be made or, if that day is not a Business Day, the spot rate of exchange quoted at Close of Business on the immediately preceding Business Day on which such a quotation was available.

2.5 The Parties confirm that introduction of and/or substitution (in place of an existing currency) of a new currency as the lawful currency of a country shall not have the effect of altering, or discharging, or excusing performance under, any term of the Agreement or any Loan thereunder, nor give a Party the right unilaterally to alter or terminate the Agreement or any Loan thereunder. Securities will for the purposes of this Agreement be regarded as equivalent to other securities notwithstanding that as a result of such introduction and/or substitution those securities have been redenominated into the new currency or the nominal value of the securities has changed in connection with such redenomination.

2.6 Modifications etc. to legislation

Any reference in this Agreement to an act, regulation or other legislation shall include a reference to any statutory modification or re-enactment thereof for the time being in force.

3. Loans of Securities

Lender will lend Securities to Borrower, and Borrower will borrow Securities from Lender in accordance with the terms and conditions of this Agreement. The terms of each Loan shall be agreed prior to the commencement of the relevant Loan either orally or in writing (including any agreed form of electronic communication) and confirmed in such form and on such basis as shall be agreed between the Parties. Unless otherwise agreed, any confirmation produced by a Party shall not supersede or prevail over the prior oral, written or electronic communication (as the case may be)

4. Delivery

4.1 Delivery of Securities on commencement of Loan

Lender shall procure the Delivery of Securities to Borrower or deliver such Securities in accordance with this Agreement and the terms of the relevant Loan.

4.2 Requirements to effect Delivery

The Parties shall execute and deliver all necessary documents and give all necessary instructions to procure that all right, title and interest in:

(a) Any Securities borrowed pursuant to paragraph 3;

(b) Any Equivalent Securities delivered pursuant to paragraph 8;

(c) Any Collateral delivered pursuant to paragraph 5;

(d) Any Equivalent Collateral delivered pursuant to paragraphs 5 or 8;

shall pass from one Party to the other subject to the terms and conditions set out in this Agreement, on delivery of the same in accordance with this Agreement with full title guarantee, free from all liens, charges and encumbrances. In the case of Securities, Collateral, Equivalent Securities or Equivalent Collateral title to which is registered in a computer-based system which provides for the recording and transfer of title to the same by way of book entries, delivery and transfer of title shall take place in accordance with the rules and procedures of such system as in force from time to time. The Party acquiring such right, title and interest shall have no obligation to return or deliver any of the assets so acquired but, in so far as any Securities are borrowed by or any Collateral is delivered to such Party, such Party shall be obliged, subject to the terms of this Agreement, to deliver Equivalent Securities or Equivalent Collateral as appropriate.


4.3 Deliveriestobesimultaneousunlessotherwiseagreed

Where under the terms of this Agreement a Party is not obliged to make a Delivery unless simultaneously a Delivery is made to it, subject to and without prejudice to its rights under paragraph 8.6, such Party may from time to time in accordance with market practice and in recognition of the practical difficulties in arranging simultaneous delivery of Securities, Collateral and cash transfers, waive its right under this Agreement in respect of simultaneous delivery and/or payment provided that no such waiver (whether by course of conduct or otherwise) in respect of one transaction shall bind it in respect of any other transaction.

4.4 Deliveries of Income

In respect of Income being paid in relation to any Loaned Securities or Collateral, Borrower (in the case of Income being paid in respect of Loaned Securities) and Lender (in the case of Income being paid in respect of Collateral) shall provide to the other Party, as the case may be, any endorsements or assignments as shall be customary and appropriate to effect, in accordance with paragraph 6, the payment or delivery of money or property in respect of such Income to Lender, irrespective of whether Borrower received such endorsements or assignments in respect of any Loaned Securities, or to Borrower, irrespective of whether Lender received such endorsements or assignments in respect of any Collateral.

5. Collateral

5.1 Delivery of Collateral on commencement of Loan

Subject to the other provisions of this paragraph 5, Borrower undertakes to deliver to or deposit with Lender (or in accordance with Lender’s instructions) Collateral simultaneously with Delivery of the Securities to which the Loan relates and in any event no later than Close of Business on the Settlement Date.

5.2 Deliveries through securities settlement systems generating automatic payments

Unless otherwise agreed between the Parties, where any Securities, Equivalent Securities, Collateral or Equivalent Collateral (in the form of securities) are transferred through a book entry transfer or settlement system which automatically generates a payment or delivery, or obligation to pay or deliver, against the transfer of such securities, then:

(a) Such automatically generated payment, delivery or obligation shall be treated as a payment or delivery by the transferee to the transferor, and except to the extent that it is applied to discharge an obligation of the transferee to effect payment or delivery, such payment or delivery, or obligation to pay or deliver, shall be deemed to be a transfer of Collateral or delivery of Equivalent Collateral, as the case may be, made by the transferee until such time as the Collateral or Equivalent Collateral is substituted with other Collateral or Equivalent Collateral if an obligation to deliver other Collateral or deliver Equivalent Collateral existed immediately prior to the transfer of Securities, Equivalent Securities, Collateral or Equivalent Collateral; and

(b) The Party receiving such substituted Collateral or Equivalent Collateral, or if no obligation to deliver other Collateral or redeliver Equivalent Collateral existed immediately prior to the transfer of Securities, Equivalent Securities, Collateral or Equivalent Collateral, the Party receiving the deemed transfer of Collateral or Delivery of Equivalent Collateral, as the case may be, shall cause to be made to the other Party for value the same day either, where such transfer is a payment, an irrevocable payment in the amount of such transfer or, where such transfer is a Delivery, an irrevocable Delivery of securities (or other property, as the case may be) equivalent to such property.

5.3 Substitutions of Collateral

Borrower may from time to time call for the repayment of Cash Collateral or the Delivery of Collateral equivalent to any Collateral delivered to Lender prior to the date on which the same would otherwise have been repayable or deliverable provided that at or prior to the time of such repayment or Delivery Borrower shall have delivered Alternative Collateral acceptable to Lender and Borrower is in compliance with paragraph 5.4 or paragraph 5.5, as applicable.

5.4 Marking to Market of Collateral during the currency of a Loan on aggregated basis

Unless paragraph 1.3 of the Schedule indicates that paragraph 5.5 shall apply in lieu of this paragraph 5.4, or unless otherwise agreed between the Parties:


(a) The aggregate Market Value of the Collateral delivered to or deposited with Lender (excluding any Equivalent Collateral repaid or delivered under paragraphs 5.4(b) or 5.5(b) (as the case may be)) (Posted Collateral) in respect of all Loans outstanding under this Agreement shall equal the aggregate of the Market Value of Securities equivalent to the Loaned Securities and the applicable Margin (the Required Collateral Value) in respect of such Loans;

(b) If at any time on any Business Day the aggregate Market Value of the Posted Collateral in respect of all Loans outstanding under this Agreement together with: (i) all amounts due and payable by the Lender under this Agreement but which are unpaid; and (ii) if agreed between the parties and if the Income Record Date has occurred in respect of any Non-Cash Collateral, the amount or Market Value of Income payable in respect of such Non-Cash Collateral exceeds the aggregate of the Required Collateral Values in respect of such Loans together with: (i) all amounts due and payable by the Borrower under this Agreement but which are unpaid; and (ii) if agreed between the parties and if the Income Record Date has occurred in respect of any securities equivalent to Loaned Securities, the amount or Market Value of Income payable in respect of such Equivalent Securities, Lender shall (on demand) repay and/or deliver, as the case may be, to Borrower such Equivalent Collateral as will eliminate the excess;

(c) If at any time on any Business Day the aggregate Market Value of the Posted Collateral in respect of all Loans outstanding under this Agreement together with: (i) all amounts due and payable by the Lender under this Agreement but which are unpaid; and (ii) if agreed between the parties and if the Income Record Date has occurred in respect of any Non-Cash Collateral, the amount or Market Value of Income payable in respect of such Non-Cash Collateral falls below the aggregate of Required Collateral Values in respect of all such Loans together with: (i) all amounts due and payable by the Borrower under this Agreement but which are unpaid; and (ii) if agreed between the parties and if the Income Record Date has occurred in respect of Securities equivalent to any Loaned Securities, the amount or Market Value of Income payable in respect of such Equivalent Securities, Borrower shall (on demand) provide such further Collateral to Lender as will eliminate the deficiency;

(d) Where a Party acts as both Lender and Borrower under this Agreement, the provisions of paragraphs 5.4(b) and 5.4(c) shall apply separately (and without duplication) in respect of Loans entered into by that Party as Lender and Loans entered into by that Party as Borrower.

5.5 Marking to Market of Collateral during the currency of a Loan on a Loan by Loan basis

If paragraph 1.3 of the Schedule indicates this paragraph 5.5 shall apply in lieu of paragraph 5.4, the Posted Collateral in respect of any Loan shall bear from day to day and at any time the same proportion to the Market Value of Securities equivalent to the Loaned Securities as the Posted Collateral bore at the commencement of such Loan. Accordingly:

(a) The Market Value of the Posted Collateral to be delivered or deposited while the Loan continues shall be equal to the Required Collateral Value;

(b) If at any time on any Business Day the Market Value of the Posted Collateral in respect of any Loan together with: (i) all amounts due and payable by the Lender in respect of that Loan but which are unpaid; and (ii) if agreed between the parties and if the Income Record Date has occurred in respect of any Non-Cash Collateral, the amount or Market Value of Income payable in respect of such Non-Cash Collateral exceeds the Required Collateral Value in respect of such Loan together with: (i) all amounts due and payable by the Borrower in respect of that Loan; and (ii) if agreed between the parties and if the Income Record Date has occurred in respect of Securities equivalent to any Loaned Securities, the amount or Market Value of Income payable in respect of such Equivalent Securities, Lender shall (on demand) repay and/or deliver, as the case may be, to Borrower such Equivalent Collateral as will eliminate the excess; and

(c) If at any time on any Business Day the Market Value of the Posted Collateral together with: (i) all amounts due any payable by the Lender in respect of that Loan; and (ii) if agreed between the parties and if the Income Record Date has occurred in respect of any Non-Cash Collateral, the amount or Market Value of Income payable in respect of such Non-Cash Collateral falls below the Required Collateral Value together with: (i) all amounts due and payable by the Borrower in respect of that Loan; and (ii) if agreed between the parties and if the Income Record Date has occurred in respect of Securities equivalent to any Loaned Securities, the amount or Market Value of Income payable in respect of such Equivalent Securities, Borrower shall (on demand) provide such further Collateral to Lender as will eliminate the deficiency.


5.6 Requirements to deliver excess Collateral

Where paragraph 5.4 applies, unless paragraph 1.4 of the Schedule indicates that this paragraph 5.6 does not apply, if a Party (the first Party) would, but for this paragraph 5.6, be required under paragraph 5.4 to provide further Collateral or deliver Equivalent Collateral in circumstances where the other Party (the second Party) would, but for this paragraph 5.6, also be required to or provide Collateral or deliver Equivalent Collateral under paragraph 5.4, then the Market Value of the Collateral or Equivalent Collateral deliverable by the first Party (X) shall be set off against the Market Value of the Collateral or Equivalent Collateral deliverable by the second Party (Y) and the only obligation of the Parties under paragraph 5.4 shall be, where X exceeds Y, an obligation of the first Party, or where Y exceeds X, an obligation of the second Party to repay and/or (as the case may be) deliver Equivalent Collateral or to deliver further Collateral having a Market Value equal to the difference between X and Y.

5.7 Where Equivalent Collateral is repaid or delivered (as the case may be) or further Collateral is provided by a Party under paragraph 5.6, the Parties shall agree to which Loan or Loans such repayment, delivery or further provision is to be attributed and failing agreement it shall be attributed, as determined by the Party making such repayment, delivery or further provision to the earliest outstanding Loan and, in the case of a repayment or delivery up to the point at which the Market Value of Collateral in respect of such Loan equals the Required Collateral Value in respect of such Loan, and then to the next earliest outstanding Loan up to the similar point and so on.

5.8 Timing of repayments of excess Collateral or deliveries of further Collateral

Where any Equivalent Collateral falls to be repaid or delivered (as the case may be) or further Collateral is to be provided under this paragraph 5, unless otherwise provided or agreed between the Parties, if the relevant demand is received by the Notification Time specified in paragraph 1.5 of the Schedule, then the delivery shall be made not later than the Close of Business on the same Business Day; if a demand is received after the Notification Time, then the relevant delivery shall be made not later than the Close of Business on the next Business Day after the date such demand is received.

5.9 Substitutions and extensions of Letters of Credit

Where Collateral is a Letter of Credit, Lender may by notice to Borrower require that Borrower, on the third Business Day following the date of delivery of such notice (or by such other time as the Parties may agree), substitute Collateral consisting of cash or other Collateral acceptable to Lender for the Letter of Credit. Prior to the expiration of any Letter of Credit supporting Borrower’s obligations hereunder, Borrower shall, no later than 10.30 a.m. UK time on the second Business Day prior to the date such Letter of Credit expires (or by such other time as the Parties may agree), obtain an extension of the expiration of such Letter of Credit or replace such Letter of Credit by providing Lender with a substitute Letter of Credit in an amount at least equal to the amount of the Letter of Credit for which it is substituted.

6. Distributions and Corporate Actions

6.1 In this paragraph 6, references to an amount of Income received by any Party in respect of any Loaned Securities or Non-Cash Collateral shall be to an amount received from the issuer after any applicable withholding or deduction for or on account of Tax.

6.2 Manufactured payments in respect of Loaned Securities

Where the term of a Loan extends over an Income Record Date in respect of any Loaned Securities, Borrower shall, on the date such Income is paid by the issuer, or on such other date as the Parties may from time to time agree, pay or deliver to Lender such sum of money or property as is agreed between the Parties or, failing such agreement, a sum of money or property equivalent to (and in the same currency as) the type and amount of such Income that would be received by Lender in respect of such Loaned Securities assuming such Securities were not loaned to Borrower and were retained by Lender on the Income Record Date.

6.3 Manufactured payments in respect of Non-Cash Collateral

Where Non-Cash Collateral is delivered by Borrower to Lender and an Income Record Date in respect of such Non-Cash Collateral occurs before Equivalent Collateral is delivered by Lender to Borrower, Lender shall on the date such Income is paid, or on such other date as the Parties may from time to time agree, pay or deliver to Borrower a sum of money or property as is agreed between the Parties or, failing such agreement, a sum of money or property equivalent to (and in the


same currency as) the type and amount of such Income that would be received by Lender in respect of such Non-Cash Collateral assuming Lender:

(a) Retained the Non-Cash Collateral on the Income Record Date; and

(b) Is not entitled to any credit, benefit or other relief in respect of Tax under any Applicable Law.

6.4 Indemnity for failure to redeliver Equivalent Non-Cash Collateral

Unless paragraph 1.6 of the Schedule indicates that this paragraph does not apply, where:

(a) Prior to any Income Record Date in relation to Non-Cash Collateral, Borrower has in accordance with paragraph 5.3 called for the Delivery of Equivalent Non-Cash Collateral;

(b) Borrower has given notice of such call to Lender so as to be effective, at the latest, five hours before the Close of Business on the last Business Day on which Lender would customarily be required to initiate settlement of the Non-Cash Collateral to enable settlement to take place on the Business Day immediately preceding the relevant Income Record Date;

(c) Borrower has provided reasonable details to Lender of the Non-Cash Collateral, the relevant Income Record Date and the proposed Alternative Collateral;

(d) Lender, acting reasonably, has determined that such Alternative Collateral is acceptable to it and Borrower shall have delivered or delivers such Alternative Collateral to Lender; and

(e) Lender has failed to make reasonable efforts to transfer Equivalent Non-Cash Collateral to Borrower prior to such Income Record Date,

Lender shall indemnify Borrower in respect of any cost, loss or damage (excluding any indirect or consequential loss or damage or any amount otherwise compensated by Lender, including pursuant to paragraphs 6.3 and/or 9.3) suffered by Borrower that it would not have suffered had the relevant Equivalent Non-Cash Collateral been transferred to Borrower prior to such Income Record Date.

6.5 Income in the form of Securities

Where Income, in the form of securities, is paid in relation to any Loaned Securities or Collateral, such securities shall be added to such Loaned Securities or Collateral (and shall constitute Loaned Securities or Collateral, as the case may be, and be part of the relevant Loan) and will not be delivered to Lender, in the case of Loaned Securities, or to Borrower, in the case of Collateral, until the end of the relevant Loan, provided that the Lender or Borrower (as the case may be) fulfils its obligations under paragraph 5.4 or 5.5 (as applicable) with respect to the additional Loaned Securities or Collateral, as the case may be.

6.6 Exercise of voting rights

Where any voting rights fall to be exercised in relation to any Loaned Securities or Collateral, neither Borrower, in the case of Equivalent Securities, nor Lender, in the case of Equivalent Collateral, shall have any obligation to arrange for voting rights of that kind to be exercised in accordance with the instructions of the other Party in relation to the Securities borrowed by it or transferred to it by way of Collateral, as the case may be, unless otherwise agreed between the Parties.

6.7 Corporate actions

Where, in respect of any Loaned Securities or any Collateral, any rights relating to conversion, sub-division, consolidation, pre-emption, rights arising under a takeover offer, rights to receive securities or a certificate which may at a future date be exchanged for securities or other rights, including those requiring election by the holder for the time being of such Securities or Collateral, become exercisable prior to the delivery of Equivalent Securities or Equivalent Collateral, then Lender or Borrower, as the case may be, may, within a reasonable time before the latest time for the exercise of the right or option give written notice to the other Party that on delivery of Equivalent Securities or Equivalent Collateral, as the case may be, it wishes to receive Equivalent Securities or Equivalent Collateral in such form as will arise if the right is exercised or, in the case of a right which may be exercised in more than one manner, is exercised as is specified in such written notice.


7. Rates applicable to Loaned Securities and Cash Collateral

7.1 Rates in respect of Loaned Securities

In respect of each Loan, Borrower shall pay to Lender, in the manner prescribed in sub-paragraph 7.3, sums calculated by applying such rate as shall be agreed between the Parties from time to time to the daily Market Value of the Loaned Securities.

7.2 Rates in respect of Cash Collateral

Where Cash Collateral is deposited with Lender in respect of any Loan, Lender shall pay to Borrower, in the manner prescribed in paragraph 7.3, sums calculated by applying such rates as shall be agreed between the Parties from time to time to the amount of such Cash Collateral. Any such payment due to Borrower may be set-off against any payment due to Lender pursuant to paragraph 7.1.

7.3 Payment of rates

In respect of each Loan, the payments referred to in paragraph 7.1 and 7.2 shall accrue daily in respect of the period commencing on and inclusive of the Settlement Date and terminating on and exclusive of the Business Day upon which Equivalent Securities are delivered or Cash Collateral is repaid. Unless otherwise agreed, the sums so accruing in respect of each calendar month shall be paid in arrears by the relevant Party not later than the Business Day which is the tenth Business Day after the last Business Day of the calendar month to which such payments relate or such other date as the Parties shall from time to time agree.

8. Delivery of Equivalent Securities

8.1 Lender’s right to terminate a Loan

Subject to paragraph 11 and the terms of the relevant Loan, Lender shall be entitled to terminate a Loan and to call for the delivery of all or any Equivalent Securities at any time by giving notice on any Business Day of not less than the standard settlement time for such Equivalent Securities on the exchange or in the clearing organisation through which the Loaned Securities were originally delivered. Borrower shall deliver such Equivalent Securities not later than the expiry of such notice in accordance with Lender’s instructions.

8.2 Borrower’s right to terminate a Loan

Subject to the terms of the relevant Loan, Borrower shall be entitled at any time to terminate a Loan and to deliver all and any Equivalent Securities due and outstanding to Lender in accordance with Lender’s instructions and Lender shall accept such delivery.

8.3 Delivery of Equivalent Securities on termination of a Loan

Borrower shall procure the Delivery of Equivalent Securities to Lender or deliver Equivalent Securities in accordance with this Agreement and the terms of the relevant Loan on termination of the Loan. For the avoidance of doubt any reference in this Agreement or in any other agreement or communication between the Parties (howsoever expressed) to an obligation to deliver or account for or act in relation to Loaned Securities shall accordingly be construed as a reference to an obligation to deliver or account for or act in relation to Equivalent Securities.

8.4 Delivery of Equivalent Collateral on termination of a Loan

On the date and time that Equivalent Securities are required to be delivered by Borrower on the termination of a Loan, Lender shall simultaneously (subject to paragraph 5.4 if applicable) repay to Borrower any Cash Collateral or, as the case may be, deliver Collateral equivalent to the Collateral provided by Borrower pursuant to paragraph 5 in respect of such Loan. For the avoidance of doubt any reference in this Agreement or in any other agreement or communication between the Parties (however expressed) to an obligation to deliver or account for or act in relation to Collateral shall accordingly be construed as a reference to an obligation to deliver or account for or act in relation to Equivalent Collateral.


8.5 Delivery of Letters of Credit

Where a Letter of Credit is provided by way of Collateral, the obligation to deliver Equivalent Collateral is satisfied by Lender delivering for cancellation the Letter of Credit so provided, or where the Letter of Credit is provided in respect of more than one Loan, by Lender consenting to a reduction in the value of the Letter of Credit.

8.6 Delivery obligations to be reciprocal

Neither Party shall be obliged to make delivery (or make a payment as the case may be) to the other unless it is satisfied that the other Party will make such delivery (or make an appropriate payment as the case may be) to it. If it is not so satisfied (whether because an Event of Default has occurred in respect of the other Party or otherwise) it shall notify the other Party and unless that other Party has made arrangements which are sufficient to assure full delivery (or the appropriate payment as the case may be) to the notifying Party, the notifying Party shall (provided it is itself in a position, and willing, to perform its own obligations) be entitled to withhold delivery (or payment, as the case may be) to the other Party until such arrangements to assure full delivery (or the appropriate payment as the case may be) are made.

9. Failure to Deliver

9.1 Borrower’s failure to deliver Equivalent Securities

If Borrower fails to deliver Equivalent Securities in accordance with paragraph 8.3 Lender may:

(a) Elect to continue the Loan (which, for the avoidance of doubt, shall continue to be taken into account for the purposes of paragraph 5.4 or 5.5 as applicable); or

(b) At any time while such failure continues, by written notice to Borrower declare that that Loan (but only that Loan) shall be terminated immediately in accordance with paragraph 11.2 as if (i) an Event of Default had occurred in relation to the Borrower, (ii) references to the Termination Date were to the date on which notice was given under this sub-paragraph, and (iii) the Loan were the only Loan outstanding. For the avoidance of doubt, any such failure shall not constitute an Event of Default (including under paragraph 10.1(i)) unless the Parties otherwise agree.

9.2 Lender’s failure to deliver Equivalent Collateral

If Lender fails to deliver Equivalent Collateral comprising Non-Cash Collateral in accordance with paragraph 8.4 or 8.5, Borrower may:

(a) Elect to continue the Loan (which, for the avoidance of doubt, shall continue to be taken into account for the purposes of paragraph 5.4 or 5.5 as applicable); or

(a) At any time while such failure continues, by written notice to Lender declare that that Loan (but only that Loan) shall be terminated immediately in accordance with paragraph 11.2 as if (i) an Event of Default had occurred in relation to the Lender, (ii) references to the Termination Date were to the date on which notice was given under this sub-paragraph, and (iii) the Loan were the only Loan outstanding. For the avoidance of doubt, any such failure shall not constitute an Event of Default (including under paragraph 10.1(i)) unless the Parties otherwise agree.

9.3 Failure by either Party to deliver

Where a Party (the Transferor) fails to deliver Equivalent Securities or Equivalent Collateral by the time required under this Agreement or within such other period as may be agreed between the Transferor and the other Party (the Transferee) and the Transferee:

(a) Incurs interest, overdraft or similar costs and expenses; or

(b) Incurs costs and expenses as a direct result of a Buy-in exercised against it by a third party,

then the Transferor agrees to pay within one Business Day of a demand from the Transferee and hold harmless the Transferee with respect to all reasonable costs and expenses listed in sub-paragraphs (a) and (b) above properly incurred which arise directly from such failure other than (i) such costs and expenses which arise from the negligence or wilful default of the Transferee and (ii) any indirect or consequential losses.



10.1 Each of the following events occurring and continuing in relation to either Party (the Defaulting Party, the other Party being the Non‑Defaulting Party) shall be an Event of Default but only (subject to sub-paragraph 10.1(d)) where the Non-Defaulting Party serves written notice on the Defaulting Party:

(a) Borrower or Lender failing to pay or repay Cash Collateral or to deliver Collateral on commencement of the Loan under paragraph 5.1 or to deliver further Collateral under paragraph 5.4 or 5.5;

(b) Lender or Borrower failing to comply with its obligations under paragraph 6.2 or 6.3 upon the due date and not remedying such failure within three Business Days after the Non-Defaulting Party serves written notice requiring it to remedy such failure;

(c) Lender or Borrower failing to pay any sum due under paragraph 9.1(b), 9.2(b) or 9.3 upon the due date;

(d) An Act of Insolvency occurring with respect to Lender or Borrower, provided that, where the Parties have specified in paragraph 5 of the Schedule that Automatic Early Termination shall apply, an Act of Insolvency which is the presentation of a petition for winding up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party shall not require the Non-Defaulting Party to serve written notice on the Defaulting Party (Automatic Early Termination);

(e) Any warranty made by Lender or Borrower in paragraph 13 or paragraphs 14(a) to 14(d) being incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated;

(f) Lender or Borrower admitting to the other that it is unable to, or it intends not to, perform any of its obligations under this Agreement and/or in respect of any Loan where such failure to perform would with the service of notice or lapse of time constitute an Event of Default;

(g) All or any material part of the assets of Lender or Borrower being transferred or ordered to be transferred to a trustee (or a person exercising similar functions) by a regulatory authority pursuant to any legislation;

(h) Lender (if applicable) or Borrower being declared in default or being suspended or expelled from membership of or participation in, any securities exchange or suspended or prohibited from dealing in securities by any regulatory authority, in each case on the grounds that it has failed to meet any requirements relating to financial resources or credit rating; or

(i) Lender or Borrower failing to perform any other of its obligations under this Agreement and not remedying such failure within 30 days after the Non-Defaulting Party serves written notice requiring it to remedy such failure.

10.2 Each Party shall notify the other (in writing) if an Event of Default or an event which, with the passage of time and/or upon the serving of a written notice as referred to above, would be an Event of Default, occurs in relation to it.

10.3 The provisions of this Agreement constitute a complete statement of the remedies available to each Party in respect of any Event of Default.

10.4 Subject to paragraphs 9 and 11, neither Party may claim any sum by way of consequential loss or damage in the event of failure by the other Party to perform any of its obligations under this Agreement.

11. Consequences of an Event of Default

11.1 If an Event of Default occurs in relation to either Party then paragraphs 11.2 to 11.7 below shall apply.

11.2 The Parties’ delivery and payment obligations (and any other obligations they have under this Agreement) shall be accelerated so as to require performance thereof at the time such Event of Default occurs (the date of which shall be the Termination Date) so that performance of such delivery and payment obligations shall be effected only in accordance with the following provisions.

(a) The Default Market Value of the Equivalent Securities and Equivalent Non-Cash Collateral to be delivered and the


amount of any Cash Collateral (including sums accrued) to be repaid and any other cash (including interest accrued) to be paid by each Party shall be established by the Non-Defaulting Party in accordance with paragraph 11.4 and deemed as at the Termination Date.

(b) On the basis of the sums so established, an account shall be taken (as at the Termination Date) of what is due from each Party to the other under this Agreement (on the basis that each Party’s claim against the other in respect of delivery of Equivalent Securities or Equivalent Non-Cash Collateral equal to the Default Market Value thereof) and the sums due from one Party shall be set off against the sums due from the other and only the balance of the account shall be payable (by the Party having the claim valued at the lower amount pursuant to the foregoing) and such balance shall be payable on the next following Business Day after such account has been taken and such sums have been set off in accordance with this paragraph. For the purposes of this calculation, any sum not denominated in the Base Currency shall be converted into the Base Currency at the Spot Rate prevailing at such dates and times determined by the Non-Defaulting Party acting reasonably.

(c) If the balance under sub-paragraph (b) above is payable by the Non-Defaulting Party and the Non-Defaulting Party had delivered to the Defaulting Party a Letter of Credit, the Defaulting Party shall draw on the Letter of Credit to the extent of the balance due and shall subsequently deliver for cancellation the Letter of Credit so provided.

(d) If the balance under sub-paragraph (b) above is payable by the Defaulting Party and the Defaulting Party had delivered to the Non-Defaulting Party a Letter of Credit, the Non-Defaulting Party shall draw on the Letter of Credit to the extent of the balance due and shall subsequently deliver for cancellation the Letter of Credit so provided.

(e) In all other circumstances, where a Letter of Credit has been provided to a Party, such Party shall deliver for cancellation the Letter of Credit so provided.

11.3 For the purposes of this Agreement, the Default Market Value of any Equivalent Collateral in the form of a Letter of Credit shall be zero and of any Equivalent Securities or any other Equivalent Non-Cash Collateral shall be determined in accordance with paragraphs 11.4 to 11.6 below, and for this purpose:

(a) The Appropriate Market means, in relation to securities of any description, the market which is the most appropriate market for securities of that description, as determined by the Non-Defaulting Party;

(b) The Default Valuation Time means, in relation to an Event of Default, the close of business in the Appropriate Market on the fifth dealing day after the day on which that Event of Default occurs or, where that Event of Default is the occurrence of an Act of Insolvency in respect of which under paragraph 10.1(d) no notice is required from the Non-Defaulting Party in order for such event to constitute an Event of Default, the close of business on the fifth dealing day after the day on which the Non-Defaulting Party first became aware of the occurrence of such Event of Default;

(c) Deliverable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered by the Defaulting Party;

(d) Net Value means at any time, in relation to any Deliverable Securities or Receivable Securities, the amount which, in the reasonable opinion of the Non-Defaulting Party, represents their fair market value, having regard to such pricing sources and methods (which may include, without limitation, available prices for securities with similar maturities, terms and credit characteristics as the relevant Equivalent Securities or Equivalent Collateral) as the Non-Defaulting Party considers appropriate, less, in the case of Receivable Securities, or plus, in the case of Deliverable Securities, all Transaction Costs incurred or reasonably anticipated in connection with the purchase or sale of such securities;

(e) Receivable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered to the Defaulting Party; and

(f) Transaction Costs in relation to any transaction contemplated in paragraph 11.4 or 11.5 means the reasonable costs, commissions (including internal commissions), fees and expenses (including any mark-up or mark-down or premium paid for guaranteed delivery) incurred or reasonably anticipated in connection with the purchase of Deliverable Securities or sale of Receivable Securities, calculated on the assumption that the aggregate thereof is the least that could reasonably be expected to be paid in order to carry out the transaction.


11.4 If between the Termination Date and the Default Valuation Time:

(a) The Non-Defaulting Party has sold, in the case of Receivable Securities, or purchased, in the case of Deliverable Securities, securities which form part of the same issue and are of an identical type and description as those Equivalent Securities or that Equivalent Collateral, (and regardless as to whether or not such sales or purchases have settled) the Non-Defaulting Party may elect to treat as the Default Market Value:

(i) In the case of Receivable Securities, the net proceeds of such sale after deducting all Transaction Costs; provided that, where the securities sold are not identical in amount to the Equivalent Securities or Equivalent Collateral, the Non-Defaulting Party may, acting in good faith, either (A) elect to treat such net proceeds of sale divided by the amount of securities sold and multiplied by the amount of the Equivalent Securities or Equivalent Collateral as the Default Market Value or (B) elect to treat such net proceeds of sale of the Equivalent Securities or Equivalent Collateral actually sold as the Default Market Value of that proportion of the Equivalent Securities or Equivalent Collateral, and, in the case of (B), the Default Market Value of the balance of the Equivalent Securities or Equivalent Collateral shall be determined separately in accordance with the provisions of this paragraph 11.4; or

(ii) In the case of Deliverable Securities, the aggregate cost of such purchase, including all Transaction Costs; provided that, where the securities purchased are not identical in amount to the Equivalent Securities or Equivalent Collateral, the Non-Defaulting Party may, acting in good faith, either (A) elect to treat such aggregate cost divided by the amount of securities purchased and multiplied by the amount of the Equivalent Securities or Equivalent Collateral as the Default Market Value or (B) elect to treat the aggregate cost of purchasing the Equivalent Securities or Equivalent Collateral actually purchased as the Default Market Value of that proportion of the Equivalent Securities or Equivalent Collateral, and, in the case of (B), the Default Market Value of the balance of the Equivalent Securities or Equivalent Collateral shall be determined separately in accordance with the provisions of this paragraph 11.4;

(b) The Non-Defaulting Party has received, in the case of Deliverable Securities, offer quotations or, in the case of Receivable Securities, bid quotations in respect of securities of the relevant description from two or more market makers or regular dealers in the Appropriate Market in a commercially reasonable size (as determined by the Non-Defaulting Party) the Non-Defaulting Party may elect to treat as the Default Market Value of the relevant Equivalent Securities or Equivalent Collateral:

(i) The price quoted (or where more than one price is so quoted, the arithmetic mean of the prices so quoted) by each of them for, in the case of Deliverable Securities, the sale by the relevant market marker or dealer of such securities or, in the case of Receivable Securities, the purchase by the relevant market maker or dealer of such securities, provided that such price or prices quoted may be adjusted in a commercially reasonable manner by the Non-Defaulting Party to reflect accrued but unpaid coupons not reflected in the price or prices quoted in respect of such Securities;

(ii) After deducting, in the case of Receivable Securities or adding in the case of Deliverable Securities the Transaction Costs which would be incurred or reasonably anticipated in connection with such transaction.

11.5 If, acting in good faith, either (A) the Non-Defaulting Party has endeavoured but been unable to sell or purchase securities in accordance with paragraph 11.4(a) above or to obtain quotations in accordance with paragraph 11.4(b) above (or both) or (B) the Non-Defaulting Party has determined that it would not be commercially reasonable to sell or purchase securities at the prices bid or offered or to obtain such quotations, or that it would not be commercially reasonable to use any quotations which it has obtained under paragraph 11.4(b) above the Non-Defaulting Party may determine the Net Value of the relevant Equivalent Securities or Equivalent Collateral (which shall be specified) and the Non-Defaulting Party may elect to treat such Net Value as the Default Market Value of the relevant Equivalent Securities or Equivalent Collateral.

11.6 To the extent that the Non-Defaulting Party has not determined the Default Market Value in accordance with paragraph 11.4, the Default Market Value of the relevant Equivalent Securities or Equivalent Collateral shall be an amount equal to their Net Value at the Default Valuation Time; provided that, if at the Default Valuation Time the Non-Defaulting Party reasonably determines that, owing to circumstances affecting the market in the Equivalent Securities or Equivalent Collateral in question, it is not reasonably practicable for the Non-Defaulting Party to determine a Net Value of such Equivalent Securities or Equivalent Collateral which is commercially reasonable (by reason of lack of tradable prices or otherwise), the Default Market Value of such Equivalent Securities or Equivalent Collateral shall be an amount equal to their Net Value as determined by the Non-Defaulting Party as soon as reasonably practicable after the Default Valuation Time.


Other costs, expenses and interest payable in consequence of an Event of Default

11.7 The Defaulting Party shall be liable to the Non-Defaulting Party for the amount of all reasonable legal and other professional expenses incurred by the Non-Defaulting Party in connection with or as a consequence of an Event of Default, together with interest thereon at such rate as is agreed by the Parties and specified in paragraph 10 of the Schedule or, failing such agreement, the overnight London Inter Bank Offered Rate as quoted on a reputable financial information service (LIBOR) as at 11.00 a.m., London time, on the date on which it is to be determined or, in the case of an expense attributable to a particular transaction and, where the Parties have previously agreed a rate of interest for the transaction, that rate of interest if it is greater than LIBOR. Interest will accrue daily on a compound basis.

Set-off

11.8 Any amount payable to one Party (the Payee) by the other Party (the Payer) under paragraph 11.2(b) may, at the option of the Non-Defaulting Party, be reduced by its set-off against any amount payable (whether at such time or in the future or upon the occurrence of a contingency) by the Payee to the Payer (irrespective of the currency, place of payment or booking office of the obligation) under any other agreement between the Payee and the Payer or instrument or undertaking issued or executed by one Party to, or in favour of, the other Party. If an obligation is unascertained, the Non-Defaulting Party may in good faith estimate that obligation and set off in respect of the estimate, subject to accounting to the other Party when the obligation is ascertained. Nothing in this paragraph shall be effective to create a charge or other security interest. This paragraph shall be without prejudice and in addition to any right of set-off, combination of accounts, lien or other right to which any Party is at any time otherwise entitled (whether by operation of law, contract or otherwise).

12. Taxes

Withholding, gross‑up and provision of information

12.1 All payments under this Agreement shall be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by any Applicable Law.

12.2 Except as otherwise agreed, if the paying Party is so required to deduct or withhold, then that Party (Payer) shall:

(a) Promptly notify the other Party (Recipient) of such requirement;

(b) Pay or otherwise account for the full amount required to be deducted or withheld to the relevant authority;

(c) Upon written demand of Recipient, forward to Recipient documentation reasonably acceptable to Recipient, evidencing such payment to such authorities; and

(d) Other than in respect of any payment made by Lender to Borrower under paragraph 6.3, pay to Recipient, in addition to the payment to which Recipient is otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the amount actually received by Recipient (after taking account of such withholding or deduction) will equal the amount Recipient would have received had no such deduction or withholding been required; provided Payer will not be required to pay any additional amount to Recipient under this sub-paragraph (d) to the extent it would not be required to be paid but for the failure by Recipient to comply with or perform any obligation under paragraph 12.3.

12.3 Each Party agrees that it will upon written demand of the other Party deliver to such other Party (or to any government or other taxing authority as such other Party directs), any form or document and provide such other cooperation or assistance as may (in either case) reasonably be required in order to allow such other Party to make a payment under this Agreement without any deduction or withholding for or on account of any Tax or with such deduction or withholding at a reduced rate (so long as the completion, execution or submission of such form or document, or the provision of such cooperation or assistance, would not materially prejudice the legal or commercial position of the Party in receipt of such demand). Any such form or document shall be accurate and completed in a manner reasonably satisfactory to such other Party and shall be executed and delivered with any reasonably required certification by such date as is agreed between the Parties or, failing such agreement, as soon as reasonably practicable.


Stamp Tax

12.4 Unless otherwise agreed, Borrower hereby undertakes promptly to pay and account for any Stamp Tax chargeable in connection with any transaction effected pursuant to or contemplated by this Agreement (other than any Stamp Tax that would not be chargeable but for Lender’s failure to comply with its obligations under this Agreement).

12.5 Borrower shall indemnify and keep indemnified Lender against any liability arising as a result of Borrower’s failure to comply with its obligations under paragraph 12.4.

Sales Tax

12.6 All sums payable by one Party to another under this Agreement are exclusive of any Sales Tax chargeable on any supply to which such sums relate and an amount equal to such Sales Tax shall in each case be paid by the Party making such payment on receipt of an appropriate Sales Tax invoice.

Retrospective changes in law

12.7 Unless otherwise agreed, amounts payable by one Party to another under this Agreement shall be determined by reference to Applicable Law as at the date of the relevant payment and no adjustment shall be made to amounts paid under this Agreement as a result of:

(a) Any retrospective change in Applicable Law which is announced or enacted after the date of the relevant payment; or

(b) Any decision of a court of competent jurisdiction which is made after the date of the relevant payment (other than where such decision results from an action taken with respect to this Agreement or amounts paid or payable under this Agreement).

13. Lender’s Warranties

Each Party hereby warrants and undertakes to the other on a continuing basis to the intent that such warranties shall survive the completion of any transaction contemplated herein that, where acting as a Lender:

(a) It is duly authorised and empowered to perform its duties and obligations under this Agreement;

(b) It is not restricted under the terms of its constitution or in any other manner from lending Securities in accordance with this Agreement or from otherwise performing its obligations hereunder;

(c) It is absolutely entitled to pass full legal and beneficial ownership of all Securities provided by it hereunder to Borrower free from all liens, charges and encumbrances; and

(d) It is acting as principal in respect of this Agreement, other than in respect of an Agency Loan.

14. Borrower’s Warranties

Each Party hereby warrants and undertakes to the other on a continuing basis to the intent that such warranties shall survive the completion of any transaction contemplated herein that, where acting as a Borrower:

(a) It has all necessary licences and approvals, and is duly authorised and empowered, to perform its duties and obligations under this Agreement and will do nothing prejudicial to the continuation of such authorisation, licences or approvals;

(b) It is not restricted under the terms of its constitution or in any other manner from borrowing Securities in accordance with this Agreement or from otherwise performing its obligations hereunder;

(c) It is absolutely entitled to pass full legal and beneficial ownership of all Collateral provided by it hereunder to Lender free from all liens, charges and encumbrances;

(d) It is acting as principal in respect of this Agreement; and


(e) It is not entering into a Loan for the primary purpose of obtaining or exercising voting rights in respect of the Loaned Securities.

15. Interest on Outstanding Payments

In the event of either Party failing to remit sums in accordance with this Agreement such Party hereby undertakes to pay to the other Party upon demand interest (before as well as after judgment) on the net balance due and outstanding, for the period commencing on and inclusive of the original due date for payment to (but excluding) the date of actual payment, in the same currency as the principal sum and at the rate referred to in paragraph 11.7. Interest will accrue daily on a compound basis and will be calculated according to the actual number of days elapsed. No interest shall be payable under this paragraph in respect of any day on which one Party endeavours to make a payment to the other Party but the other Party is unable to receive it.

16.Termination of this Agreement

Each Party shall have the right to terminate this Agreement by giving not less than 15 Business Days’ notice in writing to the other Party (which notice shall specify the date of termination) subject to an obligation to ensure that all Loans which have been entered into but not discharged at the time such notice is given are duly discharged in accordance with this Agreement.

17. Single Agreement

Each Party acknowledges that, and has entered into this Agreement and will enter into each Loan in consideration of and in reliance upon the fact that, all Loans constitute a single business and contractual relationship and are made in consideration of each other. Accordingly, each Party agrees:

(a) To perform all of its obligations in respect of each Loan, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Loans, subject always to the other provisions of the Agreement; and

(b) That payments, deliveries and other transfers made by either of them in respect of any Loan shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Loan.

18. Severance

If any provision of this Agreement is declared by any judicial or other competent authority to be void or otherwise unenforceable, that provision shall be severed from the Agreement and the remaining provisions of this Agreement shall remain in full force and effect. The Agreement shall, however, thereafter be amended by the Parties in such reasonable manner so as to achieve as far as possible, without illegality, the intention of the Parties with respect to that severed provision.

12. Specific Performance

Each Party agrees that in relation to legal proceedings it will not seek specific performance of the other Party’s obligation to deliver Securities, Equivalent Securities, Collateral or Equivalent Collateral but without prejudice to any other rights it may have.

20. Notices

20.1 Any notice or other communication in respect of this Agreement may be given in any manner set forth below to the address or number or in accordance with the electronic messaging system details set out in paragraph 5 of the Schedule and will be deemed effective as indicated:

(a) If in writing and delivered in person or by courier, on the date it is delivered;

(b) If sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender’s facsimile machine);

(c) If sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or


(d) If sent by electronic messaging system, on the date that electronic message is received,

unless the date of that delivery (or attempted delivery) or the receipt, as applicable, is not a Business Day or that communication is delivered (or attempted) or received, as applicable, after the Close of Business on a Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Business Day.

20.2 Either Party may by notice to the other change the address or facsimile number or electronic messaging system details at which notices or other communications are to be given to it.

21. Assignment

21.1 Subject to paragraph 21.2, neither Party may charge, assign or otherwise deal with all or any of its rights or obligations hereunder without the prior consent of the other Party.

21.2 Paragraph 21.1 shall not preclude a party from charging, assigning or otherwise dealing with all or any part of its interest in any sum payable to it under paragraph 11.2(b) or 11.7.

22. Non-Waiver

No failure or delay by either Party (whether by course of conduct or otherwise) to exercise any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege as herein provided.

23. Governing Law and Jurisdiction

23.1 This Agreement and any non-contractual obligations arising out of or in connection with this Agreement shall be governed by, and shall be construed in accordance with, English law.

23.2 The courts of England have exclusive jurisdiction to hear and decide any suit, action or proceedings, and to settle any disputes or any non-contractual obligation which may arise out of or in connection with this Agreement (respectively, Proceedings and Disputes) and, for these purposes, each Party irrevocably submits to the jurisdiction of the courts of England.

23.3 Each Party irrevocably waives any objection which it might at any time have to the courts of England being nominated as the forum to hear and decide any Proceedings and to settle any Disputes and agrees not to claim that the courts of England are not a convenient or appropriate forum.

23.4 Each Party hereby respectively appoints the person identified in paragraph 7 of the Schedule pertaining to the relevant Party as its agent to receive on its behalf service of process in the courts of England. If such an agent ceases to be an agent of a Party, the relevant Party shall promptly appoint, and notify the other Party of the identity of its new agent in England.

24. Time

Time shall be of the essence of the Agreement.

25. Recording

The Parties agree that each may record all telephone conversations between them.

26. Waiver of Immunity

Each Party hereby waives all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, attachment (both before and after judgement) and execution to which it might otherwise be entitled in any action or proceeding in the courts of England or of any other country or jurisdiction relating in any way to this Agreement and agrees that it will not raise, claim or cause to be pleaded any such immunity at or in respect of any such action or proceeding.


27. Miscellaneous

27.1 This Agreement constitutes the entire agreement and understanding of the Parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto.

27.2 The Party (the Relevant Party) who has prepared the text of this Agreement for execution (as indicated in paragraph 9 of the Schedule) warrants and undertakes to the other Party that such text conforms exactly to the text of the standard form Global Master Securities Lending Agreement (2009 version) posted by the International Securities Lending Association on its website except as notified by the Relevant Party to the other Party in writing prior to the execution of this Agreement.

27.3 Unless otherwise provided for in this Agreement, no amendment in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the Parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system.

27.4 The Parties agree that where paragraph 11 of the Schedule indicates that this paragraph 27.4 applies, this Agreement shall apply to all loans which are outstanding as at the date of this Agreement and which are subject to the securities lending agreement or agreements specified in paragraph 11 of the Schedule, and such Loans shall be treated as if they had been entered into under this Agreement, and the terms of such loans are amended accordingly with effect from the date of this Agreement.

27.5 The Parties agree that where paragraph 12 of the Schedule indicates that this paragraph 27.5 applies, each may use the services of a third party vendor to automate the processing of Loans under this Agreement and that any data relating to such Loans received from the other Party may be disclosed to such third party vendors.

27.6 The obligations of the Parties under this Agreement will survive the termination of any Loan.

27.7 The warranties contained in paragraphs 13, 14 and 27.2 and in the Agency Annex will survive termination of this Agreement for so long as any obligations of either of the Parties pursuant to this Agreement remain outstanding.

27.8 Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law.

27.9 This Agreement (and each amendment in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original.

27.10 A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any terms of this Agreement, but this does not affect any right or remedy of a third party which exists or is available apart from that Act.

EXECUTED by the PARTIES

SIGNED by ) ) duly authorised for and ) on behalf of )

SIGNED by ) ) duly authorised for and ) on behalf of )


SCHEDULE

1. Collateral

1.1 The securities, financial instruments and deposits of currency set out in the table below with a cross marked next to them are acceptable forms of Collateral under this Agreement.

1.2 Unless otherwise agreed between the Parties, the Market Value of the Collateral delivered pursuant to paragraph 5 by Borrower to Lender under the terms and conditions of this Agreement shall on each Business Day represent not less than the Market Value of the Loaned Securities together with the percentage contained in the row of the table below corresponding to the particular form of Collateral, referred to in this Agreement as the Margin

1.3 Basis of Margin Maintenance:

Paragraph 5.4 (aggregation) shall not apply*

Paragraph 5.4 (aggregation) applies unless the box is ticked.

1.4 Paragraph 5.6 (netting of obligations to deliverCollateral and redeliver Equivalent Collateral) shall not apply*

Paragraph 5.6 (netting) applies unless the box is ticked

1.5 For the purposes of Paragraph 5.8, Notification Time means by , London time.

1.6 Paragraph 6.4 (indemnity for failure to redeliver Equivalent Non-Cash Collateral) shall not apply*

Paragraph 6.4 (indemnity for failure to redeliver Equivalent Non-Cash Collateral) applies unless the box is ticked.

2. Base Currency

The Base Currency applicable to this Agreement is provided that if that currency ceases to be freely convertible the Base Currency shall be [US Dollars] [Euro] [specify other currency]*

3. Places of Business

(See definition of Business Day.)

4. Market Value

(See definition of Market Value.)


Automatic Early Termination shall apply in respect of Party A

Automatic Early Termination shall apply in respect of Party B

Security/Financial Instrument/Deposit of Currency

Mark «X» if acceptableform of collateral

Margin(%)



6. Designated Office and Address for Notices

(a) Designated office of Party A: Address for notices or communications to Party A: Address: Attention: Facsimile No: Telephone No: Electronic Messaging System Details:

(b) Designated office of Party A: Address for notices or communications to Party B: Address: Attention: Facsimile No: Telephone No: Electronic Messaging System Details:

7. (a) Agent of Party A for Service of Process

Name: Address:

(a) Agent of Party B for Service of Process

Name: Address:

8. Agency

Party A [may][will always]* act as agent Party B [may][will always]* act as agent The Addendum for Pooled Principal Transactions

may apply to Party A The Addendum for Pooled Principal Transactions may apply to Party B

9. Party Preparing this Agreement

Party A Party B

10. Default interest

Rate of default interest:

11. Existing Loans

Paragraph 27.4 applies* [Overseas Securities Lenders Agreement dated ]* [Global Master Securities Lending Agreements dated ]*

12. Automation

Paragraph 27.5 applies1*



AGENCY ANNEX

1. Transactions entered into as agent

1.1 Power for Lender to enter into Loans as agent

Subject to the following provisions of this paragraph, Lender may enter into Loans as agent (in such capacity, the Agent) for a third person (a Principal), whether as custodian or investment manager or otherwise (a Loan so entered into being referred to in this paragraph as an Agency Loan).

If the Lender has indicated in paragraph 8 of the Schedule that it may act as Agent, it must identify each Loan in respect of which it acts as Agent as an Agency Loan at the time it is entered into. If the Lender has indicated in paragraph 8 of the Schedule that it will always act as Agent, it need not identify each Loan as an Agency Loan.

1.2 [Pooled Principal transactions

The Lender may enter into an Agency Loan on behalf of more than [one] Principal and accordingly the addendum hereto for pooled principal transactions shall apply.]*

1.3 Conditions for Agency Loan

A Lender may enter into an Agency Loan if, but only if:

(a) It provides to Borrower, prior to effecting any Agency Loan, such information in its possession necessary to complete all required fields in the format generally used in the industry, or as otherwise agreed by Agent and Borrower (Agreed Format), and will use its best efforts to provide to Borrower any optional information that may be requested by the Borrower for the purpose of identifying such Principal (all such information being the Principal Information). Agent represents and warrants that the Principal Information is true and accurate to the best of its knowledge and has been provided to it by Principal;

(b) It enters into that Loan on behalf of a single Principal whose identity is disclosed to Borrower (whether by name or by reference to a code or identifier which the Parties have agreed will be used to refer to a specified Principal) either at the time when it enters into the Loan or before the Close of Business on the next Business Day after the date on which Loaned Securities are transferred to the Borrower in the Agreed Format or as otherwise agreed between the Parties; and

(c) It has at the time when the Loan is entered into actual authority to enter into the Loan and to perform on behalf of that Principal all of that Principal’s obligations under the agreement referred to in paragraph 1.5(b) below.

Agent agrees that it will not effect any Loan with Borrower on behalf of any Principal unless Borrower has notified Agent of Borrower’s approval of such Principal, and has not notified Agent that it has withdrawn such approval (such Principal, an Approved Principal), with both such notifications in the Agreed Format. Borrower acknowledges that Agent shall not have any obligation to provide it with confidential information regarding the financial status of its Principals; Agent agrees, however, that it will assist Borrower in obtaining from Agent’s Principals such information regarding the financial status of such Principals as Borrower may reasonably request.

1.4 Notification by Agent of certain events affecting any Principal

Agent undertakes that, if it enters as agent into an Agency Loan, forthwith upon becoming aware:

(a) Of any event which constitutes an Act of Insolvency with respect to the relevant Principal; or

(b) Of any breach of any of the warranties given in paragraph 1.6 below or of any event or circumstance which results in any such warranty being untrue if repeated by reference to the then current facts,

It will inform Borrower of that fact and will, if so required by Borrower, furnish it with such additional information as it may reasonably request to the extent that such information is readily obtainable by Agent.



1.5 Status of Agency Loan

(a) Each Agency Loan shall be a transaction between the relevant Principal and Borrower and no person other than the relevant Principal and Borrower shall be a party to or have any rights or obligations under an Agency Loan. Without limiting the foregoing, Agent shall not be liable as principal for the performance of an Agency Loan, but this is without prejudice to any liability of Agent under any other provision of this Annex; and

(b) All the provisions of the Agreement shall apply separately as between Borrower and each Principal for whom the Agent has entered into an Agency Loan or Agency Loans as if each such Principal were a party to a separate agreement with Borrower in all respects identical with this Agreement other than this Annex and as if the Principal were Lender in respect of that agreement; provided that

(i) If there occurs in relation to the Agent an Event of Default or an event which would constitute an Event of Default if Borrower served written notice under any sub-clause of paragraph 10 of the Agreement, Borrower shall be entitled by giving written notice to the Principal (which notice shall be validly given if given in accordance with paragraph 20 of the Agreement) to declare that by reason of that event an Event of Default is to be treated as occurring in relation to the Principal. If Borrower gives such a notice then an Event of Default shall be treated as occurring in relation to the Principal at the time when the notice is deemed to be given; and

(ii) If the Principal is neither incorporated in nor has established a place of business in Great Britain, the Principal shall for the purposes of the agreement referred to in paragraph 1.5(b) above be deemed to have appointed as its agent to receive on its behalf service of process in the courts of England the Agent, or if the Agent is neither incorporated nor has established a place of business in Great Britain, the person appointed by the Agent for the purposes of this Agreement, or such other person as the Principal may from time to time specify in a written notice given to the other Party.

If Lender has indicated in paragraph 6 of the Schedule that it may enter into Loans as agent, the foregoing provisions of this paragraph do not affect the operation of the Agreement as between Borrower and Lender in respect of any Loans into which Lender may enter on its own account as principal.

1.5 Warranty of authority by Lender acting as Agent

Agent warrants to Borrower that it will, on every occasion on which it enters or purports to enter into a Loan as an Agency Loan, have been duly authorised to enter into that Loan and perform the obligations arising under such Loan on behalf of the Principal in respect of that Loan and to perform on behalf of the Principal all the obligations of that person under the agreement referred to in paragraph 1.5(b) above.


ADDENDUM FOR POOLED PRINCIPAL AGENCY LOANS

1. Scope

This addendum applies where the Agent wishes to enter into an Agency Loan on behalf of more than one Principal. The Agen-cy Annex shall apply to such a Loan subject to the modifications and additional terms and conditions contained in paragraph 2 to 7 below.

2. Interpretation

2.1 In this addendum:

(a) Collateral Transfer has the meaning given in paragraph 5.1 below;

(b) If at any time on any Business Day the aggregate Market Value of Posted Collateral in respect of all Agency Loans outstanding with a Principal under the Agreement exceeds the aggregate of the Required Collateral Value in respect of such Agency Loans, Borrower has a Net Loan Exposure to that Principal equal to that excess; if at any time on any Business Day the aggregate Market Value of Posted Collateral in respect of all Agency Loans outstanding under the Agreement with a Principal falls below the aggregate of the Required Collateral Value in respect of such Agency Loans, that Principal has a Net Loan Exposure to Borrower for such Agency Loans equal to that deficiency;

(c) Pooled Principal has the meaning given in paragraph 6(a) below; and

(d) Pooled Loan has the meaning given in paragraph 6(a) below.

3. Modifications to the agency annex

3.1 Paragraph 1.3(b) of the Agency Annex is deleted and replaced by the following:

“It enters into that Loan on behalf of one or more Principals and at or before the time when it enters into the Loan it discloses to Borrower the identity and the jurisdiction of incorporation, organisation or establishment of each such Principal (and such disclosure may be made either directly or by reference to a code or identifier which the Parties have agreed will be used to refer to a specified Principal);”.

3.2 Paragraph 1.3(c) of the Agency Annex is deleted and replaced by the following:

“It has at the time when the Loan is entered into actual authority to enter into the Loan on behalf of each Principal and to perform on behalf of each Principal all of that Principal’s obligations under the Agreement”.

4. Allocation of agency loans

4.1 The Agent undertakes that if, at the time of entering into an Agency Loan, the Agent has not allocated the Loan to a Principal, it will allocate the Loan before the Settlement Date for that Agency Loan either to a single Principal or to several Principals, each of whom shall be responsible for only that part of the Agency Loan which has been allocated to it. Promptly following such allocation, the Agent shall notify Borrower of the Principal or Principals (whether by name or reference to a code or identifier which the Parties have agreed will be used to refer to a specified Principal) to which that Loan or part of that Loan has been allocated.

4.2 Upon allocation of a Loan in accordance with paragraph 4.1 above or otherwise, with effect from the date on which the Loan was entered into:

(a) Where the allocation is to a single Principal, the Loan shall be deemed to have been entered into between Borrower and that Principal; and

(B) Where the allocation is to two or more Principals, a separate Loan shall be deemed to have been entered into between Borrower and each such Principal with respect to the appropriate proportion of the Loan.

4.3 If the Agent shall fail to perform its obligations under paragraph 4.2 above then for the purposes of assessing any damage suffered by Borrower (but for no other purpose) it shall be assumed that, if the Loan concerned (to the extent not allocated) had been allocated in accordance with that paragraph, all the terms of the Loan would have been duly performed.


5. Allocation of collateral

5.1 Unless the Agent expressly allocates (a) a deposit or delivery of Posted Collateral or (b) a repayment of Cash Collateral or a redelivery of Equivalent Collateral (each a Collateral Transfer) before such time, the Agent shall, at the time of making or receiving that Collateral Transfer, be deemed to have allocated any Collateral Transfer in accordance with paragraph 6.3 below.

5.2 (a) If the Agent has made a Collateral Transfer on behalf of more than one Pooled Principal, that Collateral Transfer shall be allocated in proportion to Borrower’s Net Loan Exposure in respect of each Pooled Principal at the Agent’s close of business on the Business Day before the Collateral Transfer is made; and

(b) If the Agent has received a Collateral Transfer on behalf of more than one Pooled Principal, that Collateral Transfer shall be allocated in proportion to each Pooled Principal’s Net Loan Exposure in respect of Borrower at the Agent’s close of business on the Business Day before the Collateral Transfer is made.

(c) Sub-paragraphs (a) and (b) shall not apply in respect of any Collateral Transfer which is effected or deemed to have been effected under paragraph 6.3 below.

6. Pooled principals: rebalancing of margin

6.1 Where the Agent acts on behalf of more than one Principal, the Parties may agree that, as regards all (but not some only) outstanding Agency Loans with those Principals, or with such of those Principals as they may agree (Pooled Principals, such Agency Loans being Pooled Loans), any Collateral Transfers are to be made on an aggregate net basis.

6.2 Paragraphs 6.3 to 6.5 below shall have effect for the purpose of ensuring that Posted Collateral is, so far as is practicable, transferred and held uniformly, as between the respective Pooled Principals, in respect of all Pooled Loans for the time being outstanding under the Agreement.

6.3 At or as soon as practicable after the Agent’s close of business on each Business Day on which Pooled Loans are outstanding (or at such other times as the Parties may from time to time agree) there shall be effected such Collateral Transfers as shall ensure that immediately thereafter:

(a) In respect of all Pooled Principals which have a Net Loan Exposure to Borrower, the amount of Collateral then deliverable or Cash Collateral then payable by Borrower to each such Pooled Principal is equal to such proportion of the aggregate amount of Collateral then deliverable or Cash Collateral then payable, to all such Pooled Principals as corresponds to the proportion which the Net Loan Exposure of the relevant Pooled Principal bears to the aggregate of the Net Loan Exposures of all Pooled Principals to Borrower; and

(b) In respect of all Pooled Principals to which Borrower has a Net Loan Exposure, the aggregate amount of Equivalent Collateral then deliverable or repayable by each such Pooled Principal to Borrower is equal to such proportion of the aggregate amount of Equivalent Collateral then deliverable or repayable by all such Pooled Principals as corresponds to the proportion which the Net Loan Exposure of Borrower to the relevant Pooled Principal bears to the aggregate of the Net Loan Exposures of Borrower to all Pooled Principals.

6.4 Collateral Transfers effected under paragraph 6.3 shall be effected (and if not so effected shall be deemed to have been so effected) by appropriations made by the Agent and shall be reflected by entries in accounting and other records maintained by the Agent. Accordingly, it shall not be necessary for payments of cash or deliveries of Securities to be made through any settlement system for the purpose of such Collateral Transfers. Without limiting the generality of the foregoing, the Agent is hereby authorised and instructed by Borrower to do all such things on behalf of Borrower as may be necessary or expedient to effect and record the receipt on behalf of Borrower of cash and Securities from, and the delivery on behalf of Borrower of cash and Securities to, Pooled Principals in the course or for the purposes of any Collateral Transfer effected under that paragraph.

6.5 Promptly following the Collateral Transfers effected under paragraph 6.3 above, and as at the Agent’s close of business on any Business Day, the Agent shall prepare a statement showing in respect of each Pooled Principal the amount of cash Collateral which has been paid, and the amount of non-cash Collateral of each description which have been transferred, by or to that Pooled Principal immediately after those Collateral Transfers. If Borrower so requests, the Agent shall deliver to Borrower a copy of the statement so prepared in a format and to a timetable generally used in the market.


7. Warranties

7.1 The Agent warrants to Borrower that:

(a) All notifications provided to Borrower under paragraph 4.1 above and all statements provided to the other party under paragraph 6.5 above shall be complete and accurate in all material respects;

(b) At the time of allocating an Agency Loan in accordance with paragraph 4.1 above, each Principal or Principals to whom the Agent has allocated that Agency Loan or any part of that Agency Loan is duly authorised to enter into the Agency Loans contemplated by this Agreement and to perform its obligations thereunder; and

(c) At the time of allocating an Agency Loan in accordance with paragraph 4.1 above, no Event of Default or event which would constitute an Event of Default with the service of a Default Notice or other written notice under paragraph 14 of the Agreement has occurred in relation to any Principal or Principals to whom the Agent has allocated that Agency Loan or any part of that Agency Loan..

ABOUT THE AUTHORS

Maxime BIANCONI

44 years old, is an Investment Portfolio Manager within CACEIS Luxembourg’s Trading Room and has 18 years of experience in treasury and portfolio management. He joined the Crédit Agricole Group in 1995, after

2 years spent with Kredietbank Luxembourg as a Sales person on the bond market. +352 4767 2367 [email protected]

Nathalie COLLOT

37 years old, is a Product Manager at CACEIS in Paris since 2008. She started her career working for HSBC Global Asset Management in Paris, before joining JP Morgan Futures & Options Brokerage business

in London. She then worked as a management consultant on numerous projects in the asset management, securities services and investment banking fields during a 7-year period. + 33 1 57 78 12 [email protected]

Guy KNEPPER

42 years old, Head of the securities lending desk joined CACEIS LuxembourgTrading Room in early 2008. He started his career in Luxembourg with Kredietbank S.A where he remained 18 years as Head of

International Securities Lending & Repo.+ 352 4767 [email protected]

1-3 place Valhubert 75206 Paris Cedex 13

5 Allée Scheffer, L-2520 Luxembourg

www.caceis.com

This document is an official publication of CACEIS.CACEIS cannot be held responsible for any inaccuracy or interpretation error it may contain. All rights reserved. No part of this document may be reproduced in any form or by any means without written permission of the publisher.

Securities Lending

Documents

Transcript of Securities Lending