SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

OVERVIEW OF THE SECURITIES FINANCING MARKETS

Figure 5: Valuated example of a securities loan transaction

Trade date Value date

02/08/2010 03/08/2010 10/08/2010

Termination date

Lender

Firm A Firm B

Borrower

Securities lent

Credit Agricole SA (shares - ISIN FR0000045072)

Quantity of securities lent Market value per share

1,000,000.00 (shares)

€10.90

Total market value

€10,900,000.00

Lending fee

20 bps p.a.

Payment of fee

in fine

Securities collateral Collateralisation level

FRANCE OAT FRTR 3 ½ 04/15 (ISIN FR0010163543)

105% 108%

Dirty price of FRANCE OAT (rounded)

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.

Copyright CACEIS, 2010

Securities lending involves the absolute transfer of title to both the securities lent and the collateral taken, from the lender to the borrower 3 :

> 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.

3 Source: Source : Bank of England & the Securities Lending and Repo Committee (SLRC), “Securities borrowing and Lending Code of Guidance”, July 2009

page 14 | Securities Lending & Repo markets