SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

MAIN PLAYERS AND ARRANGEMENTS

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

SECURITIES LENDING TRADE INITIATION

Securities lending

LENDER

BORROWER

- Bridge

Reporting e.g. Custodian bank of the beneficial owner of securities TRI-PARTY AGENT

Non-cash Collateral delivery

SECURITIES LENDING TRADE TERMINATION

Securities

LENDER

BORROWER

e.g. Custodian bank of the beneficial owner of securities TRI-PARTY AGENT

Collateral

Copyright CACEIS, 2010

page 36 | Securities Lending & Repo markets