SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

OVERVIEW OF THE SECURITIES FINANCING MARKETS

Figure 6: Securities lending transaction lifecycle

1.1

3 - CONFIRMATION OF TRANSACTION Written 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

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

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

4 - COLLATERAL DELIVERY The 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

LOAN INITIATION

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

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

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

LOAN TERMINATION

7bis - RETURN OF COLLATERAL At the end of the loan, the lender returns the collateral taken to the borrower

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 lender and the borrower

7- RETURN OF SECURITIES TO LENDER At 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

LOAN IN PROGRESS

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

Copyright CACEIS, 2010

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.

Securities Lending & Repo markets | page 15