SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

OVERVIEW OF THE SECURITIES FINANCING MARKETS

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. 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 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 ; Standard agreements The GMSLA

1.3

1.3

1.3.1

> Lender and borrower’s warranties ; > Interest on outstanding payments ; > Termination of the agreement.

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