SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

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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

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