Current Developments in the Securities Lending Industry

Table of Contents

What is Securities Lending?3

Market Participants

4

Industry Trends 5

Securities Lending Risks 6

Selecting a Lending Agent 7

Third Party Lending 8

Questions

What is Securities Lending?

Securities Lending

It is the temporary transfer of securities from a lender to a borrower against collateral in the form of securities or cash

The lender receives the full economic rights and benefits of the loaned securities

The below outlines the basic structure of a securities lending transaction.

Legal Framework

Principals in the transaction

Lender(Beneficial Owner)

Borrower(e.g. Nomura)

Agent Lender

Borrower Agreements

Sec Lending Agreement

3

Who Lends? Who Borrows? Why?

Lender’s Perspective

An opportunity to generate incremental returns and gain trading insights

It offers an attractive risk/reward profile

Securities lending operates with minimal impact on a lender’s operations i.e. Agent takes care of the administration; client buy/sell as normal

The below outlines the key parties and rationale for securities lending transactions.

Lenders

Any Large Asset Gatherer

Public Pension Funds

Corporate Pension Funds

Governmental Bodies

Corporations

Banks

Demand Drivers

Prevent Market Fails

Yield Enhancement Trades

Financing Trades

Promotes Liquidity

Support Trading Strategies

Act as an Intermediary

Borrowers

Broker Dealers

Banks

Hedge Funds

Agent Lender’s Perspective

Agent arranges and administers loans to borrowers on behalf of lenders to borrowers

Agent has opportunity to provide clients with a value-added service

A win-win business where revenues are shared which helps to align agent’s interests with lenders

4

Industry Trends

Back to Basics

– An emphasis on the intrinsic value of a security as opposed to maximizing the cash reinvestment return

Transparency

– Lenders are focused on gaining a better understanding of the metrics and potential exposures in their lending program

Risk Mitigation

– Clients are focused on ensuring their lending activity is conducted in a manner to mitigate any risks

Customized Program Management

Agent lenders ability to provide separate account management and tailor lending solutions

Decision Making

– Lending decision is more market / investment decision than custodian

The Securities Finance industry has gone through an evolution since the global economic crisis

5

Understanding Risks in Securities Lending

There are various risks in securities lending but there are ways to mitigate each one

Description Sample Risk Mitigations

Counterparty Risk Loss as a result of a borrower insolvency

Cash Re-Investment Risk Loss as a result of:

– Counterparty Risk

– Interest/Rebate Rate Risk

– Liquidity Risk

– Last Man Standing Risk

Operational Risk Potential issues arising from:

– Late Settlements

– Entitlements

– Entering new markets

Legal and Regulatory Risk Insufficient clarity or completeness

Risk of a regulation violation

6

Selecting a Securities Lending Provider

Questions institutions should address prior to beginning the search process:

Do your assets hold value in the securities lending market?

Does your Board approve lending?

Should you use an investment consultant or does your staff have the expertise to conduct the search?

Narrowing the playing field!

Beneficial Owners should take into account a wide array of considerations:

Beneficial owners should conduct a thorough due diligence process in selecting an agent lending provider

Client Service-Understand Client Needs-Proactive relationship management

Transparent Reporting-Customization

Strong technology platforms-Open Architecture-Capacity-Links to 3rd Party Custodians-Compliance

Experience and Proven track record-Depth of Team-Ability to extract intrinsic value

Program Customization-Cash/Non-Cash-Flexibility

Commitment to the Business-Invests in people, technology-Innovation-Strong track record

Risk Management-Counterparty credit management-Indemnification

7

Third Party Lending

Many lenders are utilizing multiple lending agents to provide additional sources of revenue as well as increased diversification and benchmarking purposes

– Overall revenue potential is greater as more of the portfolio will be utilized

– A greater number of borrowers provides diversification

– Multiple agents can be compared for performance purposes

Third party lending remains transparent to the lender and requires no additional resources

Third party lending implementation does not require lender to complete a custody conversion

Third party lending does not result in any additional costs to the lender

There are number of benefits to participating in a 3rd Party Lending structure

8

Questions