Fundamentals

Securities Services & Securities Lending for Funds, Managers and Investors

Fundamentalsmagazine.com ISSUE 02 WINTER 2011

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Welcome to the first
Fundamentals of 2011
Many may have hoped that 2011 would be the
year that the world moved from the financial
crisis that first reared its head in 2007, but with
the debt crisis in the eurozone, among other
developments, it seems that we may not be out
of the woods yet.
In this issue of Fundamentals, we talk to some
leading figures from the world of politics and
economics about what the crisis meant for funds
and where the future may lie.
Elsewhere in FundFront State Street’s Wade
McDonald looks at the future of the life insurance
industry and we investigate the return of ABN
AMRO.
In the InvestorServices section, we have an
exclusive profile with Tim Keaney, CEO of BNY
From our readers
In your recent Fundamentals article on
performance measurement, you quote Fraser
Priestley, managing director, Performance and
Risk Analytics at BNY Mellon Asset Servicing:
"For example, if you wanted to calculate a true
rate of return that is 100% accurate, you would
have to value the assets every single time a
cash flow occurs, but that clearly isn't practical.
However, we have seen for some time now the
requirement to have market values when major
cash flows occur."
This comment is relevant when evaluating
monthly returns. However, due to the fact that
fund trades do not settle till after the close of
each day, the time during the trading day at
which a trade occurs is not relevant. So valuing
all the assets every single time a cash flow
occurs during a day is superfluous. Recognizing
the importance of daily settlement makes
accuracy not dependent on the data problem of
Editor's Letter
Mellon Asset Servicing, who tells us about the
past and future of custody. InvestorServices also
takes a look at the latest developments in data
management, as well as a focus on the CEE and
Nordic regions.
SecuritiesLending continues the debate
begun in the last issue about the use of lending
within exchange-traded funds, while the impact
on prime brokers of proprietary traders moving
into the hedge fund space is investigated.
Finally, in BackOffice, we provide our solution
to the issue of bankers’ bonuses.
All of us at Fundamentals hope you had a great
New Year, and we wish you a prosperous 2011.
Craig McGlashan, Editor
valuing all holdings in the fund and benchmark
at each instant of each cash flow. Rather, daily
fund returns are straightforward, but obtaining
the 100% accurate weight and return of fund
components each day becomes dependent on
employing the correct model for the calculation
of the weights and returns of components of
a fund when the only relevant information is
the quantity and price of each opening and
closing position and each transaction for the
day. Applying any version of Dietz or IRR to
obtain a single day’s weight and return for
fund components is demonstrably inadequate.
More advance methods are required for daily
component-level weights and returns.
Dr. Andre Mirabelli is the Managing Director
of Performance Analytics for Opturo and an
independent consultant in the area of financial
decision evaluation
>PU[LY 2011|Fundamentals4HNHaPUL| 1
 Contents Editor
Craig McGlashan
Craig.McGlashan@eFunds.tv
FundFront

Editorial Advisory Board

New colour coordinated sections, making it easier to find what you want to read Chairman
Clive Gande
P.3 P.28 P.58 Clive.Gande@eFunds.tv
People Moves 2011 Outlook 2011 Outlook
Investor Services
Editor
P.4 P.30 P.60 Brian Bollen
News Round Executive Profile: ETFs: Brian.Bollen@eFunds.tv
Tim Keaney The underlying lending
P.7 Correspondent
Mandates P.32 P.63 Stephanie Baxter
Keeping up to data 2011: Be prepared Stephanie.Baxter@eFunds.tv
P.10
InvestorServices

Crisis talks P.36 P.64 Contributors

Taking corporate Roy Zimmerhansl
CCP: Off centre
Michael Mooney
P.18 action
Cherry Reynard
Life insurance: P.66 John Sandman
The new product P.38 Quadriserv update
proposition Say what you CEE Design
P.68 Luke Merryweather
P.20 P.42 Prime brokerage: Luke.Merryweather@eFunds.tv
ABN AMRO: Nordic essentials Hedging the props
The resurgance Senior Account Manager
P.44 Gary Allen
P.70
The ETF pie Gary.Allen@eFunds.tv
P.23 Bas Cohen profile
Fees high for funds? Senior Account Manager
P.46 P.72 Neil McPhee
SecuritiesLending

P.24 Stock transfer: Talking collateral Neil.McPhee@eFunds.tv

Fund management: A brave new world
Changing times P.75 Finance
P.48 Market Movements Elliot Ainley
P.26 Calastone Q&A finance@2i.tv
Selection & survival P.76
P.50 Chief Technology Officer
Sunil Daswani profile Peter Ainsworth
Alternative payment
Peter.Ainswoth@eFunds.tv
systems P.78
Recruitments: Sales Director
P.56 Finding a way back in Marc Young
Outsourcing Marc.Young@eFunds.tv
P.80
The China angle Non-Executive Director
Jon Hewson
Jon.Hewson@eFunds.tv
P.81
BackOffice

PASLA preview
Publisher
Mark Latham
Mark.Latham@eFunds.tv
P.82
Glossary P<26UL(UNLS>OHYM
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2 | Fundamentals4HNHaPUL |>PU[LY2011

People M o ve s
Investment manager
Kellner DiLeo appointed
Rory Zirpolo as principal
and head of securities
lending, a role which will
seem him act as portfolio
manager of KDC Alpha, a
matched book securities
lending portfolio.
Zirpolo moves from
Credit Suisse, where he
was managing director
of prime services, with a
responsibility of managing
a $50bn supply-side
securities lending business.
Zirpolo has worked within
securities lending for more
than 25 years and chaired
the Risk Management
Association's US stock loan
conferences in 2006, 2007
and 2008. Additionally, he
served four years on the
board of EquiLend.
Castlerock Capital
founder Mark Whitehead
moved from the firm he
started in 2005 to head up
the equity finance business
at MF Global.
Whitehead has more than
16 years’ experience in the
international equity finance
industry, having previously
held roles at Bank of
America, Merrill Lynch and
Lehman Brothers.
Chris Venables
PricewaterhouseCoopers
(PwC) hired a team of 10
from several rival firms in
plans to expand its UK
pension advisory business.
Among the key hires was
the appointment of Chris
Venables as partner of
PwC, where he will focus
on the infrastructure and
utilities sector to help
organisations respond to
pension challenges.
“These appointments
are a coup for our ever-
expanding pensions
business, bringing a
wealth of further expertise
to supplement our
award winning practice,”
commented Marc Hommel,
head of pensions.
 The New York-based bank
CIBC World Markets
hired Greg King as
executive director of its
securities lending desk in
Toronto in plans to expand
the business.
King, who joins from
Omega ATS, will focus
on improving the bank’s
securities lending services
and value-add offerings for
the CIBC’s prime brokerage
clients and internal
partners, according to an
internal note.
Daiwa Capital Markets
appointed Martial
Rouyere as global head of
equity derivatives in plans
to strengthen management.
Rouyere, who was
previously head of retail
structured products at the
firm, will be reporting from
Daiwa’s London offices
to Dominique Blanchard,
global head of derivatives in
Hong Kong.
The move is part of plans
to boost the derivatives
management team
following Daiwa’s $1.2bn
acquisition of KBC’s Asian
equity derivatives and
global convertible bonds
units in November.
Peter Orszag
Citi made two key hires as
Peter Orszag joined as vice
chairman of global banking
and Benjamin Poor
became manager of market
intelligence for securities
and fund services (SFS).
said that Orszag, who was
previously worked under US
president Barack Obama
as director of the Office of
Management and Budget
(OMB), has expertise in
economic policy that Citi
claims will be an asset to its
global investment banking
business.
BNY Mellon Asset
Servicing appointed Jon
Willis as head of EMEA
transfer agency services,
a role which will seek him
take charge of the firm’s UK
and offshore transfer agent
activities.
Willis will report to Paul
Bodart, head of global
operations for EMEA at
BNY Mellon. He previously
spent 12 years at
International Financial
Data Services (IFDS),
State Street and DST
System’s joint venture
global transfer agency
business.
His most recent role
at IFDS was chief
administration officer and
head of transfer agent
operations.
State Street appointed
Per Ståhl as sales
>PU[LY 2011|Fundamentals4HNHaPUL| 3
People Moves
manager for the Nordic
region, while Roel van de
Wiel joined as business
development executive for
the Netherlands.
Based in Amsterdam,
Ståhl is responsible
for managing business
development activities
for the Nordic region with
a focus on institutional
investors in Scandinavia,
Iceland and Finland; van de
Wiel will focus on growing
State Street’s Global
Services business in the
Netherlands.
Nomura global head
of prime services Tim
Wannenmacher has
exited the firm.
No reason was given for
Wannenmacher’s departure
and an official replacement
has not been announced at
the time of going to press.
Rob Scott resigned from
his role as co-head of
global sales & relationship
management at Deutsche
Bank.
Societe Generale
Securities Services
(SGSS) promoted
Guillaume Heraud to
head of clearing services,
from his former role as
deputy head.
In another move, Jeanne
Duvoux was appointed
deputy CEO of SGSS S.p.A.
and legal representative for
SGSS in Italy.
Heraud will report to Alain
Closier, global head of
SGSS, and also joined the
international management
committee of the firm. He
has been employed by
Societe Generale since
1990 and was appointed
deputy head of clearing
services in July 2008.
 News round
FundFront
NEWS
7th November 2010
The UK’s Pension
Protection Fund latest
Statement of Investment
Principles allowed for
the fund to take part
in securities lending
and bond repurchase
agreements.
The PPF provides
for pensioners in the
event that their previous
employer becomes
insolvent and the
remaining pension fund is
inadequate to service its
liabilities. It was set up by
an act of Parliament but
is considered an “arm’s
length” body, separate
from the government.
The news was welcomed
by many in the securities
lending industry, which
had come under fire from
various sections of the
press since the onset of
the financial crisis
8th November 2010
Första AP-fonden (AP1)
filed a lawsuit over $35.5m
of losses made through
the reinvestment of cash
collateral by Bank of
New York Mellon at the
Commercial Court
in London.
The suit alleged that
during 2008 BNY Mellon,
the fund’s agent securities
lender, reinvested some
of AP1’s cash collateral
in notes issued by Sigma
Finance, a firm which went
into receivership in
October 2008.
4 | Fundamentals4HNHaPUL |>PU[LY2011
AP1 claims that this
investment was “negligent”
and in breach of its
investment guidelines. On
November 19th 2009 BNY
Mellon deducted $35.5m
from the fund’s managed
account in respect of these
losses.
BNY Mellon said the
claims were “without merit”
and that it would defend
itself “vigorously”.
11th November 2010
The European Fund and
Asset Management
Association (EFAMA)
said it welcomed the end
to the uncertainty that has
faced fund managers of
all non-UCITS investment
funds since the European
Commission’s initial
proposals for legislation
in April 2009, following the
approval in November of
the Alternative Investment
Fund Managers Directive
(AIFMD) by the European
Parliament.
“This Directive has been
erroneously labelled as a
‘hedge fund directive’,”
said EFAMA. “In reality
the wide scope of the
AIFMD also covers real
estate funds, investment
trusts and non-UCITS retail
funds along with many
other kinds of nationally
regulated investment
funds, all of which now will
have to restructure their
activities to comply with
the AIFMD.”
The top stories from
Fundamentalsmagazine.com
this quarter
Fundamentals’ Brian
Bollen and Craig
McGlashan were
recognised for their
achievements over the
past year at the State
Street Institutional Press
Awards.
Investor services section
editor Bollen won the
Investor Services &
Technology – Online/
Wires section, while
Fundamentals editor
McGlashan was shortlisted
in the Best Newcomer
category.
The State Street Awards,
launched in 2002,
recognise “outstanding
performance” in reporting
of categories ranging from
investments and pensions
to investor services and
technology.
12th November 2010
Nomura launched its NXT
product suite in the US in a
bid to reach out to clients
in the Americas.
The package, now live in
Asia, Europe and the US,
includes NXT Direct, an
“ultra-low latency” platform
with direct market access,
an exchange co-location
(NXT Host), market data
(NXT Data) and network
connectivity services
(NXT Ring).
"The results are
impressive – the wire-to-
wire latency of our patent
pending direct market
access platform leads
the industry at below
3 microseconds,” said
Emad Morrar, global head
of product strategy and
principal investments at
Nomura.
19th November 2010
Daiwa Capital Markets
and KBC Group finalised
a deal which will see the
latter firm sell its global
convertible bond and
Asian equity derivatives
businesses to Daiwa for
around $1.2bn.
A breakdown of the deal
reveals that roughly $0.2bn
will be spent on staff, IT
infrastructure and other
assets, with $1bn covering
trading positions.
According to the firms,
the deal – first revealed in
July this year – will allow
KBC to free up capital
resources, as part of its
strategy to focus on home
markets and reduce risk
profile, while Daiwa will
see a boost to its global
derivatives business
24th November 2010
TLG Capital invested in
Iroko Financial Products
Limited (IFP).
TLG described IFP as a
UK-based FSA regulated
firm and one of Africa's
leading fixed income
boutiques focusing on
the sub-Saharan African
region. It says that this
investment is a move
to expand its network
and operations in sub-
Saharan Africa.
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 News round
25th November 2010
Alternative UCITS funds
saw a 70% growth in
net new flows in 2010 to
FundFront
September, and were on
track to finish 2010 with
33bn net new inflows,
a study by Strategic
Insight, commissioned
by the Association
of Luxembourg
Funds Industry (Alfi)
with the support of
LuxembourgForFinance,
found.
ALFI added that most
of these funds represent
hedge-style strategies
adapted to the growing
need for absolute return
solutions. New alternative
UCITS launched this year
have already captured
6bn.
The Tokyo Stock
Exchange (TSE)
announced it will consider
changing short-selling
regulation in a bid to
tackle unfair trading and
reinvigorate Japan’s
securities market.
In light of recent
allegations of insider
trading, the TSE said
it will explore ways to
strengthen the surveillance
of suspicious trading.
Among proposals to
shorten the duration of a
trading halt and extend
trading hours, the bourse
said it plans to investigate
short selling – when an
investor sells an asset they
have borrowed, aiming to
make a profit by buying it
back at a lower price.
The TSE said it would
consider removing barriers
that prevent global
investors from participating
in the Japanese market.
14th December 2010
The US Senate Special
Committee on Aging
6 | Fundamentals4HNHaPUL |>PU[LY2011
launched an investigation
into securities lending
after a number of media
reports on large collateral
reinvestment losses
suffered by retirement
funds in 2008 and 2009.
A spokesperson for the
Senate Aging Committee
told Fundamentals that
the initiative was launched
after a specific Wall Street
Journal article that outlined
withdrawal restrictions
related to 401(k) plans.
Later it emerged that
the US Government
Accountability Office
(GAO) was assisting
the Committee with its
investigation
The GAO expects to
publish a report on its
findings on its website by
mid-February 2011.
6th December 2010
The UK pension sector
should look up to collective
defined contribution
(DC) pension schemes
in the Netherlands and
Denmark as models, said
a report published by
the Royal Society for
the encouragement of
Arts, Manufactures and
Commerce (RSA).
In the ‘Tomorrow’s
Investor’ report, David
Pitt-Watson, chairman
of Hermes Focus Asset
Management, outlined the
RSA’s vision for an ideal
pension system.
21st December 2010
New York attorney general
Andrew Cuomo filed a
lawsuit against Ernst &
Young, alleging that the
accounting firm helped
Lehman Brothers hide
its weak position through
Repo 105 transactions
According to the $150m
suit, E&Y spent seven
years helping Lehman
hide its shaky position
before the bank collapsed
in September 2008.
Included in the suit is the
allegation that the auditor
allowed Lehman to make
misleading financial filings
about its risk exposure.
E&Y said that its
accounting was in no
way responsible for the
collapse of the failed
bank. It said that it would
“vigorously defend” the
claims, adding that there
was “no factual or legal
basis” for the claim and the
transaction in question, i.e.
Repo 105, was in line with
the Generally Accepted
Accounting Principles
(GAAP).
21st December 2010
State Street Corporation
and International
Financial Data Services
(IFDS), the international
transfer agency joint
venture between State
Street and DST Systems,
introduced a new solution
to support Offshore T+0
Money Market Funds
to be accepted on the
National Securities Clearing
Corporation platform
(NSCC).
The IFDS group,
along with State Street,
provides market-leading
transfer agency, wealth
management and investor
record-keeping solutions
for a wide range of
institutions, distributors,
advisors and investors
in Australia, Canada,
Germany, Hong Kong,
Ireland, Italy, Japan,
Luxembourg, Singapore,
Switzerland, the UK and
the US.
22nd December 2010
J.P. Morgan’s Worldwide
Securities Services
(WSS) announced it
would offer direct custody
services in Ireland, further
expanding the firm’s direct
custody and clearing
footprint.
The move builds on J.P.
Morgan’s existing local
presence in a number of
markets including Australia,
India, New Zealand, Taiwan,
Russia, UK and US with
on-the-ground coverage
and expertise for clearing,
settlement, custody and
asset servicing.
The move also follows
the previously reported
completion of the
successful migration of the
direct and master custody
clients from ANZ Custodian
Services which further
strengthened its position as
a leading provider of third
party custodial services
in the Australian and New
Zealand marketplace.
5th January 2011
State Street Investment
Analytics announced
preliminary WM UK pension
fund and charity fund
universe results for 2010,
suggesting that trustees of
the average pension and
charity fund will be looking
at returns of around 13%.
“There was a general
upward trend in the equity
markets in 2010, although
continued volatility often
resulted in moves of 1%
in a day,” said Jeanette
Patrizio, vice president of
State Street Investment
Analytics.
“Most pension funds and
charities maintained their
investment strategies and
were rewarded as markets
generally continued to
recover. Local authority
pension funds also
benefitted from a higher
commitment to equities and
outperformed corporate
schemes last year.”

Altrinsic Global Advisors has
chosen State Street Corporation
to service its new Irish-domiciled
UCITS compliant fund. State Street’s
operation in Dublin will provide the
Altrinsic Global Equity Fund with
custody and fund administration
services.
BNP Paribas Securities Services
claims to have secured its first direct
UK pension fund client after winning
a £685m mandate to act as master
custodian for ATOS Origin’s three UK-
domiciled pension schemes.
The custodian also announced it will
provide global custody services in
the UK for Brevan Howard Asset
Management, the largest hedge fund
manager in Europe.
BNP Paribas Securities Services
trumpets that it has been mandated
by Standard Bank Plc to provide
custodial services in the United
Kingdom and Switzerland. Standard
Bank plans to grow beyond its African
roots into other markets.
BNY Mellon has been appointed
as depositary bank for Orascom
Construction Industries’ (OCI)
American depositary receipt
programme. Each OCI ADR represents
one ordinary share and trades on the
over-the-counter (OTC) market, while
the company's ordinary shares trade
on the Egyptian Stock Exchange.
Based in Egypt, OCI is a construction
contractor active in emerging markets.
BNY Mellon Asset Servicing has
been selected by China Construction
Bank (CCB) as global custodian for
the Qualified Domestic Institutional
Investor (QDII) fund in China, to be
launched by Yinhua Fund Management
Company (Yinhua). The new fund will
be called Yinhua Anti-Inflation Theme
Fund (LOF).
BNY Mellon Asset Servicing has also
been selected by Banco Nacional de
Costa Rica to provide global custody
for an $800m investment portfolio of
equities, fixed income and US treasury
bonds. The custodian has provided
Treasury services to the bank since
2003.
Daiwa Fund Asset Services has
chosen BNY Mellon Trustee &
Depositary to act as depositary for its
UK-authorised funds within its fund
hosting service. The appointment is
part of Daiwa’s plans to extend its
hosting service for Irish-domiciled
funds to include UK-domiciled
collective investment schemes
targeted towards institutional or high
net worth investors.
CIBC Mellon has been awarded a
mandate to provide custody, fund
accounting, securities lending and
performance & risk analytics to the
Canadian Christian School Pension
Trust Fund.
Citi has been appointed by Global X
Funds to provide third-party securities
lending services for its group of
exchange traded funds (ETFs). The
appointment is part of Citi’s plans to
strengthen its relationship with Global
X Funds.
Deutsche Bank has been appointed
depositary bank for the NYSE-
listed American Depositary Receipt
programme of China Xiniya Fashion
Limited, as a leading provider of
men’s business casual apparel in
China.
Tokai Tokyo Financial Holdings
has chosen Deutsche Bank as
depositary bank for its Sponsored
Level I American Depositary Receipt
Programme. Tokai Tokyo Financial
Holdings, Inc. is the holding company
of the Tokai Tokyo Financial Group,
>PU[LY 2011|Fundamentals4HNHaPUL| 7
Mandates
whose core company is Tokai Tokyo
Securities Co., Ltd. The Group
focuses on the securities business
and provides financial products,
services, and solutions that meet the
needs of customers.
Deutsche Bank has also been chosen
by Daiwa Capital Markets Europe to
be its Austrian securities clearer and
custodian.
GoldenSource has announced it will
provide a wider range of services
to Macquarie Securities Group
after winning a mandate with the
firm in 2009 to provide services
for Macquarie’s equity and equity
derivatives business.
J.P. Morgan will provide custody
services to BankInvest’s 28 listed
investment funds with around $9bn
assets under custody. The mandate
follows a tender of both Danish
and global custody providers at
BankInvest.
Brazilian mining company Vale S.A
has chosen J.P. Morgan as the sole
sponsor and depositary bank for
its landmark HDR listing. Vale S.A
became Hong Kong’s first ever Hong
Kong depositary receipt (HDR) listing
on the Stock Exchange of Hong
Kong (SEHK) after listing by way of
introduction in September 2010. J.P.
Morgan says that the HDR listing
framework is expected to boost
Hong Kong’s long-term reputation
as a leading exchange for global
corporates looking to develop their
business in Greater China.
J.P. Morgan has also been appointed
depositary bank China-based education
services company, TAL Education
Group, which raised $138m through
an American Depositary Shares listing
on the New York Stock Exchange last
year. TAL Education’s president Cao
 Mandates
Yundong says this listing is a big part
of the firm’s long-term growth strategy
in China.
Northern Trust has been named
FundFront
global custodian for $800m group of
funds at John Muir Health of Walnut
Creek. The bank will service the
Californian organisation’s pension,
endowment and operating funds as
well as benefit payment services for
its pension plan.
Tawuniya (the Company for
Co-operative Insurance) has
selected Northern Trust manage a
segregated passive equity portfolio,
benchmarked to the Dow Jones
Global Titans 100 index. The
appointment, which also includes
transition management services,
builds on Northern Trust’s existing
asset servicing relationship with
Tawuniya.
Northern Trust has also been
appointed by Premier Asset
Management to provide custody,
transfer agency and fund accounting
services to its latest range of OEIC
(open-ended investment company)
funds, valued at $1.4bn (£906m).
This appointment adds to an existing
$1.6bn (£980m) custody and fund
administration mandate held by
Northern Trust for a number of years.
Northern Trust has won a £881m
mandate to provide global custody
and related services to The National
Trust as part of the custodian’s
strategy to support charities around
the globe.
Phoenix Fund Services has won a
contract to provide TCF Investment
with ACD, fund accounting and
transfer agency services for its fund
range, as part of TCF’s goal to put
clients at the centre of its business.
“This is now a competitive market
with integration of systems and
technology key to delivering a quality
service at low cost,” said Phoenix.
8 | Fundamentals4HNHaPUL |>PU[LY2011
RBC Dexia Investor Services has
been mandated by SEI Canada
provide shareholder recordkeeping
services for its 19 portfolio programs
and 31 mutual funds in Canada,
representing over C$9bn in client
assets.
RBC Dexia Investor Services has
also been selected by Paratum Inc,
based in Beverly Hills, California,
U.S.A., to provide custody, fund
administration, shareholder services,
domiciliary and financial reporting
services for a new Luxembourg-
based private equity SICAV-SIF fund.
RBC Dexia says that this umbrella
fund will include several sub-funds,
the first being the US Renewable
Energy Feeder Fund, designed to
generate attractive risk adjusted
returns by investing in renewable
power generation, clean fuels and
renewable energy.
RCM has extended its UK local
authority portfolio with a global equity
high alpha mandate from the London
Borough of Wandsworth valued at
£100m.
Société Générale Securities
Services (SGSS) has won a mandate
to provide trade processing,
reconciliation, reporting, collateral
management and independent
pricing services to Finnish pensions
firm Ilmarinen Mutual Pension
Insurance.
SGSS has also been mandated
by the Paris branch of Credit
Suisse Securities Europe to
provide independent secondary
pricing services to a number of its
institutional clients. The securities
services provider said that the move
will enable Credit Suisse to meet
increasingly tough requirements by
regulators.
The Italian Investment Fund for
Small and Medium-sized Enterprises
has appointed SGSS to act as its
depository bank and provide other
complementary services. It is a
mutual fund restricted to institutional
investors with a target to raise 3bn,
and its main objective is to provide
financial support for the development
of small and medium-sized
companies in Italy.
State Street has been appointed by
the General Synod Pension Plan of
the Anglican Church of Canada to
provide custody, securities lending
and other services for CAD $600
million in assets.
In other news, Libremax Capital
has chosen State Street to provide
hedge fund administration services
for its newly-launched hedge
fund. Libremax Capital, which was
founded by former Deutsche Bank
executives Fred Brettschneider and
Greg Lippmann, will be able to focus
entirely on achieving investment
results, said Lippmann.
State Street Australia has also
won a mandate to provide a full
set of superannuation services to
REST Industry Super as part of the
custodian’s commitment to meet
the needs of Australia’s growing
superannuation sector. State Street
will provide custody, fund accounting
and complex tax services to REST,
which its chief executive Damian
Hill claims will help keep the super
fund at the top of the $1.3 trillion
Australian superannuation market.
Knight Clearing Services has
chosen SunGard’s Apex securities
finance solution to help with the
processing of its international
securities lending and repo
businesses across the front,
middle and back offices.
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 Crisis talks
CRISIS TALKS
FundFront
Craig McGlashan investigates the effects of the financial crisis on
the funds industry and how the future needs to change
Laurence J Kotlikoff is a William
Fairfield Warren professor at
Boston University, a professor of
economics at Boston University, a
fellow of the American Academy
of Arts and Sciences, a fellow of
the Econometric Society and a
research associate of the National
Bureau of Economic Research.
His book, Jimmy Stewart is Dead,
coined the phrase Limited Purpose
Banking, a set of proposals he
believes are necessary to keep the
financial system from collapse
Alistair Darling has been
a UK member of parliament
since 1987. He served as the
chancellor of the exchequer
from 2007 to 2010, during
which time he was involved
in the bailouts of a number
of leading British financial
institutions. Before becoming
chancellor, Darling served in a
number of cabinet posts from
Labour’s election victory in 1997
until its defeat in 2010
Paul Martin was the 21st
prime minister of Canada, from
2003 until 2006, and served
as a member of parliament
from 1988 until he retired in
2008. From 1993 to 2002, as
minister of finance, he oversaw
a number of policies that
altered the financial structure of
the government and saw the
elimination of Canada’s large
fiscal deficit
10 | Fundamentals4HNHaPUL |>PU[LY2011
A rose by any other name
Any article on the events in the financial world of the last
few years must overcome their lack of an agreed name -
anything that history has not yet ascribed a title cannot
really be said to be over.
Plenty of people have tried to, however. For instance, in
a speech to the Westchester County Bankers Association in
June 2010, Joseph S Tracy, executive vice president at the
Federal Reserve Bank of New York, said: "I begin with the
simple exercise of what name we should assign to this past
crisis."
This is important, he says, because “as Shakespeare
reminded us", names are important because of the meaning
they convey.
It is interesting that as recently as June 2010, Tracy could
talk of these events as in the past. This came after the Greek
bailout was agreed, but before the enormity of the problems
in Ireland were revealed, and before whatever else may have
happened in the time between this article being written and
it being published (Portugal potentially needing a bailout is
currently the hot topic).
For the sake of moving forward, this article will refer to
"the financial crisis", or just "the crisis", and will talk of
"before, during and after", with the due acknowledgement
that it is currently impossible to tell whether the crisis is
closer to the before or closer to the after.
(For the record, Tracy settled on the "Panic of 2007" as the
most "instructive" name. Given recent events, that seems to
be the kind of sweet-smelling euphemism that Shakespeare
himself would have been proud of.)
All that glitters is not gold
The impact of credit default swaps, subprime mortgages and
the like on the crisis are well documented and perhaps there
is nothing much more to add on those subjects. What can
be argued, however, is that from a fund point of view, those
were not the major issues.
Alistair Darling does make clear that much of the crisis
must still be laid at the door of the banks, with the boards of
these institutions “primarily culpable” from that angle, but
adds that regulators and central banks should also take
some blame.
 BNP Paribas Securities Services
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are available from us on request. BNP Paribas Securities Services is also a member of the London Stock Exchange. 11
>PU[LY 2011|Fundamentals4HNHaPUL|
 Crisis talks
“Lots of people now say they saw it coming but perhaps
didn’t shout loud enough at the time. People were
quite happy to go along trading with each other, with
confidence with each other, but all the time there was this
problem building up which manifested itself with the
FundFront
failure of the American subprime mortgages which then
within weeks spread right across the world.”
But is there an argument that funds themselves
should have taken a more introspective look at their
own responsibilities? “One of the criticisms that can be
levelled against some of the institutional shareholders
is that they were quite happy to let the management to
get on with it,” Darling says. “Whereas if you own a
company, you should do more than just find out what the
dividend policy is – you should find out what they are
investing in and put pressure on banks to account
for themselves.”
Laurence Kotlikoff believes that funds should “have a
share of the blame”, given that any entity investing in
risky securities “has a fiduciary duty to make sure you
have safe assets to back up the liability”. However, he
believes that the main responsiblity lies elsewhere. “The
fact is that a lot of the pension funds were investing in
securities they were told were AAA by the rating agencies
and insurance firms.
“How can the people running those funds be blamed for
investing in what was a high-yield but very safe security?
We have massive fraud and corruption underlying the
financial system. It may get dampened down in the near
term because the regulators are being told to do their
job, but basically the fundamentals are no disclosure,
full proprietary information, and that is just a breeding
ground for fraud, as we’ve seen.”
Both men feel that the problems being experienced by
funds go back a lot further. In the 1940s, the end of the
Second World War, national governments made promises
to their electorate of the state caring for them into their
twilight years; a good promise, an achievable promise.
However, given the rise in life expectancy, this model
may well be in need of massive overhaul, and indeed
governments have begun to look at this problem.
Darling agrees that these problems can be attributed to
these changes in demographics, as much as any financial
hocus pocus taking place on banks' trading floors.
“In the early part of this decade, rather than talking
about why people did not notice what was going on in
the banking system, why did people not spot the fact that
the population was growing much older?” he says.
“Frankly a lot of the problems with the pension funds
were that there was not enough money in them to
support all these people. In 1945 the life expectancy of
a man who retired was a year, now it is maybe 30 years
– there were bigger structural problems.”
Kotlikoff believes that this problem was noticed by
the people in charge of pension funds, however. The
problem, he says, has been “dramatic underfunding”.
12 | Fundamentals4HNHaPUL |>PU[LY2011
On the US private sector, he says: “With our government
insurance, people have insurance on their funds and
take risks because they can put the obligation back to the
government through the Pension Benefit
Guaranty Corporation. That organisation holds liabilities
that could get much bigger if the economy continues to
underperform.
“People running these pension funds are gambling on
making high returns in the stock market and on risky
bonds, whereas their liabilities are to a large extent much
more certain, so they could have been investing in inflation
index bonds to hedge their risk but instead they are taking
on risk in order to get the upside and if the downside
occurs it is a problem for the federal governments.”
Moving on to US state pensions, he continues: “They are
trying to put the problem on to future taxpayers because
they are even more underfunded as a group; we’re
talking about thousands of state and local municipal
pension funds that are in a terrible state. Again, they have
been investing in very risky ways and a lot of them lost a
lot of money in the market.”
However, according to Kotlikoff, the federal government
is “the worst violator of prudence”, suggesting that it has
been running a “massive Ponzi scheme”. He continues:
“It’s taking from young people, giving to old people, and
telling young people, ‘You’ll get yours later.’ It’s left the
country effectively bankrupt.”
A man loves the meat in his youth that he
cannot endure in his age
The idea that the older generation has been in effect
stealing from the young is an interesting one, particularly
given the mainstream media view of today’s youth as
lethargic and cynical, both traits that could be attributed
to a sense of injustice.
Recently, both the French and Irish governments have
dipped into their pension pots to help alleviate debt
problems. Indeed one of the major criticisms levelled
against the Labour government of which Darling was a
member was the abolition of advanced corporation tax
relief for pension funds, with some estimates suggesting
this cost UK funds as much as £100 billion. However,
these criticisms are not just of the Labour government
- other legislative impacts include the previous
Conservative government’s decision to tax pension
fund surpluses.
Darling responds: "There is always going to be a healthy
debate between the industry and the government, from
time to time. If you take the abolition of the dividend
tax relief, that was part of the changes in relation to
advance corporation tax which at the time everybody
said was a ridiculous system. Actually, if you look at
the performance of the insurance industry after it was
removed, it was fine."
An isolated case answered, perhaps. But no one can
deny that governments often make decisions that are

popular with those who vote in numbers, but may have
an impact on those too young to vote, be it because of the
voting age being too high or youthful indifference.
So is there an inherent tension between the short-termism
of government and the long-termism of pension funds?
Paul Martin admits that, in politics, there is a trend where
politicians can view pensions as a problem that can be dealt
with 10 years down the line – and successive governments
taking this view mean that the problem only becomes
exacerbated.
However, he does believe that there comes a “tipping
point”, at which “most political people will act”.
For him, this time came in Canada the mid-1990s: “One
more crisis or recession in the USA and we were at the
tipping point and that’s why we acted. It wasn’t just me - it
was my colleagues at the provinces.
“For 25 years, ministers of finance at the federal and
provincial level had essentially put things off, hadn’t dealt
with deficits, but nor had they dealt with
I said, ‘Ma’am, you’re
really asking your
children and your
grandchildren to buy
your groceries.' She
stopped and you saw
the room change
their pension plans.
“When I called the provincial finance
ministers, my message was, ‘This issue
has been put off for 25 years and we
could put it off for another 10 or 15 and
leave it to somebody else, but why don’t
we do the right thing. The vast majority
of those provincial finance ministers said,
‘Yes, let’s do it.’
“I think that that happens. Every so often you’ll get a
generation who’ll say, ‘Look we’re going to face this down
and we’re going to do it. And they did.”
[For more exclusive content from Martin on this period,
visit www.Fundamentalsmagazine.com/PaulMartin]
Ensuring that the Canadian pension plan survived
involved cutting benefits and raising premiums, the result
of which being that it then became the best funded pension
plan of all the G7 countries. However, the word “cuts” never
goes down well with the public, as has been seen of late in
the UK and Greece, to name but two countries, so how did
Martin deal with the backlash? Interestingly, he used the idea
that this section opened with – that the old were effectively
stealing from the young.
Crisis talks
“I was in a debate in a church basement and a woman
really started to give me heck because of the cuts that
were coming and I said, ‘Ma’am, you’re really asking your
children and your grandchildren to buy your groceries.'
She stopped and you saw the room change.
“It was the single biggest issue in our campaign here,
certainly in the pension plan, because if we hadn’t changed
our pension plan then our children would have been paying
massive premiums for virtually no pension at all and we
would have been living off the fat of the land.”
All the world's a stage
Despite Canada working to sort out its pension fund,
Martin’s description of a “tipping point” whereby one
country’s recession could result in terminal disaster for
another is perhaps the neatest way of describing the main
problem behind the financial crisis.
At Sibos 2010 in Amsterdam, RBS CEO Stephen Hester
described the crisis as not a financial crisis at all, but
instead “the first crisis of globalisation”.
Darling, who presided over the near-collapse of British
bank Northern Rock, said that one thing the crisis “brought
home” was “just how interconnected all these banks are,
and that does change your way of thinking”.
He continues: “In the olden days, in America, which had
3,000 odd banks you could have a small bank in the middle
of Florida could collapse and it’s a calamity for that town,
or that city, or even that state, but other than that nobody
notices. Now you can get a small bank collapsing – and
Northern Rock, unfortunately, became known throughout
the world – and not for the good reasons.”
Darling recounts attending various international
>PU[LY 2011|Fundamentals4HNHaPUL| 13
 Crisis talks
gatherings after the Northern Rock incident, and being
told “you had it coming”, adding there was “a touch of
schadenfreude about it”. However, he would reply by
telling people to look at their own banks and eventually
it became clear that Northern Rock was “a symptom
FundFront
of a problem”; it needed to secure American wholesale
funding to support its lending – a perfect example of the
interconnected nature of the banking system.
Of course, the world cannot go back to the days when
banks were truly local entities, and it is this truth that
inspired the title of Kotlikoff’s book, Jimmy Stewart is Dead.
“If you are dealing with financial companies run by
a neighbour, the Jimmy Stewart-type who is your local
banker that you trust, you’ve lived together for years, then
it is not so important to know exactly what he is up to
because you can rely on him,” Kotlikoff says. “But we can’t
rely on Dick Fuld and that is why the title of the book came
to me. This is a whole new world.
“You look at the guy inside my local Bank of America,
he’s a young clerk, he might move to another branch next
week – this is a town of maybe 50,000 people. That’s a lot
of people; he’s not going to get to know them. The world is
too big – that’s the reality.”
While funds deal with a different level of banking than
retail customers, this theory can be taken to that level,
in that many fund managers did not have the kind of
relationships with the investment banking world that they
would have done in years gone by.
Kotlikoff adds: “Funds were lied to because the rating
companies were on the take and misrating, then you
had the regulators asleep at
the wheel - probably being
bribed by the hope of a job
on Wall Street, you had the
government being bribed, and
you had directors who were
definitely being bribed, and
then you had CEOs stealing
from the shareholders of these
major financial companies.”
However, Martin has a
difference with Hester’s
proclamation, albeit “one
of nuance”. He cites the
Roman and British Empires as
examples of how globalisation
has existed in the past, but
now there is a “fundamental difference”, one that requires
the very word “globalisation” to be redefined.
“We are now dealing with the complete interdependence
of nations,” he explains. “When you have the sub-prime
crisis in the USA and Asian markets suffer. I think you
might well say that it is the first real manifestation of the
interdependence of nations in the financial area.
“The real key words are the interdependence of nations.
At the time of the Roman or British Empire you didn’t have
this seamless interdependence of nations that you have
14 | Fundamentals4HNHaPUL |>PU[LY2011
today. I think that there has never been a time in history
when contagion was the major problem, or was so much
the major problem.”
No legacy is so rich as honesty
Undoubtedly the biggest factor behind this new world
order of interdependency is the advancement in the
twentieth century of technology. However, in many ways,
technology has advanced faster than human beings have
been able to keep up and this is particularly true for the
financial services world, Kotlikoff thinks.
“There is a lot of technology being used by the financial
industry, but not for good; it’s being used for bad,” he says.
“It’s helping them perpetuate insider trading, hide their
secrets and make money off their secrets. The whole idea
that we should be investing with people who aren’t going
to tell us what they are doing with our money - that’s a
huge red flag.”
But this same technology can now be used to help
investors make good decisions, Kotlikoff believes.
“You can have full disclosure on the web of all the
securities that the mutual funds are holding, that’s part of
what I’m proposing. We can take advantage of technology
to allow people to see exactly what it is the mutual funds
are investing in.
“We can move to something very straightforward,
simple and effective.”
l do desire we be better strangers
While technology may well aid transparency, it is clear from
the events of the crisis that
more root and branch reform
will be required to avoid a
similar situation in the future.
One initiative is the new
Basel III capital requirements
for banks, which are
scheduled to be introduced
fully by 2019. This will not
solve the problem completely,
according to Darling.
“The general proposition,
the idea that banks should
hold more capital, I think is
a good one. But the amount
of capital they hold is not the
only thing you need to look
at. Northern Rock was one of the best capitalised banks in
Europe and a fat lot of good it did it.”
While new regulations have been discussed and debated
as after any financial crisis, the events of the last few
years have perhaps been unique in the amount of calls for
changes to the regulatory bodies themselves.
As an example, at the start of 2011 the European Securities
and Markets Authority (ESMA) came into effect, replacing
the Committee of European Securities Regulators (CESR).

However, there have been calls for a worldwide regulator to
be introduced to deal with what is truly a global system.
As a forerunner to these calls, the G20 meetings between
the world’s finance ministers during the crisis were seen by
many as helping to avert full worldwide collapse.
Darling was present at these meetings. “There is no doubt
that at a time when the world was looking over the edge,
having 20 of the largest economies sitting around a table -
and more importantly 20 people who could take decisions
- that made a huge difference.”
But as with any collection of sovereign states, it has
not been without its problems, he continues. “I’m very
concerned that the progress appears to have stalled. Even
18 months ago China would be at the table playing a very
active part whereas now you
have the standoff between
China and America over the
currencies and the imbalance,
which is a big problem and is
only going to get sorted out
internationally.
“But my experience in
2008/09 is the G20, although
it had no democratic basis
whatsoever, worked as an
ad hoc body because you
happened to have the people
that mattered sitting in the
same room.”
Martin was heavily involved
in the creation of the G20 in
the late 1990s; a process which he says was required because
of problems in Asia, Brazil and Russia. “I spoke to Larry
Summers [then US Treasury secretary] and Gordon Brown
[then UK chancellor] and made the point that we were
all going to be sideswiped by problems in the emerging
economies because of the economic interdependence of
countries, if we didn’t expand the size of the tent.”
This meant bringing to the table not only those countries
that were in trouble, but the likes of China and India who
were becoming major players. Martin then became its first
chairman and he believes the organisation is now vital.
Despite his support for the organisation, Martin does
admit that it will have to evolve over time, otherwise it
will become like the G8 – passé. However, he does feel
that it will have a “relatively permanent makeup” for the
foreseeable future.
But Martin believes more is needed than just the steering
committee of the G20. The body must give the Financial
Stability Board (FSB) “the authority, scope and staffing
to monitor banking regulation globally”, he says – not
becoming a global regulator, but instead a watchdog for
national regulators.
“What happened in the USA, the UK, in Europe, was that
the national regulators did not do their job,” he explains.
“You need a global body that will basically ensure globally
that the national regulators are doing their job.”
Crisis talks
But, as Darling pointed out with the problems of the G20,
any question of a global overseer of national regulators
introduces questions of sovereignty. How does Martin
respond to this problem?
“The argument that has to be made is that 100 years ago
you could say you were protecting your sovereignty by
staying alone in territorial isolation. Today, when the actions
of one country could damage your economy, the only way
to protect your sovereignty is to ensure that every country
is living up to its responsibilities, and you can only do that
through an international institution like the FSB.
“Every European or North American who would question
whether the FSB is going to damage their sovereignty, I
would say to them that the
two biggest banks in the
world are Chinese – wait till
they stumble and if you don’t
have global monitoring, so
that you know the Chinese
are doing the right thing,
as today we want to know
that the Europeans and
North Americans are doing
the right thing, you need a
FSB, and that’s the only way
you’re going to protect your
sovereignty.”
So wise so young, they
say do never live long
However, another issue is that in the minds of many in those
upcoming countries such as India and China, the financial
crisis was a problem of the West.
Darling explains: “If you speak to ministers from Asian
countries they’ll say this is a Western problem, they say to
the banks come here because we don’t have a population
that gets hung up with large bonuses or various other
things that people in the West find sometimes distasteful.”
The idea that Asia will never see a banking crisis again is
“fanciful”, according to Darling, so it will be in their interest
to be part of a global regulatory effort.
But Martin reveals that he has outlined his proposals for the
FSB in talks in South Korea. How did they go down there?
“The reception in Korea was very good to what I said.
There is the issue with China and India, although the
Chinese have called for an international supervisory body.
But there have been no details so nobody knows exactly
what they are referring to.”
Martin concedes that at points he has had the response
from emerging powers that the crisis was not their problem,
to which his reply was that “the FSB is a successor to the
Financial Stability Forum”. The Forum was created at the
same time as the G20 but, according to Martin: “It was given
no teeth, because the Europeans and the Americans said,
‘Our banks are perfect, the problem is those Asian banks in
>PU[LY 2011|Fundamentals4HNHaPUL| 15
 Crisis talks
Thailand and Indonesia.' To which I say 15 years later take
a look at what your good regulation did. You may think
you have it today, but your banks are going to go through
the same cycles the American or European banks did.”
In terms of the makeup of the FSB, Martin stresses
FundFront
that it should not include central bankers or economists
and instead should feature the “crème de la crème” of
regulators, with 20 years’ experience – “hard bitten and
with not a lot of compassion”, to be specific.
How does Martin envisage the FSB exerting its authority?
“The sanction that people are talking about is public
shaming. A peer review is a very good thing, so for the sake
of discussion if you were looking at Swiss banks, you’d
appoint a peer review of three other countries.
“They would review the Swiss regulation then publish
a report. The expectation would be that if the regulation
was not up to snuff then
the Swiss would change
it. If they didn’t, then my
recommendation is you
would say the Swiss banks
cannot operate in the other
G20 countries. If that were
the case, you’d find the Swiss
banks would put pressure on
their government to improve
the regulation.
“We’ve already seen it, the
G20 has gone after tax havens
and they’ve done more than
simply naming and shaming
so the precedent is there.”
To be, or not to be
Some commentators feel that the crisis has not been an
issue of regulators or regulation, however; it goes much
deeper than that.
Kotlikoff believes that the complexity of financial markets
now makes it impossible for regulators to operate, whether
as one super body or as a number of different entities. He
suggests that current efforts towards improving regulators
and regulation are like “putting a band aid on a patient that
needs open heart surgery” – they do not nearly go
far enough.
“You are asking them to babysit bankers on every
transaction,” he explains. “We’re allowing the banks to
gamble, to borrow short and lend long and then we’re
telling the regulators to inspect every investment which is
not a job that they’re really able to do. We could still have a
Lehman Brothers or Bear Stearns situation.
“You could have the most honest, conscientious regulators
and the system would still have collapsed.”
Instead, Kotlikoff believes that the US should have a
single regulator with an achievable task. He outlines his
proposals for what he calls “limited purpose banking”
in his book, Jimmy Stewart is dead, and has already won
support for his proposals from the likes of Bank of England
16 | Fundamentals4HNHaPUL |>PU[LY2011
governor Mervyn King.
Kotlikoff outlines the problems of the American banking
system: “Limited liability, fractional reserves, off-balance-
sheet bookkeeping, insider-rating, kickback accounting,
sales-driven bonuses, non-disclosure, director sweetheart
deals, pension benefit guarantees, and government
bailouts,” a system which, as he argues earlier in this
article, allows for corruption.
Instead, Kotlikoff’s proposals can be summarised as
follows: if depositors want their money to be completely
safe, they can have an account matched 100% by cash held
by the bank; if investors want more risks, or insurance, then
mutual funds are created to deal with these distinct needs,
and created in such a way as to avoid systemic risk, such as
not allowing the funds to borrow.
From the regulatory angle, one single super regulator will
be required to carry out just one task: ensuring that fund
managers must disclose what
they are holding at all times –
something which, as outlined
earlier, technology can now
make possible.
Kotlikoff explains further:
“If the only job of the banker
is to buy securities at auction
that are fully disclosed and
independently appraised,
rated and verified, then there
is not too much for regulators
to do. So that is why my idea
is for regulators to have a
much smaller job to do and
the financial system will
never collapse again.
“I’m taking out the proprietary information so if
somebody’s a good picker of bonds or mortgages or stocks
they’ll be able to get rewarded as a mutual fund manager
but they won’t be able to get bonuses independent of their
performance which is what we have in the
current system.”
[To find out more about Kotlikoff's proposals,
visit www.kotlikoff.net]
Kotlikoff thinks that this work must be done soon, before
it is too late. In a speech at the GSL Boston Summit in
November 2010, he cited the hypothetical situation of a
swine flu epidemic that targeted the young and a cure for
cancer being discovered. Such a situation would bring the
financial system to its knees, as the current predicament
of the young paying for the old would suddenly be
exacerbated.
He provides another example: “Suppose the US Treasury
bond market collapsed this afternoon because the Chinese
were dumping US bonds and so interest rates spike up,
the dollar falls, the Fed comes in to print money to try
to keep interest rates down and that just fuels the fire
because people are worried about too much money being

printed and then they start worrying about inflation and
start heading to the banks to get their money out and buy
something. Then you have a massive bank run in the USA,
a massive run on money market accounts, a massive run on
life insurance cash surrender value policies.
“You could have the Federal Reserve have to print $12
trillion in a matter of weeks and then the entire system
would be over. Game over for the US economy.
“Under limited purpose banking you wouldn’t have
any runs. They wouldn’t be possible. Even if the US
government got into trouble it wouldn’t have any
implications for the financial sector because things are
marked to market, people would be able to get their cash
out because they’d have cash mutual funds and they’d be
backed to the buck, and basically monetary base would be
guaranteed because they’d be a buck for dollar in
monetary base.”
While many would favour the breakup of the giant banks
that dominate the system, although not perhaps to the
extent that Kotlikoff proposes, there have been arguments
against this move, particularly given that, for instance,
RBS saw itself return to profitability thanks to its so-called
“casino banking” – i.e. investment – division.
Darling agrees with this sentiment: “There is nothing
wrong with investment banking per se and whatever
system we have in the future these functions are going to
be discharged by somebody. There is an argument – do you
break up the banks? I have great reservations about that
because I do not think that is dealing with the problem.
“If you look at RBS, it has suffered colossal losses and
now things are better although it is not out of the woods
yet, as recent figures attest. It will need all the money it can
get to repay it. The real problem RBS had is, it had toxic
assets before, but most of them were in ABN AMRO and if
someone had looked into the books there before going after
it then they might have decided it was better to leave it to
someone else.”
Again, an argument for transparency.
Tomorrow, and tomorrow, and tomorrow
It is impossible to guess what historians will glean from this
crisis in the decades to come. What really happened in any
great historical event can only ever become clear later. But
one thing that can be said for certain is that the speeding
up of all aspects of life, in technology, social mobility and
globalisation, has not been matched by the forethought
required to ensure that the benefits these shifts offer are not
overtaken by the potential havoc they can wreak.
No one can deny that the greater longevity human beings
now enjoy is a good thing, but to ignore the impact this will
have on funding the increasing numbers of elderly people
is foolhardy. Technological advances have allowed markets
to run more efficiently than ever before, but leaving such
an important function solely in the hands of automatons is
lazy. And the links that are now shared between humans
across the globe who 100 years ago would never have met
is perhaps the greatest advance of this age - and may well
Crisis talks
be the defining factor in avoiding the conflicts that have
arisen of other financial crises - but the world must realise
that everyone else on the planet is now a neighbour, and
knowing how the other side of the world operates is just as
important as understanding what is happening on the other
side of the street.
So far, through a mixture of imagination, action and effort
on the part of regulators, governments and the financial
industry, the crisis has not created any true catastrophes.
Alistair Darling can rightly point to this fact as the highlight
of his time in office. But this was a case of needs must.
Paul Martin can confidently say that his reforms meant
Canada is now in a healthier position than many of its peers
but again these reforms, no matter how much effort was
exerted to introduce them, were only possible as a result
of the problems Canada was facing at the time - the same
problems the rest of the western world would face a decade
later. Laurence Kotlikoff has offered a solution to avoid
all this happening again. Whether or not his is the correct
solution, the concerns he raises are real and must be dealt
with before they can fester.
However, certainly in the West, the demographics paint
a concerning picture, something that all pension funds
should consider, especially when looking at their liabilities.
Martin makes this point succintly: “When you have aging
populations like all of us do it’s a contradiction in terms to
talk about a surplus in your pension plan. When you look at
the difficulties that people are having because of corporate
pension plans, I think that you should leave those surpluses
and what you really have to do is build them up.”
Of course, governments should also heed that warning
and refrain from using pensions as a source of funding for
short-term populist projects.
But the lessons from the crisis should not just be picked
up by governments, CEOs and fund managers. Fighting
corruption via improved regulation of wholesale systematic
changes is one thing, but everyone must have the education
and the understanding to know when they are getting a
raw deal, be it as a pension fund trustee or as a member of
the public.
As Darling says: “When the good times were rolling
people didn’t ask questions. For the public’s part, they were
getting cheap mortgages, they were getting loans to do this
and that, and nobody asked any questions. Traditionally
people asked questions when things go wrong, we should
get in the habit of asking questions when things are going
right. Why is someone able to lend you money so cheaply?
There must be a reason for it if no one else is doing it.”
People do tend to let the good times roll.
They should remember that rolling objects tend to take a
downward direction.
>PU[LY 2011|Fundamentals4HNHaPUL| 17
 Life insurance
FundFront
Life Insurance:
The New Product Proposition
Life insurers face a series of powerful factors that are reshaping their competitive environment.
Product innovation will be critical to success, says Wade McDonald at State Street.
he life insurance industry finds itself at a
crossroads as a series of powerful forces
— both secular and related to the financial crisis
— reshapes its competitive environment. Ageing
societies and rising longevity are changing
consumers’ retirement planning needs, as the
trend from defined benefit (DB) to defined
contribution (DC) plans shifts the investment risk
onto individuals. The crisis has depleted balance
sheets, heightened regulatory scrutiny, and led to
an increased focus on absolute returns. Meanwhile,
technology is transforming the way people make
financial planning decisions and how organisations
operate.
These forces have been a major catalyst for change.
They are promoting the emergence of a long-term
savings industry where life insurance and pensions
converge. The challenge for life insurers is to retain
and redefine their role in the value chain, particularly
amid growing competition from DC pension
providers. To that end, there is scope for significant
ongoing innovation in the product space, as insurers
seek products that find the optimal balance between
risk and performance, and generate differentiated
value for the end consumer. Those insurers that adapt
to this new product paradigm will emerge as
the winners.
The Challenge of Providing Retirement Income
Product innovation is happening in a number of
areas. Demographic shifts, the pressures on private
and public sector pension schemes, and the shift to
DC have all increased the appetite for products that
generate a more certain income stream in retirement,
while ensuring that people do not outlive their assets.
At the same time, regulatory, tax and capital issues
18 | Fundamentals4HNHaPUL |>PU[LY2011
are influencing the type of retirement products that
will be required in future. For example, the UK
government is ending compulsory annuitisation at the
age of 75. Planned tax changes will reduce the relief
on pension contributions for higher earners and may
discourage those affected from saving in a traditional
pension. In addition, pressure on capital in the wake
of the financial crisis, particularly with the advent
of Solvency II in Europe in 2012, means that capital-
intensive products, such as old-style annuities, may
be on the way out. All of these factors are driving the
search for new savings solutions.
Variable annuities may be part of the answer.
Although well established in the US, they are
relatively new to Europe. Like fixed annuities, they
offer a guaranteed accumulation of interest and a
payout in retirement, with the added death benefit
of a life insurance policy. The primary difference is
that the policyholder takes on investment risk. In
addition to a fixed interest-rate account, the return on
a variable annuity is tied to an underlying portfolio of
assets such as equities. This means it can earn a higher
rate of return but it is also riskier.
There is still more work to do on improving variable
annuity products. These products hurt US insurers’
balance sheets during the crisis because of the high
guarantees in place. Most are likely to adjust the
guarantees to allow for greater downside protection
on the insurer’s part. These and other investment
products with guarantees are seeing increased interest
on the part of bancassurers and financial advisors. The
challenge in introducing and further expanding the
use of variable and other annuities into new markets
will be in educating sales forces to properly explain
the benefits of these complicated products.

A Holistic Approach to Financial Planning
One way in which insurers are seeking to reassert
their position in the value chain is by providing a
holistic financial planning solution, incorporating
both pension and non-pension products — the
“corporate wrap” platform. Already well established
in some markets, this concept is rising in importance
in the UK and US, in line with consumers’ desire for
greater transparency and cost effectiveness, and the
shift away from individual product sales towards
financial planning, as underscored by the Retail
Distribution Review in the UK.
In some markets, wrap programmes have long
been used by financial intermediaries working
with individuals. Now they are gaining ground
with corporations looking to provide integrated
employee benefits, from investment for retirement
right through to everyday financial planning. Wrap
programmes offer a number of advantages, as more
individuals take charge of their retirement planning
and investing. Employees can transfer their existing
financial assets, such as Individual Savings Accounts
(ISAs), into the wrap. This allows them to manage
their entire portfolio, including their DC scheme
assets, through an online portal, so they can monitor
it every day.
Wraps also provide an avenue to get financial
advice, and offer greater choice and flexibility than
some other benefits programmes. Options can include
savings products (to narrow the savings gap and fund
longer retirements), equity release schemes to pay for
long-term care and variable annuities. Wraps can also
be portable, if individuals move to a new employer.
Importantly, these programmes help to maximise
tax-advantaged investing by using ”wrappers” such
as the UK’s ISAs and Self-Invested Personal Pensions.
With the shift away from product selling to financial
planning, consumers will be less likely to pay for
advice unless it significantly mitigates their tax bill.
Corporate wrap platforms require scale and
a significant investment in technology to be
Life insurance
successful. Yet they are fast becoming the best way
for life insurers to compete in a crowded wealth
management industry. By owning the holistic
planning space through the wrap concept, life
insurers can ensure their place in the value chain and,
by extension, their future success.
Capital Usage and Efficiency are Also Critical while
developing the right products is key, life insurers
also have other concerns. The financial crisis shrunk
their balance sheets and Solvency II will increase the
pressure on capital. Insurers’ business models will
have to be much more efficient, starting with a new
operating platform that is technology-dependent and
globally consistent. To compete effectively, insurers
will also need to take a hard look at which activities
are core to their business and which should be
outsourced to reduce costs and capital burden.
With a strong track record in providing solutions to
the long-term savings industry, State Street can help
life insurers meet these challenges. We are focused
on being a global partner to life insurers, helping
our clients to develop differentiated products and
services, optimise their use of capital by outsourcing
their non-core activities across the broadest functional
spectrum, and leverage scale and investment in
navigating regulatory and industry change.
Wade McDonald is Head of Client Management and
Sales for State Street Global Services in the UK
and Africa.
>PU[LY 2011|Fundamentals4HNHaPUL| 19
 ABN AMRO
ABN AMRO: The Resurgence
Craig McGlashan visits Bas Cohen, newly appointed head of trading
FundFront
at ABN AMRO, as the bank officially launches its new trading floor and
seeks to move forward from the events of the last two years
aking the short train ride to the Amsterdam
financial district where ABN AMRO is
headquartered, it struck me that trying to explain
the bank’s story over the last few years to any of the
other passengers would have taken far longer than
the actual journey, regardless of my complete lack
of Dutch language skills.
However, if any one tale could sum up the wider
financial crisis as a whole it may well be ABN
AMRO’s. A takeover launched during the over-
confident times of early 2007, the shock of finding a
bunch of assets that were soon to be worthless and a
number of government bailouts.
I arrived at ABN AMRO’s offices to meet Bas
Cohen, former head of securities financing at Fortis
Bank Nederland and now heading up the whole of
ABN AMRO’s trading floor – a shiny trading floor
that the day before I arrived had just had its official
relaunch (although it had been operating for a
number of months).
While waiting in the lobby, I picked up a Dutch
newspaper, which carried a picture of the new
trading floor, under a headline that roughly
translated meant “back in honour” – a sign that the
Dutch financial press, at least, were behind the re-
launched bank.
As I met Cohen he seemed buoyant, despite his
beloved Feyenoord having been beaten 10-0 by
rivals PSV Eindhoven a few days before. It became
apparent that this positive feeling was not simply the
result of a glitzy opening ceremony, but rather the
progression the bank has made over a longer period.
“There has been a lot of negative press about what
happened with Fortis and ABN,” he says, before
handily providing me with a translation of the Dutch
newspaper I had been reading. “’Back in honour’ –
that is what we all feel and we can go forward.”
So has the official opening drawn a line under the
events of the last two years and a half? “We have
already started going forward but this is an official
opening with a lot of VIPs, yesterday we had the
press and they were all very positive.
“The people should also be proud of what has been
20 | Fundamentals4HNHaPUL |>PU[LY2011
done. Not just the front office but also the enablers,
all the IT people, all the people that helped moving,
the risk people – everyone.”
Cohen talks of the “respect” those on the trading floor
had for the people that enabled what he calls “such
an efficient move” after 1st July 2010, the legal merger
date. It involved nearly 300 people moving via buses
and removal firms from Fortis Bank’s old office in the
centre of Amsterdam to ABN AMRO’s headquarters.
He adds: “It was a massive assignment. Work had
to done on the weekends and overnight – but people
would come into the office in the morning and
everything would be working.”
Integrating IT systems is never easy, particularly
when two distinct entities are being joined over a
period of two weeks and Cohen reveals that the
bank is still “in the middle” of completing the
systematic merger.
“Three weeks ago we separated from Brussels
[Cohen was speaking at the end of October] so we
are not dependant on those systems anymore and
the old ABN guys separated from RBS on 1st April of
this year.
“One of the last pieces is the FX options book and
then we are completely separated from Brussels.
There are still a couple of areas where within ABN
AMRO we have two different systems for the same
product because we still need to merge them, but
we are now one group.”
Cohen explains that ABN AMRO opted to deal with
its systems this way rather than merging everything in
the beginning to ensure that it could continue operating
while the systems integration was taking place.
“With the structure we have chosen there is no
harm to any commercial potential; we are unleashing
the potential and are not restricted by the system.
If we had chosen to merge everything first, then we
would have been,” he says.
While the major work in integrating the different
systems is now complete, Cohen admits that it was
quite galling the day he found out that what had been
Fortis Group would now be two separate entities.
“It was pretty shocking to find out on that day (3rd
October 2008) that our colleagues in Brussels were not
 ABN AMRO

our colleagues anymore, that the guys in New York environment has completely changed,” he says. “First
where we had set up a securities financing desk were of all there was the impact of the separation with RBS
not part of our group anymore and we had to split and Santander and the separation with Fortis Group,
P&Ls, adjust fees - that was very strange,” he says. and then there was the credit crisis which caused a
However, the real process took a period of two different risk appetite and a different awareness of risk.
weeks. “The first week we all know that the Belgian, “All of that has come together in a new mandate
Dutch and Luxembourg governments decided to which is very client focused, which tries to transfer
invest money in the two legal entities. That was the risk from clients into the bank and we try to offset
first feeling of separation. that risk again into the market – that is our
“We had a big golfing event on the Friday where we primary focus.”
were supposed to have a lot of international clients
and my feeling on the Tuesday before was that this
was going to be a full separation so I cancelled the
event. It would have been very strange on the Friday
to sit with clients at a golf event and at the same time
find out that those clients were now trading with two
counterparties rather than one.
“On the Friday it was announced and I remember
staying until 2am in the office preparing all the
different documents – we created a memorandum
of understanding between myself and the head of
trading in Brussels to make sure that we would not
have back to back positions. And on Monday it was
there. It was very strange – a very weird situation.”
But to paraphrase Albert Einstein, in the middle
of weird situations lies opportunity, and both ABN
AMRO and Fortis Bank Nederland soon realised that
the merger may be mutually beneficial.
“We had two handicapped trading floors, one at
Fortis Bank Nederland and one at ABN, but funnily
enough they were very complementary,” Cohen
explains.
“At ABN AMRO the focus was a lot more on rates
trading while for Fortis that focus was in Brussels,
so it was gone. At Fortis Bank Nederland we had
the equities part, the securities finance part and the
commodities part, and now these parts have all been
put together onto the floor. So suddenly we have all
the asset classes represented again - it was a very nice
puzzle that fitted with only 10 redundancies on the
overlaps that we had.”
These 10 redundancies came out of a trading
population of 400; an impressively low figure
given that other departments of the two banks saw
redundancies of between 10% to 12% as a result of
the merger. This avoidance of risk means that ABN AMRO
All of that has passed and ABN AMRO can will not be indulging in proprietary trading and will
concentrate on the future, but what will that future avoid the kind of products that were blamed for the
look like? Will the bank’s business plan resemble credit crisis – the kind of products that are “only
those of its forerunners? It would appear not, understood by the front office while risk management
according to Cohen. and the rest of the bank have no clue what they are”,
“If you look back four years ago then the in Cohen’s words.

>PU[LY 2011|Fundamentals4HNHaPUL| 21
 ABN AMRO
It is clear that ABN AMRO are not alone in their
planned focus on clients needs – a number of
discussions that had taken place at Sibos 2010, being
held in Amsterdam the same time week as the official
FundFront
opening of ABN AMRO’s new trading floor, had been
in a similar vein.
Cohen cites a number of factors that are behind
this trend, namely the credit crisis, risk awareness,
regulation and Basel III. “If you take all that together,
the impact is that we should focus on what we are
good at and make sure that fits with what
clients need.”
Taking this further, Cohen uses a word that normally
has negative connotations: consolidation. However,
for ABN AMRO, this is a “very positive” word.
“Are we going to chase foreign clients in foreign
locations? Try to do every product? Try to set up big
systems to do different trades, or because a couple of
clients want this or that? The main thing here
is consolidation.
“Consolidation for us means being good in what we
are really good at, accelerating what we are good at,
for a select number of clients that really are the core
clients of the bank.”
Cohen explains that these core clients are: private
and retail, a space which ABN AMRO and Fortis Mees
Pierson were always strong in; small to medium-
sized enterprises, a traditionally active market for
ABN AMRO; and finally the large corporate and
institutional investor markets, the latter of which
Cohen describes as “very crucial”.
He adds: “Those are the main clients that we want
to focus on. We will focus on trying to be number one
here in Holland for all those clients and we will focus
on their subsidiaries and branches in
foreign locations.”
At this point I am struck how much the ABN
AMRO/Fortis story mirrors Cohen as a person:
“Rotterdam born and bred”, he has an Egyptian father
and Dutch mother, and his father had an Iraqi mother
and Turkish father. He travelled all over the world as
a child and, after working in various countries, has
been based firmly in the Netherlands for a number
of years now – similar to the picture of the new ABN
AMRO: a varied global experience from a Dutch base
with a renewed focus on the home market.
That said, ABN AMRO’s focus will not be entirely
on the Netherlands. Cohen explains: “In a couple of
products at which we excel we will also have a global
focus. This is very much on energy, commodities and
transportation clients. That is a value change that has
always been very crucial.
“Additionally, securities financing is of course a
global product where we want to accelerate, also the
22 | Fundamentals4HNHaPUL |>PU[LY2011
broker clearing and custody business, and of course
we have always said that the foreign exchange and
rates business is becoming a global business where
we want to target all the foreign locations of Dutch
corporates. We have made a list of roughly 500
companies and we want to make sure they know our
capabilities in that area.
“Again, consolidation - for me meaning focus –
making sure that the clients understand what we can
do, and we will offer the best of what we can do, but
we will not offer any more than that.
“We are also very keen on staying independent and
remaining as a normal Dutch system bank, because
ABN belongs in the financial landscape of Holland
and the other areas where we operate. The name
recognition is still very, very high – if I compare it to
Fortis then you do see different advantages of being
ABN now. With all respect to Fortis Bank Nederland
the brand name of ABN is definitely bigger.”
Despite the recurring theme of focusing on Holland
and cementing its position as a Dutch entity, Cohen
does admit that further in the future the bank may
look more keenly beyond the borders of
the Netherlands.
“By stating that we want to focus on what we are
really good at, and offer just that, we are creating a
basis, and that basis should be the starting point for
expanding our product palette and our ambitions,”
he explains.
“Of course our ambitions are very high and if we are
honest enough our ambitions will reach into different
locations, different client types, going beyond what
we focus on just now. But the difference between five
years ago, whether it was at ABN or Fortis, and now,
is that we first want to create a solid basis which is
a track record for us and for the clients, and then we
build on that as far as our ambitions can go – and of
course they are big enough.”
With that, the interview is over and Cohen heads
off to a meeting with the Dutch Central Bank, just
one meeting among many as ABN AMRO seeks to
continue its re-launch and strengthen its position in
the Netherlands.
One thing that became clear during the interview
is that if the bank consolidates its position in the
Netherlands it will look to become more of a global
player once again in a few specific global markets
(ECT, BCC and Private Banking).
ABN AMRO’s immediate future may be “Oranje”
but, if all goes to plan, the longer term could be
even brighter.

Fees high for funds?
Damian Burleigh, managing director at S&P Valuations & Risk
Strategies, looks at the hot topic of fund fees and whether they can be
justified by performance
und managers have come under heavy criticism in
recent weeks due to the headline grabbing statistic
that fees of 1% can, on average, consume 38% of
returns over the lifetime of an investment fund. This is
clearly a significant amount, but is it defensible?
The only way fund managers can justify the fees
they charge is by strong and consistent portfolio
performance. Yet ensuring a strong performance is
not easy: making the right bond selection in the right
sector will always partly rely on an element of intuition,
as will correctly timing trades and foreseeing the full
implications of important impact-events. And there is
also of course a significant amount of resource required
in researching and interpreting relevant information to
inform both the investment decision making and risk
management processes.
Managers that allocate more resources to data,
research and analytics tools should be capable of
performing more robust scenario analysis, stress
testing and risk monitoring across their portfolios. Poor
portfolio performance is often a result of managers using
analytics and research tools that are unfit for purpose.
Indeed, in some cases the problem of overcharging can
be at least partly attributed to managers taking bond
bets without completing a full and comprehensive
scenario analysis. If this is the case it would be near
impossible to understand how the portfolio selected
would perform in volatile economic conditions – leading
to very expensive looking fees.
However, some worthwhile excuses can be made
in this instance. Each organisation will have its own
analytical capabilities, although larger firms have
an inherent advantage. They have a deeper research
capability – largely through the employment of the most
sophisticated databases, quant systems and valuation
analytics. And larger firms are also able to attract the
best and brightest industry names.
But smaller organisations can have the upper hand
in certain respects. For example, they are less inhibited
by the kind of bureaucracy that can weigh down large
outfits. Unfortunately, the proprietary analytics and
systems some managers of smaller funds are forced to
employ are fraught with IT investment and maintenance
issues.
These problems can be mitigated with an
improvement in software infrastructure, which is
why industry leaders in market analytics such as S&P
Valuation & Risk Strategies are committed to delivering
Fees high for funds?
powerful but intuitive scenario-based analytics with
deep stress testing mixed with forecasting correlation
analytics. Such tools are becoming essential for portfolio
managers undertaking surveillance and stress testing
across asset classes and, indeed, across the entire
capital structure.
Tools are also being developed to help inform
investment decisions in specific asset classes. A good
example is S&P Valuation & Risk Strategies’ new
risk-to-price scoring system for both high-yield and
investment grade corporate bonds. Risk-to-price was
originally developed as a direct response to the credit
crisis of 2008/2009 and is now being widely adopted
for day-to-day use by managers in the US and EMEA.
The methodology aids fund managers with both risk
management and alpha generation by combing through
a growing universe of 7,000 fixed income instruments
to rank bonds according to how well they compensate
investors – through yield – for their respective market
and credit risks.
Of course, profiting in a trending market is relatively
easy and may not require complex analytics tools.
Getting the most value out of investment portfolios
while reducing risk during unstable market periods
is much harder, meanwhile, and successful managers
in this environment earn their dues. In fact, investors
have been seeking riskier investment strategies in recent
months –for example through increased durations in
the fixed income markets – putting more of an onus on
robust risk/reward analysis. Certainly, the dip in the
average duration of a bond portfolio after the financial
crisis – when tenors slid from five to three years – has
since been reversed, with between four-and-a-half and
five years now the norm. And it is possible we will
see further increases soon. In fact, pay-downs have
significantly reduced portfolios’ compositions and the
term of replacement bonds currently tends to be in the
range of five to seven years.
The idea that there are many contributing factors
in the creation of a successful portfolio is hardly
controversial. Everyone knows good data, research,
analytics tools and a dose of intuition are all necessities.
Investors looking at these more aggressive strategies
would do well to turn to discerning and well-equipped
fund managers if they are to obtain a healthy return.
This is especially true in the current economic climate:
without a capable manager using sophisticated tools the
total return is unlikely to amount to much.
>PU[LY 2011 | Fundamentals4HNHaPUL| 23
 The Times, they are a changin'
FundFront
The Times,
they are a-changin'
Fund managers are urged to ramp up their systems to adapt to
the changing landscape of regulation. By Eric Roux, managing
director - fund reporting, KNEIP
he financial crisis has had a significant
impact on the fund management industry
as well as the investment community. After the
turbulence of the past few years, it has become
apparent that today’s focus needs to be on restoring
the market’s trust by enhancing transparency
across the board. Consequently, fund managers,
distributors and independent financial advisers
(IFAs) must all place an emphasis on creating a
true partnership with their investors, one in which
communications are improved, processes are
standardised and documentation is simplified.
Against this backdrop, fund managers must
also face increasing regulation determined by the
European Union. Indeed, as has been exceedingly
well documented, a raft of legal reforms is underway
and planned for full implementation in 2011. These
include of course UCITS IV and the introduction
of the Key Investor Information Document
(KIID). Instead of regarding these regulations
as unnecessarily burdensome, the investment
community can regard them as a real opportunity to
redefine investor communications.
Shifting towards a more standardised fund
management industry
UCITS IV, which aims to create a more efficient,
flexible and competitive European fund sector while
offering greater investor protection, represents one
of the most extensive regulatory upheavals the fund
management industry has seen to date. But while
this legislation is a very important step toward
more cooperation and transparency between asset
manager, distributor and investor, it is certainly not
without its challenges.
24 | Fundamentals4HNHaPUL |>PU[LY2011
The way in which asset managers plan to
implement UCITS IV will very much depend on
their existing funds, business model and strategy.
Internal organisational strategy and distribution
policies will be the main drivers for asset managers
in choosing their fund domicile and their asset
servicing providers.
The only mandatory measure is the
replacement of the Simplified Prospectus by
the Key Investor Information Document (KIID)
from July 2011. The introduction of the KIID
responds to market needs for transparency,
uniformity and standardisation as it is intended
to help end investors make more meaningful
comparisons between UCITS funds. In line with
this objective, the KIID is basically a two sided
fact sheet-style document with a prescribed
format following five headings: (1) Objectives
and Investment Policy, (2) Risk and Reward
Profile, (3) Charges, (4) Past Performance, and
(5) Practical Information. It also introduces new
types of information such as synthetic risk and
rewards indicator.
On the surface, the KIID appears to be
straightforward and a more efficient document than
the Simplified Prospectus. However, its development
also raises the following concerns, which we believe
must be addressed by the industry as whole if the
potential benefits of the KIDD are to be fully realised.
Key hurdles to overcome
With less than 250 days to go before the regulation
is fully implemented, KNEIP recently surveyed
members of the fund management community
on their concerns and expectations ahead of the
introduction of the KIID.

According to our findings, cost is a critical issue.
Almost 70% believe that producing the KIID will cost
more than the current cost of producing the simplified
prospectuses, with 50% of respondents stating that the
increase in production costs would be in the range of
10-20%. This increase in costs could come from a wide
range of areas including timing, volume, operations
and delivery. This is particularly significant, given
not all countries will implement UCITS IV at the
same time. EU countries have until 2012 to adopt
the regulation at which point every fund launched
in the country will have a KIID. Until they do, fund
managers will need to produce both the Simplified
Prospectus and the KIID simultaneously, essentially
duplicating costs.
Translation and production of the KIID is an
additional cost and concern for the asset management
industry, with questions around quality, quantity,
timeliness and the workflow. UCITS IV requires
yearly production every January, timely delivery and
confirmation of receipt, compliance with prospectus
and translation coherence. As a result, a third of fund
managers surveyed were considering outsourcing
the KIID with almost 90% citing translations as
the number one area to outsource, followed by
production (75%).
Fund structures will also be affected and strategies
need to be revised in relation to representative share
class (RSC). This directive allows for KIID production
to be grouped into representative share classes. While
grouping carries some risks, not grouping share
classes will increase costs for producing the KIIDs
due to the number of documents to be produced.
However, 40% of the fund managers surveyed plan to
create a KIID for each share class and another 40% are
The Times, they are a changin'
currently undecided. Only 13% plan to group share
classes wherever possible while 8% are considering
combining the two strategies.
Distribution and document production were
also cited as primary concerns by 75% of asset
managers surveyed. Of those that cited distribution
as a concern, 35% worry about getting the latest
version of the KIID to the end investor through their
distribution network. In addition, 60% of respondents
are concerned about producing KIIDs within the fixed
time frame, while 35% are troubled about getting the
latest version of the KIID to the investor through the
distributor network. Distribution is crucial as it is the
final link in the chain of informing the end investor,
and not doing so potentially undermines the most
basic tenant of the KIID directive, to ensure that the
end investor always has up-to-date information.
The way to better communications
While fund managers are pressured to quickly
understand, assimilate and adapt to the regulatory
requirement and significant systemic changes that it
involves, they also acknowledge that UCITS IV is a
step in the right direction for the industry.
The last two years have demonstrated that
transparency and greater information provision with
less complexity is being demanded by investors and
UCITS IV has the potential to streamline the fund
industry, as well as encourage greater efficiencies
for fund managers offering investment products in
European markets.
Increasing comparability of products, greater
disclosure, regular updates and clearer information
provision are all key benefits of the KIID and answer
the need for more efficient communication.
>PU[LY 2011|Fundamentals4HNHaPUL| 25
 Selection and Survival
Selection and Survival
FundFront
The size of the fight is more important than the size of the firm,
according to the CEO of Schroders, Markus Ruetimann as he looks
at the future of the asset manager
imes have certainly changed in the asset
management community in the space of just
a couple of years. Firms have been forced to plump
up their client services to gently coax investors into
trusting the industry again. But the trust is still not
there, says Markus Ruetimann, chief operating
officer of Schroders. Callous jokes about investment
bankers are in full flow on the internet and
investors are still asking “how safe are my assets?”.
This is just the start of a huge transformation for
the industry, said Ruetimann as he addressed an
audience at the ISJ London Summit ‘10. We are
far from exiting the financial crisis, he says, where
market volatility has been driven by investor fear
and is set to continue. Using Darwin’s theory
of evolution as a template to explain what fund
managers need to take on board, Ruetimann said
that it’s all about ‘selection and survival’ and that
those who are careful to make the right choices will
rise above the rest.
The industry is entering the renaissance age, he
says. As the client becomes more important to
business, investment solutions and fee structures
must evolve to regain the investor’s trust, but
Ruetimann goes further than that to suggest the
introduction of a ‘duty of care’ where custodians
become stewards instead of agents. Investors have
moved from greed to fear, he says, so the industry
must ensure it implements measures to ease that
anxiety. Adopting a standard of care, which is
a-given in other sectors such as healthcare, is one
way of meeting the needs of the long-term ‘buy and
hold’ investor and maintaining respect for the ‘risk
vs reward’ seesaw in clients’ portfolios. According
to Ruetimann, firms should be asking questions
such as ‘Is this product fit for purpose?’ and ‘Do we
understand and respect the risk and
reward balance?’
It’s also about educating your client about how
their investments are segregated and why, says
Ruetimann. The industry has come under criticism
in recent times for not being open enough with
clients about what happens with their money.
26 | Fundamentals4HNHaPUL |>PU[LY2011
“Be open with your client about the things you can
and can’t do,” Ruetimann advises. He even calls into
question the way that clients’ money is segregated
because it involves a high amount of default risk.
“It’s unbelievable how many clients are asking us
‘how safe are our assets?’” But providing a good
service for your client must go further than this, he
adds. Being aware of your client’s lifestyle and age
is paramount to meeting the needs of the long-term
‘buy and hold’ investor.
Ruetimann points towards operational management
as the industry’s biggest challenge. As the industry
cries out for more accuracy and automation, the
back office is morphing into the front office. Firms
are spending huge chunks on data management,
where finding ‘talent’ is key to coping with future
operational challenges. Operations departments are
usually out-shored, but this will be undoubtedly
become more difficult as the demand for operational
integrity intensifies. But we must avoid out-shoring
the overall responsibility of ensuring reliable
operations, says Ruetimann. “This will mean that
relationships between offices will have to become
more challenging, intense, transparent and more
inclusive,” he adds.
Despite his belief that the industry needs to change,
Ruetimann criticises regulatory bodies for adopting
an “aggressive” response that resembles a tsunami
wave. Their response should be proportional, not
forced, he says, to avoid a “new ice-age” where
innovation, ambition and healthy competition
would be compromised by excessive regulation
and bureaucracy. “We’ve lost the ability to live
in a self-regulated world,” he laments. “Forced
regulation will kill a huge level of innovation in
terms of products and give a false sense of security.”
Ruetimann seems to be particularly concerned about
how new regulations will provide better protection
for clients than rules in place before the financial
crisis. Even the trade associations - which represent
industry professionals and campaign on their behalf
to regulators – are not in touch with the financial
world anymore, says Ruetimann. This follows claims

from other industry insiders that the high proportion
of retired professionals in many associations weakens
their relationship with the immediate world.
There are global fears that excessive regulation will
only add to the pressure on firms as the industry
struggles to recover. Ruetimann predicts that as
financial renumeration goes down and the pressure
falls upon profitability, providers will have to
specialise and globalise.
But it will still be difficult for new providers to
crack into the market, particularly custody providers,
which he claims will still be dominated by the big
custodian banks in the future. Yet he predicts that
smaller boutiques will continue to make a stand
on the asset management stage, where the multi-
boutique and multi-pool theme will prevail. “Is big
really beautiful?” asks Ruetimann, which brings
to mind the recent attack on the big banks. “We
must avoid a situation where strong balance sheets
and good legal terms become more important than
the quality and choice of providers.” He suggests
that smaller providers are the future and that their
emergence will be essential to allow the industry to
move forward. Quoting the famous American author
Fundamentals
World Summit Series
Selection and Survival
Mark Twain, Ruetimann says, “after all, it’s not the
size of the dog in the fight but the size of the fight in
the dog.”
Ruetimann predicts
• Absolute return funds will be occupied by
hedge funds to a large degree, around the
5,000 mark. Hedge funds will be a prime
distribution channel.
• New technology investments will be on
firms’ top costs for some time
• Asset allocation will be more unpredictable
and opportunistic
• Alpha data will be essential for success
• Greece will be defaulting pretty soon
• China will not provide the ‘nirvana’
• 27th January
GSL & ISJ London Summit, London
• 24th February
GSL & ISJ Nordic Summit, Stockholm
• 7th April
GSL Asian Summit, Shanghai/Beijing
• 12th May
GSL North American Summit, Chicago
• 15th September
GSL & ISJ Boston Summit, Boston
• 6th October
GSL & ISJ Dutch Summit, Amsterdam
• 3rd November
GSL & ISJ London Summit, London
• 1st December
GSL Middle East Summit, Abu Dhabi
>PU[LY 2011 | Fundamentals4HNHaPUL| 27
 Weeklywire
Register free for the Weeklywire - eFunds.tv/membership
For more on the outlook for 2011 see www.Fundamentalsmagazine.com/2011ISJOutlook
Outlook
Alain Closier, global head,
Societe Generale Securities Services
InvestorServices
I would expect - with the downward pressure on prices
emanating from clients’ myriad difficulties - we will see more
steps taken to improve efficiency and to stay focused on meeting
those needs in a timely fashion. Timeliness is a key issue as
external events impact upon the providers of securities services.
For example, as an industry our business timeframe does not
align well with the regulatory timeframe which is much longer;
while US, Asian, European and individual countries strive to
overhaul their regulatory framework, we face the day-to-day task
of looking after our clients’ needs, in the style to which they have
been long accustomed.
Charles Cock, head of client development, BNP
Paribas Securities Services
We are not out of the woods yet. There is pressure on
government debt and doubt over the long-term sustainability of
public pension schemes. This means there is greater opportunity
for custodians to help investors manage their risk. There will be
continued demand for asset safety, for example assiduous due
diligence over custodian networks. Proprietary networks are now
considered safer by the regulators. Also, as a result of the crisis,
stable financially strong partners are being favoured.
Jonathan Davis, director,
Jonathan Davis Wealth Management
Investors may have to get used to a period of disappointing UK
economic growth and the difficult environment that goes with it,
but thankfully warnings of a double-dip recession from economic
indicators are still few and far between. It may prove necessary to
diversify into a range of different assets in order to achieve either
income or growth from investments.
Tom Davis, CEO, Meridian Global Fund Services
Those administrators who have a good understanding of the
breadth of services they will be expected to provide to their clients
and investors and who understand that the relationship among
these three parties involves fiduciary oversight will continue to
grow and prosper. The administrators who will be left behind
are those who think they have a competitive advantage by being
the lowest cost service provider. This type of administrator sees
administration services as a commodity and fails to grasp the
value add when money is spent on resources that enhance, rather
than just process, information.
28 | Fundamentals4HNHaPUL |>PU[LY2011
Ulf Noren, global head of sub-custody, SEB
Regulatory initiatives and Target 2 Securities (T2S) are driving
post-trade development. We will see a break-up of fee structures
into an unbundled structuring. There will be much more focus
on risk management and collateral management. Single market
providers will come under intense pressure from regional
providers, both in sub regions and the whole of Europe. Europe
will also have to do something with its fragmented CCP models:
consolidation is needed.
Sameer Shalaby, CEO, Paladyne Systems
Today’s investor is now much more aware of the potential
downside and has made capital preservation their primary goal.
In this new climate if a hedge fund manager cannot demonstrate
to a potential investor that it has adequately protected itself
against all possible downside risks, including operational risk,
they will find it very difficult to attract capital.
Steven Smit, head of State Street’s Global Services
in the UK, Middle East and Africa
What [the traditional custody business model] requires is for
asset servicers to refine their operational models to extract still
greater efficiencies, by further increasing the levels of automation
and fine-tuning the way in which they deploy existing technology.
Interconnectivity and linkages between custodians, clients,
exchanges, trading venues and depositaries are obvious areas for
further improvement.
Scott Somerville, CEO, Maples Fund Services
The needs of institutional investors will continue to become
more complex and demanding. Pension funds will remain under
pressure to find ways to increase funding levels and reduce
volatility. In order to address unfunded liabilities that have
remained high in the aftermath of the financial crisis that began
in 2008 traditionally conservative pension funds will increasingly
implement strategies that have different operational and
information needs than has been traditionally required.
Paul Stillabower, global head of business
development, fund services,
HSBC Securities Services
We will continue to see a challenging industry in 2011 and
beyond, principally because it seems as if stock exchanges won’t
be co-operating any time soon in terms of returning to what the
industry had come to perceive as normal. With interest rates at
record low levels, and clients focusing on risk rather than price,
it is a challenging environment for the US securities services
business model, which was largely built in a long bull market
with assets growing by 15% or more each year.
Ten markets, ten cultures,
one bank.
For further information please contact:
Global Head of GTS Banks: Göran Fors, goran.fors@seb.se
Global Head of Sub-Custody, GTS Banks: Ulf Norén, ulf.noren@seb.se
Global Head of Client Relations and Sales, GTS Banks: Patrik Thiis, patrik.thiis@seb.se

>PU[LY 2011|Fundamentals4HNHaPUL| 29
 Executive Profile: Tim Keaney
Executive Profile:
Tim Keaney
Craig McGlashan talks
to the CEO of BNY Mellon
Asset Servicing about the
past and future of
the business
s a “career asset servicing person” with nearly
InvestorServices
25 years in the business who is in charge of
the world’s largest asset services provider by assets
serviced, Tim Keaney is perhaps more ably placed
than anyone else to describe where the industry has
been and where it is headed.
Unlike many in the business, Keaney has worked
for “very few firms” – even fewer when considering
the various mergers and acquisitions involving those
firms he has been a part of.
Beginning his career at Boston Safe Deposit and
Trust Company, he found himself working for Mellon
after the latter acquired the former. Later, while at
The Bank of New York, he would be at the forefront
of the merger between Bank of New York and Mellon
Financial Corporation – the result of which was BNY
Mellon, where he is CEO of Asset Servicing, among
other chairmanship roles.
Keaney describes his journey through the industry
over the last 25 years as having come “full circle”, a
description that is also apt for how he has seen the
business develop over this time, although he believes
his greatest success was what he achieved with Jim
Palermo as co-CEOs after the creation of BNY Mellon.
“He was legacy Mellon asset servicing head and I
was the legacy Bank of New York person. Little did
anyone know that Jim was one of my best friends, I’ve
known him for 25 years,” he says.
“We were co-CEOs from July of 2007 up until two
months ago. Very rarely in financial services do co-
CEOs succeed but we formed a partnership where we
made every decision together and created something
really special.”
In the beginning though, Keaney believes his time at
Boston Safe was pivotal in how his business life turned
out, with Tom Lucy, who ran the firm’s institutional
business, a major factor in this. Keaney began in sales
and was required to be a jack of all trades – selling
everything from active equity to master custody.
“That’s what made the business very interesting.
The range of products I had to know about pushed
me up a massive learning curve, much quicker than I
30 | Fundamentals4HNHaPUL |>PU[LY2011
otherwise normally might have had to climb. For that
I’ve been enormously grateful.”
During his time the sales model has altered from the
broad knowledge that he required to a deeper, more
specialised role, he says.
“I don’t think I’d be qualified to be in sales today
because it demands so much knowledge,” he admits.
“You need to know not just what you do but how you
do it. Everything is based on technology so those in sales
today, and relationship management, are amongst the
smartest in our company. You are only as good as the way
you present yourself to a prospective client so we have
tremendous respect for the importance of those roles.”
This shift has been caused by a trend Keaney identifies
over the last two decades, where, like him, the industry
has come full circle, particularly given events like the
Madoff fraud, Lehman Brothers default and the current
problems in the eurozone.
“It used to be that a client’s relationship with a
custodian was like expecting ice in the ice machine
when you opened the fridge door – it just always
worked. Now, with these events, it is clear that what we
do is incredibly important because we ensure the safety
and security of people’s assets,” he says. “What makes
me run into the elevator every day is that each day
throws up new challenges because of all the external
factors. It makes the business exciting. It’s come full
circle and it’s a reminder of how important it is.”
Even the name of the game has changed, Keaney
believes, from a term “rarely mentioned” – custody - to
asset servicing.
Why was this? “It’s because clients had both a need
and an opportunity to outsource non-core functions to
firms who spend an enormous amount of money on
technology and have found a way to create repeatable
processes, a scalable platform and a nimble organisation
that can respond to clients’ needs, faster than clients
could support themselves.
“First, you were a custodian, then funds asked for you
to do their accounting, then people started investing
cross-border, giving birth to global custody and the
requirement for foreign exchange. Then you add

performance measurement and risk management, and
new and very sophisticated online systems that give
people access to important decision making tools.
“That transformation took two and a half decades, and
it continues. The value chain is only limited by our
creativity, our willingness to evolve and the ability to
understand clients’ changing needs.”
This is also reflected in attitudes towards pricing
models, Keaney believes. In late 2007 and early 2008, he
says clients were well aware of the earnings being made
by the likes of BNY Mellon in foreign exchange and
securities lending, although this has now gone back to a
“normalised, pre-bubble environment”.
However, this has led to a change in clients’ focus.
“They are really smart about figuring out how much
money we make in fees and other capital markets-
related revenue and now they want a better deal; a fairer
share of that pie. When we enter into negotiations with a
client we do so with that new reality very much in mind.
I personally have a bias towards seeing more of how
I’m being paid in very straightforward fees that are very
transparent to our client.”
This transparency is one area that Keaney cites
as a major change in client expectation; however,
the other area – one where he believes BNY Mellon
“distinguished” itself during the crisis – is that
customers are looking for real-time information on
questions “that weren’t even asked before”.
He offers an example: “Across billions of assets
invested globally they’d like to know right now what
their exposure is to certain counterparties. They want
to be able to run their own scenario analysis on what
happens in different interest rate scenarios, or under
different risk scenarios, just like banks do. Clients
answer to boards that are asking very good questions
now because people understand risk in a different way
than they did pre-crisis.”
One example of the “full circle” history of the business
is that after years of giving up responsibilities to service
providers, clients are now asking for the data and tools
to empower themselves.
This is not true in every case, however. “We have very
sophisticated clients that have the staff, means and
intellectual capacity to do it themselves and we provide
them with the tools to do so,” he says. “Other clients, such
as funds under pressure to do more with less, may ask
us to carry out the analysis for them. This gives renewed
energy to our business model because it puts us in a
position to be able to do more on behalf of our clients.”
Continually providing those new technologies comes
at a cost, however – roughly $600 million was spent by
BNY Mellon on technology in each of the last two years,
Keaney reveals. This, combined with increased scrutiny
from regulators, will lead to further consolidation within
the industry, he believes.
Executive Profile: Tim Keaney
Keaney is well placed to speak about consolidation,
given his past career and two recent moves by BNY
Mellon to strengthen its position, namely the acquisition
of PNC Global Investment Servicing (GIS) in July
2010 and the asset servicing business of BHF Bank in
August 2010. With the likes of State Street also making
purchases, consolidation within the industry is a
reality, he says.
“There are two factors. One is forced sellers; as large
global financial institutions have to recapitalise
themselves under Basel III, they sell assets to raise
capital. There is a re-examination of the asset servicing
business by large players, where it might be a very small
contributor to their overall P&L.
“The other is the ever increasing level of reinvestment
one needs to make. I can’t imagine how players smaller
than us can afford to keep making the investments
needed in their operations, expanding globally, meeting
new regulatory requirements, building more efficient
and scalable platforms, building new and flexible
information tools for clients.
“This is not a business for the faint of heart; the bar
has been raised and if you don’t spend on people and
technology, watch out – because you won’t be in the
business for very long.”
However, this increased growth presents the biggest
challenge Keaney has met in his career, namely
balancing the benefits of scale (BNY Mellon’s asset
servicing business today has 16,000 employees and
provides 33% of total pre-tax income across the whole
company), but still being viewed as “nimble, small,
effective and entrepreneurial”.
If that is the current challenge, then what does the
future hold both for BNY Mellon and the wider asset
servicing business?
Keaney cites the “explosion” in alternative assets,
from derivatives to private equity, and believes there is
a “huge opportunity” to service these customers in the
same way as the traditional client base.
“In the next five years you are going to see an
increasing percentage of assets being deployed to maybe
higher risk but higher earning potential,” he adds.
Elsewhere, Keaney expects a “whole rebirth” in
performance measurement and risk information
tools, while he also anticipates the global expansion
of exchange-traded funds to continue. “I think they
will become the standard for low-cost, efficient and
very transparent core equity and core fixed income
investments for pension plans and for defined
contribution schemes.”
Keaney has been at the forefront of asset servicing during
the massive changes the industry has seen over the last two
decades; few would bet against his predictions for the next
evolution of the business.
>PU[LY 2011|Fundamentals4HNHaPUL| 31
 Keeping up to data
Keeping up to data
Brian Bollen investigates just how high up the corporate ladder data management
concerns have reached
nhance your data management, reduce your
capital requirements
Could improvements in data management help
reduce the need for banks and other financial
institutions to raise fresh equity? This is one of the
key claims made to reinforce the irresistible rise of
data management up the corporate decision-making
hierarchy. If data management tsars are not already
InvestorServices
sitting with their feet up in the boardroom, they are
at the very least knocking on the door of the C-suite,
eager to add the key to the executive toilet to their
already extensive range of baubles.
The claim does, almost inevitably, come from
the data management solutions supply side of the
industry, but it still merits some consideration.
Anything that represents an alternative to further
capital issuance and dilution deserves at
least a hearing.
“We strongly believe that over the past 18-24 months
it has made its way into the C-suite,” says Daniel
Simpson, CEO of Cadis, briefly profiled elsewhere in
this issue.
Sally Hinds, global head, enterprise data
management at Thomson Reuters, agrees
wholeheartedly. “Five years ago reference data
weren’t even on the radar,” she says. “It was in the
background. Part of the plumbing. Nobody cared.
But its profile has soared since the credit crunch
and everyone has at least a programme in place to
enhance their capabilities. In fact, data management
is now so much in vogue that it is being included in
graduate training programmes. That is a major step
forward from five years ago.”
Simpson identifies a number of reasons, beginning
with the creation of dedicated data management
departments. “This is a relatively new concept,”
he says. “Traditionally dedicated departments
didn’t exist. You either had a business problem or a
technology problem, and never the twain did meet.
Tension and conflict
This inevitably led to tension and even outright
conflict within organisations, which the creation of
dedicated units cross-pollinated by both business
specialists and technology experts has helped
to reduce.
32 | Fundamentals4HNHaPUL |>PU[LY2011
The importance of data management has been
highlighted and escalated by events of the past
few years, leading to the post-Lehman growth in
regulatory activity surrounding Solvency II, Basel III
and UCITS IV, et alia, coupled with the demands for
greater transparency. “Institutions generally know
they have the data, but not how to pull it together,”
Simpson continues. “Data Management has been
Cinderella, but Cinderella is now going to the ball.”
What, then, might be the implications of
this change in direction? First off there will be
organisational implications. “Institutions need to
assign responsibility for data, to appoint ‘Data Tsars’
or ‘Data Stewards’, who know where to turn to if
they are to source the most appropriate tools and
data management software,” suggests Simpson.
“The whole issue is forcing people to look at their
business in a hard way, and they often don’t like
what they see.”
What does he mean by that? “The front, middle
and back offices, for instance, are not as joined-up
as they’d like,” he says. “They might find they are
buying the same data eight times over, spending
more money and time than they need to. They
can also find that their exposure to a particular
counterparty is greater than they previously
thought. On the positive side, if they approach
the problem in the right way, they can reduce the
amount of capital they need to hold. Banks could
save billions in Tier 1 capital if they can get it right.”
Stuart Grant, EMEA business development
manager, financial services, at Sybase, addressed
the topic in the debut issue of Fundamentals,
highlighting the problems that could arise as long
as the back office moves at a slower pace than
the front office as it deals with the confirmation,
settlement and accounting of the front office activity.
“The importance of both timeliness and accuracy
are paramount to this confirmation, settlement and
accounting process to prevent future loss of revenue
through inaccurate exposure analysis,” he observed.
Severely out of sync
“The concept of straight-through processing
(STP), which has existed for over 10 years, should,
theoretically, address this issue of ensuring that a

transaction is progressed efficiently from the front to
the back office,” continued Grant. “However, it is far
from reality. As a result, the middle and back office
accuracy and timeliness are often severely out of sync
with the front office position. The implications of an
out-of-sync front and back office can clearly impact the
entire business’s profitability. The inconsistency between
front and back office is largely down to a combination
of issues, such as: disparate internal and external data
sources; misinterpretation of data descriptions or
metadata; and lack of scalable quantitative processes
used in the front office for functions like asset valuation
as they cannot easily be replicated in the middle office in
a robust or auditable way.
“In addition, timing has a big effect on the front,
middle and back office systems. All of these systems
are rarely in sync within a 24-hour period leading to
data inaccuracies and an inability to maintain an agile
workflow. The ‘knock-on’ effect is a firm’s inability to
understand its actual position at group level within a
given 24-hour period, thus reducing its ability to react
to Black Swan or other unexpected systemic events.
“The biggest challenge faces firms that are called
upon to understand their exposures and position
on an intra-day basis,” added Grant. An event such
as the collapse of a major counterparty relies most
heavily on the firm’s actual position, and this in
turn is down to the middle and back office functions
having consistent and up to date information.
However when the offices are out of sync and
do not run on the same clock, knowing a firm’s
exposure immediately, as with the case of a collapsed
counterparty, is almost impossible.
“As the general pace of the financial markets
increases and individuals as well as institutional
investors become more au fait with how to monitor
and invest in markets, firms will need to ensure they
are not only seen as stable but can prove it in times
of stress to maintain their customer loyalty,” he adds.
However, dealing with a lack of insight into a firm’s
actual position by overcompensating for potential
short falls or volatile movements in the market will
make a firm uncompetitive in the long term.
The growing reconciliation burden
Grant stated that if the gap between front office
and post-trade activities is allowed to grow, the
future costs of maintaining reconciliation teams and
processes will become a major burden, and one which
may require significant investment to fix. However,
in a recent Sybase survey, nearly half of respondents
downplayed risk to the model creation and execution
process imposed by using separate environments
Keeping up to data
for development and production. Executives
participating in the survey frequently pointed to
increasing efforts within their own businesses to
bring these environments closer together.
“There is clearly the recognition that dangers are
present and a need exists to rectify this situation,
however the severity needs to be understood fully.
Failure to truly understand intra-day positions and
also funding requirements could easily translate in to
failure,” Grant said.
The role of the solutions provider as summarised
by Simpson is to join up the data to present a
more accurate overview of exposures and capital
requirements. But are banks taking the potential
lessons on board? “They are embracing it,” states
Simpson. “They know it has to be done, and working
to ensure that they do it properly.” Aside from
reducing the cost of capital and the need to raise new
capital, enhanced data management has other useful
by-products. It can reduce operational risk, increase
the efficiency of straight-through processing and
reduce the volume of trade breaks. “Everything flows
from good quality data,” he adds. “Compliance, risk,
margin collateral, client reporting. Everything.” Data
is good. Quality data is better.
Power to the people
Once a dedicated data management department has
been created, it has to be given power if it is to rectify
the problems that have grown with the passing of
time. “Information in back office systems can look
very different from information in the front office,”
says Simpson. “If the back office technology is 20
years old, which is quite possible, it won’t even be
able to recognise modern instruments being traded
by the front office, which in itself creates data
reconciliation problems. You need a good process
to resolve discrepancies, and bad data can easily
overwhelm you, forcing you to assign priorities to
breaks to show which fires you need to fight first.”
This hardly sounds like an ideal state of affairs in a
world that will surely only become more and more
complex. What major developments can we expect
next? “As I said before, we are now starting to see
people embrace data management across the board,
especially enterprise-wide data. People are looking
up from tactical everyday problems and beginning
to appreciate the bigger issues.” What must happen
is that industry players will need to comply with the
fast-growing regulatory thicket.
Potential further complications lurk in the sidelines,
as yet not even embryonic. Potential problems are
mutating at the sub-atomic level even as we speak.
>PU[LY 2011|Fundamentals4HNHaPUL| 33
 Keeping up to data
With increased consolidation likely to place on
both the buy- and sell-side of the financial services
industry, mergers and acquisitions will create
hosts of new issues. “M&A always throws up new
problems,” says Simpson. “You think you have your
house in order then, wham, someone develops a
new instrument and someone makes an acquisition.
Flexibility is essential. Data is changing not only on
a daily basis, but on an intra-day basis. You can’t
afford to be rigid. And regulations are changing
almost on a weekly basis. We’re all trying to hit a
series of rapidly moving targets with brand new
weapons purpose-built for the task.”
“A fundamental change in infrastructure is
required,” concludes Grant. “Having a number of
InvestorServices
different management applications is no longer good
enough. The information in a trading environment is
critical to the existing environment and centralised
management and visibility of this information is a
necessity.” Des Gallacher, head of data management
and analytics, DST Global Solutions,
in conversation with Stephanie Baxter
“Data: there is so much of it! Companies that are
ahead of the game and have a solid data management
infrastructure in place will find themselves with a
competitive advantage. One of the key drivers behind
data
 management is cost reduction and risk reduction.”
Is data management rising up the corporate ladder?
Yes, the ‘data management’ term is widely used now.
The very forward-thinking asset manager has put
teams and budgets in place for data management –
it’s very high on the agenda. It ultimately powers
what they can deliver to their clients, to the regulator.
Regulators are looking for more and more, and
without control you’re going to be playing catch up
all the time. You need to get ahead of the game to
focus on your role as an asset manager – to make
money for clients and drive revenue.
 to get people involved when there’s an exception,
Has it reached board level?
Yes, it has reached many boards. But not every asset
manager has budgets or teams in place. Anova
(our new platform) brings power of data to board
level. Once data management starts impacting them
negatively or positively, then it starts to become
more important.
Is it inevitable?
Absolutely, everything is about data. It powers
everything that goes to the clients, who are
ultimately the recipients of your end goods. The
market is very competitive. Your clients can move
if they are insecure about not enough exposure
or transparency around what you are doing
34 | Fundamentals4HNHaPUL |2010
|>PU[LY2011
because you don’t have the right data management
infrastructure in place.
The wealth management space is growing very
competitive – clients are much more demanding.
If they don’t get what they want, it is very easy for
them to move. Everything is online now, which
means clients can easily pack up and leave. The
forward-thinking asset manager already has all this
in place. Recent issues in the economy and tougher
regulation have only increased the velocity. It has
made clients more aware of what they can get in the
market place, more aware of financial terms.
One of our clients provides stock level multi-
currency attribution, which some asset managers
don’t even provide to their large clients. Some get
left behind. Globalisation is key. Clients are looking
for alternative strategies. Large asset managers
will start to buy boutique providers to bring new
capabilities in. As they pull in all these boutiques,
they need a platform to consolidate all the extra
information.

How can companies improve their data
management?
They firstly need to make sure that all the engines in
the business are producing from the same starting
point. Then they can quickly react to new changes
in the market, such as moving into a new asset
class. Once you’ve expanded and your organisation
becomes more complex, then you need a system
to bring everything together. Then you need to
put a strategy in place to help you look at your
organisation’s positions today and what they will
look like in the future. Asset managers who are
ahead of the game are already doing this.
How much should be automated?
Workflow is key here. Automation is a primary
objective for workflow. Automate it so you only have
when you have to take action. But automate it in a
way that tracks what happened over time, looking at
the trends. It’s not a case of letting it run itself – you
need check points to maintain control. Workflow has
been lacking in asset management for a long time.
It’s going to be the next big focus.
And outsourcing?
There’s no right or wrong answer, it depends on
what you want to achieve. Data management is
usually outsourced with the middle office and
custodian services. But some aspects still need to be
sourced by the asset managers – you can’t outsource
everything. You need to keep certain parts of data
management, such as risk infrastructure.
 Keeping up to data

There is more disparity when you outsource – so the global challenge doesn’t really affect them.
you’ve got things going on on the client side and People are looking for more flexible, configurable
custodian side which are all generating data. All of solutions as opposed to large, massive products
that needs to be brought together through a platform. which can be costly and take years to develop.
The company plays a big part in data management There needs to be more transparency into how data
- it’s the asset manager who decides what they need is managed.
to provide clients. Asset managers will always have Everywhere you go, data management is high on
some kind of responsibility around data management, agenda. It’s not necessarily higher in one region,
around what is going in and out of the organisation. but different regulations affect it, which adds to
What is the next step? complexity. For example, if a US organisation wants
In the messaging space and the core reference data to expand into Europe they need to look more at
management space there are strong vendors who UCITS and regulation.
supply that market and those that are moving with So data management is no longer the
it. Regulators will undoubtedly have a hand in where ‘Cinderella’ of the financial services?
that goes. As regulators put more pressure on asset Lots of people used to think so, saying “the IT
managers, this will drive vendors to provide people will take care of that”. But as the market
more capabilities. grows in complexity, data becomes more important
There will be more platforms like Anova, tackling and expensive. Data is at the top of the list on
the data management problem. Solutions are giving company costs.
asset managers the confidence to make their business
more complex, but the problem is ‘how do you bring
it back together and make best use of the data?’. The
next level of the data management challenge will be
to get the data in front of the CIOs etc – so they can
see the fruits of their labour. They have spent all that
money, put systems in place to solve problems, and
can now bring all that together, to get what they need
and monitor the business effectively.
What must happen?
There is no underlying necessity, but more
governance and regulation will inevitably come into
place. There is the possibility that data management
could have its own global standard in the future.
Other pressures could come from government
agencies, the SEC, demanding specific information
from asset managers and banks. They may put in
place regulation that says ‘this is how we want the
data.’ I’m not saying it must happen, but it will
happen, slowly.
Regulators will take a bigger role. Government
agencies may want to see the full picture of what
asset managers are reporting to their clients.
Regulation will undoubtedly get stronger; I don’t
know where or when it will stop. It may take another
five years of positive performance. The velocity of
change may even slow down as people become more
confident again.
Does the importance of data management
differ from one country to another?
The US asset management landscape is a different
data management challenge. Domestic asset
managers don’t have the complexity of other regions

>PU[LY 2011|Fundamentals4HNHaPUL| 35
 Taking corporate action

Taking
corporate
action
Brian Bollen talks to Daniel Simpson, CEO of Cadis, about the
“desperate” need for automation in the corporate actions space

he challenge of unacceptably low level. And while we can

InvestorServices

Daniel Simpson corporate actions expect to inch forward from the current 60-70%
is CEO of Cadis, a global is often to reconcile range over the next few years, very high levels
EDM specialist. Based in the data to that of a of automation are still a long, long way off.
London, he is responsible custodian or record “It has been very much the Cinderella of the
for all global operations
keeper who may be financial services industry,” says Daniel Simpson,
and oversees the strategic
development of the supplying a message chief executive officer of Cadis, a global EDM
company. Having joined in in ISO 15022 . It is specialist, adopting a much-loved analogy. He
December 2007, Simpson therefore important to does, though, point to developments in the
has overseen rapid growth automate the collection treatment of data management which could
and expansion across process and view well have positive implications for corporate
Europe, the US and Asia- disparate sources of actions. “As an area of activity, data management
Pacific, including 20 new
information side by now has budgets that it didn’t have before, and
Cadis clients so far in 2010.
Simpson is also a partner
side then apply rules corporate actions come under the umbrella of
in Indigo Limited, an angel to cross-check the data. data management,” he observes. “There is not
investment fund focusing Many current legacy one institution we know that doesn’t have a
on financial technology systems in place are data management issue somewhere, and it is
companies. unable to handle cross- now getting the attention it needs. Our clients
border, multicurrency need quality data to meet increasing regulatory
transactions. The user is therefore often forced requirements and increased corporate actions
to manipulate the corporate action, and in turn, automation could come under the radar as part
manipulating the corporate action becomes a of that phenomenon.”
nightmare to reconcile further down the line. The It is best, though, to consider corporate actions
entire corporate action process is still desperate not in isolation but as part of the broader picture.
for automation and by using technology “Corporate actions feed into a lot of other
solutions to increase automation, non-standard processes, and you should consider them as how
corporate actions can be manually checked and they fit in with those,” he continues. “Stock splits
validated at a lower cost centre. Some corporate affect valuations. And if a company is spun out
actions result in a new security being formed so from a parent, that creates a new instrument, and
need to be able to quickly set up new instruments the industry needs to adapt to that.”
with your data management system. Speed is of Industry stands on the cusp
the essence in this instance, and automation is The industry stands on the cusp of getting it
key here. right, he adds, by way of encouragement, but
Automation levels unacceptable adds an immediate word of warning, to the effect
Automation in the often complex world that we’ve been here before, and that financial
of corporate actions remains stuck at an institutions have other more urgent priorities,

36 | Fundamentals4HNHaPUL |>PU[LY2011
 Taking corporate action

from preparing for Solvency 2, Basel III and UCITS
IV. Pressure on costs, though, is a major driving
force, as is the need to reduce operational risk.
“The industry is demonstrating a willingness to
embrace data management at all levels, and to put
in place systems to automate corporate actions.”
He points to the existence of the XBRL standard
that allows companies to report corporate actions
in a standard electronic format as something of
a step in the right direction. But one forms the
impression that it faces a long slog to achieve
broad acceptance. “It can deliver and consume
messages, and would certainly help if it took off,
but it is very much in its infancy,” he says.
What is holding things back?
For one thing, there are too many standards.
Remember, SWIFT has also been working on ISO
15022 for years.
And it is not, after all, in the naked commercial
self-interests of data vendors to standardise
too much, and so work themselves out of
employment. For another thing, the market is
almost impossibly fragmented with literally
hundreds of corporate actions likely to present
themselves at any one time. His conclusion? That
it probably needs a regulator to mandate it, but
regulators, like the financial institutions they are
supposed to supervise, have far more important
priorities on their current agenda than automating
corporate actions. Progress is more likely to be
tortoise-like than hare-like.

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>PU[LY 2011|Fundamentals4HNHaPUL| 37
nordea.com Making it possible
 Say what you CEE
Say what you CEE
Brian Bollen outlines the 2010 Transition Report on central and eastern Europe from the
European Bank for Reconstruction and Development, and what it means for custody in the area
Anecdotal evidence versus the EBRD
Anecdotal evidence is all very well for parties and
evenings spent in the bar. Who cares overmuch about
hard facts when a story is gripping and entertaining?
Real life does, though, have a rather disconcerting
habit of biting the rear end of people who have
over relied on the anecdotal. This is arguably more
applicable to investment than to any other sphere of
InvestorServices
human activity.
If a picture is worth a thousand words when trying
to tell a story, then surely a well sustained opinion
based on long experience is worth a similar volume
of flimsy personal tales. And who better to turn to
when it comes to economic activity in central and
eastern Europe (CEE) than the European Bank for
Reconstruction and Development (EBRD)? It was
after all, set up in the immediate aftermath of the
collapse of Communism and the arrival of hard-core
investment in the region.
If the EBRD is not intimately aware of the current
financial reality and future financial prospects of the
countries that make up CEE, then who is? One might
ask, but still, the long shadow of its original leader
Jacques Attali and his fondness for expensively
fitted-out offices is for some long-term market
watchers a barrier to its own credibility.
Investors and custodians who have to make long-
term strategic and tactical decisions on investment
in the region would perhaps, then, be well advised
not to take the EBRD’s word as gospel, although
it is nothing if not comprehensive. For what it is
worth, the EBRD sounds almost optimistic about the
outlook for CEE, but strikes an immediate note of
caution. In introducing its Transition Report 2010, it
says: “The EBRD region is emerging from the crisis
but there can be no return to its pre-crisis dynamism
without new reform to the region’s growth model.”
This could qualify easily as a classic ‘on the one
hand, on the other, the outlook is unclear’ statement
from a certain salmon pink globally respected
international financial publication.
Transition 2010
The Transition Report 2010 focuses on two main
reform areas, the EBRD’s introduction goes on to say.
These are (one) the development of domestic capital
markets and local currency finance and (two) the
38 | Fundamentals4HNHaPUL |>PU[LY2011
improvement of the business environment.
The report also unveils a new set of sectoral
transition indicators, notes the EBRD. The A-Z
examination of the countries that make up the
region (or, more accurately, the A-U, from Albania
to Uzbekistan) is simply fascinating, and impossible
to do justice to in these pages. The best we can
hope to do is communicate some of the essence and
flavour of key parts of the report in a way that will
encourage investors, fund managers, custodians and
other relevant parties to study the original closely, if
they have not already done so.
During the past year most of the countries in the
EBRD region have begun to recover from their
worst recessions since the early transition years. The
recovery, however, has been more sluggish than in
other emerging markets and has been heterogeneous
within the EBRD region. The countries of south-
eastern Europe, in particular, suffered output
declines well into the first half of 2010. By contrast,
most other countries have benefited from export-
led recoveries to varying degrees; particularly
those that are commodity exporters, and central
European countries with high export shares to
Germany. In a few cases, such as Armenia, Moldova,
Poland and Turkey, renewed remittance inflows
or capital inflows have contributed to growth in
2010. In contrast, the recovery in most south-eastern
European countries is progressing slowly.
An early part of the report attempts to shed light on
this heterogeneity and the factors that drive it, says
the EBRD. It begins by asking why some countries
seem to have been in a better position to benefit from
the global recovery of international trade than others.
It then analyses the reasons why domestic demand
has generally not recovered, focusing particularly
on the role of credit and fiscal policy, and examines
recent trends in inflation. It considers the atypical
behaviour of international capital flows during the
crisis and post-crisis period. Lastly, it examines the
implications of this analysis for the
short-term outlook.
An export-led recovery
As early as the second quarter of 2009, real GDP
began to increase (in seasonally adjusted quarter-
on-quarter terms) in most countries. The return to

growth was lagged by a couple of quarters in the
Baltic countries, where the need to unwind pre-crisis
imbalances remained substantial. South-eastern
Europe, however, has struggled to emerge from
recession. Real GDP continued to contract through
much of 2009 and into early 2010 in Bulgaria, Croatia
and Romania. In addition, domestic events such as
political turmoil in Kyrgyz Republic; uncertainty
surrounding presidential elections in Ukraine; and
the closure of a nuclear reactor in Lithuania depressed
growth during the first
The recovery was initially mostly driven by net
exports. By the first quarter of 2010, exports had
recovered from their collapse in the winter of 2008-09,
in line with the recovery in global trade. Commodity
exporters (Armenia, Kazakhstan, Mongolia and
Russia) benefited from rebounding commodity prices,
while countries with a heavy export concentration on
machinery (Czech and Slovak Republics, Hungary,
Poland and, to a lesser extent, Romania) benefited
from the global cyclical rebound. Exports from
countries whose real exchange rates depreciated
during 2009 and 2010 increased disproportionately.
With few exceptions, export growth offset a rebound
in imports from their compression in winter 2008-09.
As a result, the contribution of net exports to growth
was positive in most countries until the first quarter
of 2010, leading to lower current account deficits or
even surpluses across the region and easing exchange
rate pressures. However, beginning in the second
quarter of 2010, import growth has begun to outpace
export growth in several countries, reflecting a steady
recovery in domestic demand.
Legacy of the crisis weighs on private
domestic demand
Until the first quarter of 2010, domestic demand
continued to contract in many countries as
unemployment remained high and business
prospects uncertain. The drop in domestic demand
was particularly pronounced in the Baltic states and
south-eastern Europe, where recessions have been
deep and the recovery has lagged. As early as mid-
2008, unemployment rates soared in the Baltic states
and other economies where growth had begun to
slow in 2007 (for example, Turkey and Ukraine).
In contrast, in central and south-eastern Europe,
unemployment rates started to increase only in mid-
2009, and even later in south-eastern Europe. Despite
gradual declines by the second quarter of 2010 in some
countries, unemployment remains high. Fortunately, its
effect on demand is being mitigated by a resumption of
worker remittance flows to key recipient countries (the
Caucasus, Central Asia and FYR Macedonia).
Say what you CEE
Investment growth has been sluggish as business
confidence has recovered only gradually. The global
financial crisis weakened business confidence sharply;
in most countries confidence in the manufacturing
or industrial sectors dropped by 20-50% from the
fourth quarter of 2007. By the third quarter of 2010,
confidence had recovered to pre-crisis levels only in
Estonia, Hungary and Turkey. As a result of the weak
recovery, non-performing loans (NPLs) of banks have
stabilised at high levels or, in some cases, continued
to rise.
Despite the gradual recovery of economic activity
in many countries, private sector credit growth
has mostly stagnated or continued to shrink. This
has especially been the case in countries with large
pre-crisis credit booms and weakly capitalised pre-
crisis banking systems: two factors that turn out
to be strikingly correlated with the behaviour of
credit since late 2009. This group includes the Baltic
countries, most countries in south-eastern Europe,
Kazakhstan and – because of its household lending
segment – Russia. In Kazakhstan credit has stagnated
as banks remained cut off from foreign funding. In
Ukraine, too, credit shrank until the presidential
elections in February 2010, after which time capital
inflows returned and credit to corporates began to
grow slowly.
What drove the reovery in export growth?
Not every country benefitted to the same extent from
the rebound in global trade, observes the EBRD.
To better understand the reasons, year-on-year real
export growth for a sample of 55 advanced and
emerging markets was analysed at two points in
time: the first quarter of 2009 – when global trade had
dropped to its nadir – and the first quarter of 2010, to
capture the recovery from the trough to one year later.
Two cross-country regressions, one for each of the two
periods, describe the shift in the key factors driving
the export collapse and the recovery. In both cases,
real export growth was regressed on trade-weighted
real GDP growth of trading partners as a proxy for
external demand, on year-on-year real effective
appreciation (Consumer Price Index-based) to capture
changes in competitiveness, the share of machinery
in total merchandise exports as a measure for export
structure, and a ‘Herfindahl index’ of the share of
individual export markets in total exports. The latter
measures how concentrated exports are in terms of
export destinations.
The main results are as follows:
• When global trade collapsed in winter 2008-09,
a country’s product structure played a key role:
exporters of machinery were hit the hardest.
>PU[LY 2011|Fundamentals4HNHaPUL| 39
 Say what you CEE
Real depreciation did not mitigate the collapse.
More diversified export markets may have buffered
the collapse, but its statistical significance is weak.
• In recovery the export product structure seems
to have lost some of its overwhelming importance,
although there is still some indication that exporters
of intermediate inputs may have recovered
faster than other countries. Rather, gains in
competitiveness (real depreciations) both during the
crisis and thereafter seem to be the main factor that
helps explain cross-country variations in
the recovery.
Where is credit growth beginning to recover?
A cross-country ordinary least squares (OLS)
regression of growth in private sector credit between
InvestorServices
January and June 2010 on measures of pre-crisis
banking system structures, the pre-crisis build-up of
macroeconomic vulnerabilities, cyclical variables and
institutional variables help identify the patterns in
credit to the private sector. The focus is on the EBRD
region only. The regressions results suggest the
following patterns:
• banking systems that were better capitalised
before the crisis in 2007 show stronger post-crisis
(2010) credit growth;
• post-crisis credit growth is lower in countries that
experienced larger pre-crisis credit booms;
• banking systems with the closest client
relationships, that is, extensive branch networks,
have increased credit the fastest.
These effects are robust to the inclusion of
institutional controls, such as the cost of contract
enforcement. A possible interpretation is that the
recovery has so far been “credit-less”, as is typical
after financial crises in advanced countries.
Core inflation remains subdued
The region disinflated sharply in 2009 as economies
slid into deep recessions, notes the EBRD. In 2010,
however, inflation increased again in several
countries, for three main reasons:
• Adverse summer weather conditions destroyed
significant portions of the wheat harvests in
Kazakhstan, Russia and Ukraine. An export ban by
Russia and export restrictions by Ukraine, imposed
in response to rising local wheat prices, drove up
global wheat prices by 70% between early June and
mid-August 2010, feeding into price levels across
the region.
• As part of fiscal consolidation, many countries
in south-eastern and central Europe and the Baltic
states increased value-added taxes or excise taxes
on tobacco and alcohol sharply (Belarus, Croatia,
40 | Fundamentals4HNHaPUL
Fundamentals4HNHaPUL |>PU[LY2011
|>PU[LY2011
Hungary, Latvia, Moldova and Romania). In Turkey,
the expiry of a stimulus-related excise tax cut added
to inflation.
• Global energy price increases, adjustments to
regulated prices, and the closure of the Ignalina
nuclear reactor in Lithuania led to steep hikes in
electricity and/or gas prices for households in net
energy-importing countries (Albania, Armenia, the
Baltic states, Belarus, Bulgaria, FYR Macedonia,
Kyrgyz Republic and Serbia).
Core inflation, however, has mostly continued to
shrink, suggesting that most of the recent increases
in inflation could be one-off events. The notable
exception has been Turkey, where core inflation has
remained stubbornly high as the recovery
gained momentum.
This group includes countries with state-directed or
state-subsidised lending (Armenia, Belarus, Serbia)
or lending to state-owned enterprises (Slovenia).
It also includes a few countries that benefited from
exceptionally large returns in balance of payments
inflows, either in the form of capital inflows (Turkey)
or remittances (for example, Armenia and Moldova).
Fiscal tightening, monetary loosening
Fiscal consolidation packages were approved in
many transition countries even before the eurozone
sovereign debt market turmoil highlighted the risks
of continued high deficits. Following large crisis-
related revenue declines and interruptions in market
access, many 2010 budgets in the region included
measures to consolidate fiscal deficits by 0.5 to
5.0% of GDP, most sharply in the Baltic states and
Montenegro. In contrast, commodity producers with
pre-crisis fiscal surpluses (Azerbaijan, Kazakhstan
and Russia) or larger emerging markets (Poland,
Slovak Republic and Turkey) implemented fiscal
stimulus packages in 2009 and/or 2010 that are
expected to be reversed gradually over the next
few years.
Fiscal tightening was mitigated by accommodative
monetary policy. Monetary policy rates, sharply
reduced between mid-2008 and mid-2009, were
either cut further or kept on hold with few
exceptions. Armenia, Georgia, Kyrgyz Republic,
Mongolia, Serbia and Turkey have begun to raise
policy rates, either on concerns about inflation or to
ease exchange rate pressures, and some central banks
(especially those of Hungary and Poland) have made
statements holding out the prospect of policy rate
increases. Exchange rates had depreciated sharply in
the fourth quarter of 2008 and/or the first quarter of
2009 in all countries in the region with some degree
of exchange rate flexibility (currency boards and
 Say what you CEE

official pegs were maintained).
In the larger emerging markets (Czech Republic,
Hungary, Poland, Romania, Russia and Turkey) and
in some countries in the Caucasus, exchange rates
have since appreciated again, although they remain
weaker than their pre-crisis levels of August 2008.
In contrast, in the smaller countries and Ukraine,
pressures on the exchange rate have continued,
especially since the turmoil in the western European
sovereign debt markets in the spring of 2010.
Custodians say
Custodians routinely say that a key part of their core
mission is to enable their clients, or their clients’
agents, to do business in those parts of the world
where they want to do business. Custodians follow
rather than lead. They also increasingly vociferously
argue that they are not in the insurance business,
meaning that if their clients decide to invest in
a certain geography or industry sector, then the
investment risk lies firmly with the investor. It is not
transferred to the custodian, as some investors would
like to believe. If investors want custodians to act as
insurers, they will have to pay a suitable premium,
and that would be far in excess of current fees.
If the EBRD is right in its assessment and analysis,
and investor demand rises, and clear understanding
can be established between them and their
safekeeping agents on the allocation of risk, might
we be seeing more offices being opened in the region
in the near future? Time will surely tell, but will it be
sooner rather than later?
As always, we are very interested in hearing from
readers, especially if they disagree with anything we
have published. It is often more profitable to learn
from what people DON’T like than to hear about
what they DO like.
My direct email is brianbollen@mac.com
I look forward to hearing from you.

Finding Value?
Setting the 2011 Agenda

The 2011 London Investor Services &

Securities Lending Summit
7YLZLU[LKI`
Thursday, 27th January, 2011
GSL Summit Registration 10:30
ISJ Summit London Marriott Canary Wharf
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Securities Services & Securities Lending for Funds, Managers and Investors
 Nordic essentials: Mats Råstedt
1RUGLFessentials A special focus on the Nordic region
7 he Nordic region is going through a period of
profound changes in the market infrastructure. On the
trading side we can see the same pattern in our region
as has happened on many other markets already, i.e. the
fragmentation of trading is continuously increasing,
and especially for many of the blue-chip shares the
multilateral trading facilities (MTFs) regularly have
more than 30% of the total trading volumes. The
InvestorServices
implementation of equity central counterparty (CCP)
clearing during 2009 and 2010, which in itself is common
practise in Europe and thus naturally a key component
of all major markets' infrastructure, has been the biggest
infrastructural change in the region for decades.
CCP clearing has certainly reduced the counterparty risk
as such, and also reduced the total cost of trading on the
Nordic exchanges. As a consequence of this we have seen
an increased number of new trading members on the local
exchanges, and hence we should see further improved
liquidity on the market which in the end will directly
benefit the end investors as this should among others lead
to narrowed spreads.
In the Nordics we usually like to portray ourselves as a
coherent region rather than individual markets when it
concerns securities markets. We must however remember
that the Nordic markets are still quite different; we have
a fragmented post-trade market infrastructure, local
legislation and market practices, different currencies etc.
As an example, several initiatives have been started
over the years to consolidate the CSD infrastructure in
the region, however due to various reasons - sometimes
political, sometimes technical - nothing concrete has
happened on this front.
The latest initiative that has been closed is the Euroclear
platform consolidation in the Finnish and Swedish
markets, first as the overall single platform programme
was discontinued, and second as the potential back-up
plan, to consolidate the Finnish and Swedish CSDs by re-
using legacy platforms, was recently considered to be too
complex. Now the focus in all four markets is more and
more on Target 2 Securities (T2S), and on analysing what
is the most efficient model for each market. A lot of the
work is concentrating on how to adapt the direct holding
structure to T2S in a way that on one hand secures a cost
efficient process, while still meeting the eligibility criteria
set forth by the European Central Bank (ECB), and on
securing a legally sound process, including among others
settlement finality.
Close co-operation central
The Nordic markets co-operate closely to solve the matters
42 | Fundamentals4HNHaPUL |>PU[LY2011
related to the direct holding structure, however as there
are market differences we are likely to end up with slight
variations in the models. The starting point is that currently
in the Nordic markets we have in total around 10 million
end-investor accounts that are held with the local CSDs. In
Finland as well as in Norway the legislation prohibits the
nominee registration of local investors’ holdings.
One model that all Nordic countries are investigating at
the moment is a ‘layered model’, where a large number
of the accounts at the CSD level would be pooled in
T2S, thereby limiting the number of accounts in T2S. As
a consequence the Nordic markets would from a T2S
perspective be more similar to the so-called omnibus
markets. It would naturally still be possible for individual
end investors to have direct accounts in T2S if they so wish.
One of the most important targets with T2S is that by
effectively consolidating all national settlement systems
in Europe into one, it should be as easy to settle trades
from any market in T2S as it is to settle domestic trades.
For Nordic investors this will bring clear benefits as it will
make it easier and more cost-efficient to invest in other
European markets. Equally, there is a clear expectation that
T2S will make the Nordic capital markets more attractive
for the non-Nordic investors.
One must however remember that the settlement
processes in Europe are already today well harmonised
and efficient, and hence the further benefits that can be
extracted from the settlement process are limited. Today
the risk and complexity, and hence the costs, are to a large
extent in the so-called asset servicing area, which includes
among others corporate actions processing.
These processes are still very much dependent upon
variations in local legislation and practices, and will remain
so even when T2S is implemented. As a consequence the
total benefits from T2S to investors may be quite small, at
least in the beginning. Even though custodians are able
to run the settlement processes more efficiently in T2S, in
practice removing the need to use sub-custodians in the
settlement flow, they naturally still need to handle the asset
servicing part with the same quality and care as today.
In order to do so the most efficient way forward is likely
to include using local sub-custodians as is the practice
today. These institutions are today and for the foreseeable
future best placed to handle processes such as complex
corporate actions, handling the reporting obligations to
local authorities, consultation on local market development
etc., i.e. tasks that require strong local expertise and a
meaningful local presence.
Mats Råstedt, head of business infrastructure, Nordea

7
he situation in the Nordics does not differ that much
from the situation in Europe as a whole. We do notice
that we experience a map where there are too many CSDs
and CSD platforms and too many agent banks. There is a
fierce competition for volume and lower transaction fees.
This will drive consolidation so in a Machiavellian way
it is good. We applaud all efforts in Europe to dismantle
national barriers – it is not that the effort is being made but
how that can cause some doubts. The development in the
post trade arena is driven by political and regulatory forces
in Europe, so also in the Nordics.
We think that a lot will happen in the next few years
and some of the major features can be found here:
CSDs: Will lose revenues and they will be subject to
increased competition following T2S. The domestic
monopolies are threatened and especially so if the
obligation to issue securities in the national CSD is
removed. This will force CSDs to consolidate and among
these we will see attempts to move to other places in the
value chain, especially so by starting to compete in the asset
servicing space and develop further in issuer services areas.
We expect some CSDs to try to become banks and for those
that already are, to enhance their bank offering. We also
fear that some will apply the utility view and just raise fees
in order to compensate revenue losses. In the Nordics, we
had hoped for more of the Single Platform project but as
things stand right now, the only single platform within that
project is CCI. The rest is fragmented. Sweden and Finland
will remain as two platforms with some assimilation in
the jurisdictional model, in the merging of fixed income
and equity platforms locally and with some adoption to
European standards. No more than that. The Link Up
markets project has been very silent lately so also here were
one of the markets that signed up (Norway) seemingly has
abandoned the whole thing.
Agent Banks: Operational models must be re-engineered.
Winners can be found among those that manage to drive
operational costs down and still keep innovation and safety
levels high. Agent banks need to demonstrate safety in this
unsecure environment and in addition to sound and strong
financials, risk and collateral models will be essential. Agent
banks must grow regionally in order to replace revenue lost
to netting effects and as a result of fee pressure. This will
make it very challenging to be a single market provider.
We see that the search for quality in agent banks has been
re-introduced (it is not only reciprocity and price any more)
and so is the agent banks’ ability to visualise the future state
of the industry and to take us there. Banks will have more
than a handful to deal with the regulatory flood and effects
of the T2S discussion.
CCPs: It is not much of a business case in being a CCP
today. It is in very bad need of consolidation and we
believe it will start to happen - soon. The European CCPs
work with very difficult and complicated risk models and
eventual interoperability initiatives are not making it any
Nordic essentials: Ulf Noren
clearer. In the Nordics, we see that many small and mid-
sized member firms are experiencing cost and complexity
increases instead of the wanted cost efficiencies and
simplicity gains. It is time for Europe to make a choice of
what CCP model is wanted – the silo model or the user-
owned user-governed option. As a personal opinion, I
would prefer one CCP – the efficiency gains would widely
beat the competition aspects.
It is not possible to discuss Europe today without
spending time on T2S. For the Nordics and the Baltics, all
markets have signed the MoU (but the exciting time will
be when full commitment is expected). We have mainly
non-Euro currencies as only Finland (and as of Jan 2011
also Estonia) currently use the euro. All markets are direct
holding markets so finding a layered account structure is
crucial to T2S commitment. The CSDs in the markets are
concerned that they can continue to provide and further
develop investor accounts and related services. Another
possible stumbling block is the governance structure. Being
a buyer in a T2S world is very interesting and we find
seven different scenarios for how institutional sub-custody
buyers might behave. These range from: doing everything
themselves, via use of one European provider, a limited
number of regional providers, to mixed strategies and
finally to continue as is.
The settlement cost will become very transparent in the
T2S environment and we believe that the commercial
value of a settlement transaction in the future will be fairly
limited. On the other hand, risks previously assumed by
sub-custodians will now be highlighted and transparent
and we firmly believe that we are going towards an
unbundled fee structure in the not too distant future. Will
T2S happen? We think so but there are some question
marks. The business case is to a large extent building on UK
participation. Without the UK, the business case looks weak
but still not weak enough to be a stopper. The direct holding
market will be very important and as said, we believe there
is a sentiment among those to sign, eventually. The project
needs further harmonisation and the governance structure
must be appropriate for all participating countries.
By the way, SEB believes that changes triggered by
the T2S discussion will become reality even if T2S fails!
Going into regulations and their effects would require
more space so let’s just agree that there are a lot of them
at various stages of implementation and shaping. This
is a politically driven process that gives very little room
for the industry to influence. More of the spending in
investments becomes mandatory and many players feel
and will feel increased strain in finding investments
innovation. Management time is to a great extent consumed
by regulatory work and compliance areas are burning the
midnight oil.
It is very important that the custody industry does not let itself
be trapped by regulators and regulators only. Some common
ground must be found and some actions must be concerted.
Ulf Noren, global head of sub-custody, SEB
>PU[LY 2011|Fundamentals4HNHaPUL| 43
 The ETF pie
The ETF pie swells, but can
the back office keep up?
By Eamonn Ryan, director, Equities Product Management, Euroclear
or anyone who thinks ETFs are a flash in the
pan, the following statistics should change
their mind. Over the past three years, the value of
European ETF assets has doubled to $225bn. In the
past five years, the global ETF market has tripled to
$1.2 trillion according to asset manager BlackRock.
InvestorServices
And the explosive growth shows no signs of
relenting with more and more fund houses looking
to launch new ETF products.
Many of the advantages ETFs have over traditional
mutual funds derive from the similarities they share
with equities in terms of liquidity, flexibility and so on.
However, in Europe, ETFs are plagued by substantially
more post-trade challenges than for equities, to the
point where these problems are beginning to hinder
their growth as a financial product.
Clues to the origins of these operational issues
can be found in the different patterns of stock
exchange listings used by ETFs, compared with
equities. Whereas most equities are listed only
on the stock exchange in the home market of the
issuer, it is common for ETFs to be listed on several
stock exchanges, regional or trans-continental.
Because Europe’s post-trade infrastructure is highly
fragmented, it is often the case that these tracker
instruments must be moved in and out of the
central securities depository (CSD) linked to each
stock exchange where the ETF is traded in order for
settlement to take place.
Managing deposits of the same security in multiple
locations poses challenges at the best of times, but
with ETFs there is an additional factor to consider.
When a broker finds itself unable to deliver equities
that it has sold, the broker will usually borrow the
missing stock so that it can fulfill its obligations.
However, despite recent initiatives to automate
lending & borrowing for ETFs, there are limited
opportunities for stock borrowing because liquidity is
so fragmented across multiple markets and because
it is relatively easy to go back to the primary market
and create more of the same ETF units instead.
Original and supplementary issues of ETFs are
always created in the ‘issuer’ CSD of the ETF, which
is often not the market where the broker is trying to
44 | Fundamentals4HNHaPUL |>PU[LY2011
deliver the ETF it sold. Furthermore, because ETFs
are typically multi-listed securities, a broker will
frequently have holdings of the same ETF in more
than one market. In both cases – whether creating
new securities or using securities held in another
market - the broker will need to transfer ETFs from
one market to another as quickly and efficiently as
possible. Otherwise, it will face penalties such as
settlement fines or find itself being ‘bought in’ by
the trading counterparty or the central counterparty
involved in the deal.
The right structure
Furthermore, transferring ETFs from one market to
another is startlingly problematic. The main reason
is that not all ETFs use the same depository holding
structure, as is the case for equities. Three of the most
commonly used ETF holding structures today, which
co-exist simultaneously across markets, are
discussed next.
In the classic multi-deposit structure, the ETF
issuer, or rather its transfer agent/registrar, has a
relationship with only one ‘issuer’ CSD. One or
more remote CSDs, known as 'investor’ CSDs, may
hold the ETF via settlement links with the issuer
CSD. This means that the investor CSDs have an
account with the issuer CSD and hold the ETFs
through this account structure or they may hold the
ETFs through an intermediary, i.e. an international
CSD such as Euroclear Bank, via what is sometimes
called a relayed link. In either case, ETF transfers are
normally very easy and efficient using this structure,
with only one settlement instruction needed between
CSDs. The transaction is usually done on a straight-
through process (STP) basis. This structure is most
commonly used for equities that are multi-listed
across Europe.
In the depositary receipt-like structure, which
is largely used to comply with German legal
requirements, this model is used to facilitate a listing
in Germany for ETFs that are issued in, for example,
the Irish CSD. It is DR-like in that there are secondary
issuers, which hold the underlying in the home CSD
and issue a new synthetic security in the remote
CSD. In the Irish-German example, the issuance of
 The ETF pie

new securities, called global bearer certificates, are sufficient cross-CSD linkages to support the first
required which are assigned a different international model, ETF issuance and post-trade processing will
securities identifying number (ISIN) than the still need to rely on variants of the DR-like and split
original ETF issued in the Irish CSD. The fact that structures. Consideration should also be given as to
the same ETF carries two different ISINs obviously which CSD – or international CSD – should play the
complicates the management of securities reference role of issuer CSD. If a new ETF is not issued in the
databases and makes cross-market transfers more local CSD of the issuer, a split structure may later be
complex and expensive. Furthermore, transfers are needed in order to make the appropriate transfers.
less instantaneous than in the multi-deposit structure,
Post-trade challenges, such as those described,
although high levels of STP are still possible.
may influence both the liquidity of an ETF and its
The split structure differs as the link between the appeal within the trading community. Selecting the
issuer and investor CSDs are not made via cross-CSD right holding structure is one of the key elements
links, but via a third party such as a transfer agent for success.
or registrar. In effect, these ETFs have more than one
issuer CSD. So, in order to execute a transfer from one
CSD to another, the ETF must be withdrawn from one
CSD and deposited in the other, which is not usually
executed on an STP basis. This invariably takes
several days and requires special, extra instructions -
often by fax - to the third party.
This structure is particularly onerous for brokers
needing to transfer ETFs across markets because of
the time lag often involved. Moreover, if they suffer a
penalty due to late transaction settlement, they have
no recourse against the third party. Transfer agents
and registrars work on behalf of the issuer and have
service level agreements only with them.
Mastering growth
Because of the exponential growth in ETFs
and the flurry of new entrants, large
international broker/dealers are
now actively looking for ways to
alleviate operational headaches. In
essence, they have little choice but
to better understand the different
holding structures.
If one were able to create the
optimal processing environment
for ETFs, the future state would
not include split structures.
Rather, the market would do well
to benefit from the safety and
efficiency of the multi-deposit
model. That said, if there aren’t

>PU[LY 2011|Fundamentals4HNHaPUL| 45
 Stock transfer
Stock transfer: a brave new world
The transfer agent has gone through enormous change due to the advent of technology
and the drive to eliminate paper certificates. Stephanie Baxter looks back at its evolution
over the past 40 years and considers what the future may hold.
The technological evolution has completely
transformed financial services as a whole, but no
sector has seen more change than the transfer
agency business. It is hard to imagine that only
25 years ago paper stock certificates were still in
abundance. The transfer agent has seen enormous
InvestorServices
transformation in its working environment where
dematerialisation, regulation and changes in
ownership have been significant drivers for change.
A Paperless Society
Over the last five years printed certificates
have been driven out by the electronic book
entry register, which allows for a more efficient
transfer of shares and reduces the risk associated
with physical certificates. In 2006 there were
even discussions among US and UK regulators
that paper issuance should be eliminated, a
process called dematerialisation which several
EU countries had already opted for. In the US,
the Securities and Exchange Commission has
supported dematerialisation since the early 1990s
when the Group of Thirty (G30) – an international
body of leading financiers and academics – made
recommendations to reduce the dependency on
printed certificates. According to Charles Rossi,
president of the Stock Transfer Association (STA),
the G30’s proposal was an important catalyst in the
transfer agent’s evolution.
In the late 1960s, particularly in the US, brokerage
firms were overwhelmed by the large volume of
physical certificates as trading peaked to nearly
15 million shares a day on the New York Stock
Exchange (NYSE). This led to the creation of the
Central Certificate Service (CCS) in 1968 by the
NYSE with an aim to eliminate up to 75% of the
physical handling of stock certificates between
brokers. Although many brokers refused to use it
at first, the idea of a ‘certificate-less society’ seemed
inevitable with the establishment of The Depository
Trust Company (DTC) in 1973 to hold all paper
stock certificates in one centralised location and
automate the process by providing electronic
services through the Fast Automated Securities
Transfer (FAST) system, which was a major turning
point for the industry.
46 | Fundamentals4HNHaPUL |>PU[LY2011
Rise of Electronic Systems
As central depositories started to offer these kinds
of services, the transfer agent’s job inevitably
changed. Another catalyst for change has been
the introduction of electronic book-entry register
systems, mainly in the UK, US and Australia during
the 1990s. Paul Conn, president of global capital
markets at Computershare, says: “The Australian
market went through significant change with
CHESS (the Australian Clearing House Electronic
Subregister System) and when CREST entered the
UK market it put huge demands on registration
services and was a catalyst for consolidation,
helping to drive banks to exit the transfer agency
market.” In the US, the DTC introduced the Direct
Registration System (DRS) in 1996 as an addition
to the FAST system. In a bid to move the industry
away from certificates, the SEC made it compulsory
for all securities listed on US exchanges, including
inter-listed Canadian firms and their transfer agents,
to be eligible for DRS from 2008. Although there
is currently no automatic participation, there has
been talk that the SEC could require issuers to fully
participate in the future.
But the industry still has some time to go before
physical certificates are completely eliminated.
Although investors do not receive certificates in
book-entry-only (BEO) form, the custodian holds
global certificates. Dematerialised securities,
where no certificate exists, are becoming more
popular however.
Industry Consolidation
Banks have progressively exited the transfer agency
business in the last decade or so, including Lloyds
TSB, CIBC and the Bank of Montreal. Consolidation
has been happening in almost all transfer agency
markets, says Conn. As banks continued to leave the
business, professional providers started to emerge
to provide services for investors. Over a timeframe
from 2000 to 2007 a number of transfer agencies have
been sold, or combined due to new mergers, which
has inevitably been a driver for the reduction in the
number of transfer agencies. For example, when the
Bank of New York and Mellon Financial Corporation
merged in 2007, both transfer agency businesses

merged into one. In the UK, Lloyds TSB Registrars
was a huge business but was sold by the bank in
2007 to the private equity firm Equiniti. A similar
trend emerged in Hong Kong in the late 1990s when
Computershare entered the city’s share registration
market by acquiring Jardine Matheson and HSBC
Holdings – which was by far the largest share registry
in Hong Kong.
In the Australian market in particular, auditing firms
were driven out by new SEC regulation which said
that auditors could not provide professional services
to companies, says Conn. This then paved the way for
professional service providers to enter the market,
he added.
Another important change in the industry has been
the shift from registered ownership to ‘street name’
(nominee shareholding), says Rossi. Thirty years
ago the majority of shares were held in registered
form and very few were held in street name. Now
it is the complete opposite: most shares are held in
institutions, or in street name which is preferred for
its simpler trading and ability to hide the owner’s
true identity. Rossi also talks about a shift from
registered ownership to modern products offered
by other brokers, firms and funds, for example the
proliferation of mutual funds and the introduction of
401(k) saving plans.
Modern Issues
However, transfer agencies and registrars still
play a very important role in the orderly operation
of securities markets in the US, UK, Canada and
Australia, says Conn. In those markets, transfer
agents are still important to record keeping and they
continue to record transactions in their books, he
adds. But in other markets, in continental Europe for
example, Conn claims that the transfer agent’s role is
quite narrow due to dominant central depositories.
What is interesting is that transfer agents have had
to increase the breadth of their services to adjust to
the new landscape. Some have dipped into employee
plan and proxy services to meet client demand.
Another US trend that has emerged in recent years
is the merging of duties of both transfer agents
and registrars, which were previously segregated.
According to Computershare, many transfer agents
now take on the registrar’s duties, such as ensuring
that the corporation issues the right amount of stock
shares, maintaining records of authorised, issued and
outstanding shares, and also tracking the issuance
and cancellation of shares.
Regulatory Pressure
The next big issue facing transfer agents is
Stock transfer
regulation. One pending issue in the US is proxy
reform, which the SEC proposed in a concept
release in July 2010 after reviewing the current
regulatory framework around proxy voting and
shareholder communications. Industry professionals
and organisations such as the Shareholder
Communication Commission (SCC) have criticised
the existing proxy system which has been in place
for nearly 30 years. The SCC, which consists of
organisations such as the Business Roundtable, the
STA and the National Investor Relations Institute, has
been campaigning for changes to proxy mechanics for
some time. One of its proposals is to give companies
direct access to their beneficial shareholders to
enable them to have a say in who distributes their
proxy materials and counts up their votes. Current
proxy law means that companies are usually tied to
choosing who the banks and brokerage firms holding
their shares want. According to Rossi, if proxy reform
goes ahead, transfer agents will be able to compete for
the shareholder communications services which are
currently controlled by financial intermediaries who
usually outsource to one main provider. This would
revolutionise the transfer agent’s role in what would
become a more competitive market.
Although Rossi is in favour of renewing outdated
rules, he says that the regulatory environment is
growing more difficult. From January 2011 new US
regulations from the Internal Revenue Service will
require financial intermediaries such as brokers
and transfer agents to report adjusted cost basis to
investors and the IRS for securities transactions. “This
is a major piece of legislation which will have a huge
impact on transfer agents who will have to do more
programming to support it,” said Rossi. For the last
few years the SEC has been talking about enhancing
rules governing transfer agents, most of which date
back to the 1970s before the digitalisation of paper.
This has created uncertainty in the industry and
there are fears that if some transfer agencies are not
as committed to the business, they may sell, which
would further the consolidation trend. “But the rules
do need to be updated and tightened given some
of the issues present in the current market,” added
Rossi. Regulation will need to reflect modern changes
as more and more shareholder positions are recorded
electronically.
With ongoing pressure from technology, regulators
and new mergers, it is hard to predict what the
transfer agent industry will look like in the next few
years. But it is clear that further change is inevitable
and that transfer agents will have to continue to adapt
if they want to survive.
>PU[LY 2011|Fundamentals4HNHaPUL| 47
 Kevin Lee interview
Can you describe the Calastone offering?
We have three core services: order routing, launched
in May 2008; settlements, launched in March 2010; and
reconciliations, which is currently in start-up phase. We
are also planning a number of announcements in 2011.
How have these products fared since launch?
Our services have been successful because of the ease
of connection, the growth in the fund management
industry both on and offshore, the ability to trade all
asset classes within those particular funds and because
we also had massive growth in institutional funds.
Order routing has been a tremendous success. We are
experiencing up to 10% month-on-month growth from a
messaging point of view. That is predominantly because
we now have most UK fund managers connected and
InvestorServices
we have continued to expand into
Ireland and Luxembourg.
Volumes on our settlement solution are doubling
month-on-month. We have the IFDS
fund managers all live, Baring Asset
Management live at Northern Trust
and as we move into the early part of
2011 we will have Capita fully live with
both order routing and settlement.
The reconciliation service goes fully live
in January but we have clients using
the service now. So the full lifestyle of a
mutual fund transaction will for the first
time be fully automated, which I think is
a great success.
Are clients opting for specific services or
the full offering?
You don’t need one part of the suite
to utilise the other, otherwise it
would defeat our objective of global
interoperability. We provide the
services and clients choose what they
require. However, because clients want
full front-to-back STP they tend to take all three at once.
Is the product now widely accepted by the
mutual fund industry?
We held an event in March called the Tipping Point,
because Calastone was on the verge of being fully
recognised as an integral part of the funds industry
infrastructure. Since then, the momentum has been
incredible. I was paid a nice compliment by a client,
who said that when I first went to see them they really
didn’t think it would happen, yet three years later they
said they had been proved wrong.
Has the financial crisis helped uptake of your products?
Indeed. One of the attributes of the Calastone service
is that it reduces risk, a major talking point since the
Lehman collapse. Because Calastone offers full-STP, it
minimises the amount of human intervention required
in a trade.
48 | Fundamentals4HNHaPUL |>PU[LY2011
Although one would say launching a new business
in the middle of a recession is not smart, the type of
business that we offer, i.e. risk reduction from a trading
point of view, with no capital costs for a client to engage
with us, means it is a win-win. The circumstances have
helped organisations focus their minds, look for a
solution and I think Calastone was in the right place at
the right time.
Where does your focus lie for the next few years?
In March this year we opened our Luxembourg office.
That has expanded, from a client-base point of view,
and we now have up to about 20 clients. In Dublin,
Calastone was the first organisation to carry the SWIFT
SHarP certificate for hedge funds.
Because Ireland and Luxembourg are very different to
the UK, we have had to change some of our technology
to meet the processes and regulations of these other
domiciles. But because of our agility
and the cloud-computing technology
that we use, we are able to deliver new
services in short time frames.
What has been your biggest challenge in
the last 12 months?
Managing growth is the thing that
keeps me awake at night, because you
only have one reputation. That involves
investing in staff to make sure you can
still give the same level of service that
you promised in the first place. That
has been a challenge, but I think we’ve
been successful.
How much more efficient can things get?
What is the next step?
We want to implement a new service
to help the retail investor for re-
registration. Very soon we will be
launching a service that will enable
investors to re-register their portfolios very quickly,
very easily, and with significant reduction in the amount
of paper and processing that takes place. That’s good
for both the industry and the end investor.
Fundamentals
talk to Kevin Lee,
CEO of Calastone
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 A Banker's nightmare?
A banker’s nightmare?
Or the ultimate
challenge/opportunity?
The rise and rise of alternative payment systems by Brian Bollen
ny subject that grabs the attention of busy
head corporate treasurers as a means of
increasing efficiency and reducing costs must at
InvestorServices
least flicker on the radar of investors, their fund
managers and even their custodians. If there is
a lesson to be learnt by custodians, they really
ought to position themselves to make the most of
the experience. These are just some of the initial
reactions to hearing about recent developments
for corporate clients and their banks in the field
of mobile technology, especially as it relates to
mobile payments and directly or indirectly related
services. For investors the attractions of growth in
mobile payments operating on a transaction-based
model are obvious. It is potentially enormously
cash-generative, global in scale, and as scalable a
business as even the choosiest provider of finance
could hope to see.
“Companies can have a truly ‘productised’
offering,” says Georg Fasching, vice president,
products and solutions at Luup, a Norwegian
company whose foundations are built on a range
of existing mobile payment capabilities: mobile
payment solutions, network enablers, technology
development. “They can bring on new customers
quickly and simply, helping them achieve higher
margins,” he adds. Corporate treasurers have shown
great enthusiasm for Luup’s invoice presentation and
payment product, which can help replace cash across
an entire corporate network, delivering cost savings
of 20%-plus, he says. A key advantage is that mobile
technology can help corporates in geographies where
purely electronic options dependent upon good
internet accessibility just do not work. Luup is also
pushing its remote authorisation product which, it
says, is enabling corporate treasurers to concentrate
more on the underlying business of the company for
which they work.
There is a positive role for banks in particular
to play in the rapidly expanding world of mobile
payments. If they play that role well, public trust
50 | Fundamentals4HNHaPUL |>PU[LY2011
in the financial services just might begin to return.
Possibly accompanied by respect. Affection will
likely remain out of reach, at least for now, even
if the industry succeeds in transforming Africa’s
financial ecology in ways that decades of traditional
foreign aid have failed to do. If they play their cards
right, banks can help the continent finally emerge
from a catastrophic dependency culture.
If banks can commit to working with telecoms
companies to solve the problems that their success
in introducing mobile communications in general
to Africa, and mobile payments in particular have
created, they could help reshape the continent’s
commercial, economic and social future. It is a
challenge - a huge challenge. But one that some
industry players are convinced they will face up to.
Successfully.
Mobile technology is spreading further into other
areas of activity in the financial services industry.
Proxy voting, for instance, moved to the next
generation of advanced technology with the recent
announcement by Broadridge Financial Solutions
that its ProxyVote.com platform will be available on
mobile data devices such as smartphones and tablets
in early 2011.
The announcement and demonstration was made
at Broadridge's annual Investor Communications
Conference, held in New York City, which attracts
hundreds of top executives from the nation's leading
financial services firms, institutional investors and
corporate issuers.
"Mobile ProxyVote is yet another of the
technological innovations Broadridge has pioneered
to improve and encourage more shareholder voting
and enhanced shareholder communications," said
Joseph Vicari, vice president, business strategy
and development, Broadridge. "The sophisticated
graphical user interface is customized to be
used with an array of mobile devices - including
the market leading iPhone, iPad, BlackBerry
smartphones, and Android phones - and will

seamlessly integrate with Broadridge's ProxyVote.
com platform," he stated.
Broadridge calculates that 20m proxy votes were
recorded through ProxyVote.com for the 12 months
ending June 2010. ProxyVote offers street name and
registered shareowners, as well as 401(k), ESOP and
ESPP participants, the convenience of voting their
shares on the internet, and now with the introduction
of Mobile ProxyVote, through compatible mobile
devices.
Until now, shareowners who had registered for
electronic delivery of proxy materials and were
notified via e-mail, would only be able to cast
electronic votes via their personal computers.
Broadridge says that e-mail delivery of proxy
materials is growing exponentially, nearly tripling
from the annualised period ending 30th June, 2006
of 27m deliveries to almost 78m deliveries for the
annualised period ending 30th June, 2010.
"Shareholder preference is shifting towards
using technology to improve both their access to
information and their ability to act upon it," explained
Robert Schifellite, president, investor communication
solutions, Broadridge. "This introduction signals a
significant shift forward for shareholders and will
increase participation, especially among individual
investors," he concluded.
Luup has been developing and operating mobile
payment solutions since 2002, but changed its
business model in 2008 to reflect the realities of the
industry. The chief executive of the time, Thomas
Borston Jorgenson, realised there was little point
in trying to reinvent the banking wheel. Banks had
taken, years, decades, centuries, to build the networks
that are needed to achieve what could be possible in
mobile payments. It is clear that the bank-led model
for mobile payments is the way forward, at least in
developed markets, he explained, not long before he
left the company in 2010. It makes much more sense
to work with them rather than try to compete with
them. It is a different story entirely in developing
markets, many of which have bypassed fixed line
networks almost completely, and gone straight to
mobile. In such markets, it is telecoms companies
who hold the whip hand.
Build it and they will come
A large part of the potential market in areas such as
the United Arab Emirates (UAE) and in what some
people might still insist on calling lesser developed
countries is the low status foreign worker population,
made up of economic migrants from India, Pakistan,
Bangladesh, the Philippines, Sri Lanka and Egypt.
A Banker's nightmare?
Traditionally, these workers have been paid in cash
and have then used money exchanges to remit a
significant proportion of their salary home. This is
time-consuming, both in terms of the time it takes for
the money to reach the home country and the time
it takes for the migrant worker to go to the money
exchange. Another key factor to consider is legislation
making it compulsory for companies to pay salaries
electronically, which was only relatively recently
introduced in the UAE. Mobile payments provide a
cost-effective salary payment solution for corporates,
at the same time as being a convenient and secure
remittance solution for their employees.
The telco-led mobile payment models are all
aimed at the unbanked in developing countries. The
unbanked market is addressed using ‘mobile wallets’.
Some telcos also offer the service to customers of
other telcos. The service provider has to secure a
network of agents for cash-in and cash-out. This
is one of the major obstacles for unbanked mobile
payments and involves serious issues like securing
them liquidity and support.
Regulators throughout Africa are starting to
relax their stance on the telco-led model. The telco
industry is making enormous efforts to lobby
regulators and highlight the socioeconomic benefits
that they can bring to a country (i.e. 10% mobile
penetration increases GDP by 1.2%). Different types
of technologies can be used for mobile payments but
effectively rolling out an agent network is a massive
task for mobile network operators (MNOs). All
highlight training and education of agents as a major
issue not to be overlooked.
One obstacle is that running agent networks have
to compete for agents’ attention. Retailers typically
receive 20% commission selling soft drinks versus 8%
acting as cash-out agents for mobile payments.
Luup highlights UAE as key mobile
remittances gateway
The mobile money service market is growing at a
phenomenal pace and a report by analysts Gartner
states that transactions will total $4.5bn by 2012.
Further, an estimated annual growth of remittances in
the Gulf Cooperation Council region alone is pegged
at over 20% in the next five years.
At the recent Mobile Money Transfer (MMT) Global
Conference in Dubai, United Arab Emirates (UAE),
Luup highlighted how it is establishing the UAE as a
key mobile remittances gateway by partnering with
companies across the ecosystem.
In a speech given together with the National Bank
>PU[LY 2011|Fundamentals4HNHaPUL| 51
 A Banker's nightmare?
of Abu Dhabi (NBAD), Luup shared the successful
case study of the first launch of international money
transfer using MoneyGram via mobile phones in
the Middle East. Luup also pointed to its strategy
of expanding the ecosystem further by building
partnerships with countries receiving remittances
from the GCC region.
“With an exceptionally large migrant population,
the size of the remittance market in the Gulf
Cooperation Council (GCC) alone is nearly $50bn,”
said Morten Hofstad, regional director Middle East,
Northern Africa and Asia at Luup. “The region also
has one of the highest mobile phone penetration
rates in the world, as mobile phones are a key tool
InvestorServices
for these mostly unbanked migrants. Based on the
region’s potential, the MMT conference is a great
opportunity to share experiences and ideas that can
pave the way for mobile money transfer initiatives
globally.”
Luup has a successful partnership in place across
the UAE with the National Bank of Abu Dhabi
(NBAD). Recently a tie-up between NBAD and
MoneyGram was added, enabling mobile phone
international remittances to more than 200,000
locations across 190 countries and territories around
the globe. This was the first launch of international
money transfer via mobile phones in the Middle
East. The agreement between MoneyGram and
NBAD makes it even easier and even more
convenient for consumers in the UAE to send
international money transfers via their mobile
phones. Through this service, migrants and other
consumers can transfer funds directly from their
NBAD or prepaid account to persons outside the
UAE via mobile phones.
At the heart of service is NBAD’s Arrow service,
developed with Luup and launched two years ago
as the country’s first mobile phone money transfer
and payment service for current account holders.
NBAD and Luup then increased the range of Arrow
services to include transfers from general prepaid
cards. Offering international remittances through
MoneyGram was the culmination of intensive work
the partners undertook in developing this new service.
Ahmed Alnaqbi, senior manager channels and
electronic banking services at NBAD commented:
"NBAD is proud to play a significant role in this
project which paves the way for a smoother, secure
and convenient electronic money transfers." The
service is growing in popularity with an increased
customer base, and trust in mobile payments has
increased since the launch. With a seamless mobile
payments gateway established in the region, Luup is
52 | Fundamentals4HNHaPUL |>PU[LY2011
well on its way to expand with new partners in the
ecosystem to set the trend for future growth.
With some prediction saying that there could be
over seven billion mobile phones on the globe by
2015 mobile payments will undoubtedly play a key
role in the future of financial services. NBAD was
quick to see the potential of mobile technology and
by working with Luup is now is in a great position to
capitalise on the benefits that mobile payments offer.
Luup is also co-operating with Emirates
International Exchange (EIE), a leading exchange
house in the United Arab Emirates, on a project to
enable EIE customers to transfer money across the
globe from their mobile handset.
At the risk of sounding like an echo of a large
international mobile telecoms provider, it is just
about possible to argue that the future is bright. The
future is exciting. The future is challenging.
But banks must ask themselves: Are they ready
to face that future? Are they willing to invest the
time and money required? Are they able to prepare
properly to take the maximum advantage? Do they
have the resources? Do they have the technology?
After three and a half years of devastation caused to
much of the financial services industry, do they even
have the credibility? In short, are they up for it? In a
world where Qatar can be awarded the right to stage
football’s most prestigious event, the quadrennial
World Cup, anything can surely happen.
Meanwhile, in what it billed as an industry first,
Luup joined forces with Microsoft to showcase
an industry first at the annual Sibos gathering in
Amsterdam at the end of October. The newly-
launched Luup Mobile Remote Authorisations
product is interactively demoed on the Windows
Phone 7, enabling people to discover first-hand how
remote authorisations via a mobile device work and
the operational benefits the new product delivers.
Workforce mobility means that employees
increasingly rely on smartphones to keep on top of
workflows. Be it purchase orders, travel or budget
requests, payment runs, budget reconciliations
or cash replacement solutions, the Luup product
enables authorisations to take place remotely
by multiple peer or hierarchical signatories at
different locations, all within seconds via a mobile
device. Such innovation is set to bring even greater
operational changes than the electronic channel
brought, predicts Luup. Financial institutions and
their corporate customers will benefit from revenue
generation and cost reduction opportunities across
multiple business areas.

"Corporate payments innovations are gaining
considerable momentum at Sibos and our
collaboration with Luup is a natural step as Microsoft
expands in the payments integration market,"
said Karen Cone, general manager of Worldwide
Financial Services at Microsoft. "Luup's solutions
offer sophisticated workflow management tools and
Case study 1:
Mobile payment: A new universal means of payment or
a way to financial inclusion in emerging markets?
Jean Michel Guillaumond, head of research and
development at Société Générale’s international
retail banking division, is another with clear
strategic views about the benefits of reaching the
unbanked population, a subject relating to which he
has developed the concept of a need for disruptive
innovation. In developing countries, he observes,
the “classical” model of banks does not succeed
in satisfying the needs of a widely unbanked
population: The density of bank branch networks
is low, card payment infrastructures are insufficient
and financial services remain costly. Today, these
weaknesses can largely be solved thanks to the cell
phone - a large percentage of the population owns
at least one and telecommunication networks are
extensive and efficient. Technology makes it possible
to access daily banking services via the mobile in a
secured way. Once fiduciary money is transformed
into electronic money, it becomes easy to carry out
money transfers as well as pay goods and services by
mobile phone, anywhere and at anytime.
Telecommunication operators were the first to take
close interest in the subject as it seemed easy for them
to make a switch from transfer of airtime credit to
transfer of electronic money. Setting up an integrated
payment tool allowing to top up airtime also enables
operators to decrease their costs. In addition, it
represents a new traffic generating service as well as
a way to develop consumer loyalty. Therefore many
projects were initiated and today, several of them -
such as M-Pesa by Safaricom, Mobile Money by MTN
or Orange Money - are operational. In many countries
operators cannot launch a mobile payment service
on their own. For regulatory reasons they have to
conclude partnership agreements with financial
institutions who ensure the issuance of electronic
money and guarantee transaction security and
compliance towards Central Banks. In this context,
several Société Générale subsidiaries are participating
in such projects, e.g. in Ivory Coast and Madagascar.
However, operator-driven initiatives are closed-
loop systems dedicated to their own customers.
A Banker's nightmare?
directly increase efficiencies in banking operations
and treasury functions. Microsoft BizTalk Server
is a core-part of Luup's banking-grade platform,
delivering complex business process mapping,
enabling integration with mission-critical core
banking and treasury systems."
Operators’ objectives are different from banks’
objectives. Moreover, these projects can eventually
become a threat to banks. Not only are bank revenues
on payment threatened, but so is the banking
activity on the whole – especially for one such as
Société Générale - given that operators could start
using consumer files to commercialise credit and
deposit products in partnership with competitors.
The Safaricom example, with the recent launch
of M-Kesho in Kenya (a banking offer including
micro- savings, micro-credit and micro-insurance) in
partnership with Equity Bank, is edifying enough.
A new means of payment: universal, handy and safe
In emerging markets tomorrow’s banker will surely
be the one distributing and processing means of
payment, and the most widespread payment means
will probably not be by card. According to several
consumer surveys, payment is considered as a natural
extension of everyday mobile use, and therefore
mobile payment is eventually likely to develop on a
large scale.
Based on these convictions, Société Générale
decided to develop a new simplified banking service
of its own that would combine a prepaid electronic
money account and related means of payment in
order to reach the unbanked segment by using a
different business model. These are the principles on
which this new service is built:
• The service must be open to everyone regardless
of the operator and the telephone, without the
need to change the SIM card to access the service;
• The service must enable the client to send money
to any recipient owning a telephone;
• The service is shared between partners; in order
to be universal and open to a number of uses,
alliances with complementary partners are build
in order to create a ‘payment ecosystem’;
• The service must be a true banking service
because clients must enjoy the same level of
security and protection as traditional banking
customers;
>PU[LY 2011|Fundamentals4HNHaPUL| 53
 A Banker's nightmare?
• The service name must stick to the economic and
social life of the country where it is marketed
because there are strong ties between the access
to banking services, economic exchange and in
fine economic development.
A first pilot launch in Senegal
Senegal is the first country in which the service
was launched in June 2010. The company Obopay
supplies the underlying technology and brings its
expertise in the processing of transactions by mobile
phone.
Senegal presented the perfect conditions allowing
the project to succeed: a widely unbanked
population (only about 7% have a bank account)
and an extended network of mobile phone users
InvestorServices
Towards an international mobile payment network?
The idea that an international mobile payment
network can be created seems reasonable. This is true
for Sub-Saharan Africa and is also valid for other
parts of the world. In semi-mature and developed
markets, such as North Africa and Europe, the
payment platform is to be enhanced with the internet
channel for subscription and e-commerce. For
illustration, portals such as iTunes or Ovi show a
trend of the business in intangible goods, for which
payment (especially micro-payment) is a compulsory
component. This payment platform will have to be
able to process such micro-payment transactions at
a low cost. In addition, the deployment of mobile
payment services offers great perspective for

the international remittance market. For Société

(50%). The service is named “Yoban’tel by Obopay”.
Générale, this type of service would be valuable as
Yoban’tel means send by telephone in Wolof, a name
many of its subsidiaries are located in countries with
that can easily be adopted by local partners. We add
large migrant populations.
“by Obopay” to stress the belonging to the network
which will, in the future, interconnect cell phone
owners of all countries.
A new banking distribution model?
Payment and money transfer might only be the
Today the service includes person-to-person money tip of the iceberg. Besides this service, Société
transfer and bill payment. Any mobile device is Générale aims to offer financial services to everyone,
eligible for the service. A simple SMS is enough to including those who have not had access so far.
send a transfer or payment request, without having Based on the initial model set up for payments, the
to install an application on the phone. range of products could be extended, for example
Person-to-person money transfer and payment the disbursement of micro-loans and repayments
of bills were evaluated as the two most important via mobile phone; the payment of a premium to
use cases. So we developed them first. Yoban’tel customers keeping a minimum balance on their
makes person-to-person money transfer simple. prepaid electronic money account balance.
For a person who works in Dakar, it is essential to Société Générale says that Yoban'tel's launch
be able to regularly send money, in a safe, easy and in Senegal is the first step towards the full-scale
immediate way, to his family living outside the deployment throughout the continent of a universal
capital. Beneficiaries do not even have to subscribe to payment service accessible to all - including those
the service. All they need is a mobile phone. without a bank account - before becoming the
Bill payment via mobile phone has two advantages. solution for payment by mobile phone for Société
On the one hand, it prevents the remitter from Générale group worldwide.
having to go to a branch and queue for hours to pay
his bill in cash. On the other hand, it is easier for the
provider to manage payments, as transactions aare ree
automatically processed.
To ensure the development of Yoban’tel, Société té
Générale’s local subsidiary (Société Générale des es
Banques au Sénégal) has entered into partnerships hip
ips …  – 
with major actors in the Senegalese market:
• Crédit Mutuel du Sénégal, the largest micro- ro-
o- ‫ ½ ݌‬
finance institution in the country with 450,000,0000
00
customers and 180 branches, for subscriptionsionons ߕ 
and cash-in cash-out facilities;
• Canal Plus Sénégal for payment of TV billss v ia
ia
via 6HQGLQJ
mobile phone;
• Tigo, a mobile operator, for distribution off the th
he
to
op-
service at its points of sale and for airtime top- p-
ount
ou
up debited directly from the Yoban’tel account. nt.

54 | Fundamentals4HNHaPUL |>PU[LY2011

Case study 2:
The attractions of Africa
Africa is popular with bankers and technicians
pushing the development of alternative payment
networks. The GSM Association (GSMA) and Citi
Global Transactions Services hosted a timely Mobile
Money Policy Forum in Nairobi, Kenya, on 30th
November 30 and 1st December, with participation
from the US Department of State. In recent years,
mobile commerce has grown in popularity in Africa
due to the high level of mobile penetration. Recent
advances in mobile technology have the potential
to radically change the payments landscape and,
in fact, are making new payment infrastructure not
only possible, but a reality. This is enabling financial
inclusion and improving Africa's social and economic
development. All of these changes have created
myriad opportunities for market participants but also
a lot of questions as to the right strategy to execute.
The two-day event was designed to discuss
regulatory frameworks to enable mobile commerce
in Africa. Mobile commerce, and specifically the use
of e-money, is enabling the unbanked populations
of many countries in Africa to conduct financial
transactions via a mobile phone, including personal
and business transactions which can replace
cash transactions.
Maria Otero, undersecretary for democracy and
global affairs, US Department of State, and James
Wolfensohn, ninth president of the World Bank
(or International Bank for Reconstruction and
Development, to give its formal name) and chairman of
Citi International, were featured speakers at the forum.
The GSMA represents the interests of
the worldwide mobile communications
industry. Spanning 219 countries, the
GSMA unites nearly 800 of the world's
mobile operators, as well as more than
200 companies in the broader mobile
ecosystem, including handset makers,
software companies, equipment
providers, Internet companies, and
media and entertainment organisations.
A Banker's nightmare?
Representatives from Kenya, Tanzania and Uganda
– including Professor Njuguna N'dungu, the governor
of the Central Bank of Kenya - shared best practices
from the implementation of mobile commerce in East
Africa with representatives of participating countries
from Central Africa including DRC, Cameroon and
Gabon. The agenda also included a review of the
regulatory landscape in the region, critical success
factors to promote financial inclusion, and working
group sessions to implement these practices.
Ade Ayeyemi, head of Citi Global Transaction Services,
Africa, said: “The provision of mobile commerce is
enabling financial inclusion broadly in Africa. The
mobile phone’s ubiquity provides an existing and cost
efficient channel for the unbanked to reach the market
and the market to reach the unbanked.”
Gabriel Solomon, senior vice president, public
policy, GSMA, said: “Mobile is a pervasive
infrastructure that is accelerating economic and social
development across the globe. With more than 5bn
connections, mobile is the only platform that can be
leveraged to achieve broad financial inclusion. As the
GSMA and Citi partnership demonstrates, mobile
money is a win-win for banks and mobile operators;
working collectively, we can all capitalise on the
significant opportunity before us.” Citi relates that
the forum was also attended by industry participants
including key mobile network operators, CEOs from
major utility and large public sector entities, as well
as NGOs active in promoting financial inclusion
including CGAP and the Gates Foundation.
>PU[LY 2011|Fundamentals4HNHaPUL| 55
 Caceis
Uncovering the hidden benefits of outsourcing
Since the financial crisis broke, investment managers and their clients have come to
realise the added value in terms of security and peace of mind that the engagement
of an independent third-party administrator brings. Pierre Oger, head of business
engineering at CACEIS Bank Luxembourg, looks at how attitudes toward service
providers’ roles have changed over time
Handling high-volume services
An asset servicing company was traditionally
brought on board by investment managers to
handle labour-intensive, administrative tasks such
as net asset value calculation and fund accounting.
By outsourcing such tasks, investment managers
InvestorServices
also benefited indirectly by being freed from
internal infrastructure burdens associated with the
recruitment of qualified staff and IT-related matters
such as system maintenance and upgrading, back-
up plans and adoption of standards associated with
automation initiatives.
Moving up the value chain
However, the services proposed by the asset
servicing industry have greatly evolved since these
more humble beginnings, today encompassing more
complex matters such as cross-border distribution
support, risk management and performance
measurement as well as more sensitive areas of the
investment manager's business, with the advent
of outsourcing of functions typically associated
with manager's middle office. These services not
only permit the manager to concentrate on the core
business of asset management, but combined with
comprehensive online reporting tools to answer
increasing calls from investors for transparency in
many aspects of the manager's business.
An indicator of investment security
In the current marketplace, the service provider has
developed from being an anonymous outsourcing
company to being a more visible extension of the
investment manager's company. Indeed, the security
and peace of mind provided by the engagement of
a third-party administrator has seen end-investors
now actively seek information on the administrator
as part of their internal due diligence process and
the presence of a strong administrator, carrying
out constant market and regulatory monitoring,
can prove to be another indirect benefit. Managers
have realised this, and there is a growing trend
among those using the services of an independent
administrator and custodian to utilise the service
provider as one of the selling points for their fund.
The rising importance of the administrator in
56 | Fundamentals4HNHaPUL |>PU[LY2011
terms of investment transparency legitimacy and
protection concerns was demonstrated by the Swiss
fund of fund administrator UBP, which took the
decision to accept only those sub-funds serviced by a
third-party administrator.
Protecting managers' businesses
However, the indirect benefits of engaging an
administrator go beyond answering the transparency
concerns of the investor. During the recent financial
crisis, asset servicing companies were able to
demonstrate their commitment to a partnership
approach by working in very close collaboration
with manager clients, to find practicable solutions
to arising problems. For instance, as administrators'
compliance departments constantly monitor
counterparty risk, they could notify investment
managers the instant counterparty risk issues were
detected at Lehman Brothers, and by being at the
source of data, were able to identify impacted
portfolios, enabling managers to rapidly reduce their
exposure prior to the group's failure. Also, close
relationships with many prime brokers permitted
the administrator to assist manager clients using
Lehman's prime broker services to identify a suitable
replacement.
However, it was during the alternative
liquidity crisis that clients with a financially
strong administrator and affiliated custodian
benefited most. Many were able to leverage their
administrator's considerable financial resources to
assist them in negotiating the wave of withdrawals
by investors, so that they could remain liquid and
importantly, in business.
Relationship management is key
CACEIS is a strong financial player and a leading
global provider of asset services. Despite our size, we
still score highly on the human side of our business
as measured by client service and relationship
management in leading industry surveys based
on client feedback. This is thanks to the expertise
and dedication of our staff, who are committed
to supporting their clients, developing initial
relationships into dependable business partnerships.
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Outlook2011
Missy Seidel, securities lending global
product head, Brown Brothers Harriman
There are many forces at work that will influence
supply and demand in the securities lending market,
most notably our current regulatory environment.
SecuritiesLending
Regulators in all jurisdictions have been drafting
rules designed to promote transparency and control,
while not unduly impacting the way our markets
function. The US has enacted changes already
via Dodd Frank, with much subject to additional
rule making over the next two years; European
regulators are finalising Basel III and AIFMD with
changes expected to take effect around 2013; and
while we seem close to resolution on the EU short
selling proposal, there is still ambiguity as to how
the rules will ultimately impact lending. The overall
uncertainty has produced a lack of conviction on the
borrowing side, and ultimately subdued demand.
As we move into 2011, the industry is cautiously
optimistic that demand will return once the
regulatory environment stabilises and the economy
continues to improve. A rebound in hedge fund
assets and M&A activity have been positive signs
- as we see leverage and stock M&A deals return,
we expect to see more opportunities for beneficial
owners. We also anticipate that more hedge funds
will implement active trading strategies, which
would translate to an uptick in demand.
Flexibility and transparency remain front and
centre for beneficial owners - many have been
through a review of their programme and providers,
58 | Fundamentals4HNHaPUL |>PU[LY2011
and are re-engaging with more knowledge.
They are correctly demanding specific and
customised collateral and programme parameters,
meaning the ability for a lending provider to be
flexible and provide a customised programme
is more important than ever. The most nimble
providers will be well positioned to gain market
share in the coming year. Lending agents are
increasingly selected based on their merits as
agents, rather than because of custodial or other
relationships.
Jonathan Lombardo, executive director,
sales, SecFinex
The securities lending industry will face its
greatest challenges adjusting to new regulatory
changes. EMIR’s possible decision to mandate
SBL transactions to be viewed as OTC instruments
resulting in trading via CCPs will change the SBL
landscape going forward.
In addition Basel III and Solvency II initiatives will
impact capital requirements for all participants in
the SBL space, resulting in bi-lateral transactions
becoming more capital-intensive and forcing
businesses to rethink trading strategies to retain
profitability and maximise return on capital.
Business streams that are capital intensive will be
required to find alternative routes to reduce capital
requirements or inevitably might face smaller lines
to trade. These changes will bring SBL in line with
the financial community as a whole and validate an
often misunderstood market.
 Outlook 2011

David Little, director, strategy & business

development, Calypso
Collateral management of OTCs is being rewritten
by the CCP initiative. The biggest impacts are on the
margining process, because the CCP has to hold the
margin from both sides. It is bringing some people
into collateralisation who haven’t traditionally been
exposed to it before (buy-side – prime brokerage and
AMs), and it changes the rules for collateralisation for
others. As a result of this, people are reviewing what
they are doing with collateral management, so this is
possibly going to form the stimulus for a trend that
was happening anyway across the trading desks.
Traditionally collateral management was done in the
silos of equities, fixed income and OTC derivatives
but there is now a trend towards installing a single
collateral desk that takes on the responsibility for
all of these, and driving out some synergies and
economies of scale.
In regulation, Dodd Frank will shift the playing
field in the favour of the smaller players. This
runs counter to the trend currently playing in the
securities financing market which is favouring the
larger tier-1 players. We therefore expect to see more,
smaller, members. This will mean more relationships,
meaning a greater overhead to manage and will act
as a driver to improved systems, higher STP rates and
need for overall efficiency.
Basel III will impact the Sec Fin market though the
requirement to set aside capital and liquidity buffers.
By collateralising and demonstrating that you have
good control over your collateral, you can reduce
the amount of capital you have to set aside. Capital
is going to become the limiting factor in the market,
thus becoming a strong driver.

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 ETFs: The underlying lending
ETFs: The underlying lending
Following on from last quarter’s article on securities lending in ETFs,
Cherry Reynard takes a deeper look at both the physically-backed
and synthetically-replicated product offerings
ecurities lending is widely employed by
ETF providers. With the larger ETFs running
into billions, they are often a significant part of
the wider securities lending programmes of asset
managers and investment banks. Theoretically,
there should be significant benefits to the client as
well, who should see a reduced total expense ratio
and lower tracking error as a result. But are these
programmes sufficiently transparent? And are
investors aware of the risks they present?
Both physically-backed ETFs and synthetically
replicated ETFs will have securities lending
programmes. For synthetic ETFs, the risk is borne by
the swap provider (usually an investment bank). It
is therefore simply rolled up into the ultimate swap
rate and investors will never see the impact. For
physically backed ETFs, it will create variation in the
total expense ratio depending on how much revenue
can be generated via securities lending for assets in
the portfolio.
SecuritiesLending
Demand for securities held by ETFs is largely
market-driven. Stefan Kaiser, a vice president
of global securities lending at BlackRock, says:
“Securities lending is an integral part of the portfolio
management value chain and investors should
benefit from this type of programme. We try to add
all funds to our lending programme, but there is
different demand and supply for different assets.
There is less demand for FTSE 100, for example, and
more demand for the MSCI Turkey.”
In general, securities lending is done to reduce
tracking error as all ETFs will incur costs of some
kind. Vin Bhattacharjee, senior managing director
and head of EMEA Intermediary Business at State
Street Global Advisors (SSGA), says: “We see
securities lending as a way of offsetting the expense
ratio on the fund. Physically-backed funds have
expenses such as custodian fees or withholding
tax and this is a way of mitigating that. We don’t
necessarily earn a fixed amount. It is part of
managing a portfolio efficiently.”
Christos Costandinides, an ETF Strategist for the
Global Markets Research team at Deutsche Bank
points out that securities lending happens with all
mutual funds, but people talk about it a lot more
with ETFs. He adds: “If you look at any large asset
manager, there will be a big line for securities
lending.” In general, the uses of borrowed stock from
60 | Fundamentals4HNHaPUL |>PU[LY2011
ETFs are as wide as those of any securities lending
programme and may include short-selling, M&A, risk
arbitrage or the hedging of convertible bond issuance.
In physically replicated ETFs, around 50% of the
income from securities lending will flow back into
the fund. The remainder is split between the ETF
provider and the custodian. As securities lending
agreements are customised, there are no limits, but
Costandinides says that this is the market norm. It
is impossible to say the extent to which securities
lending reduces costs for derivative-backed ETFs
because it is priced into the swap rate.
The income available from securities lending will
vary quite substantially. Nick Thomas, global head of
specialised sales for HSBC Securities Services says:
“Securities lending generally brings in incremental
revenue for the ETF provider. Depending on the
nature of the ETF, this can vary quite substantially.
The revenue raised from lending out a security can
vary between a couple of basis points and a couple
of per cent. The larger a stock, the less the probability
that short-selling would influence the share price.”
For the larger groups, such as State Street and HSBC,
the ETF securities lending programme will form part
of the group’s wider lending programme and will be
managed centrally. SSGA has around $2 trillion under
management and therefore has a lot of stock that can
be lent out of which ETFs are just one part.
Securities lending programmes within ETFs have
created some controversy because of the counterparty
and collateral risks that can be generated. For
example, if an asset manager lends out a stock and
the counterparty goes bust, it will receive whatever
collateral has been put in place. This collateral may
bear no resemblance to the original stock.
Historically this has not been a problem, but became
an issue during the credit crunch when stock lending
transactions were collateralised with bonds that
became extremely illiquid. As it was, no European
ETFs were affected. In the US some ETF Securities
exchange-traded commodities were backed by
collateral posted by AIG. Before AIG was rescued,
this became a significant problem. Liquidity in one of
the ETFs disappeared because market makers would
not trade it.
This was a temporary phenomenon and
ETF Securities has now changed its collateral
requirements. Other ETF providers, unnerved by its
 ETFs: The underlying lending

experience, have also tightened up. Kaiser says: “We meaningful additional risk.
never have unsecured counterparty risk. With swap However, Costandinides says that investors still
agreements, in theory, it is possible to have unsecured have to do some due diligence. He believes it is
counterparty risk. We over-collateralise at 110-112% worth examining the underlying securities lending
for equity against equity loans to avoid unsecured agreement; how collateral is held and how quickly
counterparty exposure.”
can it be accessed. Different rules apply to the US and
Thomas says: “With a large securities lending Europe, for example. In the US, if a counterparty fails
programme, when you consider how much is being to return securities, they are served with a letter and
borrowed, the risk is very small because the loans
after three days if the securities are not returned the
are collateralised and marked to market daily. There
have been some securities lending defaults, but collateral passes to the counterparty.
compared to the aggregate amount being European repo and securities lending is more
lent in the market the losses have been complicated. Collateral may sit in a
very small. The losses have occurred different jurisdiction to the fund. Those
when lending clients have lent jurisdictions will have different legal
stock against cash collateral and The types of assets regimes and it may take anything
reinvested the cash in weaker that will be lent will from a few days to a few months to
instruments. We will always depend on the state recover the collateral.
receive more collateral than
the amount being borrowed.” of the market. This is For Costandinides, transparency
Also, ETF providers why it is often difficult is by far the greater issue for
running securities lending to get to what the fund securities lending programmes
programmes are likely to is doing. Of, say, 500 on ETFs. He says: “There are no
have a lot of counterparties. regulatory guidelines as to the
If one goes bust, it may be stocks held, not all will percentage of assets that are lent
problematic, but investors be lent out. out. You can look at the annual
are unlikely to lose their shirts.
They will simply see a short-term reports, but disclosure is poor and
widening in tracking error. should be better.” Annual reports are,
Counterparty risk is more of a problem by their nature, infrequent and it can
for derivative-backed ETFs rather than be difficult to get at the amount derived from
physically-backed ETFs running securities lending securities lending. Certainly, the majority do not
programmes. Synthetic ETFs will generally only reveal the type of stocks lent out or how much is
have one counterparty – the investment bank - and made from individual positions.
therefore the collateral problem is more pressing if it This is not simply a division between synthetic
goes wrong. Rather than just losing a few percent in and physically-backed ETFs. In synthetic ETFs, the
one or two stocks, investors risk losing the whole of investors will never see how much is made from
their investment. Any risks from securities lending securities lending because it is rolled up into the
should be set in this context. swap rate. It is clearer in physically-based ETFs,
Costandinides agrees that securities lending is but it will depend on the individual providers. For
generally a low-risk practice, despite some hysteria example, Kaiser argues that BlackRock has focused
during the financial crisis about counterparty risk. It on transparency and it is clear how its securities
introduces an element of risk, but it is not significant. lending programme adds value: “The difference
Markets have been through the most significant crisis between swaps and physically-based – in swap-based
in their history and these issues have only posed a securities lending, it happens outside the fund and
problem for a handful of ETFs. It is difficult to make it is not seen. With our funds, if the TER is 35 basis
the case that securities lending programmes create points and securities lending has generated 40 basis

>PU[LY 2011|Fundamentals4HNHaPUL| 61
 ETFs: The underlying lending

points, the investor knows about it. We show clients provide synthetic replication, while asset managers
what we are deducting and what we are generating use physical ETFs. In synthetic replication, the
in securities lending. We are transparent about costs investment bank will provide access to a total return
and the same is true of securities lending.” swap at zero cost. It is therefore more cost effective
However, part of the problem with ETF providers to construct the asset. Tracking error has also tended
giving complete transparency on costs is the relative to be better for synthetic replication. As securities
unpredictability of securities lending. Because it is lending creates variation in tracking error, it could be
driven by the market, it is difficult to know at any seen as adding to the case for synthetic replication.
one time how many stocks will be being lent out and There again, as in most cases it reduces tracking
for how much. Often asset managers will give their error, it could be seen as mitigating some of the
securities lending team a mandate enabling problems of physical replication.
them to lend out securities on demand Having historically gone for one
up to a certain level. This could side or the other, providers are
be as high as 60% or 70% of the increasingly offering both types,
portfolio, but may be nothing if We show clients depending on the asset class
there is no market demand for what we are being replicated. iShares
the assets. deducting and what has always had physically-
Costandinides says: “The based ETFs, but has recently
we are generating in
types of assets that will be lent launched a synthetic ETF.
securities lending. Credit Suisse has done the
will depend on the state of the
market. This is why it is often We are transparent opposite. Kaiser says: “We
difficult to get to what the fund about costs and tend to use swap-based ETFs
is doing. Of, say, 500 stocks held, the same is true of where physical replication
not all will be lent out.” securities lending poses challenges, such as foreign
Bhattacharjee says: “Securities investor restrictions.”
lending is a market-driven Costandinides says that there is
SecuritiesLending

phenomenon. You only lend if there is an lots of debate as to which is the best
economic return for doing so. The counterparties approach, and this has largely been propagated
don’t have much control over the securities that are by the providers: “Both have pluses and minuses –
in demand. Usually lending rates will rise if there are you have to look at it in the context of the product.
large numbers of people interested in going short. There was a lot of talk about counterparty risk during
Rates are not stable – it varies day by day.” the credit crisis, but not a single ETF suffered losses
Kaiser says that theoretically most physically-based because of counterparty risk. Investors lost a lot more
ETFs could generate an income from securities money from not understanding the type of asset in
lending, but they have to take account of demand which they were invested.”
patterns. At the moment, he says that there is more Certainly the presence or absence of a securities
demand for borrowing government debt and less for lending programme does not swing the balance
borrowing corporate debt. It depends on the asset in favour of one approach or another. It does not
class and market environment. increase risk materially to create a problem for
With this in mind, does the presence or lack of a physically-based ETFs and it does not reduce cost
securities lending programme add to the arguments sufficiently to make a case against synthetic ETFs.
for physical or synthetic replication? Costandinides The difference made by the securities lending
says that the market is now around 50/50 physical programme will depend on the asset class and the
and synthetic ETFs. In general, investment banks group providing the programme.

62 | Fundamentals4HNHaPUL |>PU[LY2011

Be Prepared
Tim Smith, executive vice president of
SunGard Securities Finance looks forward to
securities lending in 2011 - Ready?
he motto of the Boy Scouts - “Be Prepared” -
is also relevant to securities lending in 2011.
While today’s world usually resembles that
of yesterday, and it’s only the rare black swan
that takes us by surprise, the securities lending
markets and the entire capital markets are standing
presently in an uneasy state of readiness. Never
before have securities finance professionals
been so utterly uncertain as to what is going to
happen next. And we do not even know where
the unknown occurrence will happen. Will it be
BRIC? North America? Europe? Asia? Everywhere?
Therefore, it’s important that we continually
remind ourselves of the Boy Scout motto in order
to best protect ourselves and thrive in the changing
environment.
In addition to any regulatory diktats, which may
vary from region to region and country to country,
there will be new operational memoranda issued
by the industry associations. These will address
regulatory concerns and attempt to head off any
unnecessary and overly burdensome impositions.
However, securities lending booking systems will
need to be as flexible and as integrated as possible
to ensure not only the ability to comply, but to
do so without having to employ a vast army of
manual workers. The latter would be fine in normal
circumstances, but the time constraints will be far too
great to allow for manual intervention in the normal
course of business. It will have to be automated.
One of the major themes for 2010 was the expansion
of the number of ways of doing business including
central counterparties, single stock futures, and
prime custody services. The new methodologies
will co-exist because providers have established
realistic assumptions in terms of market penetration.
Nevertheless, they will still require support,
monitoring and the ability to integrate the activity
without disturbing legacy processes. As the whole
proposition grows in complexity, banks, brokers,
beneficial owners and hedge funds will realise that
to be prepared means one of two things: either
devote more resources to deal with non-core IT
Be Prepared
infrastructure and data processing, or concentrate
on bread and butter businesses and use experts to
cope with the systems and the necessary regulatory
compliance.
Qualitative controls and benchmarking will be
another major push for 2011 in terms of both risk and
performance. The problem with risk for securities
lending businesses is that the business side looks
at it from a different perspective than the corporate
side. To cover it well, there is a need to satisfy both
business and corporate, but most offerings out there
usually concentrate on one or the other. Similarly,
for the performance benchmarking technology, it
will be important to provide all required users with
easier access using familiar tools like Excel so that
information can be shared internally more quickly.
Ask anyone about the current main area of
focus and, chances are, you will receive the reply:
‘collateral management.’ Although a standard
definition of collateral management eludes many
people (and it can mean different things to different
people), the common thread is efficiency, compliance,
transparency, and managing balance sheets well for
every business that touches trading. To this end,
it will be necessary for serious players to adopt
an across-the-board approach that will necessitate
vast resource commitment. And maintaining it
in an uncertain world will require an ongoing
commitment.
The above may all sound very similar to what
has happened in the past. However, this would
be a mistaken impression. Securities finance is no
longer a stand-alone business. There are too many
variables and connections with other areas of banks
to allow a piecemeal approach. There is also too
much uncertainty as to the regulators’ next steps
in applying new forms of control and reporting.
There are also too many opportunities arising from
different markets and products. Consequently, it
is certainly wise to work with both internal and
external service providers to ‘be prepared’ for any
eventuality.
>PU[LY 2011|Fundamentals4HNHaPUL| 63
 Off Centre
Roy Zimmerhansl gauges industry opinion on why central
counterparties – deemed “inevitable” by many – have not yet fully
taken off in the securities lending world
Four Reasons Why CCPs Haven’t Had More
Impact on Securities Lending
A substantial amount of editorial space has been devoted
to the topic of central counterparties (CCP) for securities
lending. Launched in 2009 in both the US and Europe,
CCPs have been a controversial subject from the start.
It’s no surprise as to why the subject is of interest to
market participants. Any new development - whether
technology-based, the result of regulatory imposition,
or a change to best practice –has the potential to
fundamentally change the economic dynamics for
lenders, borrowers and intermediaries. Let’s recap the
supportive arguments for implementation before turning
to the questions that remain.
There are several compelling arguments for
CCP usage.
• Beneficial owners, ultimately the lenders of stock,
are generally risk averse, so surely the credit risk of
SecuritiesLending
a CCP borrower rated AAA must be an attractive
proposition.
• Agent lenders using a CCP might be in a position
to increase distribution to a large community of
borrowers, some of whom are outside its bilateral
approved list.
• CCP clearly brings huge value to the prime broker
and proprietary trading borrowing side of the
business. Regulators give substantial reduction
in balance sheet usage and capital allocation for
participants in CCP-cleared trading businesses, and
securities lending would equally benefit. Access
to supply is increased as Agent Lender Disclosure
(“ALD”) requirements are removed for CCP-traded
positions.
• Hedge funds – the end demand in most cases, should
benefit in several ways. As noted, prime brokers’
access to stock is increased and the efficient use of
resources at PBs should indirectly benefit hedge funds
from a product pricing point of view.
• Regulators around the world have been encouraging
the use of CCP for over-the-counter trading
activity. They point to the risk reduction benefits
best exemplified by the very successful unwind of
Lehman trading positions across multiple products in
numerous markets around the world. The scale of the
unwind dwarfs the relatively small securities lending
market position that Lehman carried.
Given all of these positives, it is not surprising that many
use the word “inevitable” to describe a future where
64 | Fundamentals4HNHaPUL |>PU[LY2011
Off Centre
substantial use of CCP is commonplace. Yet, even with
this weight of intellectual argument, the impact of CCP
remains negligible in the grand scheme of securities
lending today. So let’s turn the discussion to the reasons
why activity remains muted and enthusiasm comes mostly
from those with vested interests.
I should mention that several very thoughtful
commentators gave me insights as to their views on
the issues outlined below. Most were restricted from
making credited statements, so I thought it best to capture
their cumulative views for readers’ consideration and
anonymise everyone’s comments. Interestingly, virtually
all of those individuals describing the minefield of issues
we discuss below, believe CCPs are in fact inevitable.
(Few were willing to guess when though …)
Reason One - Margin
The most often discussed issues revolve around margin.
Remember that excess margin held by agent lenders on
behalf of beneficial owners is the bedrock safety net that
underpins this marketplace. Investors that lend securities
are protected from losses arising from borrower defaults
primarily by the excess collateral value that they take
from borrowers. Anything changing this core principle
threatens the very basis of the decision to lend.
Under conventional CCP arrangements for other
financial products, both the buyer and seller provide
margin to the CCP with subsequent margin movements
based on profitability or underlying value changes. This
represents a radical change from the current securities
lending business in at least four ways. First, “lenders”
(used in this article to mean either the agent or beneficial
owner) receive excess collateral, they don’t give it. Second,
the beneficial owner is the owner of the collateral. Third,
lenders decide which collateral is acceptable and the
extent of excess margin taken from borrowers. Fourth,
lenders determine where and how the collateral is held.
Solutions for many of these issues exist. Investors
that trade derivatives already have to post margin, so
conceptually it is possible to get over that hurdle. Agents
having to post collateral could in theory provide other
long positions as collateral or have custodial arrangements
whereby CCPs could call on margin in the event of a
default. Alternatively the borrower or even the General
Clearing Member acting for the lender could post the
collateral on its behalf. In many ways, collateral is just
a cost calculation that needs to be added in. Or it may
be possible to restructure the CCP arrangements so that
the lender does not have to provide collateral in the first
instance. In any case, it is clear that without an answer to

these collateral issues, it is unlikely substantial progress
will be made.
Some (in fact, many) investors are legally restricted from
lending securities without taking collateral - so their own
regulatory requirements bar them from using the current
configuration of the CCPs. It may be possible to get clients
to change their governing documentation or push for
regulatory changes that require them to hold collateral at
least equal to the value of securities on loan. But don’t hold
your breath – that’s a long-haul approach that would have
little appeal to beneficial owners or their regulators.
Reason Two – Credit Exposure
Agent lenders each have individual lists of approved
borrowers in their programme s. Beneficial owners usually
have the option of reducing the list further, even if the
agent offers those clients indemnifications.
The agents have a surprisingly wide variation of borrowers
on their approved lists. In addition to their individual
credit assessments, other factors including relationships
and business opportunities also shape these lists. Having
invested time and effort into selecting borrowers that suit
their needs, agents want to trade bilaterally with those
entities.
Currently the primary way to access the existing CCPs is
via anonymous trading platforms. The argument in favour
of the trading platform entry point is improved distribution
to a wider audience through the enhanced filter of CCPs
as risk managers. Through the CCP credit assessment of
individual members, the activity-based margin provision
by those entities, further guarantees that are required to
gain membership, and the mutuality of credit risk amongst
CCP members, regulators consider CCPs as a superior risk.
Even for those that accept the AAA-rated risk assessment
of CCPs as counterparties, it fundamentally changes the
risk relationship. Rather than choosing the counterparty
you are willing to take risk on, trades are automatically
completed with any qualifying member. This hands over
the credit assessment process to CCPs and some doubt
whether they can in fact legally delegate the decision
making process to any third party. Questions also arise on
counterparty risk where the agent lender is not a clearing
member itself – does the risk transfer to the clearing
member? While this would insulate the agent from CCP
default, it would concentrate risk into the clearing member.
Finally, many critics of CCPs in the wider financial
markets point to the concentration of credit risk into CCPs
and away from diverse counterparty credit exposure.
Reason Three – Operational Impact
CCPs have two roles at the core of their existence. One is
as risk manager described above. The second concentrates
on their position of having the “Golden Data”. Rather
than two bilateral counterparties needing to reconcile
and agree pending and outstanding transactions, billing
and entitlements, the CCP becomes the dictator of the
data. All users must accept the CCPs information as
correct. The upshot of trades cleared through CCPs is that
disagreements between counterparties or “breaks” should
Off Centre
be reduced, streamlining operational flows. And it’s hard to
dispute that having fewer breaks would be good.
CCPs generate greater benefits the more they are used,
so in the highest volume markets they bring substantial
hard-money value to large-scale users. But, like all new
products, CCPs have started with relatively low market
penetration and low volumes. Also, the securities lending
CCPs rightly concentrate on many of the highest volume
securities lending markets – US, France and Germany for
instance. Yet these markets are already amongst the most
efficient, and with sparse volumes, CCP use adds to the
operational workload rather than reducing it. Low volumes
of trades requiring new processes, practices and procedures
are the reward for the earliest users. More complex and
cumbersome markets will remain outside the scope of CCPs.
Eventually this too shall pass, and as with other
fundamental processing innovations at some point critical
mass will be achieved and the value will become accessible
to all. These high-volume markets tend to be GC markets
and anything that can help reduce overall costs for dealing
in these securities helps product profitability. Better that
operations people benefit from straight through processing
for low-margin markets and concentrate their time and
effort on complex, difficult settlement countries.
Reason Four – Cost
To paraphrase: “It’s the economics of CCP, stupid”.The
use of CCP entails new costs. At the very least, CCPs are
new additional counterparties for borrowers and lenders.
There are new processes that apply to collateral, margin,
reconciliation and entitlement processing that will add to
costs. The additional CCP charges are entirely new. And
don’t forget, under the current product structures, the
only access point is via trading platforms that carry their
own costs. And of course, all of this needs to be planned,
organised and implemented – costs of change that can’t be
underestimated. All of this against a background where
revenues have taken a significant nosedive in 2010. A
formidable challenge at the best of times, let alone the
current conditions.
Summary
So the battle rages on. Four very real and tangible barriers
to success for CCPs. Nevertheless, there are solutions
to each of these obstacles, either through adaption or
innovation from existing CCPs, trading platforms and
market participants – or new market entrants in one or
more of those categories. Success will come for those that
can walk the fine line of bringing change to the market,
listening to the borrowers’ and lenders’ needs, making
adjustments where necessary, bringing new practices to the
business without disenfranchising the very firms that are
expected to implement change.
While the barriers are real, the benefits are compelling
and for the business to survive in the long term, must
prevail. For securities lending as a whole to return to peak
levels and exceed them, more efficient resource utilisation
is a prerequisite. CCP usage is a critical piece of that brave
new world. Inevitable? Yes. When? Now that’s a different
question entirely.
>PU[LY 2011|Fundamentals4HNHaPUL| 65
 Quadriserv update
Quadriserv Primed
to Extend Automation
John Sandman catches up with the latest Quadriserv developments in New York
he regulatory climate for securities lending is
still subject to the winds of change, but industry
insiders are beginning to plan for the inevitable: the
cost of doing business in this market is likely to go
up across the board—to the custodian, the borrower
and every other link in the securities lending
supply chain.
As a result automated solutions are going to
become more critical, not only as part of a strategy
that can more efficiently deliver borrowed securities
and meet compliance demands, but as an alternative
to expensive and risky manual processing. The
current state of affairs, as well as what the future
will hold, was a topic for discussion at an after-
hours event held at the Noodle Bar East in Lower
SecuritiesLending
Manhattan, not normally a place where staff from
the International Securities Exchange and securities
lending vendor Quadriserv meet to discuss the
industry’s prospects.
Quadriserv is a vendor of market data for the
securities lending, developers of the AQS market
data service, which provides reliable real-time
data , leveraging its relationship with the Chicago-
based Options Clearing Corporation, providing a
centralized market for securities lending in the US.
Plans are in the works to expand into the European
market through it relationship with Eurex clearing.
Greg DePetris, co-founder and chief strategic officer
of Quadriserv said the two year launch phase of the
company and integration stage of AQS had gone as
planned. “We’re excited to see lots of borrowers and
lenders coming into a centralised market and that it
is resulting in better pricing. Our focus is to build out
synergised products.”
AQS extended its reach further when it became
integrated with SunGard’s Loanet, a securities
lending platform that enables broker dealers,
custodian banks and agent lenders to support the
securities lending transaction life cycle from loan
initiation to final return.
66 | Fundamentals4HNHaPUL |>PU[LY2011
DePetris identified Loanet as a critical part of this
enterprise. “We concluded that we would either
have to find a way to build something like Loanet or
partner with them,” DePetris said. “It wasn’t until
we started working with them that we realised how
similar their vision was to ours. It was only later
that we decided to adopt similar strategy.” With
Loanet, he said: “We are rolling out technology to the
entire industry that will be like having a single order
management system.”
DePetris said that Quadriserv’s subscribers to AQS
market data “can view real-time securities lending
delivered through a variety of delivery mechanisms,
including SunGard’s Astec Analytics platform.”
The expansion of AQS has extended the securities
lending products it supports to equity, index and
ADRs (American Depository Receipts) and has
been helped by relatively new products such as
exchange traded funds. The $34 million preferred
stock investment in AQS last March led by the
International Stock Exchange is evidence of
AQS’ reach.
“There’s a holistic synergy between ISE
and Quadriserv,” said Gary Katz, CEO of the
International Securities Exchange, speaking at the
event. “Our customers are natural consumers of
the data that AQS supplies and some of our biggest
customers are stock lenders. “
“Quadriserv began using technology in the
securities lending market at a time when it was more
opaque than it is now,” Katz noted. “There were
many similarities with the options market when
we started ISE and to that extent when we look at
them, they remind us of ourselves when we were at a
similar stage. What Quadriserv is doing will alter the
market by making it more liquid and transparent.”
 I needd to see credit
dit limit
li it breaches
b h when
h I book
b k a
trade – I don’t have truly real-time global position
management – I have to provide locate authorization
codes to my day traders – I have to maintain the
correct level of debit/margin balance all the time – I
am unable to benefit from hot stocks tied up in my
margin/debit balances – Many of my operational
activities are highly labor intensive - I only have
time to sort out the large billing discrepancies
Managing multiple technology
vendors takes too much of my time
– I am missing corporate actions that
impact the profitability of a trade – I
have to work very long hours to sort
our billing discrepancies – I can’t
take risks when choosing the
supplier for my mission critical
solutions - I don’t have
truly real time global
globa

SECURITIES FINANCE

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Trademark Information: SunGard, the SunGard logo and the products listed in this document are trademarks or registered trademarks of SunGard Data Systems Inc. or its subsidiaries in the U.S. and other countries. All other
trade names are trademarks or registered trademarks of their respective holders.

>PU[LY 2011|Fundamentals4HNHaPUL| 67
 Hedging the props
Danny Caplan
Head of prime
finance sales,
Hedging the props –
Deutsche Bank
The prime broker angle
As reports indicate that many proprietary traders are looking to set
up their own hedge funds, Fundamentals talks to prime brokers
about the new landscape
Merlin Securities
& marketing,
head of global sales
Senior partner and
Ron Suber
Matthew Pinnock European head of prime
services and global head of prime sales, Nomura
Is there a real move for prop trading desks to ‘go it
alone’ as hedge funds?
Caplan: This has certainly been the central theme
SecuritiesLending
in the hedge fund industry for 2010. It is difficult to
think of an institutional prop team that we have not
had a discussion with.
Pinnock: Assuming desks want to continue to be
autonomous and transact on a proprietary basis,
the forthcoming changes certainly provide few
alternatives to do so without setting up funds on
their own. We do not believe they necessarily need
to go it alone as there are also opportunities to
join existing managers in this space. This enables
managers to benefit from existing infrastructure,
marketing and expertise.
Suber: Yes, to raise institutional capital and in
response to recent regulation- numerous managers
have moved off the prop trading structure to create
independent asset management and hedge fund
businesses.
Will they get funding without an independent
track record?
Caplan: Prop teams that leave an institution with a
marketable track record will definitely have a head
start, as this is a key requirement for most investors.
At Deutsche Bank we have particular expertise in
this space, as the key principals running our prime
brokerage business were closely involved in the
spin-out of all our internal teams. If a team are
able to leave with a significant investment from
68 | Fundamentals4HNHaPUL |>PU[LY2011
their original firm then this is seen by investors as
confirmation that they had a very positive record of
running money internally.
Pinnock: Whilst our view is first day seeding
and track record are important requirements when
setting up, we don’t believe it’s impossible to do so
without either. This may be dependent on whether
managers choose to launch on their own or join an
existing manager. Additionally, we believe there
may be examples where people are allowed to keep
performance history and their reputations should
also play a part in this.
Suber: Managers with a repeatable process,
definable edge, proven risk management and
an ability to generate alpha on longs and shorts
continue to attract capital from seeders, family
offices, the managed account platforms and other
mid-size institutional investors.
Can they compete without the low cost and easily
accessible balance sheet and funding that they
have/had as banks?
Caplan: This very much depends on the strategy
they are running. Event or equity long/short
managers are unlikely to find this an issue but it
may be more difficult for prop desks that focus on
index or quant strategies. The process of devising a
comparable hedge fund track record, which takes
into account the low relative cost of bank capital,
should help them to ascertain this before they decide
to spin out.
Pinnock: Existing managers already have a proven
track record where they can compete without the
backing of a larger institution or bank. The role of the
prime broker in this regard will help facilitate this
and should not necessarily hinder success. Investors
are very cognisant of the differences of trading
outside the environs of an investment bank and are
quick to identify any potential threat to the hedge
fund business model. These key differences can
include corporate access, risk oversight, accounting
of capital usage, technology, execution, disaster
recovery etc.
Suber: Definitely, funds can compete given the

oversupply of prime brokers, under utilisation of
balance sheet offered and excess securities lending
supply - funding costs remain relatively low. In
addition, with the recent entrance of three massive
global banks offering prime brokerage, aggressive
bids are accelerating.
Are there some hedge fund strategies that are better
suited to switching to a hedge fund structure? For
instance, are index arbitrage traders who depend
on thin margins and cheap funding less likely to
form funds than other strategies?
Caplan: Answered in previous question.
Pinnock: We don’t view this to be any different to
other managers starting new funds.
The spread made by PB/Equity Finance groups
is higher on external clients than for internal prop
trading desks. Will these new hedge funds become
the new “darling” clients of prime brokers, as
sources of potentially high revenues?
Caplan: Most prop groups are run as independent
businesses and are using external swap providers for
access to specific markets and stock loan availability.
Therefore, they already have similar pricing to an
external hedge fund . The key difference will be the
more formal use of external prime brokers.
Pinnock: As with any spin out historically, there is
definite desire for prime brokers to partner with the
high calibre managers. We believe a high percentage
of funds will naturally transact more with the
providers they are closer to or are major supporters of
them. This is typically the firm they span out from in
addition to other primes. Prop desks are often more
trading oriented, which may lead to a higher turnover
and greater execution revenue.
Suber: Clients of prime brokers who borrow money
on margin, short securities, execute with the prime
and utilize other products including repo, swap, CFD,
derivatives, capital markets, research, futures, FX
and more remain "darlings" as they feed numerous
revenue streams throughout the firm.
What types of services are these firms likely to
want? Is capital introduction particularly important at
this stage, or something else?
Hedging the props
Caplan: They key difference with a prop desk
starting a hedge fund is that they will have a
significant number of years’ expertise from running
a high revenue business at an investment bank. This
leads them to choose their finance counterparties with
more technical expertise around leverage, risk and
multi-asset capabilities.
Capital introduction is definitely a key factor, and
we have regularly had to arrange global roadshows
to see the top investor groups before the official
launch. Our consulting offering has also been in high
demand, as the infrastructure needed for day one is
more sophisticated and costly than for the average
hedge fund start up.
Pinnock: The 2008 crisis forced the hedge fund
industry to revisit the way that it looks at the hedge
fund model. Some may argue there was less focus
on the structure of the fund and its key terms, for
example gates, and this caused funds in the industry
to close due to redemptions, not poor performance.
Prop traders will need assistance in the key area
of establishing a robust business structure which
previously has had less attention due to the higher
focus on performance of the portfolio.
This is clearly dependant on the strategy. However,
we would typically expect funds to require services
from leverage, execution, research, corporate access,
structuring, financing, technology, risk management,
consulting and capital introductions. We have
definitely experienced increased appetite for capital
raising, primarily due to an increase in investor due
diligence and historic redemptions.
Suber: These firms are looking for a full suite
of global execution solutions (DMA, OMS, EMS,
Dark Pool and Algo Access), real-time P&L across
multiple custodians and accounts, securities lending
consultation, advanced analytics to satisfy investor
demands, risk management and trade allocation tools
as well as support in capital development.
>PU[LY 2011|Fundamentals4HNHaPUL| 69
 Bas Cohen
Describe your history in the securities
financing business:
In 1996 I started working for Commerz Financial
Products (CFP) at the collateral management desk
in Frankfurt. Afterwards I moved to the front office
where I got involved in securities lending trading.
Within one year the team moved to London to work for
SecuritiesLending
the Japanese broker Nikko Securities. One and a half
years later Nikko Securities was acquired by Citibank.
Following this I decided to return to my Dutch roots
by joining MeesPierson Securities in London for one
and a half years, before I moved back to Amsterdam.
MeesPierson Securities eventually became part of Fortis.
In 2005 I became globally responsible for Securities
Financing within Fortis. During the credit turmoil
in October 2008 the Dutch state acquired the Dutch
operations of Fortis (including Fortis Bank Netherlands
N.V. and ABN Amro Netherlands N.V.). When Fortis
Bank Netherlands N.V. and ABN Amro Netherlands
N.V. merged in July 2008, I became global head of
markets trading at the new ABN Amro.
Nowadays, as global head of trading within ABN
Amro markets, I have to equally divide my attention
between other products as well. However, securities
financing will always have a special meaning for me as
it is where I started my journey. I have passed on the
sales side of securities financing to Cassander Jupijn
while the trading side of the business has been passed
on to Dave Chang.
How has the industry changed during this time?
I have seen a number of significant industry changes
during my career. First, I have seen securities financing
move from a semi back-office activity to a fully
fledged integrated front office trading unit. Nowadays
securities financing is an integral part of the dealing
room functioning in very near proximity to treasury
70 | Fundamentals4HNHaPUL |>PU[LY
|>PU[LY2011
2011
centres, cash and derivative trading and the ALM.
Furthermore we receive an increasing demand for
balance sheet-driven trade queries from a wide variety
of clients which often require creative and tailor made
solutions. Lastly, from a risk management perspective
we are seeing stricter controls regarding subjects like
underlying liquidity of collateral, haircuts and
dynamic margining.
Overall the securities financing industry has evolved
into a sophisticated and well respected business which
over the last couple of years has attracted a high profile
amongst various market participants.
Personally I am very pleased to see the industry
moving in this direction as it is in line with how I
view securities financing within ABN Amro. As it
stands we have identified securities financing as a key
growth activity and therefore we are globally present
in the three major time zones offering the full range of
securities financing products. In addition, on the risk
and operational side we are continuously investing
in systems in order to achieve sustainable business.
Although we are still in the process of rebuilding parts
of the business we had lost due to the separation with
Belgium, I am convinced that we are on the right track.
We are deliberately not as large as before and also not
as large as the usual prime brokers but we still possess
key securities financing intellect which is always able to
put forward creative solutions. Taking everything into
account this reaffirms that we are fully committed to the
securities lending industry.
Has the financial crisis helped develop this
move away from the back office?
The move away from the back office actually
started a long time before the financial crisis. The
crisis merely accelerated the industry’s awareness
within its surrounding areas and emphasised the
importance of this business within the financial
system. The financial crisis also stressed the
importance of collateral and its crucial link to the
balance sheet, in particular, the link to liquidity
management. Many market participants recognised
the urge to have treasury centres, balance sheet
management, collateral management and securities
financing working closely together in order to
achieve sound liquidity management.
What lessons should the securities lending
industry learn from the last few years?
It is important to make a clear distinction between
securities lending itself and reinvestment programmes
funded with the cash collateral. Although we never
offered cash reinvestment programmes, it seems
most losses were suffered on opaque reinvestment
programmes while losses from securities lending
itself were limited. As a result the responsibility for
 Bas Cohen

monitoring the reinvestments fell on the reinvestment

agents or the beneficial owners themselves. Due to the
lack of transparency of the reinvestment products and
consequently lack of adequate risk management, the
underlying risks associated with these reinvestment
programmes were clearly underestimated. To answer
your question in short, there are two “quick” wins: First,
provide more transparency in complex reinvestment
products and secondly, strengthen risk management
infrastructure.
Should beneficial owners take some of the
blame for the losses they saw?
There are several causes that lead to these losses. On a
macro level, 10 to 20 years of oversupply of liquidity
resulted in excess demand for financial assets, which
lead to the credit spread tightening. Business plans
and whole industries were built on the ability to re-
finance liabilities and even losses cheaply due to this
inexpensive and abundant liquidity. Consequently credit
risk was virtually non-existent and the concept of real
delinquencies seemed remote, however the true credit
risks did not change as we learned. On a micro level,
structured products like securitisation and SIVs were
developed further to enhance yield for investors in the
tight credit spread environment. Due to competition and
search for yield, this drew in participants to whom these
structures were not core products or the underlying was
not allowed under their own investment policies. So was
it the central bankers and governments who initiated the
monetary easing, the sellers and structures of leveraged
products or the buyers in search for yield who did not
always understand them. The answer lies in the middle;
every link in the chain is partly responsible.
With respect to your question about the reinvestment
programme losses, i.e. the last two, in my view a seller
should always provide full transparency of the risks in its
products and a buyer should stick to its own investment
policies and with its own risk management capabilities.
What other lessons can the securities lending
industry learn?
If I compare the equity lending market with the repo
market I still see a substantial difference between the
levels of maturity in the different markets. The repo
market has succeeded in transforming into a highly
liquid mature market, while securities lending is exactly
in the midst of that transition. Electronic platforms on the
repo side are currently more liquid and advanced when
compared to stock loan.
Finally there is the subject of central counterparties,
where I see a very attractive opportunity in which the
securities lending market can develop.

Winter 2011|Fundamentals4HNHaPUL| 71
>PU[LY
 Talking collateral
Talking collateral
Fundamentals spoke with Jo Van de Velde, Managing Director and
Head of Product Management at Euroclear, about the latest trends in
secured financing, particularly after the recent financial crisis.
What do you believe are the most prominent trends we will
see in the area of collateral management?
Jo Van de Velde: The financial crisis intensified the
need for firms to collateralise exposures across all
market segments. It has been common market practice
to fully collateralise some types of transactions, such
as repos, central bank credit and securities lending, but
others were not, such as OTC derivatives and many
money market transactions.
A meaningful and prominent trend we expect is
the move towards complete collateralisation of all
exposures arising from any type of transaction. We
also expect the regulators to have great influence
SecuritiesLending
in making sure this happens. Their objective is to
prevent banks from relying too heavily on short-term
funding, while requiring banks to better mitigate their
operational risks. The regulatory measures we expect
to see worldwide will establish a closer link between
collateralised transactions and the cost of funding for
banks. This will increase the need for more operational
efficiency in the movement of collateral, particularly as
the markets become more global, while the location of
useful collateral remains highly fragmented.
As a result of these trends, we believe the role of
triparty collateral management agents, like Euroclear
Bank, will grow in importance.
How are these trends different from what you see today and
saw five years ago?
Jo Van de Velde: The most pronounced difference
compared with five years ago is the fundamental
change in the sources, flows and means of access to
liquidity within the interbank market. Five years ago,
liquidity was abundant and always readily available, at
a good price.
From a collateral management perspective, five years
ago the market’s focus was on collateral usage. By this
I mean that discussions between collateral givers and
takers were more about expanding the range of assets
72 | Fundamentals4HNHaPUL |>PU[LY2011
to be used as collateral, including a variety of structured
securities, whereas today’s risk-conscious behaviour
dictates a shift to the use of only high-quality collateral,
at least in the interbank market.
Are you noticing any new regional or geographic patterns
emerging?
Jo Van de Velde: The massive intermediary role of the
central banks in Europe during the crisis has clearly
pushed a large portion of the financing business to the
domestic markets. It is understandable that the objective
for banks is to be as close as possible to their primary
source of liquidity, i.e. their national central bank.
On the other hand, recently released figures from
the European Repo Survey conducted by ICMA and
the European Repo Council demonstrate an easing of
tensions within the secured interbank lending market
across Europe. Outstanding repo volumes rose above
pre-crisis levels, of which 57% consisted of cross-border
repo transactions. In addition, figures from the Bank
for International Settlements show that banks boosted
lending activity beyond their national borders by more
than 500 billion euros in the first quarter of 2010. These
are signs that the trend is gradually moving away from
central bank sources of liquidity.
How will the exit strategy of central banks easing liquidity
impact the collateral landscape?
Jo Van de Velde: The first point to consider is the
timing of their exit strategy. In Europe, the ill financial
health of some EU nations is demonstrating that
segments of the euro zone are still extremely fragile.
The European Central Bank has, however, already
decided to implement several adjustments to its
collateral framework.
Over the past two years, banks have significantly
increased the amount – to more than 2 trillion euros
- of collateral deposited with central banks to meet
both their routine and contingency liquidity needs.
It is worth noting that the composition of collateral

held within the Eurosystem has changed dramatically,
where government debt represents only around 11%.
In comparison, in the European interbank repo market,
about 78% of European securities used as collateral are
government debt. Therefore, if it implies additional
changes to their collateral framework, the exit strategy
of central banks will have an impact on the collateral
landscape in Europe, as banks alter their models to
optimise their use of available collateral.
How has Euroclear Bank’s triparty collateral management
service portfolio changed as a result of the financial crisis?
Jo Van de Velde: All of the market infrastructure
service providers were tested during the crisis and all
performed well. Euroclear Bank’s triparty collateral
management services were no exception.
Taking on board the lessons learned from the crisis
and by request from our clients, we have implemented
several triparty service upgrades at Euroclear Bank.
We have taken into consideration the growing
importance of easing access to central bank credit and
have complemented our portfolio with new services
to automate the collateralisation process for clients to
obtain this form of credit. One of our continuing key
objectives is to provide a risk-controlled and scalable
environment to help our clients optimise use of their
assets as collateral.
What collateral management services do the Euroclear group
CSDs offer for their clients?
Jo Van de Velde: Today, some national CSDs provide
auto-collateralisation mechanisms that primarily
support the delivery-versus-payment settlement
processes that CSDs operate in central bank money.
Euroclear UK & Ireland, for example, offers collateral
management services, called Delivery-By-Value services
(DBVs) that support collateralised transactions between
banks using baskets of eligible securities as collateral.
In 2011, we will introduce term DBVs to the UK market,
where settlement banks will be better able to manage
their liquidity needs with the Bank of England. Other
Talking collateral
collateral management enhancements are planned for
other Euroclear CSDs, such as the Belgian, Dutch and
French CSDs that today operate on a single settlement
platform.
Are you seeing different types of firms engaging in collateral
management activity than before the financial crisis? Has
your client based changed since the crisis?
Jo Van de Velde: Indeed, we have seen new types
of firms using our triparty services to collateralise
previously unsecured exposures or to benefit from the
double-name risk management features we offer for
their cash investments in triparty repo. An increasing
number of money market funds, corporates and
supranationals are using our services. Also worth noting
is that more intermediaries (agent banks and custodians)
are accessing our triparty environment for the benefit of
their underlying clients.
Why does a firm outsource collateral management to a
third-party service provider like Euroclear Bank?
Jo Van de Velde: Euroclear Bank offers a unique value
proposition. We help clients access a very large pool of
collateral comprising a wide range of securities, which
is fully integrated with the transaction settlement and
custody processing services we perform for clients. As a
result, we are able to optimise their use of collateral and
manage term financing business in a seamless manner,
identifying and substituting collateral using automated
processes. Real-time reporting keeps clients informed of
these movements at all times.
The recent financial crisis has proven Euroclear’s
expertise in this area, which is supported by a solid
legal and operational environment. By outsourcing their
collateral management obligations to a triparty agent
like Euroclear Bank, clients can collateralise all types of
exposures arising with a wide range of counterparties,
or through a central counterparty (CCP), but all of the
back-office administration is done by us on an end-to-
end STP basis.
>PU[LY 2011|Fundamentals4HNHaPUL| 73
 Talking collateral

What kinds of firms are using your services?
Jo Van de Velde: As mentioned earlier, many types
of firms are using our triparty services. They are
working with us to collateralise transactions for their
own account, as well as acting as intermediaries to
collateralise exposures for their underlying clients.
While many central banks were already using
our services to manage their reserves or their own
investment activity, central banks in Europe and
beyond are also using our services for their monetary
policy operations, ranging from routine collateral
operations to arranging contingency liquidity facilities.
In addition, more CCPs are becoming active users to
manage their core margining processes and for their
new General Collateral products.
How will collateral management support a recovery in the
securities lending market?
Jo Van de Velde: The securities lending market was
severely hit by the crisis, as there was a 50% drop in
securities on loan. Many lenders and beneficial owners
withdrew from the market due to serious risk-related
concerns.
We believe triparty securities lending is helping the
market to build confidence and regain lost ground. In
SecuritiesLending
regard, Euroclear Bank’s services will complement
the risk mitigation objectives of CCPs and extend a
high degree of collateral management efficiency along
the whole post-trade processing chain. And, as CCP
interoperability becomes a reality in the future, our
services can also be of assistance in this context.
What are the biggest changes in collateral composition that
you believe collateral takers will demand in the future?
Jo Van de Velde: Fully in line with general market
trends, we saw a ‘flight-to-quality’ in collateral taker
demand within our triparty environment, i.e., a move
towards high quality and highly liquid government
debt. The evolution in collateral composition
worldwide will depend on the exit strategies of central
banks, which are currently accepting and receiving
pools of lower-quality collateral for which liquidity
has not been firmly re-established within the interbank
market.
What opportunities do you see for Euroclear in the area of
collateral management?
Jo Van de Velde: The main opportunities for Euroclear
reside in expanding the pool of assets to be used as
collateral that are held within the different entities
of the Euroclear group. With collateral becoming an

fact, volumes in our triparty securities lending service increasingly scarce resource, our priority will be to ease
are now back to pre-crisis levels. However, securities the sourcing and mobilisation of assets held within the
lenders have modified their risk profiles and have group for collateral management purposes. Our goal is
revised many of their risk assessment benchmarks. to be the market’s first choice to optimise their collateral
usage, no matter the type of transaction, location of
Do you expect an impact on your collateral management
their counterparty or where their assets are held within
business as a result of new or pending regulation?
the Euroclear group.
Jo Van de Velde: Most definitely, and in a positive
sense. New regulation will provide incentives, in the
Euroclear makes an important contribution
form of reduced capital requirements, for firms to
pursue longer-term funding arrangements and greater
to the efficient use and movement of
operational efficiency. As our triparty environment collateral to reduce risks and exposures for
has been designed to support term business in a very market participants, administering more
efficient way, we expect more business flows. than 500 billion euros of collateral everyday.
Fully automated processing of collateral substitutions,
margin calls, custody operations and more make a
compelling business case for firms to outsource these
responsibilities to a neutral agent like Euroclear Bank.
Moreover, our fully integrated collateral re-use feature
alleviates liquidity constraints that are inherent to term
cash investments.
As more and more regulatory focus is on OTC
derivatives, and the use of CCPs in this market
segment, we expect our triparty services will be
helpful in managing the systemic risks arising from
even more CCP and collateral fragmentation. In this

74 | Fundamentals4HNHaPUL |>PU[LY2011

Market Movements
Sunil Daswani, international head of client relations for
securities lending at Northern Trust, looks back at market
developments of recent months, in which the continued
corporate recovery and emergence of more positive
economic data resulted in increased overall lending
activity, and outlines the factors that are driving this trend.
he third quarter of 2010 witnessed a seasonally-
adjusted increase in securities lending trading
activity, with corporate events acting as a catalyst for
increased demand for equities globally. Fixed-income
activity, on the other hand, varied from market to
market although, at time of writing, uncertainty over
several European nations’ ability to service their
sovereign debt continues to be a dominant theme.
Europe
European equity markets enjoyed a rally during the
third quarter as positive corporate news outweighed
mixed economic data. In the eurozone there was a
notable difference between many countries’ third
quarter growth figures, with Germany’s GDP increase
of 2.2% contrasting with Spain and Portugal’s more
modest increases of 0.2%.
As expected, lending volumes declined compared
to the second quarter, due to less yield enhancement
trading activity caused by fewer companies
distributing dividends. Hedge fund demand also
remained constrained as investors’ cautious approach
of recent months persisted.
On a more positive note, the quarter saw a modest
increase in the volume of corporate activity, such
as mergers and acquisitions, stock market offerings
and fundraisings. Activity largely centred on the
construction and banking sectors, and acted as a spur
for increases in lending volume as borrowers sought
to benefit from the arbitrage opportunities created by
these events.
European fixed-income markets continued to
experience volatility, particularly in the European
sovereign sector. While August had brought a level
of stability to the market, September and later
months were marked by continually rising bond-
yield premiums culminating in the agreement of an
internationally-funded support package for the
Irish Republic.
In the securities lending market, we noted two major
trends: on the one hand, we experienced high levels
of demand to borrow bonds issued by Greece, Italy,
Ireland, Portugal and Spain. On the other, uncertainty
continued to support a "flight to quality" in the
Market Movements
eurozone region and a continuing increase in demand
for German Government bonds in particular.
North America
A continued recovery in the US meant that the equity
markets ended back in positive territory for the
quarter, although as I write, concerns over European
sovereign debt are overshadowing positive domestic
news, leading US stock markets to close slightly down
at the end of November.
Investors were generally buoyed by good earnings
from corporations, slightly more positive economic
data and the prospect of additional US Federal
Reserve asset purchases. This contributed to a 31%
decrease in stock market volatility as measured by the
Chicago Board Options Exchange Market Volatility
Index (VIX Index) – good news that may encourage
more market participation in lending, as investors are
potentially reassured by greater levels
of stability.
As in Europe an increased number of corporate
events took place, and mergers and acquisitions
in particular, although the latter did not generate
the levels of lending activity that would usually
be anticipated. The strongest lending demand
for corporate equities came from securities in the
consumer durables, automotives, and hardware and
equipment industries.
On the fixed-income front, the Federal Reserve
maintained its policies to speed up the economic
recovery, particularly its decision to reinvest proceeds
from maturing agency debt and mortgage-backed
securities into US Treasuries to maintain a stable Fed
balance sheet. Additionally, the Fed conducted its first
Treasury buyback since October 2009 and by the end
of the quarter over US$42 billion in Treasuries had
been purchased.
Corporate bond issuers took advantage of lower
yields, selling US$364 billion of new debt in the third
quarter, an increase of 86% more than during the
second quarter. US high-yield issuance was US$80
billion, a 63% increase over the second quarter. Tight
credit spreads and low yields contributed to the rush
>PU[LY 2011|Fundamentals4HNHaPUL| 75
 Market Movements
to issue new debt as firms replaced short-dated
higher yield debt with longer-dated lower
yield funding.
In terms of demand for fixed income securities,
media sector securities saw a noteworthy rise in
popularity, with an increase in demand of almost
25% during the quarter. Demand increased in the
electrical and telecommunications industries, and
fell in the banking sector.
Asia
Asian equity markets moved broadly higher during
the third quarter of 2010, as investors sought
better returns in the region's stock markets over
those of Europe and the US. Again, better-than-
expected economic data and corporate earnings also
provided a boost for equity markets here. Against
this backdrop, securities lending activity increased
modestly as hedge funds – one of the key drivers
Sunil Daswani can be contacted at sunil_daswani@ntrs.com
Author Profile
How did your career in securities lending start?
After completing a degree in accounting and finance
SecuritiesLending
at the London School of Economics and Political
Science in 1993, I started a graduate internship in
the operations team at Swiss Bank Corporation,
now known as UBS. Roles in operations are a
great foundation for careers in this industry, as
you really do get to see what happens ‘behind the
scenes’ of individual products. This provides strong
knowledge of technical practices and processes,
whatever role you move into later in your career.
After two years at UBS, I moved to Citibank,
continuing in operations but specialising in treasury,
cash management and foreign exchange. Here,
I moved to the front office taking on the role of
product manager for global custody, where I was
introduced to the securities lending business.
After seven years, I moved to Northern Trust in
2002 to specialise in securities lending. I have been
here for eight years now in various front office
roles, including leading product management and
development, and managing the business for the
Asia-Pacific region, including the trading desk in
Hong Kong. I currently head up client sales and
relationship management for securities lending
globally outside of North America.
How did the Asian market differ to Europe?
I was born in Hong Kong and have family there,
so I settled in very quickly. I was lucky in that I
76 | Fundamentals4HNHaPUL |>PU[LY2011
of lending activity – continued to exhibit a mainly
cautious and risk-averse trading approach.
However, capital-raising activity continued to
be robust, predominantly in both Hong Kong and
Japan’s financial sector. Lending volumes in the
latter moved higher towards the end of September
due to short-term borrowing demand for the
securities of many of Japan’s corporations.
Global lending activity: a steady upturn
Writing at the beginning of December, some positive
signs continue to emerge that demand for securities
lending will continue to rise in 2011. While concerns
over how the eurozone debt crisis can be stabilised
are likely to persist in the near-term, increases in
corporate activity and greater levels of market
stability are assisting a steady upturn in global
lending activity at the present time.
Stephanie Baxter talks to Sunil Daswani about his
career and the continued evolution of the industry
moved to the region when the Asian markets were
booming and even now it is the region in which
demand for lending remains particularly robust.
I was fortunate to have this experience of being
located in an exceptionally dynamic region. It also
proved essential when I came back to London to
take on my current role, as it provided the practical
understanding that client needs vary enormously
from country to country.
Shortly after arriving in Hong Kong you
became chairman of the PASLA. How did that
come about?
When arriving in Hong Kong, my predecessor at
Northern Trust was the chairman of PASLA [the Pan-
Asia Securities Lending Association]. When he left
the industry, many people encouraged me to take on
the role. Being a board member of securities lending
associations allows you to work with the industry to
develop the product, which is something Northern
Trust has supported for many years globally.
Did you find it challenging to take on a
demanding role in an unfamiliar market?
It was a good way to get involved with what was
going on in the industry and refreshing to be taking
on such an important role whilst new to the market.
I had enormous support from the executive board
and had strong knowledge of Asia as Northern
Trust had already been among the foremost lenders
in establishing itself in the Chinese, Korean &

Taiwanese markets. Therefore, I was familiar with
market practice and it was nice to ‘get out there’ and
effectively bring some new direction to the role. It
was an exciting time: I had the opportunity to meet
more regulators; we rebranded PASLA and built
a new website among other things. Ultimately, by
generating more interest, we became recognised as
the one regional ‘voice’ of the industry.
Did you find it difficult to re-adapt to the UK
market when you returned to London?
The market was certainly presenting a fresh set of
challenges. I moved back to the UK in the midst of
the financial crisis in February 2008, when the initial
tremors began in the securities lending market. Before
that there was little visibility how lending was to be
affected; there were looming issues in the financial
markets but the securities lending business had yet to
feel the ramifications. It all started when Bear Stearns
experienced problems and was ultimately taken over,
coupled with the additional and growing issues in the
credit markets.
What’s happening in the Hong Kong market at
the moment?
The market has always been cyclical but is starting
to look quite bullish at the moment. The stock and
property markets have been long-standing indictors
and both are rising at dramatic rates. The government
has tried applying the brakes through methods
such as the introduction of new taxes, to slow down
the speed and growth of the property market. We
continue to watch the market closely, have lots of
clients in the region and are looking to further expand
our client servicing teams in Asia-Pacific as a whole.
What do you think has been the biggest
change in securities lending during your time?
The key words that spring to mind are education,
risk and transparency. Educating clients about risk
is very important and needs to be continuous within
the industry. For clients, an element of risk obviously
needs to be taken in order to generate return, but
understanding it and knowing how much to take on
is absolutely key.
Client education was also crucial during and after
the crisis. We sought to lead our clients through the
crisis, to work closely with them to establish any
potential impact, and then review their lending
programmes with them to reach decisions about the
future. Securities lending can be as simple or complex
as clients want, but the more you refine, change or
customise it, the more complex it can get. The key is
to ensure you remain transparent with your
clients throughout.
Sunil Daswani
It is also important that regulators and key market
influencers are educated regarding securities lending.
The core function of industry associations should
be to ensure that key policy or regulatory decision
makers know how financial products within the
markets operate and what ramifications their
decisions may have. Their decisions, for example,
may achieve a desired outcome in one place but a
negative one in another.
Do you see much coordination between the
regulators and trade associations to help
improve the securities lending market?
Regulators within Asia are talking to each other but
I still do not see that necessarily happening across
all other regions. Asia-Pacific seems to have led
the industry in terms of communication and close
collaboration between regulators. Leading executives
have continuously been discussing issues, challenges
and potential solutions, and have always reached
out to industry experts and associations for feedback
and opinions. This is how all regulators within our
industry globally should operate.
Communication is a strength of the Asian regulators,
and bodies have been good at using simple methods
to communicate effectively – promptly publishing
white papers on their websites, for example. It was
refreshing to see that during my time at PASLA, and
it continues today. I am still in contact with PASLA’s
executive members and the current chairman, Larry
Komo, who has done a fantastic job of leading PASLA
and taking it forward since my departure.
Can the industry return to its former glory?
There has been lots of negative noise from the
media, so my aim at the moment is to emphasise the
wider picture and look at things from a long-term
perspective. I think a lot has been learned by all
market participants and we have emerged two years
on after the credit crunch as a much stronger industry.
The majority of my meetings with clients continue to
be very positive.
Of course, there are some clients that have left
programmes and not rejoined but it is good that
these have reviewed their position regarding the ‘risk
versus reward’ equation and come to a decision that
is right for their individual circumstances. That said,
clients are generally ‘in to stay’ for the long haul, and
people are generally looking towards the future in
terms of generating incremental returns via lending,
and moving this part of their business forward.
>PU[LY 2011|Fundamentals4HNHaPUL| 77
 Recruitment
Finding a way back in
While jobseekers at senior level report difficulties in securing roles in securities lending, junior
roles are increasing as firms cut back on benefits and big pay packages. By Stephanie Baxter
After huge cuts to the finance industry following
the recession, hiring seemed to be on the cards
again in 2010 with pockets of activity across the
sector and evidence of strong recovery in the
UK, US and Asia. According to head hunters, the
industry has moved on from the disaster year of
2009 where hiring fell to all-time low.
Morgan McKinley, a London-based recruitment
firm, claims that the industry is now somewhere in
between that year and the “dizzy heights” of 2005
and 2006, prior to the credit crisis. While recent global
figures published by eFinancialCareers show that
investment banking and capital markets are among
the strongest performers on the hiring league table,
securities lending is proving to be more difficult.
Securities lending is experiencing more sporadic
hiring than other sectors, says James Bennett,
managing director of eFinancialCareers. Banking
giants such Barclays Capital, J.P. Morgan, Citi and
SecuritiesLending
Nomura have been hiring, but there does not seem
to have been a significant rise across the industry,
the recruitment website added.
Several job seekers with senior level experience in
securities lending say they are finding it difficult to
find a suitable role. The sector has previously been
criticised for being too specialised, but this does not
seem to be the problem here.
Head hunters and job seekers talk about a growing
trend where junior level professionals are finding
it easier to enter the sector than those with years
of experience behind them. Many graduates start
off in global custody which can give them a broad
understanding of the industry with the opportunity
to move into securities lending at a later time.
According to Emma Rowe, manager of investment
banking operations at Morgan McKinley, although
senior candidates are not necessarily confined to a
specific role, there is more flexibility for junior-level
professionals.
This does seem to be the case when talking to
executive-level professionals who have been at the
forefront of job cuts and are struggling to find a way
back into a similar role. Michael Mooney, who spent
most of his career at Investors Bank & Trust prior
to their purchase by State Street, has been looking
78 | Fundamentals4HNHaPUL |>PU[LY2011
to secure his next role since he left Brown Brother
Harriman (BBH) in November 2009 after nearly two
years as a senior trader.
Despite a 13-year career in securities lending,
Mooney says the last year has been an “uphill
struggle” as he tries to find a suitable role in his
home town, Boston. “From the agency side of
lending, banks have seen more compression on
hiring than on broker dealers,” he says.
He adds that some cities such as Boston have seen
very limited hiring with news of mergers and job
cuts. In the last three to four years Boston has lost
some of its major players, including the securities
lending office of UBS, which has inevitably added to
the pressure on hiring. “People are willing to speak
to me and there are a few roles in the area, but it’s
about finding a role that’s suitable,” he says. The
opportunities are in New York, says Mooney, but
moving there isn’t always an option. However, he
says he is now widening his job search to New York
and elsewhere in North America.
Another Boston-based job seeker, who did not wish
to be named, has almost 20 years’ experience in the
securities lending industry, mainly prime brokerage.
He says that it is essential to avoid confining yourself
to a specific role when job hunting. “Job seekers have
to be prepared to recreate themselves. Although
it seems daunting at first, it is not actually all that
difficult to move into a different role.”
He adds that at a junior level, most candidates
are looking at relationship management roles
rather than trading roles because they are easier
to walk into. As reporting requirements become
increasingly important, firms are likely to create
more junior roles to increase the number of people
working on client accounts.
Even New York can present a struggle for job
seekers, as another jobseeker who wanted to remain
anonymous discovered. She has 15 years of securities
lending experience behind her, but feels that a desire
for young, inexperienced minds in many firms is
taking precedence over the hiring of experienced
middle managers.
“There is a gap in between the junior and senior
levels. You need a middle manager to fill that gap
 Recruitment

to help bring everything together.” She says that

firms should be taking more risks to find someone
with strong securities lending experience rather than
concentrating on hiring younger people who can be
moulded easily into the firm’s culture.
Commenting upon this emerging trend,
eFinancialCareer’s Bennett says: “There was a huge
jump in the number of apprenticeships offered in
2010, which seems to be a continuing trend. Somehow
the sector has managed to bounce back.”
The jobseeker also regrets moving away from the
trading desk, a move that she claims has “hurt”
her career. It is a very difficult time for female
professionals in particular, she says. Back in the 1990s
female executives were abundant, but now many
have had to take up roles in other services, she adds.
“I need a job badly. I have a family to provide for and
it’s very expensive to travel back and forth to New
York to meet people for future job possibilities.”
According to many job seekers, networking is the
only way to get back into the industry. Some are
getting in touch with previous bosses while others
are attending industry events to ‘get in’ with the right
people. The majority of top jobs are filled by word of
mouth or by a recommendation rather than through
job posting sites. Some firms already have a candidate
in mind before they post the vacancy, claims Kate*,
who says that she has rarely received feedback from
HR departments after applying for a role.
But there are still opportunities in securities
lending with the emergence of new products, and
blossoming markets in the Asia-Pacific, according to
head hunters. Exchange-traded funds (ETFs) are an
example of a new product that requires a new set of
skills. Few professionals have extensive experience in
specialising in ETFs, which opens a window for those
looking to adapt their skills to the new product.
Although some firms have a tendency to send a
batch of juniors to emerging Asian markets such
as Hong Kong and Singapore, it is becoming
increasingly important to have experienced
professionals who have local knowledge as regulators
impose more rules on the securities lending market.
Being able to communicate in or learn another
language can be a great asset here. More is expected
of you now, says the first jobseeker. “You need
broader skills than before, for example a better
understanding about macroeconomics and the ability
to do training across different areas.”

>PU[LY 2011|Fundamentals4HNHaPUL| 79
 The China angle
The China angle
With Michael Mooney
There has recently been excitement and a spike in
overall interest in emerging Asia and prime brokers,
beneficial owners, hedge funds and agency lenders
have all been growing their Far East infrastructure.
This call to arms is necessary as firms look
for additional opportunities to enhance their
programmes. With over 200 Chinese Depository
Receipts trading in the US markets, according to
J.P.Morgan’s ADR.com, and currently no active
securities lending trading on the Chinese mainland,
the securities lending industry has found a
very fertile uncharted territory and many fresh
opportunities.
One broker was quoted as saying that currently:
“China is a very large percentage of borrower
needs.” On the bank side, agent lenders have seen a
significant spike in demand for Chinese ADRs as
of late.
A few Chinacentric ETFs have also been of interest
SecuritiesLending
and there are expectations of a continued increase
of the issuance of Chinese shares. According to
Ernst & Young LLP, third quarter results on global
IPO activity by region and capital raised show that
$40.4 billion was raised in China and Hong Kong,
representing 76.6% of total global IPO capital raised.
The Chinese securities lending industry has been
slow to move forward due to the lack of regulation
or a regulatory body. Changes do appear to be
taking place however, following an early August
2010 meeting between government supervisors and
fund companies where many issues were addressed.
In addition, Caixin Media Company, a Beijing-
based financial media group, believes that the
securities lending market may be approved in
mainland China within the coming months.
In addition, the China Securities Regulatory
Commission (CSRC) is researching all issues with
relation to a viable local Chinese lending market.
Until this happens, ADRs will continue to be the
primary point of entry to the short side in China.
80 | Fundamentals4HNHaPUL |>PU[LY2011
Currently ADRs and ETFs are the best way for US
investors to gain exposure to the Chinese markets. In
fact, foreign investors are unable to make a market
in any Chinese mainland “A” shares.
The only route to market other than the ETFs and
ADRs are Chinese securities known as “Red Chips”
that maintain their filing and reporting requirements
on the Hong Kong Exchange. These are additional
fungible Chinese listings that are in addition to the
“A” shares. They should not be confused however as
they do not trade in parallel to the mainland shares.
With regard to ETFs, currently the only truly
liquid player in the securities lending world is
the iShares FTSE/XinhuaCina 25 Index Fund.
FXI’s membership consists of the top 25 Chinese
companies by total market cap and consists of both
H or “Red Chip” shares. The street wide utilisation
of FXI shares rallied at around 80% as stated by a
prime brokerage contact in October of 2010, with
extremely heavy demand.
Following some questioning regarding Chinese
shares, the securities lending manager at a major
beneficial owner stated that, while he is not an
expert on Chinese ADRs or their lending, its third-
party lending agent said: “We are lending Chinese
ADRs for our clients. The demand is not necessarily
a result of their being Chinese, as much as the
sectors that they represent (such as alternative
energy, technology, etc.), and the fact that certain
securities in those sectors are viewed as attractive to
borrow based upon concerns around overvaluation.”
The question is: Are other beneficial owners
and asset managers actually taking ownership and
engaging their lenders and consultants with regard
to such issues - and asking questions?
PASLA preview
The Pan Asia Securities Lending Association
(PASLA) will hold its eighth annual conference
jointly with The Risk Management Association
(RMA) on 1st–3rd March 2011 at the Ritz-Carlton in
Singapore. The programme is designed by securities
lending professionals and will cover current issues
in the Asian securities lending markets.
For the first time, a high-level roundtable will
focus on operational issues in the current markets.
Regulators and market professionals will discuss
challenges in the Asian markets, best practices
from established markets, methods to mitigate risk,
and their applications to emerging markets and
developing market workflows. The roundtable will
be hosted by the co-chairs of the PASLA
Operations Group.
Regionally focused topics will include market
updates for Korea, Taiwan, Hong Kong, and
Malaysia. Regulators and industry experts will
discuss developments, conditions, lending prospects,
and legal and regulatory issues in these markets.
In addition, separate panels will discuss the Indian
and Singaporean markets. Representatives from the
Indian exchanges, regulators, and market participants
will discuss the demand for securities in India and
the future of securities lending. The Singapore panel
will explore demand for securities in the marketplace,
market and operational challenges, and securities
lending in that market, including the effects of the
merger between the Singaporean and
Australian exchanges.
Among other regional topics to be discussed will
be current and future issues facing the hedge fund
industry. Industry participants, including members of
three regional hedge funds, will question the effects of
the financial crisis on the hedge fund industry across
the region and provide an in-depth view of potential
regulatory reform. Panellists also will debate hedge
funds issues with the equity finance world and the
relationships between central clearing counterparty,
prime brokerage houses, and agent lenders. In
addition, a panel on the lending and borrowing of
fixed income in the Asia Pacific region will review
those lending markets and discuss the outlook for
2011 from the product and participant perspective,
including funding strategies, collateral developments,
and risk tolerance.
The impacts of new tax, regulatory, and capital
reforms affecting securities lending will be discussed
by legal and tax experts in this area. Topics addressed
will include the Dodd-Frank Act and Basel III,
along with other issues being contemplated abroad.
Another panel will discuss alternative access and
sources of inventory in the market. Topics will
include non-traditional SBL routes to market and how
ADRs, GDRs, and ETFs have increased the supply of
securities for loan. The panel will discuss how this
has changed the market through recent events, what
it means to the market, and the outlook for both the
supply and demand sides of the market.
Among other topics to be addressed will be central
counterparty clearing, including the requirements
for a central counterparty in the securities lending
market given the changes in regulations and how the
Brazilian, Korean, and Taiwanese models are working
and the introduction of central counterparty in India.
What do these markets do differently and what do
central counterparty providers have for the securities
lending market and will there be conformity across
Asian markets? Continuing last year’s discussions at
the PASLA/RMA Conference in Hong Kong, global
securities lending and borrowing association chairs
will explore trends in the regional and global markets
and the regulatory environment and its impact.
Information, registration and hotel reservations
for the conference will be available soon at www.
paslaonline.com or www.rmahq.org/RMA/
SecuritiesLending. This is a secure site and all
information provided is protected against
outside intrusion.
>PU[LY 2011|Fundamentals4HNHaPUL| 81
 The Fundamentals Glossary
AFME Association of Financial Markets Europe
APJAsia-Pacific & Japan
ASICAustralian Securities and Investments Commission
ASLAAustralian Securities Lending Association
Asset managementThe professional management of investments such as
stocks, bonds and real estate.
Basel Committee on Banking SupervisionProvides a forum for
regular cooperation on banking supervisory matters, aiming to improve the quality
of banking supervision around the globe.
Basel IIIAn update to the Basel Accords (recommendations on banking laws
and regulations in the G20 countries) which are currently under development.
Under the new rules, banks will have to increase their core tier-one
capital ratio
Beneficial owner The actual owner of the asset, but that does not mean
they are necessarily the legal owner. The beneficial owner enjoys the benefits of
ownership even though the asset is under another name.
Broker-dealerAn agent that trades securities for its own account or on
behalf of its customers.
Buy-side firms This refers to firms that invest money or ‘buy’ securities.
Capital requirements A bank regulation which tells banks and
depositories how they must handle their capital. They are put in place to
ensure that institutions are not holding investments that increase default risk
and that they have enough capital to cover operating losses.
Cash collateral Negotiable securities such as certificates of deposit and
gilt-edged securities that are accepted as collateral by lenders because of their
low risk and ability to be converted into liquidity.
Cash reinvestment Where the service provider reinvests cash collateral
under the terms agreed with the client.
CASLA Canadian Securities Lending Association
Collateral management A process of dealing with collateral
transactions, where its main function is reducing credit risk in unsecured
financial transactions.
Collateral pools Cash collateral provided by the borrowing party in a
securities-lending transaction, which is then pooled and invested in short-
term securities to generate return.
Contract for difference (CFD) A contract between two parties where
the issuer agrees to pay the buyer the difference between the asset’s current
value and its value at time contract was made. The buyer pays the issuer if the
difference is negative.
Corporate actions An action which is part of a process that brings change
to a company’s stock, such as stock splits, mergers, dividends and acquisitions.
Some corporate actions have a direct or indirect impact on the shareholders,
while others do not impact them at all.
Covered short selling The opposite of naked short-selling (see below)
where the short seller has a binding stock lending agreement in place.
Custodial agent An agent, bank or trust which looks after an individual’s
mutual funds or an investment firm’s assets.
Custodian bank Financial institutions that look after the financial assets of
an individual or firm.
BackOffice
Dodd-Frank Wall Street Reform and Consumer Protection
Act A US federal statute that was signed into law in July 2010 to promote the
financial stability of the US and to put an end to the bailing-out of the banks.
Exchange-traded fund (ETF) A security that tracks like a stock on an
exchange instead of having its net asset value evaluated every day like a mutual
fund. It tracks an index, commodity or pool of assets like an index fund.
Fed Federal Reserve (US)
FSA Financial Services Authority (UK)
Hedge fund A largely unregulated portfolio of investments that are catered
for sophisticated investors. These funds are often partnerships or mutual funds
that aim to make high returns by taking advantage of ups and downs in the
markets.
IOSCO International Organisation of Securities Commission (US)
IRS Internal Revenue Service (US)
ISDA International Swaps and Derivatives Association (US)
ISLA International Securities Lending Association
Liquidity The more liquid an asset, the easier it is to convert it into cash.
Liquidity is also known as marketability.
82 | Fundamentals4HNHaPUL |>PU[LY2011
Margin collection In securities trading, it’s the difference between the loan
amount advanced by a stockbroker to a speculator.
Market maker A broker-dealer firm that creates a market for financial
obligation. They hold a certain number of shares of a particular security to ease
up trading in that asset. Market makers therefore help to keep the financial
markets running efficiently.
Naked short-selling A practice that is illegal in many countries, where
the short seller does not borrow the security in the first place or does not
ensure that it can be borrowed. It allows manipulators to drive down stock
prices, ignoring normal stock supply and demand patterns.
NAPF National Association of Pension Funds (UK)
NY Fed Federal Reserve Bank of New York
OCC Options Clearing Corporation
PASLA Pan-Asia Securities Lending Association
Prime broker A broker who provides a special group of services to clients
such as securities lending, leveraged trade executions and cash management.
Prime custodian A custodian who takes responsibility for managing a
client’s custody relationships when they have several global custodians across a
number of portfolios.
Private equity Equity capital that is not put on the public exchange, where
investors and funds make direct investments into private firms or buy out
public companies that results in a delisting of private equity.
Proprietary desk/trader A trader who deals with a securities firm’s
transactions that affect the firm’s accounts but not the accounts of its clients. The
bank uses its own balance sheet to take positions in shares, bonds or commodities.
Proxy voting Where someone acts on behalf of a company member at a
company meeting where at least one vote is taken.
Repo A repurchase agreement which is the sale of securities tied to an
agreement to buy the securities back at a later point.
Request for proposal (RFP) A document used by many organisations
to receive offers of services from potential suppliers. It enables organisations to
receive the right information to make good business decisions.
RG 196 Australian short selling regulation that was introduced by the
Australian Securities and Investments Commission in April 2010.
Risk mitigationTaking efforts to reduce the exposure to risk. Also called
risk reduction.
Risk versus return The balance between the risk of loss and the potential
return. Usually, the higher the risk of loss, the greater the potential return,
while the lower the risk of loss, the lower the potential return.
RMA Risk Management Association (US)
SAS70 audits Standards that an auditor must use to assess the contracted
internal controls of a service organisation.
SEC Securities and Exchange Commission (US)
Securities lending The lending of securities from one party to another in
return for a fee. The borrower is obliged to return them either on demand or at
the end of the agreement.
Sell-side firms Investment banks that provide buy-side firms with services
and products.
SFC Securities and Futures Commission (US)
Short selling An advanced trading strategy in securities lending where the
short seller hopes to capitalise from a fall in the asset price. ‘Going short’ is the
opposite of ‘going long’.
SIFMA Securities Industry and Financial Markets Association (US)
Single stock future (SSF) A futures contract with the underlying asset
being one particular stock. It gives investors more capabilities to leverage
themselves in the market.
Swap-based ETF ETFs that use swap arrangements to replicate markets
where there may be difficult access or poor liquidity. Unlike standard ETFs,
swap-based ETFs hold a pool of securities which may have no relation at all to
the index being tracked.
Third-party lender A firm specialising in securities lending which is not
the custodian of the beneficial owner’s assets.
Triparty collateral managers These provide a centralised service to
manage, clear and hypothecate collateral among different OTC counterparties
in the market.
Workflow management Managing and defining a series of tasks within
an organisation to produce a final outcome.
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 Directory of services
Securities Lending
Deutsche Bank’s Global Transaction Banking division, offers its clients access to a Contact:
growing domestic custody and clearing network which currently covers more than Tim Smollen
30 securities markets globally. We are dedicated to providing cross-border custody Deutsche Bank
services, fund administration, securities clearing and agency securities lending consis- Managing Director, Global Head of
tently in all markets to exceptional standards as part of our commitment to support our Agency Securities Lending
clients’ success. Tel: +1 212 250 4611
Through offices in London, New York and Frankfurt, Deutsche Bank’s Agency Securi- Email: tim.smollen@db.com
ties Lending team operates one of the world’s largest non-custodial agency securities
lending programs offering institutional clients a comprehensive and efficient service www.tss.db.com
for generating additional return on their fixed income and equity portfolios in a low risk tss.info@db.com
environment.
Deutsche Bank has been recognized in Global Custodian’s Securities Lending Sur-
vey 2010 achieving “Top-rated” status in a number of categories. It was also the highest
scoring regional provider in Europe, the highest scoring provider in the Multi-Provider
category and obtained 34 Best in Class awards.

eSecLending is a leading global securities lending agent servicing sophisticated Contact:

institutional investors worldwide. The company’s approach has introduced investment Christopher Jaynes, Co-CEO
management practices to the securities lending industry, offering beneficial owners an
alternative to the custodial lending model. Their philosophy is focused on providing Tel: US +1 617 204 4500
clients with complete program customization, optimal intrinsic returns, high touch Address: 175 Federal Street
client service and comprehensive risk management. Their process is to begin each 11th Floor, Boston, MA 02110, USA
client’s program with a competitive auction to determine the optimal route to market
for their portfolios or asset classes whether it is via agency exclusives or traditional Tel: UK +44 (0) 20 7469 6000
agency lending. This differentiated approach achieves best execution while delivering Address: 1st Floor, 10 King William
their clients with greater transparency and control, allowing them to more effectively Street, London, EC4N 7TW, UK
monitor and mitigate risks. Additional information about eSecLending is available on the Email: info@eseclending.com
company’s website - www.eseclending.com. Web: www.eseclending.com

Northern Trust Corporation (Nasdaq: NTRS) is a global leader in delivering innovative Chris Doell
and customized Securities Lending programs to clients whose assets are custodied at Senior Vice President
Northern Trust and elsewhere. Northern Trust Global Securities Lending is a leader in Head of North American
the industry, operating trading centers throughout the United States, Europe, Canada Securities Lending Client Service
and Asia to take advantage of markets throughout the world 24-hours a day. Northern +1 312 444 7177
Trust’s Securities Lending program is consistently recognized as a top lender; continu- Sunil Daswani
ously outperforms the RMA’s Aggregate Composite; holds top positions at industry or- Senior Vice President
ganizations; provides superior relationship management and technology; and maintains Head of International
a strong 28-year track record. Securities Lending Client Service
+44 (0)20 7982 3850

J.P. Morgan Worldwide Securities Services (WSS) is a premier securities servicing Visit www.jpmorgan.com/visit/wss or
provider that helps institutional investors, alternative asset managers, broker dealers contact:
and equity issuers optimize efficiency, mitigate risk and enhance revenue. A division
of JPMorgan Chase Bank, N.A., WSS leverages the firm’s unparalleled scale, J.P. Morgan Worldwide
leading technology and deep industry expertise to service investments around the Securities Services
world. It has $15.3 trillion in assets under custody and $6.5 trillion in funds under Francis Jackson, francis.j.jackson@
administration. J.P. Morgan offers a complete fund accounting solution, servicing a jpmorgan.com or 44-207-3253742
wide array of investment vehicles and fund structures with customized, full-service
BackOffice

back-office support. We service a broad array of investment products, including Huw Williams, huw.c.williams@
mutual funds, private equities, partnerships and commingled trusts, offering jpmorgan or 44-207-7775434
full support for high volumes of derivatives and complex instruments, including
meticulous distinction between GAAP and tax.

Custody & Clearing

Société Générale Securities Services offers institutional investors, asset managers Sébastien Danloy
and financial intermediaries a comprehensive range of financial securities services: Global Head of Sales,
custody, clearing & trustee services, fund administration, asset servicing and Investor Services
transfer agency. SGSS currently ranks 3rd European custodian and 9th worldwide Société Générale Securities Services
custodian (Source: Globalcustody.net) with EUR 2,580* billion in assets held and T: +33 (0)1 41 42 98 65
valuates 4,354* funds representing assets of EUR 405* billion E: sebastien.danloy@socgen.com
(as of June 2007). W: www.sg-securities-services.com

84 | Fundamentals4HNHaPUL |-HSS2010
|>PU[LY2011
 Custody & Clearing (cont)
T: +47 22 94 92 95
F: +47 22 48 28 46
Contact: Bente I. Hoem, Head of
Global Relations & Network
E: bente.hoem@dnbnor.no
W:www.dnbnor.com
For further information please
contact
Lilla Juranyi, Global Head
Custody
at + 31 20 7979 435
or contact her by email:
Lilla.Juranyi@mail.ing.nl
Contact:
Nina Groth
Head of Sub-custody and Clearing
Tel: +45 3333 6124
E-mail: nina.groth@nordea.com
71 Queen Victoria Street
London EC4V 4DE, UK
C: Tony Johnson
T: +44 (0) 20 7653 4096
E: antony.johnson@rbcdexia.com
W: http://www.rbcdexia.com
T: Europe: (34) 91 2893932 / 28
T: USA: (1212) 350 39 02
W: santanderglobal.com
E: globalsecurities@
gruposantander.com
C: Goran Fors
T: +46 8 763 5770
E: goran.fors@seb.se
W: http://www.seb.se
DnB NOR is the leading provider of Custody, Clearing and Remote Member Service
in Norway. DnB NOR offers a full range of securities settlement, Corporate Action
and cash management services for both foreign and domestic institutional clients.
The bank has a strong commitment to the Custody business in Norway and the
staff is highly knowledgeable and experienced. In addition, DnB NOR provides a
wide range of value-added services for foreign clients such as Securities Lending,
Income Collection, Proxy Voting, Tax Reclaim, and MIS reporting.
As the largest commercial bank in Norway, DnB NOR offers clients full services in
securities trading, registration, foreign exchange and Money Market.
Banking Securities Services provides award winning local and regional custody
services for investment professionals. We are proud to be the largest custodian
provider in terms of assets and number of foreign clients in Central & Eastern Europe.
ING has been providing Securities Services in CEE since 1994 and we will continue
our ongoing pursuit of excellence through new technology. Innovation and client focus
are the key drivers to service our clients the best way.
Other activities of ING Wholesale Banking Securities Services are Paying Agency
Services and web-based management of employee stock option & share plans.
ING is your local partner in: Belgium, Bulgaria, Czech Republic, Hungary, Poland,
Romania, Russia, Slovak Republic and Ukraine.
Nordea is the leading financial services group in the Nordic and Baltic region and
operates through three business areas: Nordic Banking, Private Banking and
Institutional & International Banking. Nordea is the leading custody services provider
in the region. Nordea provides high quality, tailor-made custody services for local and
foreign investors dealing with Nordic and Baltic securities. Due to the unique history of
being formed from four established banks, Nordea is the only Nordic custody provider
with strong local presence and expertise in all four markets. Nordea combines Nordic
competence with local expertise, and has proven ability to deliver high quality services
that meet both clients’ and each local market’s requirements.
• Leading Nordic custodian:
• Critical mass and resources available;
• deep local experience and active involvement in each Nordic market;
• Complete operational capabilities and best-fit systems developed in each
Nordic market;
• Proven ability to deliver high-quality service in all Nordic markets; Excellent
connection with key players in all Nordic Markets;
• Extensive product and service offering;
• Your single point of entry to the whole Nordic region.
RBC Dexia Investor Services offers a complete range of investor services to
institutions worldwide. Our unique offshore and onshore solutions, combined with the
expertise of our 5,300 professionals in 16 markets, help clients grow their business
and sustain enhanced performance through efficiency improvements and robust risk
management practices.
Equally owned by RBC and Dexia, the company ranks among the world’s top 10
global custodians with USD 2.5 trillion in client assets under administration.
RBC Dexia’s innovative solutions include global custody, fund and pension
administration, shareholder services, distribution support, securities lending and
borrowing, reconciliation services, compliance monitoring and reporting, investment
analytics, and treasury services.
Banco Santander is a retail and commercial bank, based in Spain, with presence
in 10 main markets. At the end of 2009, Santander was the largest bank in the
euro zone by market capitalization and fourth in the world by profit. Founded in
1857, Santander had EUR 1,245 billion in managed funds at the end of 2009.
Santander has 90 million customers, 13,660 branches and 170,000 employees.
It is the largest financial group in Spain and Latin America. In 2009, Santander
registered 8,943 million in net attributable profit.
SEB is the leading provider of securities services in the Nordic and Baltic area.
We are committed to custody and clearing processes for the wholesale market.
We hold securities worth over EUR 500 bn and provide services in more that 80
markets, 11 of them under the SEB name (Sweden, Norway, Finland, Denmark,
Luxembourg, Germany, Estonia, Latvia, Lithuania, Russia and Ukraine).
We offer a full range of securities services including corporate action and
information services, securities lending and services to remote members of the
Nordic and Baltic stock exchanges. We are also General Clearing Member on
all CCP´s covering Nordic securities. We continuously develop new products in
connection with clients and partners to ensure we deliver the high-quality products
our clients demand. We always strive to make the processes more efficient. With a
history of 150 years in the securities industry; we know the market and our
clients well.
>PU[LY 2011|Fundamentals4HNHaPUL| 85
 ? ??
Fund Administration

With more than 35 years’ industry experience, Capita Financial Group provides Leah Cox
fund managers with fast and cost effective third-party administration services, +44 (0) 207 954 9559
enabling you to free up your day to focus on growing your funds and business. leah.cox@capitafinancial.com
Our main focus is to provide a ‘Best in Class’ administration service, we work in www.capitafinancial.com.
partnership with you to innovate, increase efficiency and provide the high level
of customer service that you and your clients expect. With our UK and offshore
centres (Jersey, Guernsey, Ireland and Gibraltar), we offer a bespoke service to our
clients and each area’s unique regulatory environment.

Société Générale Securities Services offers institutional investors, asset managers Sébastien Danloy
and financial intermediaries a comprehensive range of financial securities services: Global Head of Sales
Clearing, Liquidity Management, Custody and Trustee, Fund Administration, Asset Société Générale Securities Services
Servicing, Fund Distribution Services and Issuer Services. SGSS currently ranks 3rd T: +33 (0)1 41 42 98 65
European custodian and 7th worldwide E: sebastien.danloy@socgen.com
custodian (Source: Globalcustody.net) with EUR 2,731* billion in assets held and W: www.sg-securities-services.com
valuates 5,158* funds representing assets of EUR 499* billion (at end March 2008).

Hedge Fund Administration

Apex Fund Services Ltd is a global hedge fund administration solution for hedge C: Peter Hughes
funds and private equity clients located in 12 separate jurisdictions across the Group Managing Director
globe. The company uses the software solution, PFS PAXUS, which is a fully T: +1 441-292-2739
integrated hedge fund accounting system combined with web-based reporting F:+1 441-292-1884
to allow clients and investors to access their information 24/7 securely online. We E: peter@apex.bm
will tailor all solutions to meet your needs and our continuing focus on the quality John Bohan
of service and the relationship with each and individual client ensures that we Group Manager of Operations
retain our ethos of providing a personalized service rather than a generic solution. T: +353 21 4633366
Highly qualified and experienced staff, mirrored with top tier technology and F: +353 21 4633377
competitive fee structures make Apex Fund Services Ltd the clear choice for your E: John@apexfunds.ie
fund administration needs.

Custom House Global Fund Services Ltd. (“CHGFS”), the Malta based parent Custom House Global Fund
company of the Custom House Group of Companies (“Custom House”), was Services Limited
established when Equity Trust’s fund services division was merged into Custom Head Office Address:
House in September 2008. CHGFS is recognised as a fund administrator and Tigne Towers
licensed under a Category 4 license as a Custodian for Funds of Funds and is also Suite 33
an authorised Trustee for Trusts. Tigne Street
Custom House offers a full 24/5, “round the world”, “round the clock” Sliema 3172
administration service out of its offices in Amsterdam, Chicago, Dublin, Guernsey, Malta
Luxembourg, Malta and Singapore. This service, which enables Custom House
www.customhousegroup.com
to offer daily dealing NAVs covers all aspects of day to day operations, including
Contacts: Dermot S. L. Butler,
maintaining the fund’s books and records, carrying out the valuations, calculating
Chairman
the NAV and handling all subscriptions and redemptions, as well as over-seeing
dermot.butler@customhousegroup.
payment of the fund’s expenses.
Custom House uses the PFS-PAXUS fully integrated fund administration system. com
Reporting is effected through CHARIOT, Custom House’s secure web-reporting T: +353 1 878 0807
platform for managers and investors. Albert Cilia, Managing Director
Custom House is fully SAS70 compliant and the Dublin office was the only hedge albert.cilia@mt.customhousegroup.
BackOffice

fund administrator in the world ever to be awarded a Moody’s Management Quality com
Rating. CHGFS and its subsidiaries are fully regulated, as required, by the relevant T: +356 2702 2799
authorities in their jurisdiction.

Consultancy

With annual revenue of USD5 billion, SunGard is a global leader in software and Visit SunGard at
processing solutions for financial services, higher education and the public sector. www.sungard.com
SunGard also helps information-dependent enterprises of all types to ensure the conti-
nuity of their business. SunGard serves more than 25,000 customers in more than 50
countries, including the world’s 50 largest financial services companies.

86 | Fundamentals4HNHaPUL |>PU[LY2011
 Technology

C: Judith McKelvey 4sight Financial Software is a leading supplier of innovative software solutions to
T: +44 (0) 207 043 8319 the Securities Finance, Settlement & Connectivity markets with offices and clients
E: judith.mckelvey@4sight.com worldwide. 4sight Securities Finance (4SF) is a flexible modular solution that empowers
C: Jason Hayes financial institutions of all sizes, from the smallest direct lender to the global custo-
T: +1 416 548 7922 dian, broker or intermediary on an agency or principal basis. 4SF contains market
E:jason.hayes@4sight.com leading functionality that provides greater automation, faster trading, improved risk
C: Peter Sanders management, and enhanced relationships with clients and counterparties. It supports
T: +61 (0) 2 90378416 borrowing, lending, repo, swaps and collateral management across the equity and
E: peter.sanders@4sight.com fixed-income markets and provides 24 hour continuous operation, inter desk trading,
W: www.4sight.com a ‘global book’, real-time value dated position keeping and a powerful web reporting
module, allowing full front to back office processing.

With annual revenue of USD5 billion, SunGard is a global leader in software and
Visit SunGard at processing solutions for financial services, higher education and the public sector.
www.sungard.com SunGard also helps information-dependent enterprises of all types to ensure the conti-
nuity of their business. SunGard serves more than 25,000 customers in more than 50
countries, including the world’s 50 largest financial services companies.

T: +41 (0)44 298 92 00 Finace is currently the only fully integrated solution which supports the future
F: +41 (0)44 298 93 00 business model within the areas of Securities Lending, Repo and OTC Derivatives
A: COMIT AG, Collateral Management. The architecture of Finace is based on a stable, leading
Pflanzschulstrasse 7, edge technology platform, which was developed with performance and robustness
CH-8004 Zürich, Switzerland as the focus of design. With flexibility at its core, customer-driven extensions and
W: www.finacesolution.com modifications can be quickly and easily applied to the standard component set.
www.comit.ch

For more information about Broadridge Financial Solutions, Inc., with over $2.1 billion in revenues in fiscal year 2009
Broadridge, please visit and more than 40 years of experience, is a leading global provider of technology-based
www.broadridge.com. solutions to the financial services industry. Our systems and services include investor
communication, securities processing, and clearing and outsourcing solutions. We
offer advanced, integrated systems and services that are dependable, scalable and
cost-efficient. Our systems help reduce the need for clients to make significant capital
investments in operations infrastructure, thereby allowing them to increase their focus
on core business activities.Proxy Edge - our comprehensive solution for institutional
global proxy voting management.Gloss - our leading international STP system which
automates the trade processing lifecycle from trade capture through confirmation,
clearing agency reporting and settlement. Tarot - a UK retail and private client
stockbroking, custody and fund management solution. Securities Data Management -
outsourced data services for securities operations.

Eagle Investment Systems LLC
The Bank of New York Mellon Financial
Centre
160 Queen Victoria Street, London
UNITED KINGDOM
EC4V 4LA
Phone Number: 44 (0)20 7163 5700
E: sales@eagleinvsys.com
W: www.eagleinvsys.com
Eagle Investment Systems LLC is a global provider of financial services technology
serving the world’s leading financial institutions. Eagle provides enterprise-
wide, leading-edge technology and professional services for data management,
investment accounting and performance measurement. Eagle’s Web-based
solutions support the complex requirements of firms of any size including
institutional investment managers, mutual funds, hedge funds, brokers, public
funds, plan sponsors and insurance companies. Eagle’s product suite is offered
as an installed application or can be hosted via Eagle ACCESSSM, Eagle’s ASP
offering. Eagle Investment Systems LLC is a subsidiary of The Bank of New
York Mellon Corporation. To learn more about Eagle’s solutions, contact sales@
eagleinvsys.com or visit www.eagleinvsys.com.

C: Mr Ras Sipko KOGER is a leading provider of technology solutions to the fund administration
T: +1-201-291-7747 industry. KOGER products are used by some of the largest and most respected
E: ras@kogerusa.com institutions in the industry. KOGER has offices in each of the USA, Ireland, Slovakia
W: http://www.kogerusa.com and Australia and
provides comprehensive 24/5 technical support.
NTAS (New Generation Transfer Agency System) is the premier shareholder register
and transfer agency system in the market. NTAS modules include an extensive range
of incentive fee calculation methods as well as an extensive list of capabilities such
as dividend processing, cash flow management, anti-money laundering, blacklist,
taxation and fee management. NTAS supports a wide variety of fund structures
including master-feeder, fund of funds, series, limited partnerships, private equity and
side pockets. Reports are fully customizable and worldwide replication is available.
KOGER’s GRID (Global Reach Interface Daemon) is a middleware interface that
integrates NTAS with any third-party system.

>PU[LY 2011|Fundamentals4HNHaPUL| 87
Fall 2010|Fundamentals4HNHaPUL|
 National service: Think of the bonuses

National service : Think of the bonuses

Or how public outrage at bankers’ pay can strengthen regulators

B uilders talking about short selling, school

kids waxing lyrical about credit default swaps,
barbers talking about, well, haircuts – the financial
crisis ensured many new phrases entered the
public discourse, but probably nothing got the
average man on the street quite so riled as the issue
of bankers’ pay.
And it is ongoing - moves to cap bonuses or put
greater tax burdens on them are afoot across
the globe.
Everyone knows bankers are well remunerated,
always have been and probably always will be. It
is one of the reasons (or the only?) why people get
into it in the first place. It is why the top economics
graduates and financial minds choose banking as
a career path, as opposed to something dull – say,
being a regulator. Poaching pays better than
game-keeping.
Of course, regulators did not get off lightly either,
although exactly what they had done wrong is still a
matter of debate: they were under-qualified and not
as smart as the people they were regulating or they
were too academic and not real-world savvy; they
were over burdened or they did not have enough
responsibilities; they were too chummy with the
industry or were too distant.
So what can be done? The answer is simple – a
form of national service. When a top figure at a bank
wants to retire with his cushy pension and bonuses,
he gets taxed at, say, 75%, for the sake of argument.
Public happy, government purse strings happy – but
banker unhappy.
However, he can win his money back – he will only
BackOffice
level figures to know they would be happy ratting
one another out – all for the public good of course.
But why stop at banking? There are plenty of other
applications – one that particularly springs to mind
is politicians.
In the UK, pensions secretary Iain Duncan Smith
has called for the long-term unemployed to do
community work in order to receive their full
benefits. Why not ask politicians to do the same
upon retiring from office?
Finding out whether they would smile as much
while helping clean graffiti off walls or sweep up
streets as they do in new policy publicity shots
would be an interesting experiment.
Of course, following that line would mean that
the policy should be applied across the board – so
journalists would have to spend a couple of years
working at the Press Complaints Commission.
Luckily, journalists do not get bonuses, so any tax
hike would not affect us; the minimum retirement
age will soon be above average life expectancy so
pensions are a moot point; and most importantly, no
one ever listens to journalists so this policy will never
be enacted anyway.
See you next quarter...

be taxed at, say 25%, if he works for two years at a

regulator. That way, regulators get the experience
of people who have worked at the top level in the
real world, have no vested interest in returning to
the private sector and have a good idea of what
loopholes need to be closed (safe in the knowledge
that as they are soon to retire, said closed loopholes
will not affect them - anymore).
It would even be simple to put in some KPIs –
identify a certain amount of dubious practices or
fraudulent practices a year to get the full tax break.
There must be enough bad blood between some top

88 | Fundamentals4HNHaPUL |>PU[LY2011
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