Section 2 - FTSE

THE NEAR-DEATH experience of Countrywide 

Financial Corporation (CFC) in recent months 

developed so rapidly that it surprised perhaps even 

Angelo R Mozilo, the company’s brash and supremely 

confident chief executive officer. Throughout late 2006—as 

sub prime loans made by other lenders began defaulting in 

large numbers, home prices softened, and interest rates 

rose — Mozilo exuded confidence at his company’s 

prospects. At a conference of bond investors in September 

of 2006, he asserted that CFC’s “proprietary technology” 

and “prudent underwriting guidelines”would win the day. 

His optimism seemed justified because common wisdom 

said the home mortgage industry’s problems were 

restricted to sub prime loans. While those loans were made 

to borrowers with weak credit they comprised no more 

than 10% of CFC’s business (even so, enough to rank 

FTSE GLOBAL MARKETS • NOVEMBER/DECEMBER 2007 

Photograph supplied by iStockphoto.com, 

October 2007. 

From a single office in 

Calabasas — a former 

stagecoach stop just north of 

Los Angeles — Countrywide 

grew into the world’s largest 

home-mortgage company, 

originating $463bn in loans 

last year and servicing a 

$1.5trn portfolio of home 

loans. The company’s success 

made cofounder and 

chairman Angelo Mozilo a 

very wealthy man. Now, both 

his fortune and his company 

may be in jeopardy because 

of a deadly combination of 

rising interest rates, falling 

home sales, and a worldwide 

liquidity crisis. Art Detman 

reports from California. 

COUNTRYWIDE: 

UP CLOSE & PERSONAL? 

Countrywide third among all sub prime lenders). Mozilo 

castigated other mortgage companies for incompetence, 

said Countrywide would grow by hiring its competitors’ 

castoffs, and predicted that 2007 would be the trough in the 

home lending cycle. By 2008 business would be humming 

again. Actually, business hummed in 2006 for CFC, which 

reported record revenues of $11.4bn, record per share 

earnings of $4.29, and net profits of $2.511bn (down a hair 

from $2.528bn in 2005). In March this year, New Century 

— a major sub prime lender — suspended operations. By 

this time, more than two dozen sub prime lenders had 

closed up shop. But there were signs that the mortgage 

industry’s problems weren’t confined to sub prime loans. 

CFC, for example, reported that during 2006 the 

delinquency rate on its prime loans rose to 2.93% from 

1.57% in 2005. 

PROFILE: COUNTRYWIDE FINANCIAL 

51


52 

Financial company executives testify on Capitol Hill in Washington, Thursday, March 22nd, 2007, before the Senate Banking Committee hearing 

on sub prime mortgages. From left are, WMC Mortgage chief executive officer Laurent Bossard; Countrywide Financial executive managing 

director Sandy Samuels; HSBC Finance Corporation chief executive officer Brendan McDonaugh; Janis Bowdler; and First Franklin Financial 

Corporation President L. Andrew Pollock. Photograph by Dennis Cook, supplied by Associated Press/PA Photos, October 2007. 

In July two hedge funds managed by Bear Stearns 

suddenly collapsed, mainly because they were unable to 

determine the value of their sub prime loans. Fear rippled 

through credit markets around the globe. The entire 

worldwide credit system threatened to freeze up. Some put 

the blame upon Alan Greenspan, who as chairman of the 

Federal Reserve System (the Fed) flooded the financial 

system with liquidity after the dot-com collapse in 2000 and 

lowered short-term rates to just 1%. This stabilised markets 

and softened the 2001 recession. However, in driving down 

interest rates, the Fed enabled more people to buy homes 

and thus fueled an unprecedented run up in housing prices. 

An unsustainable cycle had gotten under way. Lenders 

gladly allowed buyers to overextend themselves by making 

loans with below-market rates during the first two or three 

years, the expectation being that homeowners could 

refinance before the higher rate kicked in. Besides, the 

reasoning went, rising home prices would enable even 

buyers who were paying only interest to build equity. 

To yield-hungry investors — aggressive hedge funds and 

cautious pension funds alike — packages of these 

mortgages appeared to be super-safe investments with 

higher returns than those of other collateralised securities. 

Bundling thousands of mortgages into a single tradable 

security dates to the late 1970s, when Solomon Brothers 

invented the idea. Until then, companies like Countrywide 

either sold their loans to the Federal National Mortgage 

Association or the Government National Mortgage 

Association, both of which had dollar limits on each loan 

and strict underwriting standards, or kept nonconforming 

loans on their own books. Securitisation freed loan volume 

from the anchor of in-house capital. US mortgage 

companies were transformed from long-term lenders into 

mere originators. 

What’s more, as consumer credit companies became 

more sophisticated in assessing the creditworthiness of 

individuals, what had been an exhaustive underwriting 

process became little more than a clerical procedure to 

obtain credit scores. 

Meanwhile, agencies such as Standard & Poor’s and 

Moody’s began rating the individual mortgages that 

comprised the collateralised debt obligations. Mortgage 

originators, says Peter S Cohan, head of his own consulting 

firm, “gave the business to the agency that provided the 

highest rating. Basically, they were buying the ratings.” 

With the risk transferred in large part to investors that 

bought mortgages, rather than the companies that 

originated them, a classic moral hazard had been created. 

Soon marketing, not underwriting, was the key to success 

in the mortgage business. 

No one did this better than Countrywide. Its loan 

origination officers became the industry’s most effective, 

winning prospects with this assurance: “I want to be sure you 

are getting the best loan possible.”Even so, there was a flaw in 

the business model.“What got Countrywide and others into 

trouble was their financing strategy,”says Michael McMahon, 

a former commercial banker turned security analyst who is 

now a private investor.“They finance medium and long term 

assets with short and medium term borrowings.” 

Even though CFC sells most of its loans to institutions, it 

holds several billion dollars in mortgages on its books and 

needs to roll over short-term loans that finance those 

mortgages. Without ready cash to fund new mortgages for 

sale, it would be essentially out of business. As industry-wide 

defaults and foreclosures rose and home sales dropped, 

Mozilo sought to reassure investors by claiming a line of 

readily available credit that totalled almost $50bn. Liquidity, 

he assured the market, was not a problem for Countrywide. 

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54 

Kenneth Bruce, a highly regarded analyst at Merrill Lynch 

who, for 13 years, worked in the banking industry (including 

two years at Countrywide), agreed and reiterated a buy rating. 

Two days later, in mid-August, Bruce reversed himself and 

issued a sell rating, warning that Countrywide could go 

bankrupt if it could not continue borrowing money to fund 

its portfolio. Neither his upbeat note nor sell rating was 

intended for the public. “Those notes were proprietary for 

our clients,”says a Merrill Lynch spokeswoman. “We did not 

send them to any media.”Bruce’s alarm triggered a sell-off in 

not only Countrywide stock, which fell 13% one day and 

then 11% the next, but in mortgage-related securities of all 

kinds. There was a 

week-long run on 

Countrywide Bank, 

CFC’s wholly owned 

thrift that has about 100 

offices across the US. 

The $50bn in ready 

credit that Mozilo 

touted had evaporated. 

He scrambled to pull 

together a financing 

package. One report 

said he was offered 30day 

money at 12.5%, 

the financial equivalent 

of hara-kiri. Pundits 

opined that CFC was 

too big to fail — after 

all, it originated one in six home mortgages in the US. The 

stock traded as low as $15. On August 17 Mozilo 

announced he had secured a financing of $11.5bn from a 

consortium of 40 banks. This failed to ease market fears. 

Every month Countrywide made $41bn in mortgage loans, 

and to finance these it relied upon turning over $13bn in 

commercial paper. The new funding fell short of 

Countrywide’s needs. Paul J Miller, an analyst at Friedman, 

Billings, Ramsey & Co., predicted that if the liquidity crunch 

lasted more than a month, Countrywide would be forced to 

sell assets at a deep discount to remain in business. 

As we’ll see, he was right. First though, Mozilo announced 

that Countrywide Bank—the company’s wholly owned 

federal savings bank—would speed its expansion in order to 

fund home loans with deposits. As McMahon notes, this is 

relatively easy because Countrywide Bank branches are just 

kiosks inside Countrywide Home Loan offices, not branches 

as defined by the Fed. By this time, according to one source, 

examiners from the Office of Thrift Supervision (which 

regulates federally chartered savings banks) had set up shop 

inside of Countrywide’s headquarters and were monitoring 

events on a real-time basis. Countrywide had staunched the 

outflow of funds with newspaper ads offering above-average 

interest rates. By the end of September, Countrywide Bank 

was attracting $50m in deposits each day. As the industry 

continued to deteriorate, Mozilo made a surprise 

announcement: Bank of America (BofA) had agreed to invest 

In March, New Century—second only to CFC 

in making sub prime loans—suddenly 

suspended operations, just a week after a 

favourable analyst’s report from Bear Stearns. 

By this time, more than two dozen sub prime 

lenders had either failed or closed up shop. 

However, there were signs that the mortgage 

industry’s problems were not confined to sub 

prime loans. CFC, for example, reported that 

during 2006 the delinquency rate on its prime 

loans rose to 2.93% from 1.57% in 2005. 

$2bn in CFC. BofA, the nation’s leading consumer bank with 

assets of $1.46trn, had romanced CFC for six years or more, 

according to reports. In return for BofA’s ready cash, CFC gave 

up 20,000 shares of preferred stock, which pay an annual 

dividend of 7.25% (more than double the rate similar CFC 

securities paid just a month before) and are convertible into 

111m shares of common at $18. BofA CEO Kenneth Lewis 

had secured the right to buy 16% of Countrywide for not only 

less than market price but for 20% less than book value. BofA 

cannot sell the preferred shares for 18 months, but in return 

gets the right of first refusal on any offer to acquire all of CFC. 

An enigmatic phrase in the agreement says that the 

conversion price “may be 

adjusted upon the 

occurrence of certain 

events.” Neither 

company would 

elaborate, but reasonably 

translated it means that if 

CFC’s financial condition 

declines beyond a certain 

point, the conversion 

price also declines. 

Analyst Paul Miller’s 

prediction had come to 

pass. An analyst at S&P 

says the preferred stock 

sale signaled distress on 

the part of Countrywide, 

and Frederick Cannon of 

Keefe, Bruyette & Woods (KBW) agrees. “From a 

shareholder’s viewpoint, it was very expensive, but it would 

appear that it was also extremely necessary.” 

Mozilo put forward the best face possible, calling it a vote 

of confidence and portraying the transaction as a win-win 

deal for both companies. BofA’s Lewis was more detached. 

“We hope this investment will be a step toward a return to 

a more normal liquidity in the mortgage market,”he said. 

Alas, investors weren’t persuaded that Countrywide had 

been saved.They concluded that the $2bn BofA investment 

was really too small to make a real difference. Interest rates 

were rising, home values were falling, and an 

undetermined number of CFC borrowers would be unable 

to continue making payments as the interest rates on their 

loans reset to market rates. One clue: fully 60% of CFC’s 

sub prime loans made in 2005 and 2006 and scheduled to 

reset in 2008 have not been refinanced. Mozilo himself 

spoke despairingly of a “sudden and severe and deep 

deterioration”in home values. 

In August Mozilo announced that 500 jobs would be cut. 

In early September he announced that an additional 900 

employees would be let go. Two days later he said the total 

would reach 10,000 to 12,000 over the next three months, up 

to 20% of Countrywide’s total headcount. A week later, 

almost buried in a press release, was news of a new financing 

of $12bn secured by liens against mortgages held in 

Countrywide’s own portfolio. Over 30 days, Countrywide 


had obtained three financings: first a bank financing of 

$11.5bn, then the sale of $2bn in convertible preferred stock, 

and finally a mystery funding of $12bn. Meanwhile, layoffs 

of 500, then 900, and ultimately 12,000 had been announced. 

It appeared that Mozilo no longer had a firm hand on events 

but rather was improvising almost day to day. In fact, the 

announced layoffs may not be enough. Nonconforming 

loans accounted for 40% of CFC’s loans in 2006. Mozilo 

wants to reduce that to 10%, which means he likely will have 

to reduce headcount by a total of 30% or even 40%. 

Meanwhile, lawsuits are piling up. “It’s not atypical to 

have a number of lawsuits occur when you see a stock price 

drop the way this stock price has dropped,”says Cannon of 

KBW. “Whether or not they have meaningful merit from an 

equity investor’s point of view is hard to say. But I would 

put those lawsuits as one of those off-balance sheet risks 

that we try to be aware of.” 

Cannon is right, of course. Furthermore, one suit goes to 

the very heart of Countrywide’s problems. Filed by the San 

Francisco law firm of Liner Yankelevitz Sunshine & 

Regenstreif as a class action on behalf of everyone enrolled 

in the company’s employee pension plan, the suit 

maintains that the administrators of the plan—all company 

insiders—knew or should have known that Countrywide 

was about to encounter conditions that would drive down 

the price of its stock (which fell more than 50% during the 

first nine months of 2007). Ronald S Kravitz, the lead 

attorney in the action, will surely ask jurors this key 

question: “Why did the administrators of the pension plan 

offer CFC stock as an investment option, and why did they 

fund the company’s share of employee contributions solely 

with CFC stock, when they themselves were selling their 


Countrywide bank customers wait in the lobby of a Los Angeles 

branch, Monday, August 20th 2007. Countrywide Financial Corp. 

tries to reassure customers that the liquidity problems dogging its 

mortgage lending business are not affecting its banking unit, 

Countrywide Bank FSB, even as people worried about their savings 

converge on bank offices. Photograph by Nick Ut, supplied by 

Associated Press/PA Photos, October 2007 

own shares, month after month after month?” 

Indeed, it appears that Mozilo himself has not bought a 

share for his own portfolio since 1987, and that no officer 

or director bought a share in 2006 or 2007. Insider trading, 

as reported on the SEC’s website, amounts to 23 pages of 

transactions, but every transaction is a sale, not a purchase. 

Mozilo himself allegedly has reaped more than $400m in 

stock options that he has exercised over the years. Many 

of these sales were, it has been reported, made under Rule 

10b5-1, which permits executives to establish plans for the 

regular sale of stock. The idea is that, as long as these sales 

were executed under a predetermined plan, the executive 

is protected from any accusations of insider trading. But 

this may prove a challenging argument for Mozilo to 

make. According to filings in late 2006 and early 2007 ( as 

the liquidity crisis was becoming evident but before CFC 

stock reached its low point) he allegedly adopted a new 

plan, added a second plan, and then revised it. The net 

effect was to permit him to sell shares at far higher prices 

than if he hadn’t instituted the new plan (which allowed 

him to sell up to 350,000 shares a month), or adopted a 

second plan (which allowed him to sell an additional 

115,000 shares a month), or filed a revision that allowed 

the sale of 580,000 shares a month (just as CFC stock 

reached its all-time high of $45.03). 

55


56 

Typically, executives file a plan and stick with it for years. 

But Mozilo filed plans that allowed him to sell stock at an 

ever-increasing rate even though his options did not expire 

until June 2011. Mozilo also began selling shares he had 

held for years. As October drew to a close, it appeared that 

soon Mozilo would own no shares of his company, a 

remarkable situation for a CEO. Because Mozilo is ultimately 

the responsible officer for the company’s pension plan, and 

because he sold so much stock within the past two years, 

litigants may demand he give up some of those gains. 

Kravitz goes further than simply alleging that CFC stock 

was an unlucky investment for the pension plan. 

“Countrywide stock became an imprudent investment 

based in part on the misconduct going on in the company 

that, once disclosed, could lead to a drop in the price of the 

stock.” This alleged misconduct has been reported in 

various news articles, which describe a variety of practices 

that exploited Countrywide borrowers by charging them 

interest rates that were higher than their credit scores 

merited and overcharging them for a variety of fee-based 

services, such as appraisals and credit reports. Mozilo has 

angrily denied the allegations, although he has not 

specifically rebutted any particular one. 

Meanwhile, the state treasurer of North Carolina wrote 

to the SEC complaining that Mozilo “apparently 

manipulated his trading plans to cash in” even as the sub 

prime debacle was unfolding. And the Louisiana 

Municipal Police Employees’Retirement System persuaded 

the Delaware Chancery Court to order Countrywide to 

provide confidential information about the operation of its 

stock-option program. Countrywide was also told to 

provide any related information that it may have already 

given to the SEC, the New York Stock Exchange, or the US 

Department of Justice. 

Clearly, both actions lay the foundation for lawsuits. 

Kravitz expects that at some point all the suits will be 

consolidated into a single action and a lead attorney will be 

appointed by the court to prosecute the action.The lawsuits 

present a possible impediment to what is likely the most 

logical solution to the problems facing Countrywide, which 

would be its acquisition by Bank of America. BofA now 

holds nearly 10% of all US bank deposits, which is the limit 

set by the government. If BofA is to grow, the mortgage 

market presents a natural path. Already BofA ranks fifth, 

with a 7% market share, but experts say that its mortgage 

operation is not managed nearly as well as Wells Fargo’s 

(the number two mortgage company) or CFC’s. 

Mozilo has proposed that BofA outsource its entire 

mortgage business to Countrywide, which presumably 

would put its own people at home mortgage desks in BofA 

branches and which certainly would act as BofA’s back 

office for all mortgage transactions. BofA CEO Lewis has 

not publicly responded directly to this idea, but he has said 

that he has never been involved in a successful joint 

venture. Indeed, suppose that BofA had hired 

Countrywide to run its mortgage business, and then 

Countrywide was hit with these lawsuits, unfavorable press 

articles, and equally unfavorable comments by various 

politicians. Lewis would have little if any control over the 

situation, hardly the position a conscientious (or 

ambitious) CEO wants to find himself in. 

Mike McMahon, the former banker, notes one potential 

downside. Mortgage banking is a volatile, cyclical and 

seasonal business, and therefore mortgage banks 

command a low price/earnings multiple. CFC, for 

example, traded below 10 times earnings (recently, the p/e 

ratio was 5). Even so, CFC might still make sense for BofA. 

Like other commercial banks, BofA expects to cross-sell 

services to its mortgage customers. Besides, even with the 

book of CFC mortgage business, BofA would not be 

primarily a mortgage bank but rather a consumer bank 

with a big mortgage business. 

Will it happen? It might, provided that Mozilo and Lewis 

find a way to settle the lawsuits quickly and at a reasonable 

cost. But there is still another potential problem. Generally, 

institutional investors who buy mortgage-backed securities 

have no recourse if those mortgages default. The exception is 

fraud — whether it is committed by the mortgage originator 

or the borrower. Here lies the rub: it is an unquantifiable 

hazard for CFC or any company that acquires it. In the 

freewheeling days of 2003 to 2005, it was easy for loan officers 

and borrowers to bend the facts to their advantage. If an 

institutional investor can substantiate enough such instances, 

it may force Countrywide to take back an entire package of 

loans — a potentially devastating event. 

Meanwhile, the housing market continues to deteriorate 

and so does Countrywide’s financial results. For 

September, the company reported that total loan fundings 

fell 44% from September 2006. Delinquencies as a 

percentage of unpaid principal balances rose to 5.85%, up 

from 4.04%, and pending foreclosures climbed to 1.27%, 

up from 0.51%. A few days later CFC announced that 

layoffs and office closings will require a pretax charge of 

$125m to $150m. Analysts projected third quarter losses of 

as much as $1.3bn after loan loss provisions. 

What does Mozilo have to say about his company’s 

predicament? Very little (phone calls from the press, 

including FTSE Global Markets, are rarely returned). 

However, in an effort to combat an increasingly poor public 

image, Mozilo hired a major public relations agency with 

substantial experience in crisis management. Now, 

employees are provided with rubber wristbands that 

proclaim “Protect Our House.” In a meeting with 

employees, a senior executive reportedly told them that “it’s 

gotten to the point where our integrity is being attacked. 

NOW IT’S PERSONAL! . . . And, WE’RE NOT GOING TO 

TAKE IT!” In other words, if anyone has suffered during 

the recent mortgage lending crash, it is Countrywide, not 

its customers or shareholders. 

The events of the past two years have resulted in a grim 

outlook for nearly every aspect of the US housing industry. But 

the industry will bounce back and once again the American 

housing market will be robust and growing. For now, it’s too 

soon to say the same about Countrywide Financial. 


THE SECURITIES LENDING 

Roundtable 

TRANSFORMATION & TRANSPARENCY 

COMMENTATORS: 

Left to right back row: 

MICK CHADWICK, head of trading, securities finance, Morley Fund Management 

DAVID RULE, chief executive officer, International Securities Lending Association (ISLA) 

MARK FAULKNER, chief executive officer, Spitalfields Advisors 

CHRIS JAYNES, president, eSeclending 

Left to right front row: 

RICHARD STEELE, head of product development for securities lending, 

JPMorgan Worldwide Securities Services 

FRANCESCA CARNEVALE, Editor, FTSE Global Markets 

JOHN POOLE, chief operating officer - Europe, Mercer Investment Management 


Supported by: 

57

THE SECURITIES LENDING ROUNDTABLE 

58 

TRENDS TO WATCH 

CHRIS JAYNES, PRESIDENT, eSECLENDING: There is an 

increasing demand for lending in emerging market 

countries. It been a growing trend for a number of years 

and agent lenders are more actively looking at different 

ways to structure trades to gain access to these markets. As 

well, beneficial owners continue to unbundle securities 

lending from custody and utilise multiple providers and 

different routes to market to optimise their programmes. 

Institutions increasingly view lending as an investment 

decision and now use multiple providers across different 

parts of their lendable asset base. This allows the beneficial 

owner to choose the provider with the greatest expertise 

and ability to add value in each market, asset class or route 

to market and enables them to better benchmark 

performance against other providers. 

MARK FAULKNER, CHIEF EXECUTIVE OFFICER, 

SPITALFIELDS ADVISORS: The big trend? There are now 

fund managers who traditionally shunned securities 

lending and left it to be dealt with in a back office manner 

by back office people who are now borrowing securities for 

the first time. Not only 130/30 investment strategies, but 

also new regulations and deregulation have encouraged 

investment managers to recognise that borrowing 

securities and shorting them is actually good investment 

management practice and not just something that “evil 

people do”. A problem the industry faces is that it is still 

built upon the same operational foundations that it always 

has been. The good news is that some of these traditional 

fund managers will wake up to this fact and actually make 

things better and move securities lending closer to their 

front offices.That will happen when they realise how much 

money they have to pay to borrow securities, how much 

money they can make as lenders, how inefficient the 

market is, and how opaque the pricing is. This trend is 

welcome, forceful and positive. 

RICHARD STEELE, HEAD OF PRODUCT DEVELOPMENT 

FOR SECURITIES LENDING, JPMORGAN WORLDWIDE 

SECURITIES SERVICES: The market is definitely evolving. 

Until quite recently the industry was pretty segmented— 

some might say almost regimented. There were people 

who lent their own portfolios on a directed basis, and then 

there were agent lenders (typically custodians). We also see 

new third party providers coming in and offering more 

unbundled services. Traditional providers recognise this 

development and have responded accordingly by providing 

a much broader product range. At the same time, our more 

sophisticated clients now look to us to provide more 

flexible solutions than may have been the case before. In 

particular, traditional long only managers are looking to 

utilise their portfolios in different ways and asking service 

providers to accommodate that change. Faced with this 

unprecedented level of demand some providers find that 

their platforms may need to be overhauled, so they can 

provide the flexibility that clients require and it is 

interesting that prime brokers are looking at this space as 

well. 

DAVID RULE, CHIEF EXECUTIVE, ISLA: Big regulatory 

changes are underway. For example, the introduction of 

Basel II, with dealers in particular having to obtain more 

information from agent lenders about the underlying 

principals to their loans and the allocation of collateral 

among them. Mark has talked about securities lending 

moving towards being a front office activity and part of that 

is going to be more price transparency. We have already 

seen the growth of an interdealer market with the 

introduction of ICAP’s platform recently, which further 

encourages price transparency. 

JOHN POOLE CHIEF OPERATING OFFICER - EUROPE, 

MERCER INVESTMENT MANAGEMENT: UCITs III 

considerably increases the flexibility of what we can do in 

our core funds. We can now adopt shorting strategies, so 

the challenge for us is to find a cost effective way to 

implement 130/30 within a UCITs structure, which involve 

some additional regulatory restrictions. With our long only 

funds on the one side, and hedge type funds on the other, 

one of the things we want to do longer term is borrow 

securities from one of our long only funds and lend them 

to one of our long short funds. There are some huge 

compliance issues in that. Nonetheless, we want to cut out 

some of the people who would normally be in that kind of 

structure. Why should our long only funds lend to a third 

party only for our long short funds to borrow from them? 

The lending fund gets a lower return, and the borrowing 

fund pays a higher financing cost. We want to get rid of 

those costs to our funds. We need to find somebody to 

work with, to achieve this and ensure that we behave in a 

way that is fair to both funds. 

MICK CHADWICK, HEAD OF TRADING, SECURITIES 

FINANCE, MORLEY FUND MANAGEMENT: I echo John’s 

sentiment about the convergence between traditional long 

only fund management and the long/short space and that 

the compliance hurdles are significant. However, even if 

we cannot go so far as to disintermediate prime brokers 

altogether, the mere existence of both strategies under the 

same roof can at least keep the prime broker honest. I also 

strongly echo Mark’s sentiments. There has been a debate 

about where the product should actually sit. Is it an 

operations function? Alternatively, is it (to use fund 

management jargon) a potential source of alpha? We are 

now able to benchmark performance in a way that we 

were not able to five or ten years ago. Practitioners can 

now judge the performance of a programme in both 

absolute and relative terms. Moreover, as the industry 

becomes more competitive, securities lending becomes an 

increasingly important source of revenue. In the overall 

market, two trends dominate. In relatively mature, 

commoditised markets, where price discovery is less of an 


issue, anything that moves is being automated. It’s all 

about scale; it’s all about operational efficiency. Then, at 

the other end of the spectrum you have some of the 

emerging markets where traditionally, standard securities 

lending has not been possible, and there you see the 

development of synthetic products that allow participants 

to generate returns in those markets. This is where it helps 

to work under the same roof as the fund manager who 

ultimately controls those assets, since such structures will 

typically involve the outright purchase and sale of the 

underlying securities. 

FC: I get a sense of a market in transition and becoming 

increasingly complex. How is that affecting the provision of 

your services Richard? 

RS: As the custodian and lending agent to a very broad 

and diverse client base we have had to develop flexibility 

as well as scale in our business for many years now. That is 

something that we have become very adept at and, at the 

same time, we are in a constant dialogue with our clients 

about their requirements and what they are trying to 

achieve. There are now many different routes to market 

and we all know that lending can be very portable 

nowadays. Above all, you must remember that it is not 

over when you have been awarded the portfolio mandate. 

In fact, that is where the relationship really begins. Clearly 

then in the final analysis if we are in the business, and also 

growing our book at a significant rate, we must be doing 

something right. 

130/30 STRATEGIES & THEIR IMPACT 

MF: Recent headlines suggest that there is about $60bn in 

130/30 dedicated investment right now, which manifests 

itself at ratios of $18bn worth of shorts, which is a drop in 

a bucket frankly. Looking forward, we are talking about 

something that could be much more important. If there is 

a take-off along the lines of that in exchange traded funds 

(ETFs), 130/30 could become very important, very quickly. 

It is interesting to see that many of the funds and firms 

that are focusing on this strategy are the same funds and 

firms that made a success out of ETFs. They were right last 

time and maybe they will be right again. We think that 

they are backing this horse. Therefore, it could be much 

more significant than it currently is, but it isn’t all that 

significant yet. 

RS: This sort of thing requires a long lead time and people 

need to decide where they are going to start investing in 

the cycle. With some of the deals that are going around at 

the moment, questions come up such as: “Can you support 

discretionary lending? Can you support directed lending? 

Can you support it in a pooling environment? Can you 

support a long short type structure?” I am not sure that 

everyone can tick all those boxes yet, and that is where it 

starts to get very, very interesting. 


CHRIS JAYNES, president, eSeclending 

FC: Chris, do you think that eSecLending can tick all 

those boxes? 

CJ: Absolutely. Each client will need to evaluate the various 

options presented to them. Mark’s point is pertinent in that 

long short 130/30 portfolios are not a significant part of the 

market yet, but it still is an important component for 

clients. No matter how small a component these new 

strategies may be to any client’s overall asset base, it is the 

first time many have been borrowers of securities and there 

is a need for education on the legal, regulatory and 

operational issues involved. There is a concern about how 

to manage this process most efficiently and to make sure 

that they are being charged fair and reasonable fees. 

Whether you are managing $100m in shorts or $5bn you 

still need to be able to answer all these questions. All of the 

agents are working on solutions in different ways to help 

clients determine how they migrate from a long only 

manager to a long short manager and the trend is clearly 

going in that direction. I do not think any of us can predict 

how big it will ultimately become but the trend is clearly 

happening and I do not see it stopping any time soon. 

JP: Do we see 130/30 being adopted across the board, 

across all equity asset classes? Or, will it be market 

specific? I can’t see us going down the 130/30 route in the 

short term in every asset class, but we are seeing a definite 

change in attitude to this strategy. The impression I have is 

that it has already been adopted quite strongly in US 

equities, and other asset classes are now catching up. I’m 

not sure of all the reasons for this, but certainly the 

relaxation provided by UCITs III, especially now we can 

physically short, makes the operational aspects of 

implementing 130/30 far less of a barrier. Clearly UK and 

European equities are more important asset classes here, 

and the UCITs III changes are now making the 

implementation of strategies like this easier for us. 

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60 

MF: A number of issues 

come into play. What will 

be the investment path 

taken? Established markets 

first and then more 

emerging markets? It is 

likely to be the established 

markets first. Will 130/30 

follow the ETF model? 

Only now, for instance, are 

you seeing really esoteric 

emerging market ETFs. It 

must be remembered that 

shorting is not that easy. It 

is not as easy as just selling 

securities that you do not 

like. Take the S&P 500, the 

‘bottom” or most shorted 

10 securities are already 

over 60% utilised, trading 

at a massive premium in 

the securities lending 

market, difficult to borrow and keep short. Moreover, the 

role of your prime broker(s)—and/or your custodian(s) who 

are increasingly becoming competitors in this space—will 

be critical in getting sustainable access to securities, for the 

newer borrowers to base their strategies around. If, say, I 

ring up a major prime broker or custodian and I am a 

relatively new fund and I say that I would like some hard to 

borrow stock, they will more than likely say,“You know, you 

aren’t borrowing billions of dollars of general collateral 

(GC) securities from me. I cannot give it to you. I am going 

to give it to the guys that I have an historic, balance-driven 

relationship with.” It is going to be very difficult to break 

into those more obvious trades and those hard to borrow 

stocks if you are a relative newcomer. 

PRIME BROKERS & CUSTODIANS: A 

MERGING OF INTERESTS? 

FC: David how do you see this dynamic evolving? 

MARK FAULKNER, chief executive officer, Spitalfields Advisors 

DR: One of the differences between prime brokers and 

custodians is the leverage that they provide and that prime 

brokers lend against the assets. One reason why prime 

brokers have never been disintermediated by the 

custodians with hedge funds is because they would not 

take the credit risk. Actually, to be precise, they could not 

manage the credit risk in the way that the prime brokers 

can and whether they will be able to provide that kind of 

leverage to asset managers, I don’t know. That said some 

big hedge fund managers now are beginning to look more 

like traditional asset managers. 

MC: Prime brokerage has long been to the hedge fund 

industry what global custody has been to the long only side. 

With the blurring of the boundaries between the long only 

and long/short, inevitably 

there are going to be 

attempts by both the 

investment banks and the 

custodians to drive their 

tanks onto the other’s lawn 

and try to erode the other 

guy’s franchise. The market 

is sufficiently diversified 

that one cannot easily pick 

a winner.There are going to 

be funds and strategies for 

which the custodian is the 

natural provider. 

Conversely, the prime 

broker will be best placed to 

provide the relevant service 

for other funds, other 

strategies. The beauty from 

a beneficial owner’s 

perspective is that there’ll 

be choice. Greater 

transparency will facilitate the unbundling of these various 

products and services, and you don’t have to put all your eggs 

in one basket.You can do certain activities with one provider 

and others with another. 

FC: Chris is there is room for everybody? 

CJ: There will always be room for providers who can add 

value. It is a huge market that is controlled by a small 

number of significant players so there is absolutely room 

for providers offering a differentiated product or a new 

approach. Increasingly though, with the shift that Mark 

talked about earlier regarding the move from a back office 

to a front office function, there will be different 

expectations placed upon providers and there will be an 

increased demand for performance measurement and 

other data that did not exist a few years ago. As Beneficial 

Owners continue to un-bundle securities lending they are 

demanding a higher service level and specialized 

capabilities, based on each provider’s specific competencies 

and expertise. It does not need to be a one-stop shop or 

one size fits all approach like it was year’s ago. 

RS: We have very good relationships with the prime 

brokers. However, I can’t see them ever wanting to get into 

the core custody space, because it is not going to be 

remunerative enough. You have to be able to offer both 

scale and customisation at the same time, and on a very 

cost effective basis. However, they are going to try to 

cherry-pick the best relationships if they can. 

Fundamentally, custodians and prime brokers have 

radically different business models and so as you have seen 

convergence, arguably between hedge funds and long only 

managers, it is interesting to understand where the 

interface is going to be between the different providers. 


MF: That’s a good point. I predict, though, that within a year 

we will see a major acquisition or transaction in the financial 

markets along the lines of custodian and broker dealer 

getting together. Moreover, one of the primary reasons cited 

behind the transaction will be to do with financing and 

servicing the growing section of the investment management 

community that go long and short. There will be headline 

announcements and some of the words in those headlines 

will be will be ‘long/short’, ‘prime brokerage’ and ‘global 

custody’. Like Richard says, prime brokers are reluctant 

custodians and very few dominant custodians if any of them, 

have a prime brokerage capability or prime broking 

operations worth talking about. The capabilities shouldn’t be 

mutually exclusive but in practice they seem to be. However, 

some of the custodians do have the capital to service this 

growing segment of the market, so there is an opportunity 

there for somebody to actually go out and do some financial 

re-engineering on a massive scale. The timing is now right. 

Prices are more realistic and the profile of the financing 

business has increased. Fortune favours the brave. 

MC: That will raise some interesting questions. I don’t 

dispute any of that logic; but at the risk of playing devil’s 

advocate, you already have institutions such as JPMorgan 

and Citibank who in theory could do precisely that 

already—offer both sides of the service under the same roof. 

However, whether the issues are cultural, operational or 

compliance, there hasn’t been much convergence to date. 

DR: They will also have an issue about how they offer best 

execution to both sets of customers. To a pension fund who 

wants to make sure that its securities are being lent to the 

best deal in the market and to the hedge fund who wants to 

make sure that it is getting its securities on the best terms. 

FAIR & TRANSPARENT PRICING 

JP: Basically we disintermediate relationships over which 

we have no control and limit ourselves to dealing with a 

party we have appointed allowing us better control over 

programme costs and greater transparency of information. 

I have an issue. I actually think that custodians are 

conflicted already and I don’t think they actually know who 

is really their client in their securities lending programmes. 

I suspect they make way, way more money from their big 

broker dealer relationships in terms of the cash balances 

that they maintain with them than they do from me, and so 

I have never felt comfortable with the idea that we get a 

disinterested service from the custodians. 

RS: I don’t think you will necessarily get a completely 

disinterested service from any service provider. However, 

custodians sign agreements with their clients who they 

represent as agents and they will get the best deal they 

possibly can on the terms that are agreed, which include 

your investment guidelines and any other risk/reward 

parameters that you choose to adopt. 


MF: The problem that custodians often face is that they 

have clients that want to lend that quite frankly should not 

be lending and all too often an overhang of easy to borrow 

securities in their lending pools. They don’t say “no” as 

easily as they should. The lending departments are very 

accommodating of their custody colleagues, because 

lending offsets the expense of custody for their clients. This 

has fuelled the third party lending business as they can 

afford to be more discerning in the selection of their clients 

and the securities that enter their lending pools. 

RS: Actually, we do manage the book much more 

rigorously than that and do turn away business that is not 

profitable. Sometimes it seems as if people are happy to 

take the aggregation benefits of using a custodian when it 

comes to all the products and services, but expect the 

custodian to invest the same amount in the supporting 

infrastructure when they want to cherry-pick the bits of 

business that make the most revenue. 

MC: To be honest you pass on those costs to your clients. The 

cost of settling a trade in CREST is what? 50 pence? The 

volume discounts available to custodians mean that it’s even 

lower than that. Meanwhile, many fund managers get charged 

between £10 and £15 a ticket. Now obviously there are fixed 

costs to cover, but custody is an inherently good business in 

which to be.The barriers to entry for any potential new entrant 

are huge, so effectively what you have is an established cartel, 

for want of a better word. If greater transparency facilitates 

unbundling and the potential for ‘cherry-picking’as you call it, 

perhaps the way forward is for custodians to charge a sensible 

price for each component of the service they provide, rather 

than one product effectively subsidising another within the 

current ‘bundled’service offering. 

MF:There has to be a catalyst for unbundling.You are absolutely 

right, something has to happen and what is happening is that 

fund managers are effectively popping up on both sides of the 

debate right now that they are both long and short—add in the 

hedge funds who are long and short as well and you have a 

heady mix. So the catalyst is people actually recognising the 

significance of this business, which is a good start. But then, 

what happens next to encourage change? Regulators, possibly, 

have a significant role to play because industries typically 

change slowly unless they are forced to. There may well be 

regulatory change forthcoming that will drive this business to 

take steps regarding transparency and best execution that this 

industry would not necessarily volunteer for. 

MC: Anyone who is making a living as an intermediary is 

hardly incentivised to promote greater transparency and greater 

efficiency. It has to come either from one end of the chain or 

the other, or it has to be imposed by regulation. The way to 

ameliorate any potential compliance issue is via the mechanism 

of price. There should be a transparent price for a product, or a 

transaction, or a service.This industry, despite the best efforts of 

guys such as Mark, is still bedevilled by its relative opaqueness. 

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62 

DEFINING BEST EXECUTION 

DR: In general terms, my understanding is that for agent 

lenders, best execution mean looking to get the best deal 

for customers, having policies setting out how you do that 

and being transparent with customers. Most people have 

behaved that way and we have a well regulated and fair 

industry in that respect in any case. 

MF: And shame on the industry for lobbying as they did 

and getting off the hook on this one. 

DR: I do not think that they did get off the hook, because 

I don’t think there was a hook in the first place 

MF: But there is no obligation to provide best execution. 

There was discussion as to whether it would be relevant 

and extended into the world of securities lending and the 

industry got together and wrote a letter, which quite 

frankly shocked me in terms of its contents and got off the 

hook. So, typical clients who spend very little time thinking 

about securities lending, would reasonably expect to be 

protected by MiFiD and best execution and they aren’t. 

DR: They will be actually, because many agent lenders are 

concluding that they actually do have to offer best execution 

to their clients, because they are going to be treated as 

professionals and depending on your interpretation of the 

runes from the European Commission, securities lending 

may or may not be—and some people are concluding that 

it is—an execution of client orders 

MF: That would be very welcome. I am heartened to here 

that, the clients will be too and that will be a winning 

strategic decision. 

DR: The question is what does best execution amount to? 

What it doesn’t amount to is that you have to execute at 

this market price, which is on a ticker tape, because that 

does not exist in securities lending and securities lending 

transactions are not as simple as equities sales. There are 

different dimensions to the transaction, and therefore 

acting in the client’s interest does not necessarily mean 

dealing at one particular price—it also depends on the 

client’s collateral needs and tax status, etc. So what the best 

execution will amount to is in effect having a policy that 

says to the customer that we will act in your best interests. 

RS: The debate has actually moved on. Looking at the latest 

guidance provided by the FSA and the response of the 

European Commission to CESR, a client will always need to 

be properly protected whether retail, professional or eligible 

counterparty. Every lending provider has to look at this in 

the context of the firm’s overall approach to best execution 

and JPMorgan has written a best execution policy which 

outlines very clearly how we would operate on behalf of our 

clients to obtain the best possible outcome. The challenge is 

that securities lending is not a business that fits very neatly 

into a trade by trade disclosure regime and people arguing 

for that are potentially going to do the industry a disservice 

by leveraging a huge cost base on it, which frankly it is not 

in a position to support at the moment. 

CJ: I would come back to the issue raised earlier about 

pricing and so called cherry-picking. It is a strange concept 

in this industry where some view that there is something 

bad about a beneficial owner choosing to take their assets 

and lend through a different route or a different provider. 

They feel that it is somehow unfair to a custody provider 

who now only has to charge transaction fees for supporting 

the custody function of lending. Securities lending is not an 

entitlement of custody providers so their pricing should just 

be set according to what service they provide. The industry 

should stop utilizing opaque pricing structures where the 

clients do not know how much they are actually paying for 

the different services being provided. These bundled 

arrangements prevent beneficial owners from evaluating all 

options and making proper informed decisions. 

JP: Until recently, I had never seen an RFP response from a 

custodian that did not include the condition that this 

pricing structure is conditional on them getting more 

securities lending. 

MC: When I asked this question of a custodian in a similar 

forum earlier this year, they told me that increasingly they 

were being asked to strip that out and quote separately for 

securities lending and ‘core’ custody. Because of the rise of 

third party lending agents, auction platforms, alternative 

routes to market, there is a desire on behalf of the ultimate 

customer to see that transparency and the custodians 

simply do not have a choice here. 

JP: That is very true but they used to just ignore it. In RFP 

exercises before I joined Mercer, we were absolutely 

explicit. The actual phrase used was: “You should assume 

that you will get none of our lending business”. We still got 

fee quotes that assumed a level of lending income. Then, 

there was then surprise when we lent the most lucrative 

asset classes through a third party. 

MF: I am asking for some adoption of standards that apply 

across the industry, not more information that is part of this 

kind of gentle obfuscation of pricing and information and 

bundling together of everything. Those days should be and 

are slowly going away, but this is just is just another subtle 

example of just more obfuscation. 

RS: Many of us use independent data providers to report to 

our clients on their programme performance. However 

most clients do not want to be called every day, preferring 

to look at it over a period of time and my second point is: 

what would the benchmark be, and could it have been 

implemented effectively in time? 


MF: No idea. It would not have been beyond the wit of 

this industry to meet this challenge head on rather than 

duck it. That is a hypothetical question really and one for 

about 18 months ago and not for today. What I am 

responding to is a call for clarity from a client of the global 

custody industry; a client of the securities lending 

industry. When they asked for clarity of pricing they were 

ignored—so they took their valuable assets away and 

their provider got upset. That seems like a logical 

response by the client to an illogical act by the provider to 

me. It seems almost deliberate the way that some 

providers ignore the clients’requests for information. This 

is not a recipe for long term success. 

BUNDLING & UNBUNDLING 

CJ: I’d like to dispute the notion that something was taken 

away. The provider should not feel entitled to a client’s 

business, so nothing was taken away from them. Rather, 

the beneficial owner just chose a different provider to 

perform a specific service. No one has the entitlement to 

be a client’s sole provider so it should not be seen or 

accepted as a takeaway if a Beneficial Owner decides to 

transfer a portion of their business to another firm who 

they feel can add value 

JP: One of the problems with custodians, is that they have 

not got their heads around the fact that lenders became 

better educated and more knowledgeable. If you go back 

15 years, the choice of a custodian was an obvious 

solution because nobody on the lending side, or few 

people on the lending side really understood the risks and 

the rewards and the nature of securities lending. As you 

become more knowledgeable, you become more 

sophisticated and better able to choose the best provider, 

which goes back to what Chris was saying earlier, 

different asset classes, different structures lend 

themselves to different ways of accessing the best 

risk/reward trade off. It is not always the custodian, and 

the problem today is that the custodian sometimes seems 

to think that it is almost theirs by right and it isn’t. 

MC: In defence of the custodian, there will always be a role for the 

custodian. The overwhelming volume of assets that are made 

available to the Street are in fairly fiddly, administratively and 

operationally intensive clumps,and the custodians should be given 

credit for mobilising those assets. They are and will remain a 

permanent feature in the landscape; no-one is trying to 

disintermediate them out of existence. From our perspective, there 

are certain markets and asset classes where we don’t think we add 

any value for the client, so we let the custodian do the lending. On 

the other hand, there are markets where we do have the scale and 

the expertise, the revenue potential is there, so we handle the 

lending ourselves.Then there are other portfolios that maybe lend 

themselves to auctions or exclusives. There is enough money on 

the table in this product for various different types of provider to 

make a living. 


RICHARD STEELE, head of product development for securities 

lending, JPMorgan Worldwide Securities Services 

JP: A handful of basis points can make a huge difference 

to how performance is perceived and therefore it is almost 

an obligation on us, to certainly give the service that we 

sell and claim to be providing to our clients. We don’t just 

claim to find the best managers to deliver alpha. We also 

claim that, we are offering more challenging of service 

providers generally. This includes indentifying better 

ways of delivering peripheral returns on things like 

securities lending 

CJ: Another important development that has helped facilitate 

more choice in providers is technology and the improvements 

in communications and settlement platforms. It was more 

difficult to operate in a third party environment ten years ago 

than it is today. Some of the inherent advantages that 

custodians had when it was more difficult to transact outside 

of a custody framework have now disappeared due to these 

technological advancements. It is now an efficient process for 

everyone, regardless of where they are located. 

MC: Custodians have historically relied on client inertia, 

because it was always incredibly difficult and complicated 

to switch providers. That said, just as in UK retail financial 

services, people can now switch providers in a way that 

they never used to be able to. To be fair, that has forced the 

custodians to raise their game. I can remember years ago, a 

custodian pooh-poohing the concept of third party 

lending, saying it was never going to fly. Nowadays 

custodians not only accept the existence of third party 

lenders, but they are also establishing third party lending 

programmes themselves. 

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64 

DAVID RULE, chief executive officer, International Securities Lending 

Association (ISLA) 

COPING WITH MARKET VOLATILITY 

FC: How does current market volatility play out? Does it 

favour custodians or third party lenders? 

RS: One of the things that helps players better differentiate 

themselves is: did their performance track the rising market 

or did they actually outperform it? This is where more 

transparency of data can help. When it comes to the more 

volatile markets we are seeing at the moment, it’s really time 

to revisit your lending programme parameters such as cash 

investment guidelines to determine that they are appropriate 

given the concerns we are seeing. In this sense you have to 

step back and say that although people may be looking for 

alpha, they are not willing to risk their portfolio in a market 

like this and are looking now to manage risks accordingly. 

CJ: Many beneficial owners have under taken reviews of 

their programs in response to recent market events and are 

evaluating their approach and reviewing the risks and 

returns within their program. Some beneficial owners have 

made changes to certain parameters or guidelines where 

appropriate, while others have reaffirmed their existing 

structures. This is not unique to custodians, third parties or 

direct exclusives. It’s a client issue related to their specific 

goals, return expectations and risk profile. 

MC: As the old saying goes, return of your capital is more 

important than return on your capital. I suspect that what 

is happening in the market at the moment will probably be, 

in the medium to long term, healthy for the industry. The 

closest thing most people can remember that compares to 

this in recent times is probably Long Term Capital 

Management, back in 1998. That whole episode spurred the 

development and improvement of collateral management 

in terms of its robustness, pricing methodology etc. It is only 

in times of crisis that any flaws or weaknesses in the system 

become apparent. It is too soon to say whether we will see 

any in our little subset of the overall market universe. The 

area of the securities finance industry that is probably most 

exposed to a potential credit loss is the cash reinvestment 

business, run predominantly by the US global custodian 

agency lending programmes. Over the course of the history 

of this industry, any credit losses have been on the cash 

reinvestment side rather than on the actual lending side of 

the business. We do have some cash reinvestment business 

but ours is all fully collateralised and pretty low risk. 

MF: The key questions that Mick partially addressed there 

was, “How much of my lending revenue actually comes 

from lending? How much of my lending revenue comes 

from cash reinvestment? And these are going to be the 

questions that people are going to be focusing on, if they 

aren’t already doing so, now and in the coming weeks. 

There are lots of different ways to make money from cash 

reinvestment, as we know. Invariably, the strategies 

employed by certain re-investors of cash will come under 

scrutiny and the clients will ask themselves and their 

providers,“was that a good strategy or a bad one for me the 

client who is at risk?” I don’t think for one minute that 

anybody engaged in securities lending has deliberately 

breached client guidelines. Everybody in securities lending 

knows that they cannot do that. Nonetheless, there are 

providers who, if you ask them, will say: “We always 

operate well within or right in the centre of our clients’ 

guidelines. We actually do take less risk than our clients 

would allow us to take on their behalf because we have got 

tremendous understanding of the money markets and 

strong internal controls. ”I believe many of them when they 

say that. However, they also privately allude to there being 

providers that are out there trading on the edge of client 

guidelines a little bit and we may find that those might have 

some issues. This could be sour grapes at losing business to 

high income projections from competitors—but if it isn’t the 

clients, the market will find out very soon. In the Financial 

Times recently, Deutsche Bank said something of vital 

relevance. It had to do with confidence and banking and 

noted that crucial questions in the next days and weeks 

include “How do you mark your positions to market? What 

price are you putting on the securities that you have 

invested in?”It is a question that investors want answered 

by their cash reinvestment providers and I would really 

encourage anyone who is a lender who takes cash as 

collateral, to consider asking them now. Some will take 

great comfort from the responses – others may not. 

FC: What role can ISLA play in encouraging that dialogue? 

DR: One of the things that ISLA has been doing is 

developing operational best practice guidelines, including 


interestingly on mark to market. ISLA has facilitated it but 

it is really market practitioners who are doing it. 

Developing standards for how the operations of the 

industry work is important and part and parcel of that is 

greater automation of processes. 

MF: Does that mark to market best practice extend beyond 

the lent securities and the price at which they are marked?. 

Does it follow through and actually address the mark to 

market of the instruments purchased via the cash 

reinvestment? 

DR: It does not really focus on cash reinvestment. It is 

more about what price sources people would use for 

marking to market securities. 

MF: I think it would really be helpful to take that best 

practice one step further so that clients can ask “how is the 

traded and OTC inventory that I own in my reinvestment 

portfolio marked to market?” That is where their risk 

associated with lending is greatest. But it is important to 

note that we are not talking about those kinds of hard to 

price OTC instruments being a large component of a 

typical securities lending collateral portfolio. That type of 

reinvestment trading is a very different type of activity and 

it is important that readers of a stock lending article do not 

think that it is typical for there to be assets in a securities 

lending collateral pool that might be unpriceable. If there 

are any concerns they should liaise with their provider and 

review their positions. 

CJ: Having ample short term liquidity within collateral 

portfolios was critical in July and August to avoid any 

unnecessary sales of securities into a difficult market. With 

few buyers for many short term products during this time 

the normal liquidity in the market froze up. This happened 

broadly in the market across asset classes unrelated to sub 

prime so collateral managers managed through the period 

by keeping sufficient overnight cash to meet any 

redemption needs. 

MC: For the lion’s share of European lending 

programmes, non-cash collateral is the norm, so you 

don’t have the outright unsecured exposure to credit 

product that goes with most cash reinvestment 

programmes.Your primary risk is your counterparty credit 

exposure. If it is a well managed programme, you are only 

dealing with reputable, creditworthy entities. Everything 

is done under industry standard documentation, with 

exposure marked to market daily. If you are prudent in 

your collateral criteria, and you have a sufficiently sensible 

policy on haircuts and over-collateralisation, the quantum 

of risk in a securities lending programme is actually very 

small. That cannot be over-stated. 

MF: I can tell you that we regularly review about $1trn worth 

of cash reinvestment and non-cash collateral. We see risk. 


MC: I am not saying there is zero risk. We are a direct 

lender, in a sense that we are part of the Aviva Group, but 

it is an agency model. Our clients are predominantly the 

group life and pensions companies. We do VaR analysis for 

these clients in our programme- funnily enough, we use 

some of the tools that Mark sells. The problem is that the 

numbers look almost too good to be true. You have gross 

outstandings in a programme of tens of billions and then, 

because everything is done with creditworthy 

counterparties, fully collateralised and marked to market 

daily, you end up with a VaR figure that is maybe in the low 

millions. Some clients have raised a sceptical eyebrow. Is 

that your experience as well? 

DR: It is a real strength of the industry that risks are 

managed well and kept low. Fair enough lenders are 

looking again at their collateral guidelines and they should 

do that. But heaven help us that they don’t panic because 

they do not need to and if they did you would see how 

important securities lending is to the liquidity of the capital 

markets. In the sterling money markets for instance we’ve 

seen a flight from unsecured to secured, and the repo 

market would not work without the securities lending 

market because banks don’t own gilts any more, they 

borrow them all. And that is just one corner. Equity 

markets, bond markets, credit markets, they all rely at the 

end of the day on securities borrowing, because the people 

that own the securities are the institutions and it really is 

vital that they continue to lend and there is no sign, so far 

that I can see, that they have stopped. One other point I 

would like to make is on people now talking of lending as 

a form of alpha. That is not particularly healthy, because 

alpha is about excess returns from skill in investing. There 

can be an element of that with securities lending but it does 

not account for the bulk of the lending income. Part of 

lending is the market return, that you are missing out on if 

you do not lend, and part of the return is from taking credit 

risk and leverage, which is what you do with the cash 

reinvestment. Telling investors that they are getting alpha 

is misleading frankly. 

MC: I dispute the assertion that there is not a component 

of alpha in the equation, particularly in the current 

environment.There has been a flight to quality where there 

is a premium on government bond collateral, and we have 

been able to make considerable additional revenue. 

Liquidity, whether it is in the form of cash or government 

bonds, which until recently was cheap and plentiful has 

suddenly become scarce and expensive. Because we like to 

think we know what we are doing, we’ve been able to 

capture that value in the additional returns we have been 

able to generate in our programme. I am not sure of the 

extent to which that has occurred elsewhere. Mark can 

confirm that between similar lending programmes, with 

similar collateral profiles and similar mandates, there is 

considerable variance in the performance of those 

programmes. The fact is that some firms are better than 

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66 

others at extracting value from this product- I’d call that 

Alpha. It is not just about what your collateral mandate is 

and what the size and composition of your portfolio is. It 

is also about the expertise and capability of the people 

doing the business. 

MF: Broadly, to go back to the point about the collateralised 

nature of the markets, right now most people’s fixed income 

business is going like gangbusters. To put some numbers 

around this, there is $3trn to $4trn a day being generated as 

cash collateral (mainly in the US dollar) looking for a home. 

Typically some of it is out there on the yield curve, some of it 

is nearer the front end. Today, it is nearly all at the front end. 

One of the biggest challenges for the re-investors of such 

large pools of cash is finding a home for the money on a daily 

basis. The supply of commercial paper has dried up and the 

risk appetite of the re-investment agents and their 

underlying principal clients has dramatically reduced. The 

scale of this daily activity and its importance to the global 

money markets is quite stunning. The sub prime crisis is very 

different than say the LTCM crisis. This time, things are 

different because the risk has effectively been syndicated 

through hundreds of hedge funds, funds and broker dealers. 

In the LTCM crisis the risk was concentrated in the hands of 

about ten to 12 significant known counterparts. People do 

not know who owns the risk positions today and it is only 

going to be as we go through the results season that we will 

begin to see where the damage lies. However, the importance 

of the securities lending markets to the cash markets is 

enormous. Without it, it is almost difficult to see how they 

would efficiently function.This is the time when the old stock 

lending cliché “that it is the liquidity that helps the global 

machine of capitalism function”comes to the fore. It happens 

to be true. It is the oil that keeps the machine going. 

RS: With quarter end coming up as well that will exercise 

everybody’s minds. 

FC: Is the securities lending industry very skittish then? 

JP: Unfortunately only a few people really understand all 

the reasons why people borrow securities and most 

borrowing is perceived as being done by a bunch of guys 

who want to take a punt on Stock A going down 20% in 

the next month, so what we don’t want to see is a blow up 

which causes lending to be at the forefront of the client’s 

mind, when really they ought to have other things to 

challenge them than our lending programme. 

THE USE & ABUSE OF VOTING RIGHTS 

DR: There is a risk to the industry of unintended 

consequences if regulators intervene to try to prevent 

borrowing to vote. It is important that the industry presents 

its case well to prevent that, but also that the industry 

keeps its own house in order so that we don’t get abuses of 

people borrowing securities in order to vote. I do think 

though that this whole issue is going to get more 

complicated with the introduction of long: short funds 

alongside long-only funds in fund management houses. 

And what we talked about earlier of an index fund lending 

to another fund in the group that has a short position, who 

decides how they vote? It is quite tricky and it is not 

primarily a stock lending issue. Rather it is an inherent 

issue of shorting becoming a more normal part of 

investment management, which effectively separates out 

the two functions of taking a position in a share and 

owning a company. People are going to have to wrestle 

with how those things are combined. 

FC: What role is ISLA playing in encouraging good practice? 

DR: ISLA can only go so far. I don’t think that ISLA can set 

standards for how fund management houses should 

manage themselves. 

MC: A lot of equity borrowing is driven by dividend trading 

strategies, and that confuses the issue from a corporate 

governance perspective when you have a dividend and a 

vote happening at the same time. 

MF: It makes the charts look very spiky. 

MC: Is there not merit in maybe decoupling those two and 

having the dividends paid at a different time in the 

calendar from the votes? Wouldn’t that make it easier to 

spot voting or other corporate governance abuses? 

DR: Yes, and we have said that that is more desirable. But 

that is really down to the individual companies and again 

it may not be at the top of their list of priorities. 

MF: A contentious vote is obviously also a trading or arbitrage 

opportunity for a trader. A vote for something that is 

contentious is most likely to take the company in one direction 

or another – positive or negative.That is a good opportunity for 

a trader to take a position - be it long or short. So again, if it 

really is a hot issue, you may get a lot of borrowing around that 

time, not to actually secure a cheap vote, but to actually take 

advantage of a market trading opportunity to the short side. 

So it is very unfair of people that look at corporate governance 

in a vacuum to say,“Another big spike around a vote! Surely, 

another abuse of lending” These people would do well to 

remember that there are dividends and there is legitimate 

trading and the facts simply do not support the fiction on the 

alleged charges in corporate governance. One of the best 

industry responses to this wrong-headed attack is the detailed 

data based research that ISLA and the London Business 

School Hedge Fund Studies Group are doing with Data 

Explorers. The objective is to get some independent research 

concluded and facts established. To date the debate has been 

hijacked by people who do not understand securities lending 

and want to sensationalise it for their own benefit. I believe 

that the facts will set the record straight. 


DR: It remains true nonetheless that there are very few 

empirical cases that you can show. However, it may only 

take one high profile one to bring the politicians down on 

this industry like a ton of bricks and what I have been 

saying to everyone, is: “Do not be tempted to facilitate this 

type of trade.” 

JP: There are some commercial reasons why this wouldn’t 

happen. Our target market, for instance, is pension 

schemes and their sponsoring companies and many of 

these will be quoted PLCs . We would not want to see 

anybody borrowing our stock effectively for no other 

reason than to vote against the management of the 

companies who are one step removed from our clients. 

There have been examples recently, where hedge funds 

have taken what are really very small positions for a short 

time simply to facilitate challenging incumbent 

management, and it isn’t clear they have any long-term 

interest in the companies involved. We simply would not 

want to facilitate that. Long-term shareholders 

challenging incumbent management is one thing, but we 

do not see short-term stock borrowing as an appropriate 

way to do so. 

MC: If you feel that badly about it you simply recall the 

stock. There is no inherent contradiction between good 

corporate governance and securities lending. What you 

need is a clearly articulated and understood policy on the 

subject, plus a good working relationship between the 

respective areas. Sorry for mentioning this again but there 

is an advantage to having securities lending run out of the 

fund manager, because we are just 20 yards away from our 

corporate governance people. 

JP: Just a quickie on spikes close to contentious votes. That 

suggests a lack of responsibility. In our programme, we say 

we reserve the right to recall stock when there are 

contentious votes and I can imagine scenarios where we 

will exercise that right. We regard voting as part of our 

stewardship of our clients’ assets. If there is a contentious 

vote, we should be voting. We have a fiduciary 

responsibility to our clients. 

FC: A naive question. Does no one ask why some firms 

want to borrow particular stock at crucial times? 

MF: Typically borrowing motivation is not questioned by the 

lenders – be they principal or agents. It is the difference 

between an agency relationship were you have a fiduciary 

responsibility to protect someone and a principal relationship 

where motive is not necessarily questioned and therefore 

cannot necessarily be understood. There are many reasons to 

borrow a specific security at any given time and it would be 

imprudent and inappropriate to assume what the motive was. 

In the principal world caveat emptor applies and it does not in 

the agency or fiduciary world. Couple that with the adage that 

no borrower likes a smart lender and there you have it. 


JOHN POOLE, chief operating officer - Europe, Mercer Investment 

Management 

MC: Actually, we are frequently lending it to an investment 

bank who is lending it on to someone else in any case. It 

may therefore be impossible for a lender to determine who 

is ultimately trying to borrow stock and why. 

DR: Prime brokers may be able to police it in a limited 

sense, but even they can’t fully control it, because a firm 

may use multiple prime brokers and in any case they are 

not running the hedge funds. 

RS: This was discussed some years ago by the UK Takeover 

Panel. They were reviewing whether there was a 

requirement for every stock lending transaction in an 

offeree company to be disclosed to them during a takeover 

situation, and after taking soundings in the industry they 

concluded that because all offeree and offeror positions 

were already being disclosed there was no requirement to 

extend the reporting to all transactions. 

CONCLUDING REMARKS 

FC: Either from a regulatory standpoint, or a market 

standpoint, what should people be looking out for? 

RS: We are seeing the final confluence of a range of 

regulatory issues that the industry has been getting to grips 

with, in particular in the European space. MiFiD comes into 

force in November and will continue to occupy the industry 

in the coming months. Basel II is coming in January next year 

and that speaks to the European agent lender disclosure 

issue that people are also engaged with at the moment. The 

industry is coping with a lot of things that have hit at the 

same time and it is difficult to keep all these things in check, 

but from what I have seen from JPMorgan’s perspective and 

having been on the ISLA board, we are certainly bringing 

things to a satisfactory conclusion. From a market 

standpoint, the industry will continue to see more of the 

same, but also some transformation, particularly in the 

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68 

130/30 space with more 

active participation of the 

front office in what has 

been a largely back office 

business for many clients. 

Those are the things to 

look out for next year. 

CJ: There is certainly more 

scrutiny from a regulatory 

perspective. In the coming 

months we will see more 

on MiFiD and best 

execution and Beneficial 

Owners are expecting more 

transparency in their 

programs. From a client 

perspective, more 

beneficial owners want to 

see where returns are being 

generated from, what risks 

they are taking to generate 

returns, and want to ensure that earnings are being allocated 

appropriately and not subsidising other accounts. 

MICK CHADWICK, head of trading, securities finance, Morley Fund 

Management 

JP: For us the next 12 to 18 months, the important areas will 

be assistance in helping us come up with products that 

allow us to take full advantage of the new UCITs III 

freedoms, in particular allowing us to find efficient ways of 

financing short trading. In the very short term what we 

don’t want to see is for one result of the current liquidity 

crisis to be a blow up in someone’s lending programme, 

especially on the reinvestment side, which causes fear 

across the lending industry generally. Lending really is 

relatively safe. 

DR: I agree with some of that and certainly one of the 

things I want to do with ISLA is to make people outside 

the industry understand the importance of the industry to 

the capital markets, because I don’t think it is widely 

understood by regulators, central bankers, chief 

executives, and so on. The risk to the industry is that for 

most beneficial owners stock lending is no 59 in their list 

of things that they care about. Nonetheless, the 

importance of well-functioning stock lending markets to 

wider market liquidity has grown significantly over the 

last decade? in particular with the growth of the 

derivatives markets, the expansion of hedge funds and 

the changes in banks’ balance sheets. The stock lending 

industry has come out of the recent market turbulence 

with a good story to tell. Lending volumes actually grew 

and that helped to sustain liquidity in the repo markets 

and the cash bond and equity markets. More narrowly on 

what regulation is coming up in Europe, Basel II is going 

to be a big change, particularly for the dealers, in the way 

that they are going to have to calculate their capital on 

stock loans, they will have to get granular information on 

their exposure to each 

underlying principal from 

the agent lenders and they 

will have to credit assess 

all those principals. ISLA 

will be doing work to 

facilitate that disclosure 

from the agent lenders and 

we will be planning a 

survey of the industry in 

the next few weeks. 

MF: Eighty percent of the 

revenue in this industry 

comes from emerged 

markets and that the bulk 

of the energy of the 

industry will be consumed 

in making those markets 

more efficient and to grow 

those and get more 

supply. Battle lines are 

increasingly drawn between the prime brokers and the 

custodians who want to be prime brokers and this will 

be interesting to see play out, and the extent to which 

they park tanks on each other’s lawns. I actually think 

performance attribution will be the next big thing. Much 

like they choose an asset manager, beneficial owners will 

ask “How do you do it?” and everyone will have to 

articulate where the money comes from. The buzz is 

about optimisation, not maximisation. I also think this 

mark to market issue is huge, and Richard mentioned 

quarter end. It will be an interesting end of the year, but 

I do predict that there will be a major M&A event next 

year in the banking world that at its core will have 

finance as its logic. 

MC: In terms of the growth and development of the industry, 

it may sound prosaic but I see more of the same. In mature 

markets there will be increased volume accompanied by the 

automation necessary to handle that volume. Across all 

markets I see increasing convergence between synthetic and 

traditional lending, given that they are driven by the same 

goal. As far as the overall industry landscape is concerned, 

within the fund management sector there will be an 

increasing recognition that securities finance is very much a 

front office discipline. My own background is on the sell 

side. Back when I started there, securities finance was 

regarded as a quasi back office function. Now, securities 

finance and prime brokerage sits at the heart of an 

investment bank’s dealing operation. For most fund 

managers it will never be as core as that- unless a fund needs 

to use leverage, securities finance will remain a ‘bolt-on’yield 

enhancement strategy. However, given the competitiveness 

of the industry, the revenue contribution from this activity 

will become ever more important, and it will attract 

appropriate management time and attention as a result. 


So far, automation has helped back offices stay one step ahead of 

the game. They have moved away from processing every trade 

toward handling exceptions, but that function isn't scalable. If it 

takes 50 people in a dealer's back office to sort out 20% of 

today's trades it will take twice as many when volume doubles – 

and qualified staff are hard to find. At some point, the industry 

has to tackle the error rate, through either greater reliance on 

affirmation or electronic trading. Photograph supplied by 

Istockphotos.com, October 2007. 


Efforts to automate trade processing have come 

a long way since regulators leaned on the 

industry to cut the volume of outstanding 

confirms on credit default swaps two years ago. 

Yet despite the enormous information 

technology investment already made, the 

summer surge in trading revealed that more is 

needed to handle the market’s continuing 

exponential growth. Neil O’Hara reports. 

THE MOVE TO 

AUTOMATION 

LIKE THE BATTLE of Waterloo, this summer’s turmoil 

was a near-run thing for the over the counter (OTC) 

derivatives market. “If what happened in July and 

August had happened a year ago or two ago the 

consequences could have been catastrophic,” says John 

LaVecchia, director of US credit markets at the Jersey City, 

New Jersey office of TradeWeb, an electronic trading 

platform for fixed income derivatives. 

Although derivatives dealers declined to comment, 

market participants say back office staff had to burn the 

midnight oil and work weekends to keep up when volume 

exploded. It is not unusual for dealers’ staff to handle 

fluctuations around the average transaction flow during 

normal business hours; not two or three times that 

amount. Nevertheless, some firms found their operations 

side was not as scalable as they anticipated, according to 

Mark Beeston, president of T-Zero, a London-based 

electronic affirmation service. 

The immediate crunch was in booking trades and 

executing documents, but the whole operations function 

was swamped.“You cannot borrow bodies out of your other 

areas,”Beeston says,“At the time you need those resources 

they are exceptionally busy doing their own thing.” Error 

rates tend to rise when people are working under stress, 

too, which makes the processing backlog worse. 

Markit’s Quarterly Metrics Report for June 2007 shows a 

rapid increase in electronic trading and a steady decline in 

non-electronic trading of credit derivatives over the past 

AUTOMATING OTC DERIVATIVES 

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70 

Henry Hunter, chief marketing office for SwapsWire in London, an 

electronic processing platform for OTC derivatives, says the low level 

of automation in interest rate swaps reflects a buy side that includes 

a large number of participants who trade so infrequently they aren't 

concerned about operational overload from manual confirmations. 

Those trades still flow through the two dozen major dealers, however, 

where they cause real headaches. Photograph supplied by 

SwapsWire, October 2007. 

two years. The volume of outstanding confirmations 

shrivelled between September 2005 and December 2006, 

but crept back up in the first half of 2007 as the market 

expanded even faster than before. It’s a safe bet the third 

quarter report will show backlogs ticked up over the 

summer for both credit derivatives and other contracts. 

T-Zero tackles the problem by trying to squelch errors up 

front. It receives trade details directly from dealers’ trade 

capture systems and transmits it to buy-side counterparties 

for affirmation, then allocates the trade among the various 

sub-accounts. In effect, counterparties have an obligation 

to spot errors before dealers do any further processing. The 

system shifts responsibility for allocations over to the buy 

side, too. “It makes the middle office more accurate and 

scalable,” says Beeston, “It also removes the source of 

operational errors before errant trade data flows 

downstream to cause them.” 

Many market participants expected Depository Trust & 

Clearing Corporation’s (DTCC) electronic matching and 

documentation services to eliminate all their processing 

problems. It hasn’t worked out that way in practice. 

Although a huge improvement over manual confirmations, 

DTCC’s services do not eradicate settlement risk because 

matching still does not occur until one or more days after 

the trade date. By the time an error shows up in the 

documentation process, it may have already caused a 

payment break and possibly a bad margin call as well as an 

incorrect calculation of counterparty risk exposure. 

Janet Wynn, general manager and managing director of DTCC 

Deriv/SERV, says the firm's electronic platform and data warehouse 

have already proved their worth. For example, when a troubled hedge 

fund is taken over, the entire credit default swaps portfolio can be 

assigned to an acquirer through DTCC's platform in just a few days. 

In the past, a buyer had to print out and pore over thousands of pages 

of documentation just to see what was in the portfolio and how to 

handle the assignments, a process that could take several weeks. 

Photograph kindly supplied by the DTCC, October 2007. 

“Electronic matching addresses a symptom,”Beeston says, 

“We address the disease, which is inaccurate trade data.” 

It is a disease of epidemic proportions. According to the 

International Swaps and Derivatives Association’s (ISDA’s) 

2007 Operations Benchmarking Survey, 20% of credit default 

swaps, 20% of equity derivatives and 18% of interest rate 

derivatives executed by large dealers have to be rebooked. 

The ISDA speculates that efforts to cut confirmation 

backlogs may have inflated the numbers somewhat, but it 

is a huge burden on the back office because every break 

requires manual intervention. 

The sheer complexity of OTC derivatives provides many 

more opportunities for breaks to occur than in 

conventional transactions. Cash market trades have just 

three fields: price, security identification number and 

volume. In addition to those, a derivatives trade has to 

specify the precise legal counterparties, margins, collateral 

arrangements and fees. Multimillion dollar novations can 

be held up over differences as small as $50 because firms 

use a different number of decimal points to convert fees the 

traders express in basis points into a dollar amount the 

back office must enter into DTCC’s system. 

For cash instruments, fixing errors a day or two after 

trade date inflicts a mark to market gain or loss but no 

counterparty risk. In OTC derivatives, which are typically 

more volatile than cash securities, participants have to 

accept counterparty risk, too. John La Vecchia, director of 

credit sales for Thomson TradeWeb LLC, says the failure of 


several hedge funds this summer left some dealers stuck 

with open confirmations that could have caused severe 

losses if other players had not stepped in to take over the 

stricken funds. 

Although electronic affirmation shortens the time errors 

that are outstanding from days to minutes or hours, 

somebody still has to enter the trade details and the 

counterparty has to check them. LaVecchia says dealers have 

taken steps to automate the process all the way from trade 

capture through matching and confirmation, but except for a 

few large firms the buy side has been slow to adopt electronic 

processing. He believes—not surprisingly—that electronic 

trading is a better solution.“It creates an accurate record at the 

time of execution that 

can be used to feed all 

the downstream 

systems,”LaVecchia says. 

Markit’s quarterly 

report found that 

electronic execution 

now accounts for 

almost 90% of credit 

derivatives trading 

volume, double the 

proportion in 

September 2005. Equity 

derivatives are less 

automated, although 

the proportion is 

growing, especially 

among the major 

dealers. For interest 

rate derivatives, 

conventional trading still represents more than 60% of the 

total, however. 

Henry Hunter, chief marketing office for SwapsWire in 

London, an electronic processing platform for OTC 

derivatives, says the low level of automation in interest rate 

swaps reflects a buy side that includes a large number of 

participants who trade so infrequently they aren’t 

concerned about operational overload from manual 

confirmations.Those trades still flow through the two dozen 

major dealers, however, where they cause real headaches. 

Hunter says dealers are encouraging more clients to switch 

over to SwapsWire’s electronic system, which requires no 

technology integration and is free to the buy side. 

The large sell side firms have a strong incentive to 

improve back office scalability because they account for 

most of the volume whether the market is quiet or 

frenzied. Sell side clients have flocked to SwapsWire’s fully 

automated interface that feeds interest rate swaps 

transactions into their trade capture systems already 

confirmed.“The back office has nothing to clear up,” says 

Hunter, “It is already being done. They have almost 

unlimited scalability with the operations department.” 

For interbank transactions, dealers can take automation a 

step further with SwapClear, a product offered by 


According to the International Swaps and 

Derivatives Association’s (ISDA’s) 2007 

Operations Benchmarking Survey, 20% of 

credit default swaps, 20% of equity derivatives 

and 18% of interest rate derivatives executed 

by large dealers have to be rebooked. The 

ISDA speculates that efforts to cut 

confirmation backlogs may have inflated the 

numbers somewhat, but it's a huge burden on 

the back office because every break requires 

manual intervention. 

LCH.Clearnet. Once SwapsWire has processed a trade, it 

feeds the details into SwapClear, which acts as a post-trade 

clearing house for cash flow movements, margin calls and 

collateral management. “For trades done through the 

dealers in the interbank market the whole thing is 

completely automated,”Hunter says,“All the ops guys need 

is another reel of paper to spew out of the printer saying ‘No 

Exceptions’. That’s stunning scalability.”Some dealers who 

are SwapsWire clients have just one back office person who 

keeps an eye on their entire SwapsWire/SwapClear flow. 

A back office that incorporates state of the art 

automation does not solve all the problems, however. 

Stephen Bruel, an analyst in the securities and capital 

markets practice at 

Tower Group, a market 

research firm based in 

Needham, Mass., says 

the inability to value 

some structured debt 

instruments caused far 

more trouble than trade 

processing backlogs 

during the market 

turmoil. He 

acknowledges that back 

office operations still 

need work but pricing 

OTC derivatives is a 

front office function. 

“The dangers relate to 

proprietary risk that 

banks and hedge funds 

have taken and not so 

much the operational risk associated with these 

instruments,”says Bruel. 

The back office does need price information, of course. 

Margin calculations, collateral movements and quarterly 

payments all depend on valuations, and, as so many 

investors discovered to their cost, the theoretical price a 

computer model spits out bears no relation to what a 

willing buyer will pay a forced seller in a volatile market. 

Bruel suggests the exchanges, which facilitate liquidity and 

provide a consistent pricing mechanism, may have a role to 

play. OTC derivatives represent a potential source of 

revenue; indeed, Eurex has already listed futures on some 

iTraxx credit default swaps indices. 

Karel Engelen, policy director and head of FpML at 

ISDA, says the summer volume surge spilled over into 

novations, which are much less automated than regular 

trades. A novation allows a new legal entity to substitute 

for one of the original counterparties to a bilateral 

derivative contract, so it requires the consent of all three 

parties. The market has adopted standard language in 

emails relating to novation but people still have to look up 

the details and give their consent. Once terms are agreed 

by the front office, the back office completes the novation 

through an automated confirmation process. 

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72 

Karel Engelen, policy director and head of FpML at ISDA, says the 

summer volume surge spilled over into novations, which are much less 

automated than regular trades. A novation allows a new legal entity 

to substitute for one of the original counterparties to a bilateral 

derivative contract, so it requires the consent of all three parties. 

Photograph kindly supplied by ISDA, October 2007. 

Novations caused much of the paperwork backlog that 

drew regulators’ attention to credit default swaps in the 

first place two years ago. In response, ISDA developed its 

Novation Protocol to standardise and speed up the 

procedure. That helped the industry get backlogs under 

control, but the process still requires manual 

intervention. “There is a renewed focus on looking for 

electronic solutions for novation consents,”says Engelen. 

Up to now, automation has focused on immediate posttrade 

processing but market participants are starting to 

explore electronic solutions for the entire product life 

cycle, including novations, portfolio reconciliation and 

collateral management. 

Engelen expects the spread of electronic processing to 

facilitate the introduction of new products, too. A higher 

degree of automation makes it easier to handle new products 

and shifts the point at which automated processing is 

economic earlier in the product life cycle. Manual processing 

will never disappear, though. It takes time for market 

participants to agree on standard terms for new products and 

until they do automation is virtually impossible. 

Janet Wynn, general manager and managing director of 

DTCC Deriv/SERV, says the firm’s electronic platform and 

data warehouse have already proved their worth. For 

example, when a troubled hedge fund is taken over, the 

entire credit default swaps portfolio can be assigned to an 

acquirer through DTCC’s platform in just a few days. In the 

past, a buyer had to print out and pore over thousands of 

pages of documentation just to see what was in the 

Mark Beeston, president of T-Zero, a London-based electronic affirmation 

service.The immediate crunch was in booking trades and executing 

documents, but the whole operations function was swamped, notes 

Beeston.“You cannot borrow bodies out of your other areas,”he says,“At 

the time you need those resources they are exceptionally busy doing their 

own thing.”Photograph kindly supplied by T-Zero, October 2007. 

portfolio and how to handle the assignments, a process 

that could take several weeks. 

Wynn notes that although backlogs increased over the 

summer they were nowhere near as bad as when regulators 

sounded the alarm in September 2005. She points out that 

back office staff had enough capacity to handle other 

projects over the summer as well. The big firms finished 

loading their historical portfolios into DTCC’s data 

warehouse and participated in a test of payment 

calculations for the settlement system DTCC will launch 

later this year.“There is no paralysis out there,”Wynn says, 

“Everybody is working very hard. There are a lot more 

exceptions to handle but it is very much under control.” 

The industry cannot afford to sit still, however. 

Automation frees up back office resources to focus on 

novations and breaks, but if OTC derivatives keep up their 

breakneck volume growth the need for staff is bound to 

increase, too. “Without DTCC’s platform the volume of 

trades could not have happened,” says Wynn, “And they 

could never have handled this surge.” 

So far, automation has helped back offices stay one step 

ahead of the game. They have moved away from 

processing every trade toward handling exceptions, but 

that function isn’t scalable. If it takes 50 people in a 

dealer’s back office to sort out 20% of today’s trades it will 

take twice as many when volume doubles – and qualified 

staff are hard to find. At some point, the industry has to 

tackle the error rate, through either greater reliance on 

affirmation or electronic trading. 


Interest in 130/30 strategies is setting off. An 

estimated $50bn to $60bn is already invested in 

130/30 strategies and this value is expected to 

grow rapidly. Some market watchers predict 

that up to 20% of the money invested in US 

large-cap core long-only strategies will move to 

short-enabled strategies during the next 

decade. The current level of investor interest is 

leading some commentators to posit that 

130/30 investing could be the makings of a new 

investment paradigm rather than a passing fad. 

Neil O’Hara tests the waters. 

130/30 portfolios are not hedge funds though. That is 

because the risk controls overlaid by 130/30 strategists 

on Jones’ model keep the target market exposure at 

100%. It is then a relative value play, not an absolute 

return strategy. The appropriate risk gauge is therefore 

tracking error rather than standard deviation; after all, 

if net market exposure is 100%, volatility should track 

the market, too. Photograph supplied by 

iStockphotos.com, October 2007. 


getting 

noticed 

INSTITUTIONS IN SEARCH of alpha are shovelling 

money into 130/30 portfolios, which aim to extract the 

maximum value from active equity managers’ research. 

Is it a new paradigm or another passing fad? The 

underlying concept isn’t exactly new. Alfred Jones created 

the first hedge fund in 1948 on the premise that if he 

levered a long portfolio and took short positions in stocks 

expected to lag he could improve performance and cut 

market risk at the same time. 

130/30 portfolios are not hedge funds though. That is 

because the risk controls overlaid by 130/30 strategists on 

Jones’model keep the target market exposure at 100%. It is 

then a relative value play, not an absolute return strategy. 

The appropriate risk gauge is therefore tracking error rather 

than standard deviation; after all, if net market exposure is 

100%, volatility should track the market, too. 

Not all 130/30 programmes are the same, of course. At one 

end of the spectrum, managers view 130/30 as a small step 

beyond enhanced indexing. For example, Warren Chiang, 

managing director responsible for active equities strategies 

at Mellon Capital, a division of The Bank of New York Mellon 

Corporation, restricts variance from benchmark weight for 

individual stocks to ±1% and keeps a tight rein on factor 

risks to eliminate any bias toward growth, value or 

momentum. Such constraints deliver low tracking error 

(between 2.5% and 3%) and a modest excess return target of 

2.5%, which is about 1.5% higher than for the equivalent 

long only portfolio.“We market 130/30 as a substitute for a 

low volatility core equity manager,” Chiang says,“we think 

that is where you maximise the alpha given the risk.” 

Mellon Capital uses quantitative models to construct 

both long only and 130/30 portfolios. The firm is not trying 

to shoot the lights out, but aims to earn a bit more than the 

THE VALUE PLAY OF 130/30 STRATEGIES 

73


74 

benchmark return from diversified 

portfolios that minimise risk.“We are 

not one of those 130/30 managers 

that have really concentrated bets 

that are highly deviated from the 

benchmark,” says Chiang. Rather 

than a separate asset class, he sees 

130/30 as a tool that can be applied 

to, say, large capitalisation or 

international equity mandates, 

which accounts for differences in 

how managers construct the 

portfolios and what fees they charge. 

Among the top 130/30 managers 

this year is UBS, which has pursued 

a fundamental price to intrinsic 

value investment approach for more 

than 25 years. The firm’s analysts 

have always run discounted cash 

flow models on the companies they 

cover, according to Scott Bondurant, 

capability head for long-short equity 

products at UBS Global Asset 

Management. UBS stock rankings 

all the way back to 1980 show that 

the most under-priced names 

outperformed the market by about 

5% and the most overvalued 

underperformed by about 3%. UBS 

targets an excess return of 200 basis 

points (bps) for a long only portfolio 

benchmarked to the Russell 1000 

Index, but for a similar 130/30 

portfolio the firm expects its 

leveraged stock selection to deliver 

250bps-500bps over the benchmark. 

Leverage can cut both ways, of 

course. “We believe in active 

management,” says Bondurant, “if 

you have a manager that doesn’t 

have that skill in the first place 

130/30 is giving him another shot at 

getting it wrong.” 

To proponents, the 130/30 

structure frees managers to make 

more money from stocks they expect 

to underperform. In capitalisation 

weighted equity indices, a few large 

names dominate the list followed by 

a long tail of stocks with trivial 

weights. For example, Bondurant 

says more than 80% of the stocks in 

the Russell 1000 have a weighting of 

less than 15bps. Long only mandates 

that contemplate a maximum 

100bps variance from the 

benchmark weighting in individual 

Brad Taylor, global head of investment finance and 

hedge fund services at RBC Dexia, says institutions 

are happy to pay for alpha but not for strategies 

that only deliver repackaged beta.“Institutions are 

looking for the benefit of a long-g- short approach 

but they are increasingly seeking this exposure in a 

more modest cost structure,”Taylor says. Institutions 

like the transparency and controlled risk profile 

130/30 portfolios offer, too. Photograph kindly 

supplied by RBC Dexia, October 2007. 

Warren Chiang, managing director responsible for 

active equities strategies at Mellon Capital, a 

division of The Bank of New York Mellon 

Corporation, restricts variance from benchmark 

weight for individual stocks to ±1% and keeps a 

tight rein on factor risks to eliminate any bias 

toward growth, value or momentum. Such 

constraints deliver low tracking error (between 2.5% 

and 3%) and a modest excess return target of 2.5%, 

which is about 1.5% higher than for the equivalent 

long only portfolio. Photograph kindly supplied by 

The Bank of New York Mellon, October 2007. 

stocks don’t give managers the 

flexibility to make that bet against 

the smaller names: they can only go 

to zero, no matter what the weight. 

“If you have a 15bps you identify as 

50% overvalued and it 

underperforms by 50% then you 

have added 7.5 bps,” Bondurant 

says, “It is no big deal. However, if 

you can go to 85bps short—100bps 

less than the benchmark—you add 

50bps. That is very meaningful.” 

Charles Shaffer, managing 

director and product manager for 

130/30 in Merrill Lynch’s global 

markets and investment banking 

division, says quantitative 

managers have taken an early lead 

in snagging 130/30 mandates, 

accounting for more than 70% of 

the assets under management. It is 

a natural extension of their 

investment process, which relies on 

factor models to rank stocks from 

best to worst. For a long only 

mandate, managers buy the top 

stocks, but they have a ready-made 

list of losers to populate the short 

side of a 130/30 portfolio. 

Like quants, long only 

fundamental managers focus on 

picking winners, but they have no 

incentive to devote scarce resources 

to losers. If a company doesn’t pass 

muster, most fundamental analysts 

drop it and move on; unlike quants 

or shops like UBS, they don’t rank 

their entire universe. Fundamental 

managers who want to offer 130/30 

products have to reorient their 

research to generate ideas for the 

short book. 

Shaffer says sceptics once 

claimed that only hedge fund 

managers, who know how to 

handle shorts, and quants, who 

employ rigorous risk management 

and a ready ranking of stocks, 

would be able to run 130/30 money 

well. Experience has proved the 

naysayers wrong, however: 

fundamental 130/30 managers have 

beaten the quants hands down in 

2007. “The conventional wisdom, 

particularly in the early days of 

product development, is often 

backwards,” says Shaffer, whose 


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76 

Ric Thomas, a senior managing director of State Street Global 

Advisors (SSgA) and department head of the US enhanced equity 

group, estimates that at any particular time only 10 or 15 names in 

the Russell 1000 are specials subject to higher borrowing costs. 

Even for the small capitalisation Russell 2000 Index, he reckons 

85% of the names are general collateral. With so much scope for 

shorting general collateral stocks, 130/30 managers either avoid 

specials altogether or take small positions in just a few names. 

Leverage can cut both ways, of course. 

“We believe in active management,” says 

Bondurant, “If you have a manager that 

doesn’t have that skill in the first place 

130/30 is giving him another shot at 

getting it wrong.” 

team provides advice, analysis, prime broker and securities 

lending services to managers who run 130/30 portfolios. 

Although Darrell Riley, head of global institutional 

marketing at T. Rowe Price, accepts the logic behind 130/30 

structures he remains leery of its practical application, 

particularly for fundamental managers who often lack the 

quantitative tools and risk management systems needed to 

handle a short book. He notes that short positions 

consume a disproportionate share of a manager’s 

emotional energy, too. “It’s the exception rather than the 

rule that people are good at it,” Riley says. T. Rowe Price 

does not offer 130/30 portfolios today and has no 

immediate plans to do so. 

Riley sees 130/30 products positioned as high conviction 

long strategies with selective use of shorts to capture the 

full benefit of a manager’s research knowledge. On the 

quant side, it works remarkably well for as long as the 

quantitative model works.“Quants are fine when there is 

good factor stability and when you combine that with 

130/30, it’s fantastic,” Riley says, “But when there is a 

turning point, they may really suffer.” It’s no secret that 

quantitative 130/30 managers hit a rough patch during the 

market turmoil in July and August. 

Track records in 130/30 are still short, but so far, UBS, 

which has $2.25bn under management, has delivered 

about double the excess return of its long only portfolios. 

From inception in September 2005 through the end of 

June, its institutional 130/30 product is up 17.93%, 

compared to 15.76% for the equivalent long only 

portfolio and 14.32% for the Russell 1000, the benchmark 

for both. At 4.33%, the tracking error has come in at the 

low end of the 4%-8% target range, which Bondurant 

attributes to unusually low market volatility through 

most of the period. 

Investors don’t get a free lunch, however. 130/30 

portfolios bear incremental transaction costs because they 

deploy 60% more capital and have correspondingly higher 

portfolio turnover. Managers charge higher fees, too. For 

its retail 130/30 product, UBS charges 150bps—about 

35bps more than for the equivalent long only vehicle. 

Institutional fees are lower, of course, but 130/30 products 

still command a 45% premium over long only fees. The 

portfolios incur stock borrowing and financing costs, too, 

which Bondurant estimates at 15bps provided almost all 

the shorts come from the general collateral pool. On 

balance, a retail UBS investor pays an extra 50bps for a 

shot at up to 300bps of excess return. 

Borrowing from the hedge fund world, institutional 

130/30 fees often include a performance element although 

it typically doesn’t kick in unless the manager beats the 

benchmark return. Brad Taylor, global head of investment 

finance and hedge fund services at RBC Dexia, says 

institutions are happy to pay for alpha but not for 

strategies that only deliver repackaged beta. “Institutions 

are looking for the benefit of a long- short approach but 

they are increasingly seeking this exposure in a more 

modest cost structure,” Taylor says. Institutions like the 

transparency and controlled risk profile 130/30 portfolios 

offer, too. 

So far, most 130/30 products are benchmarked to broad 

indices, including the MSCI World, the Standard & Poor’s 

500 and the Russell 1000. For large capitalisation indices 

like these, even the smaller names a 130/30 manager might 

want to sell short are usually available in the general 

collateral pool. 


Nevertheless, Taylor says 

liquidity dried up in some 

names during the recent 

upheaval, which caused 

problems for a few funds. “In 

times of market turmoil, 

managers need access to the 

widest possible array of 

securities and large inventories 

of those securities to reduce the 

likelihood of a loan being 

recalled,”says Taylor, who notes 

that RBC Dexia has a large pool 

of securities available to 

borrowers from its $2.6trn of 

assets under custody. 

Ric Thomas, a senior 

managing director of State 

Street Global Advisors (SSgA) 

and department head of the US 

enhanced equity group, 

estimates that at any particular 

time only 10 or 15 names in the 

Russell 1000 are specials 

subject to higher borrowing 

costs. Even for the small 

capitalisation Russell 2000 

index, he reckons 85% of the 

names are general collateral. 

With so much scope for shorting 

general collateral stocks, 130/30 

managers either avoid specials 

altogether or take small 

positions in just a few names. 

Thomas also points out that 

the emphasis on smaller stocks 

on the short side does not 

necessarily introduce a 

capitalisation bias to the overall 

portfolio because the 

incremental 30% in long 

positions are often smaller 

names, too.“People think this is 

only a way for you to take advantage of negative 

information,” he says,“If your model works down the cap 

distribution, you will take more overweights among small 

cap names, not just underweights. Net-net, you are not 

taking any size bet.” 

Thomas acknowledges that leverage and short selling 

ratchet up the risk of 130/30 portfolios relative to long only, 

but in a way that benefits investors as long as managers 

pick stocks well. “None of the increase in risk is due to 

uncompensated factor exposure such as a size bet or a 

sector bet,” he says, “It’s hard to make the case that long 

only is a better structure than 130/30.”SSgA now manages 

more than $10bn in its Edge brand 130/30 portfolios. 

As a substitute for long only equity, 130/30 products allow 


Charles Shaffer, managing director and product manager for 130/30 in Merrill Lynch’s global markets 

and investment banking division, says quantitative managers have taken an early lead in snagging 

130/30 mandates, accounting for more than 70% of the assets under management. It is a natural 

extension of their investment process, which relies on factor models to rank stocks from best to worst. For 

a long only mandate, managers buy the top stocks, but they have a ready-made list of losers to populate 

the short side of a 130/30 portfolio. Photograph kindly supplied by Merrill Lynch, October 2007. 

managers to compete for core equity mandates rather than 

scarce allocations to alternative investments. Merrill Lynch 

estimates that US public and private pension plans alone 

hold $3trn in long only equity, about 10 times their allocation 

to alternatives. For institutional investors unwilling to seek 

or unable to get board approval for a higher alternative 

allocation, 130/30 portfolios provide access to a key source of 

hedge fund alpha: short selling.“The key to this product is 

precisely the fact that it does keep beta at one,”says Shaffer, 

who expects the explosive growth in assets under 

management to continue. “If these products’ early 

performance is any indication our $1trn estimate [of the 

potential market] could be quite conservative.” By any 

measure, that’s more than a flash in the pan. 

77


78 

THE 130/30 PRIMER: WHAT YOU NEED 

TO KNOW & A LITTLE BIT MORE 

What is 130/30 investing? 

The idea is simple. Start with a long portfolio tied to 

a benchmark, but give managers room to exploit 

stocks identified as dogs by selling short up to 30% 

of the portfolio and let them reinvest the proceeds in 

expected winners. The net market exposure remains 

100% (130% long and 30% short), explains Jeremy 

Baskin, global head of active quant strategies at 

Northern Trust Global Investors (NTGI) in Chicago. A 

successful stock picker should deliver better 

performance relative to a benchmark while still 

subject to the constraints typical of a long only 

mandate, including maximum variance from 

benchmark weightings by sector, industry and 

individual security. “I think that 130/30 has become 

a category reference that includes funds that similarly 

net to 100% long,” notes Baskin, “it may not be 

right for every investor.” Even so, for the right 

investor, 130/30 strategies offer investors a lot of 

flexibility. “130/30 removes the constraint on shorts,” 

he says. 

Is this a new strategy? 

It has been around for three or slightly more 

years and is sometimes referred to as active 

extension or short extension strategies. It is 

picking up in popularity quite quickly though and 

as of March this year it is estimated that between 

$50bn and $60bn worth of assets are invested in 

130/30 strategies. 

Why 130/30 funds are popular 

There is a significant demand from the institutional 

market. Pension funds, for example, show a 

growing need for alpha-based returns to help 

solvency levels. 130/30 strategies also offer an 

alternative to those institutions for which pure hedge 

fund plays are a little to rich for their liking. 130/30 

strategies are attractive because they work around 

the usual constraints placed on managers by long 

only mandates. “Most managers in this regard have 

a benchmark and benchmarks are cap weighted,” 

says Baskin, adding, “By definition, if you have a 

long only mandate, you simply cannot short. 

Therefore, the moderate leverage and shorting 

that 130/30 allows means that it is attractive to 

beneficial owners, which might be wary of jumping 

on the hedge fund bandwagon. The appeal of 

130/30 is augmented by the fact that they are 

cheaper than hedge funds as well.” 

While many beneficial owners are looking to 

alternative investments, such as hedge funds and 

private equity funds for some of this alpha, up to 

now actual allocations to these types of 

investments as a percentage of overall assets 

under management are still very low. The biggest 

bulk of corporate plan assets (over 41%) and 

public plan assets (over 45%) are in domestic 

equities. Most of these investments are in large 

cap stocks, which cuts to the heart of 130/30 

investing, as it is principally centred in the large 

cap segment. 

Additionally, UCITs III provide investment 

managers with an opportunity to package these 

funds for retail investments. While UCITs III funds 

do not borrow stocks to sell, they do use 

derivatives to gain the same effect. 

Baskin says plans can replicate 130/30 exposure 

with equitised long/short strategies, such as investing 

in market neutral hedge funds and combining that 

exposure with a swap on the S&P 500, or a futures 

contract to gain particular market exposure. 

Why 130/30 and not 140/40 or 150/50? 

It is worth noting that 130/30 is not necessarily a set 

ratio. Some managers prefer anything from 120/20 

to 140/40 or range between. However, in a 130/30 

fund the active risk is similar to traditional long only 

fund, although the overall exposure to an investment 

manager’s investment process is 160%. However, as 

NTGI’s Baskin notes, “130/30 strategies are about 

getting more alpha per unit of risk. However, if you 

look at the maximum value of going short, after 

140/40 and 1510/50, the benefits generally 

diminish, so you have to have the right balance that 

works for your process, benchmark and level of 

active risk.” 

Why are so many investment banks 

beginning to offer 130/30 support? 

Not everyone who wants to launch a 130/30 fund 

will have the appropriate technology, operational 

processes or culture to support the strategy (strange 

though it may appear, not all fund managers are 

adept at shorting stock, for example). Prime brokers, 

for example, while expensive, do offer constructive 

help in this regard offering both broking and 

custodial services. Equally, banks offering quant 

services can help the asset manager identify over or 

under priced stocks. 


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DEBT REPORT: ASSET BACKED SECURITIES 

80 

ABS 

ISSUANCE 

INHIBITED 

While no mass sell-offs had taken place by 

late September, some initial casualties 

emerged at the end of August. Among the first 

was the Cheyne Finance SIV, which was 

established in August 2005 and whose $9.7bn 

of assets included an unusually heavy 

exposure to the US sub prime market through 

both direct investments and CDOs. 

Photograph © pmphoto, supplied by 

Dreamstime.com, October 2007. 

After the first six months of 2007, European securitisation was set to 

break all records. Analysts were confidently expecting that new issuance 

for the year would exceed €500bn for the first time, as asset-backed 

bonds appeared to have become a highly liquid option for financial 

market investors. Yet within six weeks, the abrupt seizure in short-term 

borrowing around the world—driven by concerns over exposures to the 

worsening US sub prime mortgage crisis—turned the market on 

its head. The consequent funding problems experienced by 

many ABS investors sent valuations spiraling downwards. 

Bond spreads in the secondary market quadrupled across 

the ratings spectrum in some cases, forcing prospective 

new issuers to abandon their plans indefinitely. How 

did this happen, and where does the market go from 

here? Andrew Cavenagh reports. 

THE IRONY OF the collapse in the value of European 

asset-backed securities market is that—excepting 

those assets with US sub-prime exposure—it has 

nothing to do with the performance of their underlying 

assets. It is entirely down to the way a large chunk of the 

investor base has chosen to fund its investments. They are 

the conduits and structured-investment vehicles (SIVs) 

that are sponsored by banks and others. Worldwide they 

are reckoned to hold asset-backed securities worth the 

equivalent of $1,400bn. They finance these investments to 

a large extent by issuing asset-backed commercial paper 

(ABCP), which typically has a maturity of between three 

and six months. While rates on ABCP were low—flat or 

close to inter-bank rates such as three-month Libor and 

Euribor—this model provides a significant arbitrage 

opportunity as the ABS investments pay 

spreads above Libor. 


The strategy depends crucially, however, on the ability to 

“roll over” the commercial paper as it falls due. As 

mounting fears over banks’ sub-prime exposures (both 

direct and indirect through collateralised debt obligations 

[CDOs]) cause them to stop lending to each other in the 

short-term markets, appetite for CP dried up and left those 

who relied on it for funding exposed. While the banksponsored 

conduit programmes have liquidity facilities 

(put up by their sponsors) that cover 100% of the CP they 

have issued—which enables them to refinance any debt 

that falls due for a period of at least 90 days—the liquidity 

facilities in SIVs are not so large. Consequently their only 

alternative to meet 

debts falling due (if they 

cannot refinance it) is 

to sell off assets, and it 

is the scale of these 

potential fire-sales that 

has had such a 

detrimental impact on 

ABS valuations. 

The Moody’s rating 

agency estimates that 

SIVs held $400bn of 

various asset-backed 

bonds at the beginning 

of September, and that 

vehicles without bank 

sponsors accounted for 

$90m of this total. 

While banks in most 

cases can be expected 

to provide the additional liquidity necessary to prevent the 

vehicles they sponsor from having to dispose of large 

volumes of securities at significant discounts, those set up 

by hedge funds and others do not have such an “in house” 

liquidity provider. To say the least, they consequently face 

an uphill struggle to find an external source of such 

funding in the current environment. 

Their situation is exacerbated by their high gearing of 

the vehicles, which obliges them to maintain mark-tomarket 

valuations and other triggers that—if breached— 

can also force them to sell off assets. As the values of assetbacked 

bonds have plunged, more SIVs have faced 

enforced asset sales for this reason, and such disposals can 

only drive market prices further down and spread the 

malaise to other vehicles.“The problem is that one fund’s 

forced liquidation depressing prices would be the next 

fund’s trigger point to liquidate, as net asset values 

decline,”explains Chris Greener, credit research analyst at 

Société Générale in London. 

While no mass sell-offs had taken place by late 

September, some initial casualties emerged at the end of 

August. Among the first was the Cheyne Finance SIV, which 

was established in August 2005 and whose $9.7bn of assets 

included an unusually heavy exposure to the US sub-prime 

market through both direct investments and CDOs. 


While banks in most cases can be 

expected to provide the additional 

liquidity necessary to prevent the vehicles 

they sponsor from having to dispose of 

large volumes of securities at significant 

discounts, those set up by hedge funds 

and others do not have such an “in 

house” liquidity provider. To say the 

least, they consequently face an uphill 

struggle to find an external source of 

such funding in the current environment. 

In an announcement to the Irish Stock Exchange on 

August 28, the Dublin-listed vehicle said that mark-tomarket 

losses in its investment portfolio had breached one 

of its key triggers—the major capital loss test—and that it 

had sold off assets to raise enough cash to meet its 

projected liabilities for the next few months. Cheyne added 

that it would “continue to sell assets to meet out liabilities 

as they come due” while it attempted to negotiate a recapitalisation 

to extend the maturity of its debt. 

The same day the €10bn Rhinebridge SIV, sponsored by 

the troubled IKB Deutsche Industriebank, sold $176m of 

bonds to meet its immediate debt obligations rather than 

attempt to draw on 

liquidity facilities, 

conceding that further 

support from IKB and 

its owners “cannot be 

expected at this stage”. 

The impact of these 

enforced disposals— 

and the threat of a lot 

more to come—on 

bond valuations was 

savage. By mid- 

September, the spreads 

on triple-A residential 

mortgage-backed 

securities (RMBS) 

issued by the big UK 

master trusts—up to 

July the tightest priced 

bonds in the European 

market—had shot out to 50 basis points on the 3-month 

Libor benchmark from a level of 11bp just two months 

before.The secondary market spreads on triple-A bonds on 

all other asset classes widened by between 175% and 

400%, which quickly strangled the primary market. Spain’s 

Banco Pastor, for example, confirmed on September 20 that 

it was postponing a planned €600m issue indefinitely until 

conditions improved, and one banker estimated that at 

least €20bn of deals out of the country would now be 

shelved until 2008. 

The only deals of any size that did emerge in September 

—like the £5bn Granite 2007-8 issue out of the Northern 

Rock RMBS master trust that will be used as collateral for 

the beleaguered bank’s emergency loan facility from the 

Bank of England—were those that issuers wanted to retain 

for repo purposes. One or two smaller deals, such as the 

€750m Sound BV 2 and €250m E-MAC BV issues out of 

the Netherlands (where in both cases the underlying 

assets are covered by NHG guarantees) also came out, 

where the issuers managed to pre-place the senior classes 

of triple-A notes but were obliged to retain the mezzanine 

and junior ones. 

In the secondary market, meanwhile, several of the large 

repeat issuers began to buy back their own bonds at a 

substantial discount.“It makes sense for them to do that,” 

81

DEBT REPORT: ASSET BACKED SECURITIES 

82 

observed Greener at Société Générale. Most asset-backed 

analysts are not expecting the situation to change much 

before the end of October, as lack of liquidity some SIVs to 

sell off more assets. 

Priya Shah, structured credit strategist at Dresdner 

Kleinwort, says the vehicles that did not have bank 

sponsors were looking particularly vulnerable and while 

all the SIVs are looking for temporary liquidity lines to 

enable them to dispose of their assets in a more orderly 

manner not all would succeed in the current climate. “If 

you have half of those non-bank vehicles having to sell 

their assets, then that’s going to be a pretty big number,” 

she pointed out. 

Shah added that the $12bn of assets held in the recently 

established SIV-lites would undoubtedly have to be sold. 

These riskier variants of the SIV structure do not have bank 

sponsors (they have been issued by CDO managers), have 

larger capital note structures below the issued debt, and 

their collateral is much more concentrated into a single 

asset class. Four of the five launched to date have funded 

themselves exclusively in the CP market, where they have 

no chance of rolling over the debt in the necessary timeframe. 

“There’s no one now that going to buy that 

commercial paper,”she says. 

The shadow of these disposals looks set to inhibit new 

issuance for at least another two months, as the triple-A 

spreads on prime RMBS will need to halve from the mid- 

September levels before the big serial issuers (who 

dominate European RMBS) return to the market. This is 

because the margins on the mortgages average 55-75bp 

over Libor, and they need 40-50bp of excess spread to 

cover reserve funds, servicing costs and potential losses. 

“That’s the only point at which the arbitrage really starts to 

work,”explained Laila Kollmorgen, head of secondary ABS 

trading at BNP Paribas in London. By the end of 

September, however, there were signs that the market was 

turning as triple-A secondary spreads came in 10bp in the 

final week of the month. Kollmorgen said that indicated 

primary market should come back within six weeks.“At the 

latest it’s going to be mid-November.” 

While the European bank-sponsored conduits, which 

hold the equivalent of around $300bn of asset-backed 

securities will not be able to start buying again until ABCP 

margins come back to at least 10bp over inter-bank rates as 

in the US, there are fledgling signs that real-money 

investors (insurers, pension funds and rational asset 

managers ) are setting up funds to acquire discounted ABS, 

as PIMCO and others have done on a large scale in the US. 

These buyers should then account for a larger share of the 

investor base going forward in as European securitisation 

gets back on track—albeit with risk re-priced from the 

spread levels that prevailed before July—in 2008. 

Don’t work in the dark, 

who knows what you might find 

Emerging Markets Report provides a comprehensive 

overview of the principal deals, trends, opportunities 

and challenges in fast-developing markets. For more 

information on how to order your individual copy of 

Emerging Markets Report please contact: 

Paul Spendiff 

Tel:44 [0] 20 7680 5153 

Fax:44 [0] 20 7680 5155 

Email:paul.spendiff@berlinguer.com 


While there is confusion over the precise definition of an ECN, 

at its most basic level it is an electronic marketplace that 

facilitates the buying and selling of stocks by lining up brokers 

and market-makers that trade on behalf of institutional and 

retail investors without sending the order through an exchange 

for execution. In Europe, under MiFiD, ECNs and crossing 

networks are mostly referred to as MTFs, which can offer a 

displayed market as well as dark orders and quotes. They all 

differ from the established stock exchanges in that they do not 

trade their own list of stocks nor do they hold initial public 

offerings. Photograph © Rolffimages, Agency: 

Dreamstime.com, supplied September 2007. 


Although regulation in the US and Europe is 

often written about as a catalyst for change, the 

trading landscape in both regions has already 

been altered thanks to direct market trading, 

algorithmic trading, a sharpened focus on best 

execution and banks’ internalising their own 

orders. Legislation has and will only accelerate 

the trends set in motion. New electronic players 

have emerged while existing incumbents and 

regulated exchanges are busy reconfiguring 

their models. Who will survive, of course, is 

another question. Lynn Strongin Dodds reports. 

KEEPING AN 

EYE ON THE 

FUTURE 

OF ECNs 

THE ONE CERTAINTY is that the securities exchange 

marketplace will become even more crowded and not 

every player will make it to the finishing line. Many 

believe that Europe will follow a similar pattern to the US, 

which has seen a proliferation of participants in the wake 

of the Regulation for National Markets (Reg NMS), which 

was introduced in 2005 and came into force earlier this 

year. Under the new rules, the onus is put on the exchange 

to pass on an order if it cannot provide the best price when 

the order is executed. 

The Markets in Financial Instruments Directive (MiFiD), 

which finally sees the light of day in November this year, is 

a broader framework. Under MiFiD, the obligation firmly 

rests on an investment firm’s ability to find the best trading 

venue. MiFiD also provides for the creation of multi-lateral 

trading facilities (MTFs), which allows parties to trade 

among themselves away from the exchanges, much like 

crossing networks in the US. While the two sets of 

regulation may differ, their main objectives remain the 

same - to protect the investor by ensuring best price on 

every execution. 

Moreover, they are both designed to level the playing 

field. One of the challenges, though, is that the lines of 

distinction seem to be blurring between the various 

electronic participants, the exchanges and their value 

propositions. For example, in the past three years, the New 

York Stock Exchange (NYSE) bought Archipelago 

Exchange. NASDAQ meantime, which had bought Brut in 

2004, purchased Instinet a year later. With this growing 

market complexity and blurring, often times the 

ECNS RING CHANGES IN THE TRADING LANDSCAPE 

83


84 

characteristics and terminology used to describe these 

different platforms can be confusing. In simple terms then, 

how do alternative trading systems (ATS), electronic 

communication networks (ECN), crossing networks, MTFs 

and stock exchanges differ from each other? 

The common thread is that most are electronic trading 

platforms. Breaking it down further, in official parlance, an 

ATS across in North American markets is a networked 

application that electronically connects potential buyers 

and sellers of securities, matching their trades on 

predefined criteria. This can include call markets, matching 

systems and crossing networks as well as electronic 

communications networks (ECNs). 

While there is confusion over the precise definition of an 

ECN, at its most basic level it is an electronic marketplace 

that facilitates the buying and selling of stocks by lining up 

brokers and market-makers that trade on behalf of 

institutional and retail investors without sending the order 

through an exchange 

for execution. In 

Europe, under MiFiD, 

ECNs and crossing 

networks are mostly 

referred to as MTFs, 

which can offer a 

displayed market as 

well as dark orders and 

quotes. They all differ 

from the established 

stock exchanges in 

that they do not trade 

their own list of stocks 

nor do they hold initial 

public offerings. 

It is no surprise, perhaps, that industry participants often 

refer to all of these different types of platforms, except the 

exchanges, as electronic venues. As Alasdair Haynes, chief 

executive officer and head of ITG’s international business, 

points out,“You need a dictionary to understand what the 

market looks like and I think there needs to be more 

clarification. For example, some might ask what is Chi-X 

(the first order-driven pan-European equities alternative 

trading system launched by Instinet this past March). Is it 

an ECN, MTF, ATS or quasi-exchange? The exchanges are 

looking at what the MTFs are doing and visa versa in terms 

of offering different value products. No one wants to be left 

behind and they are encroaching on each other’s territory.” 

Alan Jenkins, European head of MiFiD at BearingPoint, a 

UK based consultancy, agrees, adding,“It does seem that all 

the acronyms are becoming synonyms for each other. In 

Europe, ECNs now have a new name - MTFs - although 

they do not get off that lightly and have similar obligations 

as fully fledged exchanges under MiFiD.The result, though, 

will be that liquidity will fragment further and we will see 

a proliferation of new data and execution venues in the first 

12 to 18 months of MiFiD. Then in the next two to three 

year period, people will start to work out which are the best 

In Europe, under MiFiD, ECNs and crossing 

networks are mostly referred to as MTFs, which 

can offer a displayed market as well as dark 

orders and quotes. They all differ from the 

established stock exchanges in that they do not 

trade their own list of stocks nor do they hold 

initial public offerings. 

trading venues and liquidity will coalesce around a small 

number of platforms just as it happened in the US.” 

Right now, there is a great deal of buzz around the 

advent of dark pools. These are electronic trading venues 

that match buyers and sellers anonymously, without 

quoting prices. For institutional investors, these deals are 

usually done at the mid-point of the underlying market 

price, which saves half the bid-offer spread. Another 

advantage is that market impact, which can account for up 

to 80% of transaction costs, is eliminated. 

Although it has been touted as a recent phenomenon, 

dark pools are not a new concept, according to Joseph 

Cangemi, managing director of BNY ConvergEx, the 

agency brokerage, research and technology affiliate of Bank 

of New York Mellon. In the old days of floor based trading, 

if a broker had received a large order, he would not show 

his full hand. Instead, they would work it in smaller pieces 

while disclosing the least amount of information possible 

and only to those they 

trust. 

Dark pools have 

mushroomed in the 

US with estimates 

having it that around 

40 to 45 are in 

operation, although 

the types of liquidity 

pools vary 

dramatically. There are 

agency brokers that 

only handle client 

orders and cross 

those, where possible. 

These include ITG, which pioneered the dark liquidity 

model, Instinet and relative newcomers, Pipeline Trading 

Systems and Nyfix Millenium. On the independent front, 

Liquidnet is the most prominent player, catering to the 

buyside. This means that institutions can trade with each 

other without using a broker. 

Investment banks, on the other hand, offer crossing 

networks that match their own proprietary orders with 

those of institutional, hedge funds and retail clients. Many 

household names have also banded together to create 

Block Interest Delivery System Trading (Bids) in an attempt 

to increase competition and liquidity in equities trading. 

These include Citigroup, Goldman Sachs, Lehman 

Brothers, Merrill Lynch, Morgan Stanley and UBS and 

more recently, Bank of America, Bear Stearns, Credit 

Suisse, Deutsche Bank, JP Morgan and Knight Capital 

Group have invested in the system. 

In addition, broker-dealer-owned platforms have started 

to link with other broker-owned and/or independent dark 

liquidity pools, which again can distort the dividing lines. 

For example, Credit Suisse has linked its CrossFinder with 

Instinet CAB, Fidelity CrossStream, Lehman LCX, 

Liquidnet and others. Merrill Lynch and ITG, on the other 

hand, have joined forces to launch Block Alert, a global 


Joseph Cangemi, managing director of BNY ConvergEx, the agency 

brokerage, research and technology affiliate of Bank of New York 

Mellon. In the old days of floor based trading, if a broker had received 

a large order, he would not show his full hand. Instead, they would 

work it in smaller pieces while disclosing the least amount of 

information possible and only to those they trust. Photograph kindly 

supplied by BNY Convergex, October 2007. 

block trading service using agency broker ITG’s Posit 

crossing network. 

Overall, the new contenders and incumbents have been 

successful in wrestling liquidity away from the established 

exchanges in US equities. A recent study conducted by Aite 

this past autumn revealed that exchanges currently account 

for about 75% of domestic equity trade volume, compared 

to 25% for ATS’. By the end of 2011, this figure is expected 

to be whittled down to about 62%. 

Sang Lee, managing partner of Aite, along with others, 

believes consolidation is inevitable.“Today, the US equities 

market is highly fragmented and it is not easy to navigate 

in the short term as liquidity migrates from one location to 

another. The displayed platforms have been more 

successful, with the four largest – NYSE, NASDAQ, BATS 

and Direct Edge - accounting for about 85% to 90% of all 

trading in US equities. Market consolidation seems to be 

inevitable, and while the share of the four largest players 

may fall, I believe they will continue to dominate.” 

Cangemi of BNY ConvergEx, which recently launched a 

dark liquidity trading venue called VortEx, notes,“I do not 

think that the US market can support all these varieties of 

liquidity pools. There are about 45 registered ATS/ECN in 

the US but that does not mean that they are all having a 

critical impact on the market. Looking ahead, I think there 

is room for eight to ten but they may be totally different 


John Barker, head of Liquidnet believes “the next four years will see 

several new entrants coming into the European market with both 

mainstream and niche offerings. As players such as ITG, Chi-X and 

Liquidnet have demonstrated, there is market share to be gained 

although I think in the end Europe is smaller than the US and will 

only be able to sustain three to four different models.” Photograph 

kindly supplied by Liquidnet, October 2007. 

than the ones that are currently in the market.” 

As for the growth of dark liquidity pools, Lee believes 

that their potential is limited despite the hype. “They 

currently occupy about 12% to 15% of the US market and 

while some predict they will grow to account for 50% of 

trading, I think that is unsupportable. First, their growth 

creates a credibility problem because by definition they do 

not offer displayed quotes and instead rely on the publicly 

available quotes to determine crossing points. As the public 

market shrinks, the credibility of the public price will come 

into question and as a result, trade execution quality in the 

dark liquidity pools may come into question as well. Also, 

their growth may be curtailed because of the regulators 

emphasis on transparency.” 

This is unlikely, though, to stop electronic upstarts and 

exiting players in the displayed and dark pool space from trying 

their luck in the post MiFiD world. At first glance, Europe may 

be a harder market to crack. The efficiency of the exchanges’ 

electronic order books, where average order sizes remain 

substantially greater than in the US, has made it difficult for 

competitors to win liquidity in Europe. However, as Peter 

Randall, director, Chi-X Europe Ltd, notes, “It is difficult to 

speculate about how many players there will be but I think the 

pie will get bigger as more liquidity is generated.The platforms 

that will win are those that can offer access to new liquidity, 

better pricing and sophisticated technology.” 

85


86 

So far, the recipe has 

worked for Chi-X. 

Instinet claims that 

trading on Chi-X is on 

average 90% cheaper 

than on the main 

European markets. In 

August, the trading 

platform took a 

significant minority of 

trading in the largest 

shares listed on the 

Dutch and German 

stock exchanges – two 

countries where 

domestic law does not 

require that all share 

trading be routed 

through the local 

exchange. 

A promising start 

no doubt but the jury 

is out over its long 

term performance as 

the European 

marketplace has yet to 

become crowded. 

Now, Nyfix intends to 

launch Euro- 

Millennium, an MTF 

for pan-European 

listed cash equities in 

the fourth quarter 

while Liquidnet is 

continuing to enhance 

its product offering in 

Europe. Equiduct, 

which was borne out 

of the old Easdaq 

trading platform, 

recently struck a deal 

with Börse Berlin - 

formerly known as the 

Berlin Stock 

Exchange. Few details 

of their precise 

offering are currently 

available and there are 

concerns that Bob Fuller, head of the venture, is leaving at 

the end of October. 

All eyes are still sharply focused on the fate of Project 

Turquoise, the pan-European exchange being set up by a 

consortium of investment banks, including Credit Suisse, 

Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan 

Stanley and UBS. It has already selected the DTCC 

subsidiary EuroCCP to provide clearing and settlement 

services; however, a management team is yet to be 

announced. The group 

has said it will be fit for 

purpose by the first or 

second quarter of 2008 

but industry pundits 

remain sceptical. John 

Barker, head of 

Liquidnet believes “the 

next four years will see 

several new entrants 

coming into the 

European market with 

both mainstream and 

niche offerings. As 

players such as ITG, 

Chi-X and Liquidnet 

have demonstrated, 

there is market share 

to be gained although I 

think in the end 

Europe is smaller than 

the US and will only be 

able to sustain three to 

four different models.” 

For now, all the 

attention is on 

equities, but looking 

farther down the line, 

there could be limited 

opportunities in the 

over the counter 

space. Paul Winter, 

global head of OTC 

derivatives, at Fortis 

Investments, says,“If it 

happens we could see 

electronic trading in 

the simpler products 

such as plain vanilla 

interest rate swaps or 

forward rate 

agreements where 

there is a lot of 

liquidity. I think it 

would be harder to 

create an electronic 

trading platform in the 

more complicated 

products such as collaterised debt obligations where there 

are more problems with pricing and valuations.” 

As Richard Balarkas, head of advanced execution 

services at Credit Suisse, puts it, “An exchange type of 

mechanism may encourage more liquidity in some of the 

OTC derivatives markets but by definition, they are OTC. 

There is a lack of uniformity and I think the new venues 

will be focusing more on developing products for the 

equities market.” 

Alan Jenkins, European head of MiFiD at BearingPoint, a UK based 

consultancy, agrees, adding,“It does seem that all the acronyms are becoming 

synonyms for each other. In Europe, ECNs now have a new name – MTFs - 

although they do not get off that lightly and have similar obligations as fully 

fledged exchanges under MiFiD. The result, though, will be that liquidity will 

fragment further and we will see a proliferation of new data and execution 

venues in the first 12 to 18 months of MiFiD. Then in the next two to three year 

period, people will start to work out which are the best trading venues and 

liquidity will coalesce around a small number of platforms just as it happened 

in the US.” Photograph kindly supplied by Bearing Point, October 2007. 

A recent study conducted by Aite this past 

autumn revealed that exchanges currently 

account for about 75% of domestic equity trade 

volume, compared to 25% for ATS’. By the end 

of 2011, this figure is expected to be whittled 

down to about 62%. 


A SNAPSHOT VIEW OF THE SECURITIES LENDING MARKET AS OF OCTOBER 10 2007 

Top 10 Equities By Daily Total Return 

Rank Stock description 

1 Groupe Eurotunnel SA 

2 Imergent Inc 

3 Home Solutions of America Inc 

4 Medis Technologies Ltd 

5 Alitalia - Linee Aeree Italiane Spa 

6 Raser Technologies Inc 

7 Dendreon Corp 

8 Delta Financial Corp 

9 Sulphco Inc 

10 InterOil Corp 

Equity by Fee > 10 < 100 Mln 


1 Groupe Eurotunnel SA 

2 Imergent Inc 

3 Home Solutions of America Inc 

4 Medis Technologies Ltd 

5 Alitalia - Linee Aeree Italiane Spa 

6 Raser Technologies Inc 

7 Delta Financial Corp 

8 Sulphco Inc 

9 InterOil Corp 

10 Interoil Corp 

Corp by Fee > 10 < 100 Mln 


1 Rotech Healthcare Inc (9.5% 01-Apr-2012) 

2 Fremont General Corp (7.875% 17-Mar-2009) 

3 Magnachip Semiconductor Finance Co (8% 15-Dec-2014) 

4 Tembec Industries Inc (8.625% 30-Jun-2009) 

5 K Hovnanian Enterprises Inc (8.875% 01-Apr-2012) 

6 K Hovnanian Enterprises Inc (8.625% 15-Jan-2017) 

7 Beazer Homes Corp (8.125% 15-Jun-2016) 

8 Calpine Corp (7.75% 01-Jun-2015) 

9 Trac-x North America 2 March 2009 Tr 1 (6.05% 25-Mar-2009) 

10 Dura Operating Corp (8.625% 15-Apr-2012) 

Govt by Fee > 10 < 100 Mln 


1 Philippines, Republic Of The (Government) (6.375% 15-Jan-2032) 

2 Turkey, Republic Of (Government) (11.875% 15-Jan-2030) 

3 Indonesia, Republic Of (Government) (6.875% 09-Mar-2017) 

4 Mexico Government International Bond (5.875% 15-Jan-2014) 

5 Italy, Republic Of (Government) (2.25% 01-Feb-2010) 

6 Argentina, Republic Of (Government) (1.33% 31-Dec-2038) 

7 Italy, Republic Of (Government) (5.25% 20-Sep-2016) 

8 Resolution Funding Corp (0% 15-Jul-2019) 

9 United States Treasury (0% 15-Aug-2021) 

10 Turkey, Republic Of (Government) (4.75% 06-Jul-2012) 


Top 10 Corp Bonds By Daily Total Return 


1 Rotech Healthcare Inc (9.5% 01-Apr-2012) 

2 Fremont General Corp (7.875% 17-Mar-2009) 

3 Magnachip Semiconductor Finance Co (8% 15-Dec-2014) 

4 Tembec Industries Inc (8.625% 30-Jun-2009) 

5 K Hovnanian Enterprises Inc (8.875% 01-Apr-2012) 

6 K Hovnanian Enterprises Inc (8.625% 15-Jan-2017) 

7 Dollar General Corp (10.625% 15-Jul-2015) 

8 Beazer Homes Corp (8.125% 15-Jun-2016) 

9 Burlington Coat Factory Warehouse Corp (11.125% 15-Apr-2014) 

10 Freescale Semiconductor Inc (10.125% 15-Dec-2016) 

Equity by Fee > 100 Mln 


1 Dendreon Corp 

2 Corus Bankshares Inc 

3 Cree Inc 

4 Force Protection Inc 

5 Thornburg Mortgage Inc 

6 Indymac Bancorp Inc 

7 USANA Health Sciences Inc 

8 La-z-boy Inc 

9 Mueller Water Products Inc 

10 Utstarcom Inc 

Corp by Fee > 100 Mln 


1 Dollar General Corp (10.625% 15-Jul-2015) 

2 Burlington Coat Factory Warehouse Corp (11.125% 15-Apr-2014) 

3 Freescale Semiconductor Inc (10.125% 15-Dec-2016) 

4 Ford Motor Co (4.25% 15-Dec-2036) 

5 Realogy Corp (12.375% 15-Apr-2015) 

6 Calpine Corp (8.5% 15-Feb-2011) 

7 Bon Ton Stores Inc (10.25% 15-Mar-2014) 

8 Pilgrims Pride Corp (8.375% 01-May-2017) 

9 Spectrum Brands Inc (11.25% 02-Oct-2013) 

10 General Motors Corp (8.375% 15-Jul-2033) 

Govt by Fee > 100 Mln 


1 Federal Home Loan Mortgage Corp (5.5% 23-Aug-2017) 

2 United States Treasury (0% 15-Nov-2011) 


4 Canada Mortgage And Housing Corp (4.3% 01-Apr-2009) 


6 Federal Home Loan Banks (3.875% 14-Jun-2013) 

7 Kfw Bankengruppe (0.5% 03-Feb-2010) 

8 United States Treasury (0% 10-Jan-2008) 

9 United States Treasury (0% 18-Oct-2007) 

10 Italy, Republic Of (Government) (2.2% 01-Jul-2009) 

Source: Data Explorers, 2007. All figures kindly compiled by Data Explorers, October 2007. 

SECURITIES LENDING DATA 

87

MARKET DATA BY FTSE RESEARCH 

Global Indices 

5-Year Total Return Performance Graph 

Index Level Rebased (30 Sep 02=100) 

800 

700 

600 

500 

400 

300 

200 

100 

0 

2-Month Performance 

% Change 

1-Year Performance 

% Change 

Sep-02 

12 

10 

80 

70 

60 

50 

40 

30 

20 

10 

0 

8 

6 

4 

2 

0 

Mar-03 

Sep-03 

FTSE All-World Index 

FTSE World Index 

FTSE Developed Index 

FTSE Emerging Index 

FTSE Advanced Emerging Index 


FTSE World Index 

FTSE Developed Index 


FTSE Advanced Emerging Index 

Mar-04 

FTSE Secondary Emerging Index 

FTSE Global All Cap Index 

FTSE Developed All Cap Index 

Sep-04 

FTSE Emerging All Cap Index 

FTSE Advanced Emerging All Cap Index 

Mar-05 

Sep-05 


FTSE Global Government Bond Index 

FTSE EPRA/NAREIT Global Index 

FTSE EPRA/NAREIT Global REITs Index 





FTSE4Good Global Index 

Macquarie Global Infrastructure Index 

FTSE GWA Developed Index 

FTSE RAFI Emerging Index 

88 NOVEMBER/DECEMBER 2007 FTSE GLOBAL MARKETS 

Mar-06 

Sep-07 

Mar-07 

Sep-07 

FTSE EPRA/NAREIT Global Dividend+ Index 

FTSE EPRA/NAREIT Global Rental Index 

FTSE EPRA/NAREIT Global Non-Rental Index 


Macquarie Global Infrastructure 100 Index 


FTSE4Good Global 100 Index 

FTSE GWA Development Index 

FTSE RAFI Developed ex US 1000 Index 



FTSE Global All Cap Index 

FTSE Developed All Cap Index 

FTSE Emerging All Cap Index 

FTSE Advanced Emerging All Cap Index 




FTSE EPRA/NAREIT Global REITs Index 

FTSE EPRA/NAREIT Global Dividend+ Index 

FTSE EPRA/NAREIT Global Rental Index 

FTSE EPRA/NAREIT Global Non-Rental Index 


Macquarie Global Infrastructure 100 Index 


FTSE4Good Global 100 Index 

FTSE GWA Development Index 

FTSE RAFI Developed ex US 1000 Index 


Capital return 

Total return 


Total return

Table of Capital Returns 

Index Name Currency Constituents Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div 

Yld (%) 

FTSE All-World Indices 

FTSE All-World Index USD 2883 268.48 4.7 10.1 22.2 12.3 2.15 

FTSE World Index USD 2465 470.32 4.5 9.2 20.8 11.4 2.18 

FTSE Developed Index USD 2022 254.38 4.4 8.2 19.2 10.4 2.17 

FTSE Emerging Index USD 861 590.09 7.3 29.1 54.6 31.7 2.02 

FTSE Advanced Emerging Index USD 443 529.70 5.3 25.4 48.8 29.2 2.36 

FTSE Secondary Emerging Index USD 418 727.29 10.4 34.5 63.6 35.1 1.55 

FTSE Global Equity Indices 

FTSE Global All Cap Index USD 7892 450.93 4.3 9.7 22.6 12.3 2.07 

FTSE Developed All Cap Index USD 6155 429.84 4.1 7.7 19.5 10.2 2.09 

FTSE Emerging All Cap Index USD 1737 839.97 6.8 30.2 56.8 33.4 1.95 

FTSE Advanced Emerging All Cap Index USD 923 767.85 4.4 26.7 51.1 30.8 2.28 

FTSE Secondary Emerging USD 814 995.08 10.1 35.2 65.5 36.9 1.51 

Fixed Income 

FTSE Global Government Bond Index USD 719 112.02 3.7 3.5 4.4 3.7 3.56 

Real Estate 

FTSE EPRA/NAREIT Global Index USD 302 2647.73 8.4 -4.1 14.5 1.2 3.26 

FTSE EPRA/NAREIT Global REITs Index USD 193 1171.46 8.8 -6.4 7.1 -3.4 4.12 

FTSE EPRA/NAREIT Global Dividend+ Index USD 236 2398.27 10.0 -1.5 14.3 2.0 4.01 

FTSE EPRA/NAREIT Global Rental Index USD 245 1307.82 7.3 -8.6 7.2 -5.1 3.94 

FTSE EPRA/NAREIT Global Non-Rental Index USD 57 1650.25 11.2 9.0 37.8 21.3 1.62 

Infrastructure 

Macquarie Global Infrastructure Index USD 226 10398.57 6.5 6.7 25.6 12.2 2.86 

Macquarie Global Infrastructure 100 Index USD 100 10170.23 6.6 5.6 24.0 11.2 2.89 

SRI 

FTSE4Good Global Index USD 698 7116.23 4.0 7.0 16.7 8.2 2.54 

FTSE4Good Global 100 Index USD 105 6106.07 4.5 7.4 13.0 6.3 2.83 

Investment Strategy 

FTSE GWA Developed Index USD 2022 4343.07 3.8 7.3 18.8 9.3 2.44 

FTSE RAFI Developed ex US 1000 Index USD 1002 7320.11 3.6 8.2 24.9 12.9 2.68 

FTSE RAFI Emerging Index USD 351 6965.29 8.7 33.9 62.6 36.1 2.43 

Table of Total Returns 


Yld (%) 


FTSE All-World Index USD 2883 311.54 5.1 11.6 24.9 14.4 2.15 

FTSE World Index USD 2465 732.18 4.9 10.6 23.5 13.5 2.18 

FTSE Developed Index USD 2022 294.62 4.8 9.7 21.9 12.4 2.17 

FTSE Emerging Index USD 861 711.65 7.8 30.9 58.2 34.3 2.02 

FTSE Advanced Emerging Index USD 443 642.51 5.8 27.1 52.6 32.1 2.36 

FTSE Secondary Emerging Index USD 418 869.52 10.7 36.5 66.7 37.4 1.55 


FTSE Global All Cap Index USD 7892 499.56 4.7 11.1 25.2 14.3 2.07 

FTSE Developed All Cap Index USD 6155 475.43 4.5 9.0 22.1 12.2 2.09 

FTSE Emerging All Cap Index USD 1737 954.52 7.2 32.0 60.3 35.9 1.95 

FTSE Advanced Emerging All Cap Index USD 923 878.69 5.0 28.5 54.8 33.6 2.28 

FTSE Secondary Emerging USD 814 1116.95 10.4 37.0 68.6 39.1 1.51 

Fixed Income 

FTSE Global Government Bond Index USD 719 151.40 4.3 5.5 8.3 6.6 3.56 

Real Estate 

FTSE EPRA/NAREIT Global Index USD 302 3720.14 9.1 -2.4 18.2 3.7 3.26 

FTSE EPRA/NAREIT Global REITs Index USD 193 1253.61 9.7 -4.3 11.5 -0.5 4.12 

FTSE EPRA/NAREIT Global Dividend+ Index USD 236 2511.81 10.9 0.6 18.9 4.9 4.01 

FTSE EPRA/NAREIT Global Rental Index USD 245 1399.15 8.1 -6.6 11.2 -2.4 3.94 

FTSE EPRA/NAREIT Global Non-Rental Index USD 57 1703.31 11.5 9.9 40.4 22.7 1.62 


Macquarie Global Infrastructure Index USD 226 11830.08 7.0 8.7 29.4 14.9 2.86 

Macquarie Global Infrastructure 100 Index USD 100 11600.95 7.0 7.6 27.9 13.9 2.89 

SRI 

FTSE4Good Global Index USD 698 8163.90 4.5 8.6 19.6 10.5 2.54 

FTSE4Good Global 100 Index USD 105 7046.08 5.0 9.2 16.2 8.8 2.83 


FTSE GWA Developed Index USD 2022 4578.66 4.2 8.8 21.7 11.5 2.44 

FTSE RAFI Developed ex US 1000 Index USD 1002 7720.03 4.1 10.2 28.2 15.6 2.68 

FTSE RAFI Emerging Index USD 351 7087.80 9.3 36.1 67.5 38.9 2.43 

FTSE Research Team contact details 

Andy Harvell Andreas Elia Kamila Lewandowski Sandra Jim 

Head of Research Research Analyst Research Analyst Research Manager, Asia Pacific 

andy.harvell@ftse.com andreas.elia@ftse.com kamila.lewandowski@ftse.com sandra.jim@ftse.com 

+44 20 7866 8986 +44 20 7866 8013 +44 20 7866 1877 +(852) 223 0-5814 

FTSE GLOBAL MARKETS NOVEMBER/DECEMBER 2007 

89


Americas Indices 



350 

300 

250 

200 

150 

100 

50 

0 

Sep-02 

Mar-03 

Sep-03 


% Change 

12 

10 

8 

6 

4 

2 

0 


% Change 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Mar-04 

Sep-04 

Mar-05 

Sep-05 

FTSE Americas Index 

FTSE Americas Government Bond Index 

FTSE EPRA/NAREIT North America Index 

FTSE EPRA/NAREIT US Dividend+ Index 

FTSE4Good USIndex 

FTSE GWA US Index 

FTSE RAFI US 1000 Index 


Mar-06 

Sep-07 

Mar-07 

Sep-07 


FTSE North America Index 

FTSE Latin America Index 

FTSE Americas All Cap Index 

FTSE North America All Cap Index 

FTSE Latin America All Cap Index 

FTSE LATIBEX All-Share Index 

FTSE LATIBEX TOP Index 

FTSE LATIBEX Brasil Index 


FTSE USA Government Bond Index 



FTSE EPRA/NAREIT North America Rental Index 

FTSE EPRA/NAREIT North America Non-Rental Index 

Macquarie North America Infrastructure Index 

Macquarie USA Infrastructure Index 

FTSE4Good US Index 

FTSE4Good US 100 Index 



FTSE RAFI US Mid Small 1500 Index 


FTSE North America Index 

FTSE Latin America Index 

FTSE Americas All Cap Index 

FTSE North America All Cap Index 

FTSE Latin America All Cap Index 

FTSE LATIBEX All-Share Index 

FTSE LATIBEX TOP Index 

FTSE LATIBEX Brasil Index 


FTSE USA Government Bond Index 



FTSE EPRA/NAREIT North America Rental Index 

FTSE EPRA/NAREIT North America Non-Rental Index 

Macquarie North America Infrastructure Index 

Macquarie USA Infrastructure Index 

FTSE4Good US Index 

FTSE4Good US 100 Index 



FTSE RAFI US Mid Small 1500 Index 


Total return 


Total return



Yld (%) 


FTSE Americas Index USD 872 614.99 5.5 9.3 17.7 10.2 1.80 

FTSE North America Index USD 737 640.14 5.3 8.5 16.0 9.1 1.78 

FTSE Latin America Index USD 135 881.81 8.3 30.3 67.8 38.2 2.17 


FTSE Americas All Cap Index USD 2766 390.68 5.3 8.9 18.1 10.3 1.72 

FTSE North America All Cap Index USD 2565 378.35 5.1 8.1 16.5 9.2 1.70 

FTSE Latin America All Cap Index USD 201 1327.76 7.8 30.0 68.3 38.1 2.13 

Region Specific 

FTSE LATIBEX All-Share Index USD 38 3338.50 8.8 35.9 67.4 44.1 na 

FTSE LATIBEX TOP Index USD 15 4954.80 2.9 23.2 51.5 31.1 na 

FTSE LATIBEX Brasil Index USD 13 13148.70 10.5 43.4 82.3 52.8 na 

Fixed Income 

FTSE Americas Government Bond Index USD 155 110.92 2.2 2.1 1.6 2.4 4.53 

FTSE USA Government Bond Index USD 135 108.34 1.8 1.3 1.1 1.6 4.59 

Real Estate 

FTSE EPRA/NAREIT North America Index USD 122 2681.25 10.1 -8.1 2.5 -5.2 4.05 

FTSE EPRA/NAREIT US Dividend+ Index USD 98 2121.28 10.3 -9.2 0.9 -6.8 4.11 

FTSE EPRA/NAREIT North America Rental Index USD 118 1230.56 10.1 -8.7 1.9 -5.7 4.16 

FTSE EPRA/NAREIT North America Non-Rental Index USD 4 1341.77 9.5 -2.0 8.0 -0.5 3.03 


Macquarie North America Infrastructure Index USD 98 8679.55 4.8 1.6 16.6 8.0 2.79 

Macquarie USA Infrastructure Index USD 91 8623.83 4.8 0.6 16.2 7.7 2.75 

SRI 

FTSE4Good US Index USD 145 5667.27 5.0 6.7 11.4 5.4 2.04 

FTSE4Good US 100 Index USD 101 5430.04 5.5 7.0 11.3 5.3 2.07 


FTSE GWA US Index USD 679 3853.97 4.3 6.2 13.8 6.6 1.97 

FTSE RAFI US 1000 Index USD 986 6274.06 3.6 4.9 13.3 6.2 2.06 

FTSE RAFI US Mid Small 1500 Index USD 1344 5518.03 2.5 0.9 - 3.7 1.28 



Yld (%) 


FTSE Americas Index USD 872 929.97 5.9 10.3 19.8 11.7 1.80 

FTSE North America Index USD 737 1026.02 5.7 9.4 18.1 10.6 1.78 

FTSE Latin America Index USD 135 1095.34 8.7 31.9 71.9 40.6 2.17 


FTSE Americas All Cap Index USD 2766 424.19 5.6 9.8 20.2 11.7 1.72 

FTSE North America All Cap Index USD 2565 410.22 5.5 9.0 18.5 10.6 1.70 

FTSE Latin America All Cap Index USD 201 1542.23 8.2 31.6 72.4 40.5 2.13 


FTSE LATIBEX All-Share Index USD 38 na na na na na na 

FTSE LATIBEX TOP Index USD 15 na na na na na na 

FTSE LATIBEX Brasil Index USD 13 na na na na na na 

Fixed Income 

FTSE Americas Government Bond Index USD 155 163.71 3.0 4.4 6.4 5.9 4.53 

FTSE USA Government Bond Index USD 135 159.28 2.6 3.6 5.9 5.1 4.59 

Real Estate 

FTSE EPRA/NAREIT North America Index USD 122 4043.58 10.9 -6.2 6.5 -2.5 4.05 

FTSE EPRA/NAREIT US Dividend+ Index USD 98 2220.96 11.2 -7.4 4.8 -4.2 4.11 

FTSE EPRA/NAREIT North America Rental Index USD 118 1318.66 11.0 -6.9 5.9 -3.0 4.16 

FTSE EPRA/NAREIT North America Non-Rental Index USD 4 1423.67 10.4 -0.4 11.4 1.9 3.03 


Macquarie North America Infrastructure Index USD 98 9826.38 5.5 3.1 20.0 10.3 2.79 

Macquarie USA Infrastructure Index USD 91 9755.92 5.5 2.0 19.5 10.0 2.75 

SRI 

FTSE4Good US Index USD 145 6287.28 5.4 7.8 13.6 7.0 2.04 

FTSE4Good US 100 Index USD 101 6044.96 5.9 8.1 13.5 6.9 2.07 


FTSE GWA US Index USD 679 4031.38 4.7 7.2 16.0 8.1 1.97 

FTSE RAFI US 1000 Index USD 986 6547.21 4.0 6.0 15.7 7.8 2.06 

FTSE RAFI US Mid Small 1500 Index USD 1344 5630.98 2.8 1.5 14.4 4.7 1.28 


91


Europe, Middle East, Africa Indices (EMEA) 



400 

350 

300 

250 

200 

150 

100 

50 

0 

Sep-02 

Mar-03 

Sep-03 


% Change 

10 

8 

6 

4 

2 

0 

-2 

-4 

-6 

-8 


% Change 

50 

40 

30 

20 

10 

0 

-10 

-20 

Mar-04 

Sep-04 

Mar-05 

Sep-05 

Mar-06 

Sep-07 

Mar-07 

Sep-07 

FTSE Europe Index 

FTSE Eurobloc Index 

FTSE Developed Europe ex UK Index 

FTSE Developed Europe Index 

FTSE Europe All Cap Index 

FTSE Eurobloc All Cap Index 

FTSE Developed Europe All Cap ex US Index 

FTSE Developed Europe All Cap Index 

FTSE All-Share Index 

FTSE 100 Index 

FTSEurofirst 80 Index 



FTSE/JSE Top 40 Index 

FTSE/JSE All-Share Index 

FTSE Russia IOB Index 

FTSE Eurozone Government Bond Index 

FTSE Pfandbrief Index 

FTSE Gilts Fixed All-Stocks Index 

FTSE EPRA/NAREIT Europe Index 

FTSE EPRA/NAREIT Europe REITs Index 

FTSE EPRA/NAREIT Europe ex UK Dividend+ Index 

FTSE EPRA/NAREIT Europe Rental Index 

FTSE EPRA/NAREIT Europe Non-Rental Index 

Macquarie Europe Infrastructure Index 

FTSE4Good Europe Index 

FTSE4Good Europe 50 Index 

FTSE GWA Developed Europe Index 

FTSE RAFI Europe Index 

FTSE Europe Index 

FTSE Eurobloc Index 

FTSE Developed Europe ex UK Index 

FTSE Developed Europe Index 

FTSE Europe All Cap Index 

FTSE Eurobloc All Cap Index 

FTSE Developed Europe All Cap ex US Index 

FTSE Developed Europe All Cap Index 

FTSE All-Share Index 

FTSE 100 Index 




FTSE/JSE Top 40 Index 

FTSE/JSE All-Share Index 

FTSE Russia IOB Index 

FTSE Eurozone Government Bond Index 

FTSE Pfandbrief Index 

FTSE Gilts Fixed All-Stocks Index 

FTSE EPRA/NAREIT Europe Index 

FTSE EPRA/NAREIT Europe REITs Index 

FTSE EPRA/NAREIT Europe ex UK Dividend+ Index 

FTSE EPRA/NAREIT Europe Rental Index 

FTSE EPRA/NAREIT Europe Non-Rental Index 

Macquarie Europe Infrastructure Index 

FTSE4Good Europe Index 

FTSE4Good Europe 50 Index 

FTSE GWA Developed Europe Index 

FTSE RAFI Europe Index 

FTSE Europe Index (EUR) 

FTSE All-Share Index (GBP) 

FTSEurofirst 80 Index (EUR) 

FTSE/JSE Top 40 Index (SAR) 

FTSE Gilts Fixed All-Stocks Index (GBP) 

FTSE EPRA/NAREIT Europe Index (EUR) 

FTSE4Good Europe Index (EUR) 

FTSE GWA Developed Europe Index (EUR) 

FTSE RAFI Europe Index (EUR) 


Total return 


Total return 

92 NOVEMBER/DECEMBER 2007 FTSE GLOBAL MARKETS



Yld (%) 


FTSE Europe Index EUR 595 477.65 -0.4 1.6 10.9 4.0 2.82 

FTSE Eurobloc Index EUR 2011 139.45 0.7 3.1 14.4 6.6 2.47 

FTSE Developed Europe ex UK Index EUR 391 258.88 0.4 2.5 13.5 5.7 2.81 

FTSE Developed Europe Index EUR 528 250.35 -0.4 1.6 10.9 4.0 2.88 


FTSE Europe All Cap Index EUR 1782 426.11 -0.9 0.9 11.7 3.7 2.73 

FTSE Eurobloc All Cap Index EUR 867 455.16 0.0 2.2 14.7 6.3 2.83 

FTSE Developed Europe ex UK All Cap Index EUR 1186 458.68 -0.2 1.8 14.2 5.5 2.72 

FTSE Developed Europe All Cap Index EUR 1661 420.58 -1.0 0.7 11.4 3.6 2.78 


FTSE All-Share Index GBP 692 3316.89 0.8 1.0 8.7 3.0 2.89 

FTSE 100 Index GBP 102 6466.79 1.7 2.5 8.5 4.0 3.05 

FTSEurofirst 80 Index EUR 81 5605.33 1.8 4.8 14.2 7.6 3.16 



FTSE/JSE Top 40 Index SAR 41 27267.58 5.5 10.9 33.0 20.6 2.21 

FTSE/JSE All-Share Index SAR 160 29959.19 4.9 9.9 33.9 20.2 2.36 

FTSE Russia IOB Index USD 10 1287.88 5.6 7.1 23.8 5.2 0.95 

Fixed Income 

FTSE Eurozone Government Bond Index EUR 236 97.49 0.3 -1.6 -4.0 -2.5 4.49 

FTSE Pfandbrief Index EUR 416 105.33 0.2 -1.7 -3.5 -2.3 4.79 

FTSE Gilts Fixed All-Stocks Index GBP 29 145.36 0.3 -0.9 -4.4 -3.0 4.82 

Real Estate 

FTSE EPRA/NAREIT Europe Index EUR 99 2353.30 -3.7 -22.9 -8.6 -21.6 2.89 

FTSE EPRA/NAREIT Europe REITs Index EUR 37 971.59 -1.9 -22.0 -12.3 -21.4 3.04 

FTSE EPRA/NAREIT Europe ex UK Dividend+ Index EUR 47 2621.10 1.0 -18.3 0.1 -12.2 3.92 

FTSE EPRA/NAREIT Europe Rental Index EUR 85 1124.09 -3.6 -23.2 -9.4 -22.1 3.01 

FTSE EPRA/NAREIT Europe Non-Rental Index EUR 14 1319.13 -6.0 -17.5 5.7 -12.3 1.10 


Macquarie Europe Infrastructure Index USD 52 13601.79 8.8 13.5 36.4 18.3 2.98 

SRI 

FTSE4Good Europe Index EUR 294 5106.46 -0.7 0.6 7.7 1.9 3.13 

FTSE4Good Europe 50 Index EUR 55 4426.07 -0.3 1.6 4.2 0.8 3.46 


FTSE GWA Developed Europe Index EUR 528 4129.01 -0.8 26.9 38.7 29.3 3.20 

FTSE RAFI Europe Index EUR 468 6295.08 -0.2 2.1 13.3 5.2 3.06 



Yld (%) 


FTSE Europe Index EUR 595 891.98 0.0 3.7 14.2 6.7 2.82 

FTSE Eurobloc Index EUR 2011 176.72 0.8 5.6 17.7 9.4 2.47 

FTSE Developed Europe ex UK Index EUR 391 312.68 0.5 4.8 16.7 8.4 2.81 

FTSE Developed Europe Index EUR 528 307.34 0.0 3.7 14.2 6.7 2.88 


FTSE Europe All Cap Index EUR 1782 491.35 -0.6 2.9 14.9 6.3 2.73 

FTSE Eurobloc All Cap Index EUR 867 524.41 0.1 4.6 18.0 9.0 2.83 

FTSE Developed Europe ex UK All Cap Index EUR 1186 524.33 -0.1 4.0 17.2 8.1 2.72 

FTSE Developed Europe All Cap Index EUR 1661 485.42 -0.7 2.7 14.5 6.2 2.78 


FTSE All-Share Index GBP 692 3952.04 1.6 2.7 12.2 5.7 2.89 

FTSE 100 Index GBP 102 3734.40 2.5 4.3 12.2 6.9 3.05 




FTSE/JSE Top 40 Index SAR 41 2905.22 6.3 12.3 36.4 23.2 2.21 

FTSE/JSE All-Share Index SAR 160 3160.72 5.7 11.3 37.4 22.8 2.36 

FTSE Russia IOB Index USD 10 1303.08 6.2 8.3 25.2 6.2 0.95 

Fixed Income 

FTSE Eurozone Government Bond Index EUR 236 155.74 1.0 0.6 0.3 0.7 4.49 

FTSE Pfandbrief Index EUR 416 178.74 0.9 0.3 0.5 0.8 4.79 

FTSE Gilts Fixed All-Stocks Index GBP 29 1966.08 1.5 1.6 0.6 0.9 4.82 

Real Estate 

FTSE EPRA/NAREIT Europe Index EUR 99 3092.54 -3.4 -21.3 -6.2 -19.8 2.89 

FTSE EPRA/NAREIT Europe REITs Index EUR 37 1037.49 -1.5 -20.1 -9.3 -19.3 3.04 

FTSE EPRA/NAREIT Europe ex UK Dividend+ Index EUR 47 2829.40 1.2 -16.1 3.9 -9.4 3.92 

FTSE EPRA/NAREIT Europe Rental Index EUR 85 1181.70 -3.21 -21.61 -6.89 -20.24 3.01 

FTSE EPRA/NAREIT Europe Non-Rental Index EUR 14 1348.81 -5.9 -16.8 6.7 -11.6 1.10 


Macquarie Europe Infrastructure Index USD 52 15719.09 8.9 16.4 40.9 21.6 2.98 

SRI 

FTSE4Good Europe Index EUR 294 6147.50 -0.3 2.8 11.1 4.7 3.13 

FTSE4Good Europe 50 Index EUR 55 5374.54 0.3 4.0 7.9 4.0 3.46 


FTSE GWA Developed Europe Index EUR 528 4416.32 -0.4 3.3 13.9 5.8 3.20 

FTSE RAFI Europe Index EUR 468 6672.45 0.1 4.4 16.7 8.1 3.06 


93


Asia Pacific Indices 



1600 

1400 

1200 

1000 

800 

600 

400 

200 

0 

Sep-02 

Mar-03 

Sep-03 


% Change 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 


% Change 

300 

250 

200 

150 

100 

50 

0 

Mar-04 

Sep-04 

Mar-05 

Sep-05 

FTSE Asia Pacific Index 

FTSE/ASEAN 40 Index 

FTSE/Xinhua China 25 Index 

FTSE Asia Pacific Government Bond Inde 

FTSE IDFC India Infrastructure Index 


Mar-06 

Sep-07 

Mar-07 

Sep-07 


FTSE Asia Pacific ex Japan Index 

FTSE Japan Index 

FTSE Asia Pacific All Cap Index 

FTSE Asia Pacific ex Japan All Cap Index 

FTSE Japan All Cap Index 

FTSE/ASEAN Index 


FTSE Bursa Malaysia 100 Index 

TSEC Taiwan 50 Index 

FTSE Xinhua All-Share Index 


FTSE Asia Pacific Government Bond Index 

FTSE EPRA/NAREIT Asia Index 

FTSE EPRA/NAREIT Asia 33 Index 

FTSE EPRA/NAREIT Asia Dividend+ Index 

FTSE EPRA/NAREIT Asia Rental Index 

FTSE EPRA/NAREIT Asia Non-Rental Index 


FTSE IDFC India Infrastructure 30 Index 

FTSE4Good Japan Index 

FTSE SGX Shariah 100 Index 

FTSE Bursa Malaysia Hijrah Shariah Index 

FTSE Shariah Japan 100 Index 

FTSE GWA Japan Index 

FTSE GWA Australia Index 

FTSE RAFI Aiustralia Index 

FTSE RAFI Singapore Index 

FTSE RAFI Japan Index 

FTSE RAFI Kaigai 1000 Index 

FTSE RAFI China 50 Index 


FTSE Asia Pacific ex Japan Index 

FTSE Japan Index 

FTSE Asia Pacific All Cap Index 

FTSE Asia Pacific ex Japan All Cap Index 

FTSE Japan All Cap Index 

FTSE/ASEAN Index 


FTSE Bursa Malaysia 100 Index 

TSEC Taiwan 50 Index 

FTSE Xinhua All-Share Index 


FTSE Asia Pacific Government Bond Index 

FTSE EPRA/NAREIT Asia Index 

FTSE EPRA/NAREIT Asia 33 Index 

FTSE EPRA/NAREIT Asia Dividend+ Index 

FTSE EPRA/NAREIT Asia Rental Index 

FTSE EPRA/NAREIT Asia Non-Rental Index 


FTSE IDFC India Infrastructure 30 Index 

FTSE4Good Japan Index 

FTSE SGX Shariah 100 Index 

FTSE Bursa Malaysia Hijrah Shariah Index 

FTSE Shariah Japan 100 Index 

FTSE GWA Japan Index 

FTSE GWA Australia Index 

FTSE RAFI Aiustralia Index 

FTSE RAFI Singapore Index 

FTSE RAFI Japan Index 

FTSE RAFI Kaigai 1000 Index 

FTSE RAFI China 50 Index 


Total return 


Total return



Yld (%) 


FTSE Asia Pacific Index USD 1276 305.07 4.9 14.4 28.4 17.5 1.86 

FTSE Asia Pacific ex Japan Index USD 803 532.24 10.3 31.7 56.2 35.5 2.35 

FTSE Japan Index USD 473 110.85 -4.9 -5.1 1.3 -3.7 1.22 


FTSE Asia Pacific All Cap Index USD 3148 538.56 4.3 14.8 29.2 18.2 1.85 

FTSE Asia Pacific ex Japan All Cap Index USD 1821 1199.85 15.9 52.8 75.6 52.1 2.29 

FTSE Japan All Cap Index USD 1327 392.06 -5.2 -5.4 0.7 -3.8 1.23 


FTSE/ASEAN Index USD 151 467.14 3.1 18.8 53.7 30.4 2.79 

FTSE/ASEAN 40 Index USD 40 9188.52 1.7 15.5 45.2 22.9 2.95 

FTSE Bursa Malaysia 100 Index MYR 100 8697.89 -3.5 6.1 39.1 22.1 2.85 

TSEC Taiwan 50 Index TWD 50 6646.84 3.2 17.7 27.6 16.3 3.38 

FTSE Xinhua All-Share Index CNY 995 12504.01 21.8 89.7 268.0 173.4 0.46 

FTSE/Xinhua China 25 Index CNY 25 26121.81 25.1 67.1 117.4 57.3 1.30 

Fixed Income 

FTSE Asia Pacific Government Bond Index USD 257 86.63 4.5 2.6 2.7 3.4 1.62 

Real Estate 

FTSE EPRA/NAREIT Asia Index USD 81 2488.26 11.1 9.3 39.0 20.8 2.66 

FTSE EPRA/NAREIT Asia 33 Index USD 41 1860.50 12.6 6.7 34.2 17.2 4.7 

FTSE EPRA/NAREIT Asia Dividend+ Index USD 54 2990.99 13.1 18.2 44.4 24.1 3.91 

FTSE EPRA/NAREIT Asia Rental Index USD 42 1463.56 9.4 4.9 29.8 11.9 4.48 

FTSE EPRA/NAREIT Asia Non-Rental Index USD 39 1706.78 12.3 12.6 46.3 28.1 1.42 


FTSE IDFC India Infrastructure Index IRP 63 1336.01 12.1 61.1 97.0 59.9 0.49 

FTSE IDFC India Infrastructure 30 Index IRP 30 1401.38 14.0 67.9 98.4 65.1 0.60 

SRI 

FTSE4Good Japan Index JPY 192 5938.05 -4.8 -5.6 0.7 -5.3 1.22 

Shariah 

FTSE SGX Shariah 100 Index USD 100 6544.11 5.7 12.6 23.9 13.2 1.67 

FTSE Bursa Malaysia Hijrah Shariah Index MYR 30 9781.76 2.2 17.7 57.1 36.0 2.67 

FTSE Shariah Japan 100 Index JPY 100 1752.93 -2.0 -1.3 9.0 -0.2 1.21 


FTSE GWA Japan Index JPY 473 4262.96 -5.0 -6.4 1.5 -3.9 1.27 

FTSE GWA Australia Index AUD 113 4716.79 7.2 10.6 27.3 16.3 3.78 

FTSE RAFI Australia Index AUD 55 6834.23 5.6 6.7 23.7 12.7 4.02 

FTSE RAFI Singapore Index SGD 19 8413.46 2.8 16.0 48.0 24.5 2.98 

FTSE RAFI Japan Index JPY 344 5965.57 -4.2 -5.9 3.6 -2.2 1.32 

FTSE RAFI Kaigai 1000 Index JPY 1008 6304.90 0.8 5.7 17.9 7.2 2.61 

FTSE RAFI China 50 Index HKD 50 8096.76 23.4 55.0 na na 1.78 



Yld (%) 


FTSE Asia Pacific Index USD 1276 348.54 5.5 15.7 31.0 19.5 1.86 

FTSE Asia Pacific ex Japan Index USD 803 660.07 11.1 33.9 60.5 38.7 2.45 

FTSE Japan Index USD 473 132.36 -4.4 -4.6 2.6 -2.6 1.17 


FTSE Asia Pacific All Cap Index USD 3148 593.14 4.9 16.2 31.8 20.3 1.84 

FTSE Asia Pacific ex Japan All Cap Index USD 1821 1395.95 17.2 55.7 81.5 57.0 2.37 

FTSE Japan All Cap Index USD 1327 414.20 -4.7 -4.8 2.0 -2.7 1.17 


FTSE/ASEAN Index USD 151 569.64 4.1 21.4 58.7 33.8 2.71 

FTSE/ASEAN 40 Index USD 40 10032.76 2.8 18.3 49.9 26.1 2.81 

FTSE Bursa Malaysia 100 Index MYR 100 9114.36 -2.7 8.1 43.8 25.1 2.50 

TSEC Taiwan 50 Index TWD 50 7933.71 4.1 21.7 32.0 20.2 3.38 

FTSE Xinhua All-Share Index CNY 995 13496.30 21.8 90.8 270.4 175.1 0.55 

FTSE/Xinhua China 25 Index CNY 25 31827.01 25.7 70.1 121.5 60.2 1.49 

Fixed Income 

FTSE Asia Pacific Government Bond Index USD 257 101.02 4.8 4.0 4.9 5.2 1.62 

Real Estate 

FTSE EPRA/NAREIT Asia Index USD 81 3251.70 11.7 10.8 43.1 23.3 2.85 

FTSE EPRA/NAREIT Asia 33 Index USD 41 2025.91 13.3 8.3 38.4 19.7 5.0 

FTSE EPRA/NAREIT Asia Dividend+ Index USD 54 3141.80 14.0 20.5 50.3 27.5 3.86 

FTSE EPRA/NAREIT Asia Rental Index USD 42 1594.88 10.7 7.4 35.9 15.7 4.66 

FTSE EPRA/NAREIT Asia Non-Rental Index USD 39 1751.78 12.5 13.4 48.7 29.3 1.53 


FTSE IDFC India Infrastructure Index IRP 63 1339.48 12.2 61.5 98.3 60.8 0.51 

FTSE IDFC India Infrastructure 30 Index IRP 30 1405.58 14.1 68.4 100.0 66.2 0.66 

SRI 

FTSE4Good Japan Index JPY 192 6337.31 -4.3 -4.9 2.0 -4.2 1.24 

Shariah 

FTSE SGX Shariah 100 Index USD 100 6767.01 6.1 13.7 26.1 14.9 1.73 

FTSE Bursa Malaysia Hijrah Shariah Index MYR 30 10378.35 3.1 20.2 63.0 39.5 2.59 

FTSE Shariah Japan 100 Index JPY 100 1837.23 -1.6 -0.6 10.4 1.0 1.24 


FTSE GWA Japan Index JPY 473 4384.91 -4.6 -5.8 2.8 -2.8 1.23 

FTSE GWA Australia Index AUD 113 5181.86 8.5 12.7 32.4 19.9 3.77 

FTSE RAFI Australia Index AUD 55 7485.93 7.1 9.0 29.4 16.8 4.14 

FTSE RAFI Singapore Index SGD 19 8953.05 4.3 19.1 53.1 28.0 2.96 

FTSE RAFI Japan Index JPY 344 6120.19 -3.7 -5.3 5.0 -1.1 1.26 

FTSE RAFI Kaigai 1000 Index JPY 1008 6583.17 1.2 7.4 21.0 9.5 2.65 

FTSE RAFI China 50 Index HKD 50 8281.84 24.2 58.36 na na 2.05 


95

CALENDAR 

96 

Index Reviews November – December 2007 

Date Index Series Review Type Effective 

(Close of business) 

Data Cut-off 

9-Nov Hang Seng Quarterly review 7-Dec 28-Sep 

14-Nov MSCI Standard Index Series Quarterly review 30-Nov 31-Oct 

Early Dec CAC 40 Quarterly review 21-Dec 30-Nov 

Early Dec ATX Quarterly review 31-Dec 30-Nov 

Early Dec IBEX 35 Semi-annual review 2-Jan 30-Nov 

Early Dec OBX Semi-annual review 21-Dec 30-Nov 

Early Dec OBX Quarterly review 21-Dec 30-Nov 

5-Dec DAX Quarterly review 21-Dec 30-Nov 

6-Dec FTSE Global Equity Index Series 

(incl. FTSE All-World) Annual review / North America 21-Dec 28-Sep 

7-Dec S&P BRIC 40 Annual review 21-Dec 16-Nov 

7-Dec S&P / ASX Indices Quarterly review 21-Dec 

11-Dec NZSX 50 Quarterly review 31-Dec 30-Nov 

12-Dec FTSE/JSE Africa Index Series Quarterly review 21-Dec 7-Dec 

12-Dec FTSE UK Index Series Annual review 21-Dec 11-Dec 

12-Dec FTSE techMARK 100 Quarterly review 21-Dec 30-Nov 

12-Dec FTSE Euromid Quarterly review 21-Dec 30-Nov 

12-Dec FTSEurofirst 300 Quarterly review 21-Dec 30-Nov 

12-Dec FTSE EPRA/NAREIT Global Real 

Estate Index Series Quarterly review 21-Dec 7-Dec 

12-Dec FTSE eTX Index Series Quarterly review 21-Dec 30-Nov 

14-Dec FTSE NAREIT US Real Estate 

Index Series Annual review 21-Dec 30-Nov 

14-Dec FTSE NASDAQ Index Series Annual review 21-Dec 30-Nov 

14-Dec NASDAQ 100 Annual review 21-Dec 30-Nov 

18-Dec FTSE Bursa Malaysia Index Series Annual review 21-Dec 30-Nov 

15-Dec PSI 20 Semi-annual review 2-Jan 30-Nov 

Mid Dec VINX 30 Semi-annual review 25-Dec 30 Nov 

Mid Dec OMX C20 Semi-annual review 25-Dec 30-Nov 

Mid Dec OMX S30 Semi-annual review 29-Dec 30-Nov 

Mid Dec OMX N40 Semi-annual review 29-Dec 30-Nov 

Mid Dec Baltic 10 Semi-annual review 29-Dec 30-Nov 

18-Dec S&P MIB Quarterly review - shares & IWF 27-Dec 17-Dec 

19-Dec S&P US Indices Quarterly review 21-Dec 

19-Dec S&P Europe 350 / S&P Euro Quarterly review 21-Dec 

19-Dec S&P Topix 150 Quarterly review 21-Dec 

19-Dec S&P Asia 50 Quarterly review 21-Dec 

19-Dec S&P Latin 40 Quarterly review - shares & IWF 21-Dec 

19-Dec S&P Global 1200 Quarterly review - shares & IWF 21-Dec 

19-Dec S&P Global 100 Quarterly review - shares & IWF 21-Dec 

19-Dec DJ STOXX Quarterly review 21-Dec 13-Nov 

21-Dec Russell US Indices Quarterly review - IPO additions only 31-Dec 30-Nov 

Sources: Berlinguer, FTSE, JP Morgan, Standard & Poors, STOXX 


Jim wondered if there was an easier way to 

get his own copy of FTSE Global Markets... 

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issuers, fund managers, pension plan sponsors, investment bankers, 

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To discuss advertising insertions, tip-ons, supplements, sponsored 

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...there is: 

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