Discussion paper on Short Selling and Securities Lending and Borrowing
THE SECURITIES BORROWING AND LENDING MARKET · THE SECURITIES BORROWING AND LENDING MARKET Aaron...
Transcript of THE SECURITIES BORROWING AND LENDING MARKET · THE SECURITIES BORROWING AND LENDING MARKET Aaron...
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SUNGARD Astec Analytics
THE SECURITIES BORROWING AND LENDING MARKET
Aaron Gerdeman Timothy Smith
October 22, 2009
SUNGARD
SunGard’s Astec Analytics
SUNGARD Background of SunGard’s Astec Analytics
� Securities lending specialist � Market information � Benchmarking � Research
� Founded 1980 � Acquired by SunGard October 2007 � 29-years experience � State-of-the-art technology � Integration with other SunGard solutions
� Clients � Beneficial owners and direct lenders � Custodians and 3rd-party agent lenders � Prime brokers � Hedge funds
SUNGARD
State of the Industry
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Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
Availability (Trillion
s)
Securities Available for LendingTrillions of Shares / Par Value
SUNGARD Effects of the Last Year – Supply
2007 20092008
Source: SunGard Astec Analytics
0 bp
50 bp
100 bp
150 bp
200 bp
250 bp
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul
Fee (bp)
Global Equity Spreads
SUNGARD Effects of the Last Year – Demand
2007 20092008
Source: SunGard Astec Analytics
$‐
$100
$200
$300
$400
$500
$600
$700
$800
$900
2007 2008 2009
Billion
s
U.S. Equity Loan Volume ($)
Non‐U.S. Equity Loan Volume ($)
SUNGARD Effects of the Last Year – Changes in Volume
Securities Loan Volume
U.S. Equities
Source: SunGard Astec Analytics
‐1.00
0.00
1.00
2.00
3.00
4.00
5.00
2007 2008 2009
Intrinsic Fee (%
)
GC
Specials
SUNGARD Effects of the last year – spread differentials
GC vs. Special by Intrinsic FeesGC vs. Special,
Source: SunGard Astec Analytics
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009
Special
GC
SUNGARD Effects of the Last Year – ‘Specials only lending?’
GC vs. Special
Source: SunGard Astec Analytics
Insurance Companies
27.5%
ERISA Funds22.0%
Public Pensions19.0%
S&LG Treasurers21.9%
Mutual Funds8.5%Closed-End Funds
and ETF's 1.1%
SUNGARD Focus on Investment Companies: S/L Market Share
� About one-tenth of loan volume TOTAL ON-LOAN VOLUME (2Q08)
$2.2 Tn
� Lending activity at funds has increased steadily since the late 1990s
SUNGARD Focus on Investment Companies: S/L Growth
� Total returns vary across asset classes � Due to utilization rates and loan spreads
SUNGARD Focus on Investment Companies: Returns in S/L
Average Earnings Due To Securities Lending for Different Investment Styles July 2008. Source: SunGard Astec Analytics
Investment Style
Return on Loans (Basis Points)
Average Share of Portfolio on Loan
Annualized S/L Return on Portfolio Value (Basis Points)
Equity Small‐Cap 173.5
Equity Mid‐Cap 153.2
Equity International 119.3
Fixed Income Government 40.1
Equity Growth 92.3 Equity Value 82.0 Fixed Income Corporate 73.7
Fixed International 50.0
Equity Domestic 68.0
Fixed Income High Yield 89.3
Balanced 51.7
Equity Large‐Cap 79.4
11.6% 6.1%
5.7%
15.6%
5.9%
6.0%
5.7%
8.2%
5.5%
4.2%
5.9%
2.6% 20.0
9.4
6.8
6.3
5.4
4.9
4.2
4.1
3.7
3.7
3.0
2.0
SUNGARD
Overview of the U.S. Securities Lending Model
SUNGARD Overview of the U.S. Securities Lending Model
� Use of Lending Agents � Custodial / operational activity � Few ‘direct’ lending programs
� Collateral � Cash , almost exclusively, with regulatory promotion � Collateral ‘re-investment’ became driver of S/L revenue
� Industry competition � Rise of the third party lending agent � Competing on (cash) returns
� Service levels � Income splits � Indemnification
SUNGARD
U.S. Regulatory Interest and Impact
–
SUNGARD Reg SHO Timeline
Pilot Period 2 May 2005 – 30 Jun 2007
Reg SHO Adopted 7-Sep-2004
Threshold List Jan 2005
Rule 201 Eliminates Uptick Rule
Jul 2007
Rule 203: Grandfather Clause Removed
15 Oct 2007
SEC Bans Short Selling in Financial Stocks
18 Sep 2008 8 Oct 2008
Rule 204T 17 Sep 2008 – 31 Jul 2009
SEC Emergency Order 21 Jul 2008 – 12 Aug 2008
10b-21 17 Sep 2008
2005 2006 2007 2008 2009
SUNGARD US Regulatory Interest and Impact – The Uptick Rule
� The original uptick rule vis-à-vis securities lending
Analysis of changes in stock loan volume before/during/after Pilot Period for Russell 3000 Index stocks:
� Change from pre-Pilot to start of Pilot: � Pilot stocks (N=750) Æ +17%
� Non-Pilot stocks (N=2,600) Æ +14%
� Change from end days of Pilot to elimination of Uptick rule: � Pilot stocks (N=750) Æ +18% � Non-Pilot stocks (N=2,600) Æ +16%
0%
20%
40%
60%
80%
100%
120%
7 Jul 21 Jul 4 Aug 18 Aug
19 Financials
Rest of NYSE
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50%
40%
30%
20%
10%
0%
10%
1 Aug 15 Aug 29 Aug 12 Sep 26 Sep 10 Oct 24 Oct 7 Nov
US Financial StocksUS Stocks ex Financials
SUNGARD
US Regulatory Interest and Impact – Short Selling Restrictions
� SEC short selling restrictions � Emergency Order of July 2008 � Short selling ban of September 2008
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SEC Emergency Order
Change in Shares On Loan for 19 Financial Stocks
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SEC Ban on Shorting Financials
U.S. Equity Loan Volume
Source: SunGard Astec Analytics
SUNGARD US Regulatory Interest and Impact – Rule 204
SUNGARD
Transparency in Securities Lending
SUNGARD Transparency in Securities Lending
� How it all started � Unintentional opacity
� How it has changed � Cross-border expansion � Corporate actions and voting � Academic interest � Beneficial owner interest � Growth in robust available data � Performance benchmarking requirements and the RFP
process � Regulatory interest
� Where we are today � ‘Real’ acceptance of principle of ‘relevant’ transparency
SUNGARD Example of Transparency: Lending Pit
� Price discovery tool
� Securities lending trading desks
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SUNGARD Astec Analytics
Thank You