Section 2 - FTSE
Section 2 - FTSE
Section 2 - FTSE
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
THE NEAR-DEATH experience of Countrywide<br />
Financial Corporation (CFC) in recent months<br />
developed so rapidly that it surprised perhaps even<br />
Angelo R Mozilo, the company’s brash and supremely<br />
confident chief executive officer. Throughout late 2006—as<br />
sub prime loans made by other lenders began defaulting in<br />
large numbers, home prices softened, and interest rates<br />
rose — Mozilo exuded confidence at his company’s<br />
prospects. At a conference of bond investors in September<br />
of 2006, he asserted that CFC’s “proprietary technology”<br />
and “prudent underwriting guidelines”would win the day.<br />
His optimism seemed justified because common wisdom<br />
said the home mortgage industry’s problems were<br />
restricted to sub prime loans. While those loans were made<br />
to borrowers with weak credit they comprised no more<br />
than 10% of CFC’s business (even so, enough to rank<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
Photograph supplied by iStockphoto.com,<br />
October 2007.<br />
From a single office in<br />
Calabasas — a former<br />
stagecoach stop just north of<br />
Los Angeles — Countrywide<br />
grew into the world’s largest<br />
home-mortgage company,<br />
originating $463bn in loans<br />
last year and servicing a<br />
$1.5trn portfolio of home<br />
loans. The company’s success<br />
made cofounder and<br />
chairman Angelo Mozilo a<br />
very wealthy man. Now, both<br />
his fortune and his company<br />
may be in jeopardy because<br />
of a deadly combination of<br />
rising interest rates, falling<br />
home sales, and a worldwide<br />
liquidity crisis. Art Detman<br />
reports from California.<br />
COUNTRYWIDE:<br />
UP CLOSE & PERSONAL?<br />
Countrywide third among all sub prime lenders). Mozilo<br />
castigated other mortgage companies for incompetence,<br />
said Countrywide would grow by hiring its competitors’<br />
castoffs, and predicted that 2007 would be the trough in the<br />
home lending cycle. By 2008 business would be humming<br />
again. Actually, business hummed in 2006 for CFC, which<br />
reported record revenues of $11.4bn, record per share<br />
earnings of $4.29, and net profits of $2.511bn (down a hair<br />
from $2.528bn in 2005). In March this year, New Century<br />
— a major sub prime lender — suspended operations. By<br />
this time, more than two dozen sub prime lenders had<br />
closed up shop. But there were signs that the mortgage<br />
industry’s problems weren’t confined to sub prime loans.<br />
CFC, for example, reported that during 2006 the<br />
delinquency rate on its prime loans rose to 2.93% from<br />
1.57% in 2005.<br />
PROFILE: COUNTRYWIDE FINANCIAL<br />
51
PROFILE: COUNTRYWIDE FINANCIAL<br />
52<br />
Financial company executives testify on Capitol Hill in Washington, Thursday, March 22nd, 2007, before the Senate Banking Committee hearing<br />
on sub prime mortgages. From left are, WMC Mortgage chief executive officer Laurent Bossard; Countrywide Financial executive managing<br />
director Sandy Samuels; HSBC Finance Corporation chief executive officer Brendan McDonaugh; Janis Bowdler; and First Franklin Financial<br />
Corporation President L. Andrew Pollock. Photograph by Dennis Cook, supplied by Associated Press/PA Photos, October 2007.<br />
In July two hedge funds managed by Bear Stearns<br />
suddenly collapsed, mainly because they were unable to<br />
determine the value of their sub prime loans. Fear rippled<br />
through credit markets around the globe. The entire<br />
worldwide credit system threatened to freeze up. Some put<br />
the blame upon Alan Greenspan, who as chairman of the<br />
Federal Reserve System (the Fed) flooded the financial<br />
system with liquidity after the dot-com collapse in 2000 and<br />
lowered short-term rates to just 1%. This stabilised markets<br />
and softened the 2001 recession. However, in driving down<br />
interest rates, the Fed enabled more people to buy homes<br />
and thus fueled an unprecedented run up in housing prices.<br />
An unsustainable cycle had gotten under way. Lenders<br />
gladly allowed buyers to overextend themselves by making<br />
loans with below-market rates during the first two or three<br />
years, the expectation being that homeowners could<br />
refinance before the higher rate kicked in. Besides, the<br />
reasoning went, rising home prices would enable even<br />
buyers who were paying only interest to build equity.<br />
To yield-hungry investors — aggressive hedge funds and<br />
cautious pension funds alike — packages of these<br />
mortgages appeared to be super-safe investments with<br />
higher returns than those of other collateralised securities.<br />
Bundling thousands of mortgages into a single tradable<br />
security dates to the late 1970s, when Solomon Brothers<br />
invented the idea. Until then, companies like Countrywide<br />
either sold their loans to the Federal National Mortgage<br />
Association or the Government National Mortgage<br />
Association, both of which had dollar limits on each loan<br />
and strict underwriting standards, or kept nonconforming<br />
loans on their own books. Securitisation freed loan volume<br />
from the anchor of in-house capital. US mortgage<br />
companies were transformed from long-term lenders into<br />
mere originators.<br />
What’s more, as consumer credit companies became<br />
more sophisticated in assessing the creditworthiness of<br />
individuals, what had been an exhaustive underwriting<br />
process became little more than a clerical procedure to<br />
obtain credit scores.<br />
Meanwhile, agencies such as Standard & Poor’s and<br />
Moody’s began rating the individual mortgages that<br />
comprised the collateralised debt obligations. Mortgage<br />
originators, says Peter S Cohan, head of his own consulting<br />
firm, “gave the business to the agency that provided the<br />
highest rating. Basically, they were buying the ratings.”<br />
With the risk transferred in large part to investors that<br />
bought mortgages, rather than the companies that<br />
originated them, a classic moral hazard had been created.<br />
Soon marketing, not underwriting, was the key to success<br />
in the mortgage business.<br />
No one did this better than Countrywide. Its loan<br />
origination officers became the industry’s most effective,<br />
winning prospects with this assurance: “I want to be sure you<br />
are getting the best loan possible.”Even so, there was a flaw in<br />
the business model.“What got Countrywide and others into<br />
trouble was their financing strategy,”says Michael McMahon,<br />
a former commercial banker turned security analyst who is<br />
now a private investor.“They finance medium and long term<br />
assets with short and medium term borrowings.”<br />
Even though CFC sells most of its loans to institutions, it<br />
holds several billion dollars in mortgages on its books and<br />
needs to roll over short-term loans that finance those<br />
mortgages. Without ready cash to fund new mortgages for<br />
sale, it would be essentially out of business. As industry-wide<br />
defaults and foreclosures rose and home sales dropped,<br />
Mozilo sought to reassure investors by claiming a line of<br />
readily available credit that totalled almost $50bn. Liquidity,<br />
he assured the market, was not a problem for Countrywide.<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
4-6 December, 2007 Direct Energy Center • Toronto, ON<br />
www.tradetechcanada.com<br />
Find Liquidity And Achieve Best Execution In The Evolving Canadian Market<br />
2007 Speaking Faculty Includes:<br />
Jeff Brown<br />
CIO<br />
Highstreet Asset Management<br />
John Spitman<br />
Vice President and Portfolio<br />
Manager<br />
AIC<br />
David Easthope<br />
Senior Analyst<br />
Celent<br />
Executive Buy Side Summit Arrives<br />
In Toronto! Tuesday, December 4<br />
TradeTech is thrilled to bring the Executive Buy Side<br />
Summit to Toronto! The unique format in Toronto<br />
combines breakout discussions with the opportunity to be<br />
proactive and have your questions answered by leading<br />
solution providers. Determine which trading tools would<br />
add the most benefit by meeting your partners in an<br />
intimate environment where you can talk freely.<br />
TradeTech delegates are better prepared for tomorrow’s<br />
market changes than their non-attending counterparts.<br />
Sponsored By: Organized by:<br />
TO REGISTER<br />
Network with over 100 buy side traders at TradeTech Canada<br />
2006 sold out! Register early to ensure a seat!<br />
TradeTech Canada Is Your Best Opportunity To:<br />
• Assess optimal conditions for using algos in the<br />
Canadian market to give you more time to focus on<br />
other trades<br />
• Build stronger broker dealer relationships to<br />
ensure better performance and best execution<br />
Tom Brown<br />
Manager, Trade Support &<br />
Settlements<br />
RBC Asset Management<br />
Craig Gaskin<br />
Managing Director<br />
TD Asset Management<br />
The real-life examples shared at TradeTech prompted ideas for<br />
my own trading desk and provided the perfect opportunity to<br />
target potential partners for projects."<br />
Michael Crockett, Senior Equity Trader, BRAZOS CAPITAL<br />
MANAGEMENT<br />
Subscribers Gain<br />
15% Off With<br />
Code XS67<br />
• Gain a stronger sense of the landscape and<br />
regulatory outlook in the proliferating<br />
ATS market<br />
• Integrate cross border trading to add value to<br />
your desk<br />
Call: 888.482.6012 or 973.812.5153 Fax: 973.256.0205<br />
Email: tradetechca@wbresearch.com Web: www.tradetechcanada.com
PROFILE: COUNTRYWIDE FINANCIAL<br />
54<br />
Kenneth Bruce, a highly regarded analyst at Merrill Lynch<br />
who, for 13 years, worked in the banking industry (including<br />
two years at Countrywide), agreed and reiterated a buy rating.<br />
Two days later, in mid-August, Bruce reversed himself and<br />
issued a sell rating, warning that Countrywide could go<br />
bankrupt if it could not continue borrowing money to fund<br />
its portfolio. Neither his upbeat note nor sell rating was<br />
intended for the public. “Those notes were proprietary for<br />
our clients,”says a Merrill Lynch spokeswoman. “We did not<br />
send them to any media.”Bruce’s alarm triggered a sell-off in<br />
not only Countrywide stock, which fell 13% one day and<br />
then 11% the next, but in mortgage-related securities of all<br />
kinds. There was a<br />
week-long run on<br />
Countrywide Bank,<br />
CFC’s wholly owned<br />
thrift that has about 100<br />
offices across the US.<br />
The $50bn in ready<br />
credit that Mozilo<br />
touted had evaporated.<br />
He scrambled to pull<br />
together a financing<br />
package. One report<br />
said he was offered 30day<br />
money at 12.5%,<br />
the financial equivalent<br />
of hara-kiri. Pundits<br />
opined that CFC was<br />
too big to fail — after<br />
all, it originated one in six home mortgages in the US. The<br />
stock traded as low as $15. On August 17 Mozilo<br />
announced he had secured a financing of $11.5bn from a<br />
consortium of 40 banks. This failed to ease market fears.<br />
Every month Countrywide made $41bn in mortgage loans,<br />
and to finance these it relied upon turning over $13bn in<br />
commercial paper. The new funding fell short of<br />
Countrywide’s needs. Paul J Miller, an analyst at Friedman,<br />
Billings, Ramsey & Co., predicted that if the liquidity crunch<br />
lasted more than a month, Countrywide would be forced to<br />
sell assets at a deep discount to remain in business.<br />
As we’ll see, he was right. First though, Mozilo announced<br />
that Countrywide Bank—the company’s wholly owned<br />
federal savings bank—would speed its expansion in order to<br />
fund home loans with deposits. As McMahon notes, this is<br />
relatively easy because Countrywide Bank branches are just<br />
kiosks inside Countrywide Home Loan offices, not branches<br />
as defined by the Fed. By this time, according to one source,<br />
examiners from the Office of Thrift Supervision (which<br />
regulates federally chartered savings banks) had set up shop<br />
inside of Countrywide’s headquarters and were monitoring<br />
events on a real-time basis. Countrywide had staunched the<br />
outflow of funds with newspaper ads offering above-average<br />
interest rates. By the end of September, Countrywide Bank<br />
was attracting $50m in deposits each day. As the industry<br />
continued to deteriorate, Mozilo made a surprise<br />
announcement: Bank of America (BofA) had agreed to invest<br />
In March, New Century—second only to CFC<br />
in making sub prime loans—suddenly<br />
suspended operations, just a week after a<br />
favourable analyst’s report from Bear Stearns.<br />
By this time, more than two dozen sub prime<br />
lenders had either failed or closed up shop.<br />
However, there were signs that the mortgage<br />
industry’s problems were not confined to sub<br />
prime loans. CFC, for example, reported that<br />
during 2006 the delinquency rate on its prime<br />
loans rose to 2.93% from 1.57% in 2005.<br />
$2bn in CFC. BofA, the nation’s leading consumer bank with<br />
assets of $1.46trn, had romanced CFC for six years or more,<br />
according to reports. In return for BofA’s ready cash, CFC gave<br />
up 20,000 shares of preferred stock, which pay an annual<br />
dividend of 7.25% (more than double the rate similar CFC<br />
securities paid just a month before) and are convertible into<br />
111m shares of common at $18. BofA CEO Kenneth Lewis<br />
had secured the right to buy 16% of Countrywide for not only<br />
less than market price but for 20% less than book value. BofA<br />
cannot sell the preferred shares for 18 months, but in return<br />
gets the right of first refusal on any offer to acquire all of CFC.<br />
An enigmatic phrase in the agreement says that the<br />
conversion price “may be<br />
adjusted upon the<br />
occurrence of certain<br />
events.” Neither<br />
company would<br />
elaborate, but reasonably<br />
translated it means that if<br />
CFC’s financial condition<br />
declines beyond a certain<br />
point, the conversion<br />
price also declines.<br />
Analyst Paul Miller’s<br />
prediction had come to<br />
pass. An analyst at S&P<br />
says the preferred stock<br />
sale signaled distress on<br />
the part of Countrywide,<br />
and Frederick Cannon of<br />
Keefe, Bruyette & Woods (KBW) agrees. “From a<br />
shareholder’s viewpoint, it was very expensive, but it would<br />
appear that it was also extremely necessary.”<br />
Mozilo put forward the best face possible, calling it a vote<br />
of confidence and portraying the transaction as a win-win<br />
deal for both companies. BofA’s Lewis was more detached.<br />
“We hope this investment will be a step toward a return to<br />
a more normal liquidity in the mortgage market,”he said.<br />
Alas, investors weren’t persuaded that Countrywide had<br />
been saved.They concluded that the $2bn BofA investment<br />
was really too small to make a real difference. Interest rates<br />
were rising, home values were falling, and an<br />
undetermined number of CFC borrowers would be unable<br />
to continue making payments as the interest rates on their<br />
loans reset to market rates. One clue: fully 60% of CFC’s<br />
sub prime loans made in 2005 and 2006 and scheduled to<br />
reset in 2008 have not been refinanced. Mozilo himself<br />
spoke despairingly of a “sudden and severe and deep<br />
deterioration”in home values.<br />
In August Mozilo announced that 500 jobs would be cut.<br />
In early September he announced that an additional 900<br />
employees would be let go. Two days later he said the total<br />
would reach 10,000 to 12,000 over the next three months, up<br />
to 20% of Countrywide’s total headcount. A week later,<br />
almost buried in a press release, was news of a new financing<br />
of $12bn secured by liens against mortgages held in<br />
Countrywide’s own portfolio. Over 30 days, Countrywide<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
had obtained three financings: first a bank financing of<br />
$11.5bn, then the sale of $2bn in convertible preferred stock,<br />
and finally a mystery funding of $12bn. Meanwhile, layoffs<br />
of 500, then 900, and ultimately 12,000 had been announced.<br />
It appeared that Mozilo no longer had a firm hand on events<br />
but rather was improvising almost day to day. In fact, the<br />
announced layoffs may not be enough. Nonconforming<br />
loans accounted for 40% of CFC’s loans in 2006. Mozilo<br />
wants to reduce that to 10%, which means he likely will have<br />
to reduce headcount by a total of 30% or even 40%.<br />
Meanwhile, lawsuits are piling up. “It’s not atypical to<br />
have a number of lawsuits occur when you see a stock price<br />
drop the way this stock price has dropped,”says Cannon of<br />
KBW. “Whether or not they have meaningful merit from an<br />
equity investor’s point of view is hard to say. But I would<br />
put those lawsuits as one of those off-balance sheet risks<br />
that we try to be aware of.”<br />
Cannon is right, of course. Furthermore, one suit goes to<br />
the very heart of Countrywide’s problems. Filed by the San<br />
Francisco law firm of Liner Yankelevitz Sunshine &<br />
Regenstreif as a class action on behalf of everyone enrolled<br />
in the company’s employee pension plan, the suit<br />
maintains that the administrators of the plan—all company<br />
insiders—knew or should have known that Countrywide<br />
was about to encounter conditions that would drive down<br />
the price of its stock (which fell more than 50% during the<br />
first nine months of 2007). Ronald S Kravitz, the lead<br />
attorney in the action, will surely ask jurors this key<br />
question: “Why did the administrators of the pension plan<br />
offer CFC stock as an investment option, and why did they<br />
fund the company’s share of employee contributions solely<br />
with CFC stock, when they themselves were selling their<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
Countrywide bank customers wait in the lobby of a Los Angeles<br />
branch, Monday, August 20th 2007. Countrywide Financial Corp.<br />
tries to reassure customers that the liquidity problems dogging its<br />
mortgage lending business are not affecting its banking unit,<br />
Countrywide Bank FSB, even as people worried about their savings<br />
converge on bank offices. Photograph by Nick Ut, supplied by<br />
Associated Press/PA Photos, October 2007<br />
own shares, month after month after month?”<br />
Indeed, it appears that Mozilo himself has not bought a<br />
share for his own portfolio since 1987, and that no officer<br />
or director bought a share in 2006 or 2007. Insider trading,<br />
as reported on the SEC’s website, amounts to 23 pages of<br />
transactions, but every transaction is a sale, not a purchase.<br />
Mozilo himself allegedly has reaped more than $400m in<br />
stock options that he has exercised over the years. Many<br />
of these sales were, it has been reported, made under Rule<br />
10b5-1, which permits executives to establish plans for the<br />
regular sale of stock. The idea is that, as long as these sales<br />
were executed under a predetermined plan, the executive<br />
is protected from any accusations of insider trading. But<br />
this may prove a challenging argument for Mozilo to<br />
make. According to filings in late 2006 and early 2007 ( as<br />
the liquidity crisis was becoming evident but before CFC<br />
stock reached its low point) he allegedly adopted a new<br />
plan, added a second plan, and then revised it. The net<br />
effect was to permit him to sell shares at far higher prices<br />
than if he hadn’t instituted the new plan (which allowed<br />
him to sell up to 350,000 shares a month), or adopted a<br />
second plan (which allowed him to sell an additional<br />
115,000 shares a month), or filed a revision that allowed<br />
the sale of 580,000 shares a month (just as CFC stock<br />
reached its all-time high of $45.03).<br />
55
PROFILE: COUNTRYWIDE FINANCIAL<br />
56<br />
Typically, executives file a plan and stick with it for years.<br />
But Mozilo filed plans that allowed him to sell stock at an<br />
ever-increasing rate even though his options did not expire<br />
until June 2011. Mozilo also began selling shares he had<br />
held for years. As October drew to a close, it appeared that<br />
soon Mozilo would own no shares of his company, a<br />
remarkable situation for a CEO. Because Mozilo is ultimately<br />
the responsible officer for the company’s pension plan, and<br />
because he sold so much stock within the past two years,<br />
litigants may demand he give up some of those gains.<br />
Kravitz goes further than simply alleging that CFC stock<br />
was an unlucky investment for the pension plan.<br />
“Countrywide stock became an imprudent investment<br />
based in part on the misconduct going on in the company<br />
that, once disclosed, could lead to a drop in the price of the<br />
stock.” This alleged misconduct has been reported in<br />
various news articles, which describe a variety of practices<br />
that exploited Countrywide borrowers by charging them<br />
interest rates that were higher than their credit scores<br />
merited and overcharging them for a variety of fee-based<br />
services, such as appraisals and credit reports. Mozilo has<br />
angrily denied the allegations, although he has not<br />
specifically rebutted any particular one.<br />
Meanwhile, the state treasurer of North Carolina wrote<br />
to the SEC complaining that Mozilo “apparently<br />
manipulated his trading plans to cash in” even as the sub<br />
prime debacle was unfolding. And the Louisiana<br />
Municipal Police Employees’Retirement System persuaded<br />
the Delaware Chancery Court to order Countrywide to<br />
provide confidential information about the operation of its<br />
stock-option program. Countrywide was also told to<br />
provide any related information that it may have already<br />
given to the SEC, the New York Stock Exchange, or the US<br />
Department of Justice.<br />
Clearly, both actions lay the foundation for lawsuits.<br />
Kravitz expects that at some point all the suits will be<br />
consolidated into a single action and a lead attorney will be<br />
appointed by the court to prosecute the action.The lawsuits<br />
present a possible impediment to what is likely the most<br />
logical solution to the problems facing Countrywide, which<br />
would be its acquisition by Bank of America. BofA now<br />
holds nearly 10% of all US bank deposits, which is the limit<br />
set by the government. If BofA is to grow, the mortgage<br />
market presents a natural path. Already BofA ranks fifth,<br />
with a 7% market share, but experts say that its mortgage<br />
operation is not managed nearly as well as Wells Fargo’s<br />
(the number two mortgage company) or CFC’s.<br />
Mozilo has proposed that BofA outsource its entire<br />
mortgage business to Countrywide, which presumably<br />
would put its own people at home mortgage desks in BofA<br />
branches and which certainly would act as BofA’s back<br />
office for all mortgage transactions. BofA CEO Lewis has<br />
not publicly responded directly to this idea, but he has said<br />
that he has never been involved in a successful joint<br />
venture. Indeed, suppose that BofA had hired<br />
Countrywide to run its mortgage business, and then<br />
Countrywide was hit with these lawsuits, unfavorable press<br />
articles, and equally unfavorable comments by various<br />
politicians. Lewis would have little if any control over the<br />
situation, hardly the position a conscientious (or<br />
ambitious) CEO wants to find himself in.<br />
Mike McMahon, the former banker, notes one potential<br />
downside. Mortgage banking is a volatile, cyclical and<br />
seasonal business, and therefore mortgage banks<br />
command a low price/earnings multiple. CFC, for<br />
example, traded below 10 times earnings (recently, the p/e<br />
ratio was 5). Even so, CFC might still make sense for BofA.<br />
Like other commercial banks, BofA expects to cross-sell<br />
services to its mortgage customers. Besides, even with the<br />
book of CFC mortgage business, BofA would not be<br />
primarily a mortgage bank but rather a consumer bank<br />
with a big mortgage business.<br />
Will it happen? It might, provided that Mozilo and Lewis<br />
find a way to settle the lawsuits quickly and at a reasonable<br />
cost. But there is still another potential problem. Generally,<br />
institutional investors who buy mortgage-backed securities<br />
have no recourse if those mortgages default. The exception is<br />
fraud — whether it is committed by the mortgage originator<br />
or the borrower. Here lies the rub: it is an unquantifiable<br />
hazard for CFC or any company that acquires it. In the<br />
freewheeling days of 2003 to 2005, it was easy for loan officers<br />
and borrowers to bend the facts to their advantage. If an<br />
institutional investor can substantiate enough such instances,<br />
it may force Countrywide to take back an entire package of<br />
loans — a potentially devastating event.<br />
Meanwhile, the housing market continues to deteriorate<br />
and so does Countrywide’s financial results. For<br />
September, the company reported that total loan fundings<br />
fell 44% from September 2006. Delinquencies as a<br />
percentage of unpaid principal balances rose to 5.85%, up<br />
from 4.04%, and pending foreclosures climbed to 1.27%,<br />
up from 0.51%. A few days later CFC announced that<br />
layoffs and office closings will require a pretax charge of<br />
$125m to $150m. Analysts projected third quarter losses of<br />
as much as $1.3bn after loan loss provisions.<br />
What does Mozilo have to say about his company’s<br />
predicament? Very little (phone calls from the press,<br />
including <strong>FTSE</strong> Global Markets, are rarely returned).<br />
However, in an effort to combat an increasingly poor public<br />
image, Mozilo hired a major public relations agency with<br />
substantial experience in crisis management. Now,<br />
employees are provided with rubber wristbands that<br />
proclaim “Protect Our House.” In a meeting with<br />
employees, a senior executive reportedly told them that “it’s<br />
gotten to the point where our integrity is being attacked.<br />
NOW IT’S PERSONAL! . . . And, WE’RE NOT GOING TO<br />
TAKE IT!” In other words, if anyone has suffered during<br />
the recent mortgage lending crash, it is Countrywide, not<br />
its customers or shareholders.<br />
The events of the past two years have resulted in a grim<br />
outlook for nearly every aspect of the US housing industry. But<br />
the industry will bounce back and once again the American<br />
housing market will be robust and growing. For now, it’s too<br />
soon to say the same about Countrywide Financial.<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
THE SECURITIES LENDING<br />
Roundtable<br />
TRANSFORMATION & TRANSPARENCY<br />
COMMENTATORS:<br />
Left to right back row:<br />
MICK CHADWICK, head of trading, securities finance, Morley Fund Management<br />
DAVID RULE, chief executive officer, International Securities Lending Association (ISLA)<br />
MARK FAULKNER, chief executive officer, Spitalfields Advisors<br />
CHRIS JAYNES, president, eSeclending<br />
Left to right front row:<br />
RICHARD STEELE, head of product development for securities lending,<br />
JPMorgan Worldwide Securities Services<br />
FRANCESCA CARNEVALE, Editor, <strong>FTSE</strong> Global Markets<br />
JOHN POOLE, chief operating officer - Europe, Mercer Investment Management<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
Supported by:<br />
57
THE SECURITIES LENDING ROUNDTABLE<br />
58<br />
TRENDS TO WATCH<br />
CHRIS JAYNES, PRESIDENT, eSECLENDING: There is an<br />
increasing demand for lending in emerging market<br />
countries. It been a growing trend for a number of years<br />
and agent lenders are more actively looking at different<br />
ways to structure trades to gain access to these markets. As<br />
well, beneficial owners continue to unbundle securities<br />
lending from custody and utilise multiple providers and<br />
different routes to market to optimise their programmes.<br />
Institutions increasingly view lending as an investment<br />
decision and now use multiple providers across different<br />
parts of their lendable asset base. This allows the beneficial<br />
owner to choose the provider with the greatest expertise<br />
and ability to add value in each market, asset class or route<br />
to market and enables them to better benchmark<br />
performance against other providers.<br />
MARK FAULKNER, CHIEF EXECUTIVE OFFICER,<br />
SPITALFIELDS ADVISORS: The big trend? There are now<br />
fund managers who traditionally shunned securities<br />
lending and left it to be dealt with in a back office manner<br />
by back office people who are now borrowing securities for<br />
the first time. Not only 130/30 investment strategies, but<br />
also new regulations and deregulation have encouraged<br />
investment managers to recognise that borrowing<br />
securities and shorting them is actually good investment<br />
management practice and not just something that “evil<br />
people do”. A problem the industry faces is that it is still<br />
built upon the same operational foundations that it always<br />
has been. The good news is that some of these traditional<br />
fund managers will wake up to this fact and actually make<br />
things better and move securities lending closer to their<br />
front offices.That will happen when they realise how much<br />
money they have to pay to borrow securities, how much<br />
money they can make as lenders, how inefficient the<br />
market is, and how opaque the pricing is. This trend is<br />
welcome, forceful and positive.<br />
RICHARD STEELE, HEAD OF PRODUCT DEVELOPMENT<br />
FOR SECURITIES LENDING, JPMORGAN WORLDWIDE<br />
SECURITIES SERVICES: The market is definitely evolving.<br />
Until quite recently the industry was pretty segmented—<br />
some might say almost regimented. There were people<br />
who lent their own portfolios on a directed basis, and then<br />
there were agent lenders (typically custodians). We also see<br />
new third party providers coming in and offering more<br />
unbundled services. Traditional providers recognise this<br />
development and have responded accordingly by providing<br />
a much broader product range. At the same time, our more<br />
sophisticated clients now look to us to provide more<br />
flexible solutions than may have been the case before. In<br />
particular, traditional long only managers are looking to<br />
utilise their portfolios in different ways and asking service<br />
providers to accommodate that change. Faced with this<br />
unprecedented level of demand some providers find that<br />
their platforms may need to be overhauled, so they can<br />
provide the flexibility that clients require and it is<br />
interesting that prime brokers are looking at this space as<br />
well.<br />
DAVID RULE, CHIEF EXECUTIVE, ISLA: Big regulatory<br />
changes are underway. For example, the introduction of<br />
Basel II, with dealers in particular having to obtain more<br />
information from agent lenders about the underlying<br />
principals to their loans and the allocation of collateral<br />
among them. Mark has talked about securities lending<br />
moving towards being a front office activity and part of that<br />
is going to be more price transparency. We have already<br />
seen the growth of an interdealer market with the<br />
introduction of ICAP’s platform recently, which further<br />
encourages price transparency.<br />
JOHN POOLE CHIEF OPERATING OFFICER - EUROPE,<br />
MERCER INVESTMENT MANAGEMENT: UCITs III<br />
considerably increases the flexibility of what we can do in<br />
our core funds. We can now adopt shorting strategies, so<br />
the challenge for us is to find a cost effective way to<br />
implement 130/30 within a UCITs structure, which involve<br />
some additional regulatory restrictions. With our long only<br />
funds on the one side, and hedge type funds on the other,<br />
one of the things we want to do longer term is borrow<br />
securities from one of our long only funds and lend them<br />
to one of our long short funds. There are some huge<br />
compliance issues in that. Nonetheless, we want to cut out<br />
some of the people who would normally be in that kind of<br />
structure. Why should our long only funds lend to a third<br />
party only for our long short funds to borrow from them?<br />
The lending fund gets a lower return, and the borrowing<br />
fund pays a higher financing cost. We want to get rid of<br />
those costs to our funds. We need to find somebody to<br />
work with, to achieve this and ensure that we behave in a<br />
way that is fair to both funds.<br />
MICK CHADWICK, HEAD OF TRADING, SECURITIES<br />
FINANCE, MORLEY FUND MANAGEMENT: I echo John’s<br />
sentiment about the convergence between traditional long<br />
only fund management and the long/short space and that<br />
the compliance hurdles are significant. However, even if<br />
we cannot go so far as to disintermediate prime brokers<br />
altogether, the mere existence of both strategies under the<br />
same roof can at least keep the prime broker honest. I also<br />
strongly echo Mark’s sentiments. There has been a debate<br />
about where the product should actually sit. Is it an<br />
operations function? Alternatively, is it (to use fund<br />
management jargon) a potential source of alpha? We are<br />
now able to benchmark performance in a way that we<br />
were not able to five or ten years ago. Practitioners can<br />
now judge the performance of a programme in both<br />
absolute and relative terms. Moreover, as the industry<br />
becomes more competitive, securities lending becomes an<br />
increasingly important source of revenue. In the overall<br />
market, two trends dominate. In relatively mature,<br />
commoditised markets, where price discovery is less of an<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
issue, anything that moves is being automated. It’s all<br />
about scale; it’s all about operational efficiency. Then, at<br />
the other end of the spectrum you have some of the<br />
emerging markets where traditionally, standard securities<br />
lending has not been possible, and there you see the<br />
development of synthetic products that allow participants<br />
to generate returns in those markets. This is where it helps<br />
to work under the same roof as the fund manager who<br />
ultimately controls those assets, since such structures will<br />
typically involve the outright purchase and sale of the<br />
underlying securities.<br />
FC: I get a sense of a market in transition and becoming<br />
increasingly complex. How is that affecting the provision of<br />
your services Richard?<br />
RS: As the custodian and lending agent to a very broad<br />
and diverse client base we have had to develop flexibility<br />
as well as scale in our business for many years now. That is<br />
something that we have become very adept at and, at the<br />
same time, we are in a constant dialogue with our clients<br />
about their requirements and what they are trying to<br />
achieve. There are now many different routes to market<br />
and we all know that lending can be very portable<br />
nowadays. Above all, you must remember that it is not<br />
over when you have been awarded the portfolio mandate.<br />
In fact, that is where the relationship really begins. Clearly<br />
then in the final analysis if we are in the business, and also<br />
growing our book at a significant rate, we must be doing<br />
something right.<br />
130/30 STRATEGIES & THEIR IMPACT<br />
MF: Recent headlines suggest that there is about $60bn in<br />
130/30 dedicated investment right now, which manifests<br />
itself at ratios of $18bn worth of shorts, which is a drop in<br />
a bucket frankly. Looking forward, we are talking about<br />
something that could be much more important. If there is<br />
a take-off along the lines of that in exchange traded funds<br />
(ETFs), 130/30 could become very important, very quickly.<br />
It is interesting to see that many of the funds and firms<br />
that are focusing on this strategy are the same funds and<br />
firms that made a success out of ETFs. They were right last<br />
time and maybe they will be right again. We think that<br />
they are backing this horse. Therefore, it could be much<br />
more significant than it currently is, but it isn’t all that<br />
significant yet.<br />
RS: This sort of thing requires a long lead time and people<br />
need to decide where they are going to start investing in<br />
the cycle. With some of the deals that are going around at<br />
the moment, questions come up such as: “Can you support<br />
discretionary lending? Can you support directed lending?<br />
Can you support it in a pooling environment? Can you<br />
support a long short type structure?” I am not sure that<br />
everyone can tick all those boxes yet, and that is where it<br />
starts to get very, very interesting.<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
CHRIS JAYNES, president, eSeclending<br />
FC: Chris, do you think that eSecLending can tick all<br />
those boxes?<br />
CJ: Absolutely. Each client will need to evaluate the various<br />
options presented to them. Mark’s point is pertinent in that<br />
long short 130/30 portfolios are not a significant part of the<br />
market yet, but it still is an important component for<br />
clients. No matter how small a component these new<br />
strategies may be to any client’s overall asset base, it is the<br />
first time many have been borrowers of securities and there<br />
is a need for education on the legal, regulatory and<br />
operational issues involved. There is a concern about how<br />
to manage this process most efficiently and to make sure<br />
that they are being charged fair and reasonable fees.<br />
Whether you are managing $100m in shorts or $5bn you<br />
still need to be able to answer all these questions. All of the<br />
agents are working on solutions in different ways to help<br />
clients determine how they migrate from a long only<br />
manager to a long short manager and the trend is clearly<br />
going in that direction. I do not think any of us can predict<br />
how big it will ultimately become but the trend is clearly<br />
happening and I do not see it stopping any time soon.<br />
JP: Do we see 130/30 being adopted across the board,<br />
across all equity asset classes? Or, will it be market<br />
specific? I can’t see us going down the 130/30 route in the<br />
short term in every asset class, but we are seeing a definite<br />
change in attitude to this strategy. The impression I have is<br />
that it has already been adopted quite strongly in US<br />
equities, and other asset classes are now catching up. I’m<br />
not sure of all the reasons for this, but certainly the<br />
relaxation provided by UCITs III, especially now we can<br />
physically short, makes the operational aspects of<br />
implementing 130/30 far less of a barrier. Clearly UK and<br />
European equities are more important asset classes here,<br />
and the UCITs III changes are now making the<br />
implementation of strategies like this easier for us.<br />
59
THE SECURITIES LENDING ROUNDTABLE<br />
60<br />
MF: A number of issues<br />
come into play. What will<br />
be the investment path<br />
taken? Established markets<br />
first and then more<br />
emerging markets? It is<br />
likely to be the established<br />
markets first. Will 130/30<br />
follow the ETF model?<br />
Only now, for instance, are<br />
you seeing really esoteric<br />
emerging market ETFs. It<br />
must be remembered that<br />
shorting is not that easy. It<br />
is not as easy as just selling<br />
securities that you do not<br />
like. Take the S&P 500, the<br />
‘bottom” or most shorted<br />
10 securities are already<br />
over 60% utilised, trading<br />
at a massive premium in<br />
the securities lending<br />
market, difficult to borrow and keep short. Moreover, the<br />
role of your prime broker(s)—and/or your custodian(s) who<br />
are increasingly becoming competitors in this space—will<br />
be critical in getting sustainable access to securities, for the<br />
newer borrowers to base their strategies around. If, say, I<br />
ring up a major prime broker or custodian and I am a<br />
relatively new fund and I say that I would like some hard to<br />
borrow stock, they will more than likely say,“You know, you<br />
aren’t borrowing billions of dollars of general collateral<br />
(GC) securities from me. I cannot give it to you. I am going<br />
to give it to the guys that I have an historic, balance-driven<br />
relationship with.” It is going to be very difficult to break<br />
into those more obvious trades and those hard to borrow<br />
stocks if you are a relative newcomer.<br />
PRIME BROKERS & CUSTODIANS: A<br />
MERGING OF INTERESTS?<br />
FC: David how do you see this dynamic evolving?<br />
MARK FAULKNER, chief executive officer, Spitalfields Advisors<br />
DR: One of the differences between prime brokers and<br />
custodians is the leverage that they provide and that prime<br />
brokers lend against the assets. One reason why prime<br />
brokers have never been disintermediated by the<br />
custodians with hedge funds is because they would not<br />
take the credit risk. Actually, to be precise, they could not<br />
manage the credit risk in the way that the prime brokers<br />
can and whether they will be able to provide that kind of<br />
leverage to asset managers, I don’t know. That said some<br />
big hedge fund managers now are beginning to look more<br />
like traditional asset managers.<br />
MC: Prime brokerage has long been to the hedge fund<br />
industry what global custody has been to the long only side.<br />
With the blurring of the boundaries between the long only<br />
and long/short, inevitably<br />
there are going to be<br />
attempts by both the<br />
investment banks and the<br />
custodians to drive their<br />
tanks onto the other’s lawn<br />
and try to erode the other<br />
guy’s franchise. The market<br />
is sufficiently diversified<br />
that one cannot easily pick<br />
a winner.There are going to<br />
be funds and strategies for<br />
which the custodian is the<br />
natural provider.<br />
Conversely, the prime<br />
broker will be best placed to<br />
provide the relevant service<br />
for other funds, other<br />
strategies. The beauty from<br />
a beneficial owner’s<br />
perspective is that there’ll<br />
be choice. Greater<br />
transparency will facilitate the unbundling of these various<br />
products and services, and you don’t have to put all your eggs<br />
in one basket.You can do certain activities with one provider<br />
and others with another.<br />
FC: Chris is there is room for everybody?<br />
CJ: There will always be room for providers who can add<br />
value. It is a huge market that is controlled by a small<br />
number of significant players so there is absolutely room<br />
for providers offering a differentiated product or a new<br />
approach. Increasingly though, with the shift that Mark<br />
talked about earlier regarding the move from a back office<br />
to a front office function, there will be different<br />
expectations placed upon providers and there will be an<br />
increased demand for performance measurement and<br />
other data that did not exist a few years ago. As Beneficial<br />
Owners continue to un-bundle securities lending they are<br />
demanding a higher service level and specialized<br />
capabilities, based on each provider’s specific competencies<br />
and expertise. It does not need to be a one-stop shop or<br />
one size fits all approach like it was year’s ago.<br />
RS: We have very good relationships with the prime<br />
brokers. However, I can’t see them ever wanting to get into<br />
the core custody space, because it is not going to be<br />
remunerative enough. You have to be able to offer both<br />
scale and customisation at the same time, and on a very<br />
cost effective basis. However, they are going to try to<br />
cherry-pick the best relationships if they can.<br />
Fundamentally, custodians and prime brokers have<br />
radically different business models and so as you have seen<br />
convergence, arguably between hedge funds and long only<br />
managers, it is interesting to understand where the<br />
interface is going to be between the different providers.<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
MF: That’s a good point. I predict, though, that within a year<br />
we will see a major acquisition or transaction in the financial<br />
markets along the lines of custodian and broker dealer<br />
getting together. Moreover, one of the primary reasons cited<br />
behind the transaction will be to do with financing and<br />
servicing the growing section of the investment management<br />
community that go long and short. There will be headline<br />
announcements and some of the words in those headlines<br />
will be will be ‘long/short’, ‘prime brokerage’ and ‘global<br />
custody’. Like Richard says, prime brokers are reluctant<br />
custodians and very few dominant custodians if any of them,<br />
have a prime brokerage capability or prime broking<br />
operations worth talking about. The capabilities shouldn’t be<br />
mutually exclusive but in practice they seem to be. However,<br />
some of the custodians do have the capital to service this<br />
growing segment of the market, so there is an opportunity<br />
there for somebody to actually go out and do some financial<br />
re-engineering on a massive scale. The timing is now right.<br />
Prices are more realistic and the profile of the financing<br />
business has increased. Fortune favours the brave.<br />
MC: That will raise some interesting questions. I don’t<br />
dispute any of that logic; but at the risk of playing devil’s<br />
advocate, you already have institutions such as JPMorgan<br />
and Citibank who in theory could do precisely that<br />
already—offer both sides of the service under the same roof.<br />
However, whether the issues are cultural, operational or<br />
compliance, there hasn’t been much convergence to date.<br />
DR: They will also have an issue about how they offer best<br />
execution to both sets of customers. To a pension fund who<br />
wants to make sure that its securities are being lent to the<br />
best deal in the market and to the hedge fund who wants to<br />
make sure that it is getting its securities on the best terms.<br />
FAIR & TRANSPARENT PRICING<br />
JP: Basically we disintermediate relationships over which<br />
we have no control and limit ourselves to dealing with a<br />
party we have appointed allowing us better control over<br />
programme costs and greater transparency of information.<br />
I have an issue. I actually think that custodians are<br />
conflicted already and I don’t think they actually know who<br />
is really their client in their securities lending programmes.<br />
I suspect they make way, way more money from their big<br />
broker dealer relationships in terms of the cash balances<br />
that they maintain with them than they do from me, and so<br />
I have never felt comfortable with the idea that we get a<br />
disinterested service from the custodians.<br />
RS: I don’t think you will necessarily get a completely<br />
disinterested service from any service provider. However,<br />
custodians sign agreements with their clients who they<br />
represent as agents and they will get the best deal they<br />
possibly can on the terms that are agreed, which include<br />
your investment guidelines and any other risk/reward<br />
parameters that you choose to adopt.<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
MF: The problem that custodians often face is that they<br />
have clients that want to lend that quite frankly should not<br />
be lending and all too often an overhang of easy to borrow<br />
securities in their lending pools. They don’t say “no” as<br />
easily as they should. The lending departments are very<br />
accommodating of their custody colleagues, because<br />
lending offsets the expense of custody for their clients. This<br />
has fuelled the third party lending business as they can<br />
afford to be more discerning in the selection of their clients<br />
and the securities that enter their lending pools.<br />
RS: Actually, we do manage the book much more<br />
rigorously than that and do turn away business that is not<br />
profitable. Sometimes it seems as if people are happy to<br />
take the aggregation benefits of using a custodian when it<br />
comes to all the products and services, but expect the<br />
custodian to invest the same amount in the supporting<br />
infrastructure when they want to cherry-pick the bits of<br />
business that make the most revenue.<br />
MC: To be honest you pass on those costs to your clients. The<br />
cost of settling a trade in CREST is what? 50 pence? The<br />
volume discounts available to custodians mean that it’s even<br />
lower than that. Meanwhile, many fund managers get charged<br />
between £10 and £15 a ticket. Now obviously there are fixed<br />
costs to cover, but custody is an inherently good business in<br />
which to be.The barriers to entry for any potential new entrant<br />
are huge, so effectively what you have is an established cartel,<br />
for want of a better word. If greater transparency facilitates<br />
unbundling and the potential for ‘cherry-picking’as you call it,<br />
perhaps the way forward is for custodians to charge a sensible<br />
price for each component of the service they provide, rather<br />
than one product effectively subsidising another within the<br />
current ‘bundled’service offering.<br />
MF:There has to be a catalyst for unbundling.You are absolutely<br />
right, something has to happen and what is happening is that<br />
fund managers are effectively popping up on both sides of the<br />
debate right now that they are both long and short—add in the<br />
hedge funds who are long and short as well and you have a<br />
heady mix. So the catalyst is people actually recognising the<br />
significance of this business, which is a good start. But then,<br />
what happens next to encourage change? Regulators, possibly,<br />
have a significant role to play because industries typically<br />
change slowly unless they are forced to. There may well be<br />
regulatory change forthcoming that will drive this business to<br />
take steps regarding transparency and best execution that this<br />
industry would not necessarily volunteer for.<br />
MC: Anyone who is making a living as an intermediary is<br />
hardly incentivised to promote greater transparency and greater<br />
efficiency. It has to come either from one end of the chain or<br />
the other, or it has to be imposed by regulation. The way to<br />
ameliorate any potential compliance issue is via the mechanism<br />
of price. There should be a transparent price for a product, or a<br />
transaction, or a service.This industry, despite the best efforts of<br />
guys such as Mark, is still bedevilled by its relative opaqueness.<br />
61
THE SECURITIES LENDING ROUNDTABLE<br />
62<br />
DEFINING BEST EXECUTION<br />
DR: In general terms, my understanding is that for agent<br />
lenders, best execution mean looking to get the best deal<br />
for customers, having policies setting out how you do that<br />
and being transparent with customers. Most people have<br />
behaved that way and we have a well regulated and fair<br />
industry in that respect in any case.<br />
MF: And shame on the industry for lobbying as they did<br />
and getting off the hook on this one.<br />
DR: I do not think that they did get off the hook, because<br />
I don’t think there was a hook in the first place<br />
MF: But there is no obligation to provide best execution.<br />
There was discussion as to whether it would be relevant<br />
and extended into the world of securities lending and the<br />
industry got together and wrote a letter, which quite<br />
frankly shocked me in terms of its contents and got off the<br />
hook. So, typical clients who spend very little time thinking<br />
about securities lending, would reasonably expect to be<br />
protected by MiFiD and best execution and they aren’t.<br />
DR: They will be actually, because many agent lenders are<br />
concluding that they actually do have to offer best execution<br />
to their clients, because they are going to be treated as<br />
professionals and depending on your interpretation of the<br />
runes from the European Commission, securities lending<br />
may or may not be—and some people are concluding that<br />
it is—an execution of client orders<br />
MF: That would be very welcome. I am heartened to here<br />
that, the clients will be too and that will be a winning<br />
strategic decision.<br />
DR: The question is what does best execution amount to?<br />
What it doesn’t amount to is that you have to execute at<br />
this market price, which is on a ticker tape, because that<br />
does not exist in securities lending and securities lending<br />
transactions are not as simple as equities sales. There are<br />
different dimensions to the transaction, and therefore<br />
acting in the client’s interest does not necessarily mean<br />
dealing at one particular price—it also depends on the<br />
client’s collateral needs and tax status, etc. So what the best<br />
execution will amount to is in effect having a policy that<br />
says to the customer that we will act in your best interests.<br />
RS: The debate has actually moved on. Looking at the latest<br />
guidance provided by the FSA and the response of the<br />
European Commission to CESR, a client will always need to<br />
be properly protected whether retail, professional or eligible<br />
counterparty. Every lending provider has to look at this in<br />
the context of the firm’s overall approach to best execution<br />
and JPMorgan has written a best execution policy which<br />
outlines very clearly how we would operate on behalf of our<br />
clients to obtain the best possible outcome. The challenge is<br />
that securities lending is not a business that fits very neatly<br />
into a trade by trade disclosure regime and people arguing<br />
for that are potentially going to do the industry a disservice<br />
by leveraging a huge cost base on it, which frankly it is not<br />
in a position to support at the moment.<br />
CJ: I would come back to the issue raised earlier about<br />
pricing and so called cherry-picking. It is a strange concept<br />
in this industry where some view that there is something<br />
bad about a beneficial owner choosing to take their assets<br />
and lend through a different route or a different provider.<br />
They feel that it is somehow unfair to a custody provider<br />
who now only has to charge transaction fees for supporting<br />
the custody function of lending. Securities lending is not an<br />
entitlement of custody providers so their pricing should just<br />
be set according to what service they provide. The industry<br />
should stop utilizing opaque pricing structures where the<br />
clients do not know how much they are actually paying for<br />
the different services being provided. These bundled<br />
arrangements prevent beneficial owners from evaluating all<br />
options and making proper informed decisions.<br />
JP: Until recently, I had never seen an RFP response from a<br />
custodian that did not include the condition that this<br />
pricing structure is conditional on them getting more<br />
securities lending.<br />
MC: When I asked this question of a custodian in a similar<br />
forum earlier this year, they told me that increasingly they<br />
were being asked to strip that out and quote separately for<br />
securities lending and ‘core’ custody. Because of the rise of<br />
third party lending agents, auction platforms, alternative<br />
routes to market, there is a desire on behalf of the ultimate<br />
customer to see that transparency and the custodians<br />
simply do not have a choice here.<br />
JP: That is very true but they used to just ignore it. In RFP<br />
exercises before I joined Mercer, we were absolutely<br />
explicit. The actual phrase used was: “You should assume<br />
that you will get none of our lending business”. We still got<br />
fee quotes that assumed a level of lending income. Then,<br />
there was then surprise when we lent the most lucrative<br />
asset classes through a third party.<br />
MF: I am asking for some adoption of standards that apply<br />
across the industry, not more information that is part of this<br />
kind of gentle obfuscation of pricing and information and<br />
bundling together of everything. Those days should be and<br />
are slowly going away, but this is just is just another subtle<br />
example of just more obfuscation.<br />
RS: Many of us use independent data providers to report to<br />
our clients on their programme performance. However<br />
most clients do not want to be called every day, preferring<br />
to look at it over a period of time and my second point is:<br />
what would the benchmark be, and could it have been<br />
implemented effectively in time?<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
MF: No idea. It would not have been beyond the wit of<br />
this industry to meet this challenge head on rather than<br />
duck it. That is a hypothetical question really and one for<br />
about 18 months ago and not for today. What I am<br />
responding to is a call for clarity from a client of the global<br />
custody industry; a client of the securities lending<br />
industry. When they asked for clarity of pricing they were<br />
ignored—so they took their valuable assets away and<br />
their provider got upset. That seems like a logical<br />
response by the client to an illogical act by the provider to<br />
me. It seems almost deliberate the way that some<br />
providers ignore the clients’requests for information. This<br />
is not a recipe for long term success.<br />
BUNDLING & UNBUNDLING<br />
CJ: I’d like to dispute the notion that something was taken<br />
away. The provider should not feel entitled to a client’s<br />
business, so nothing was taken away from them. Rather,<br />
the beneficial owner just chose a different provider to<br />
perform a specific service. No one has the entitlement to<br />
be a client’s sole provider so it should not be seen or<br />
accepted as a takeaway if a Beneficial Owner decides to<br />
transfer a portion of their business to another firm who<br />
they feel can add value<br />
JP: One of the problems with custodians, is that they have<br />
not got their heads around the fact that lenders became<br />
better educated and more knowledgeable. If you go back<br />
15 years, the choice of a custodian was an obvious<br />
solution because nobody on the lending side, or few<br />
people on the lending side really understood the risks and<br />
the rewards and the nature of securities lending. As you<br />
become more knowledgeable, you become more<br />
sophisticated and better able to choose the best provider,<br />
which goes back to what Chris was saying earlier,<br />
different asset classes, different structures lend<br />
themselves to different ways of accessing the best<br />
risk/reward trade off. It is not always the custodian, and<br />
the problem today is that the custodian sometimes seems<br />
to think that it is almost theirs by right and it isn’t.<br />
MC: In defence of the custodian, there will always be a role for the<br />
custodian. The overwhelming volume of assets that are made<br />
available to the Street are in fairly fiddly, administratively and<br />
operationally intensive clumps,and the custodians should be given<br />
credit for mobilising those assets. They are and will remain a<br />
permanent feature in the landscape; no-one is trying to<br />
disintermediate them out of existence. From our perspective, there<br />
are certain markets and asset classes where we don’t think we add<br />
any value for the client, so we let the custodian do the lending. On<br />
the other hand, there are markets where we do have the scale and<br />
the expertise, the revenue potential is there, so we handle the<br />
lending ourselves.Then there are other portfolios that maybe lend<br />
themselves to auctions or exclusives. There is enough money on<br />
the table in this product for various different types of provider to<br />
make a living.<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
RICHARD STEELE, head of product development for securities<br />
lending, JPMorgan Worldwide Securities Services<br />
JP: A handful of basis points can make a huge difference<br />
to how performance is perceived and therefore it is almost<br />
an obligation on us, to certainly give the service that we<br />
sell and claim to be providing to our clients. We don’t just<br />
claim to find the best managers to deliver alpha. We also<br />
claim that, we are offering more challenging of service<br />
providers generally. This includes indentifying better<br />
ways of delivering peripheral returns on things like<br />
securities lending<br />
CJ: Another important development that has helped facilitate<br />
more choice in providers is technology and the improvements<br />
in communications and settlement platforms. It was more<br />
difficult to operate in a third party environment ten years ago<br />
than it is today. Some of the inherent advantages that<br />
custodians had when it was more difficult to transact outside<br />
of a custody framework have now disappeared due to these<br />
technological advancements. It is now an efficient process for<br />
everyone, regardless of where they are located.<br />
MC: Custodians have historically relied on client inertia,<br />
because it was always incredibly difficult and complicated<br />
to switch providers. That said, just as in UK retail financial<br />
services, people can now switch providers in a way that<br />
they never used to be able to. To be fair, that has forced the<br />
custodians to raise their game. I can remember years ago, a<br />
custodian pooh-poohing the concept of third party<br />
lending, saying it was never going to fly. Nowadays<br />
custodians not only accept the existence of third party<br />
lenders, but they are also establishing third party lending<br />
programmes themselves.<br />
63
THE SECURITIES LENDING ROUNDTABLE<br />
64<br />
DAVID RULE, chief executive officer, International Securities Lending<br />
Association (ISLA)<br />
COPING WITH MARKET VOLATILITY<br />
FC: How does current market volatility play out? Does it<br />
favour custodians or third party lenders?<br />
RS: One of the things that helps players better differentiate<br />
themselves is: did their performance track the rising market<br />
or did they actually outperform it? This is where more<br />
transparency of data can help. When it comes to the more<br />
volatile markets we are seeing at the moment, it’s really time<br />
to revisit your lending programme parameters such as cash<br />
investment guidelines to determine that they are appropriate<br />
given the concerns we are seeing. In this sense you have to<br />
step back and say that although people may be looking for<br />
alpha, they are not willing to risk their portfolio in a market<br />
like this and are looking now to manage risks accordingly.<br />
CJ: Many beneficial owners have under taken reviews of<br />
their programs in response to recent market events and are<br />
evaluating their approach and reviewing the risks and<br />
returns within their program. Some beneficial owners have<br />
made changes to certain parameters or guidelines where<br />
appropriate, while others have reaffirmed their existing<br />
structures. This is not unique to custodians, third parties or<br />
direct exclusives. It’s a client issue related to their specific<br />
goals, return expectations and risk profile.<br />
MC: As the old saying goes, return of your capital is more<br />
important than return on your capital. I suspect that what<br />
is happening in the market at the moment will probably be,<br />
in the medium to long term, healthy for the industry. The<br />
closest thing most people can remember that compares to<br />
this in recent times is probably Long Term Capital<br />
Management, back in 1998. That whole episode spurred the<br />
development and improvement of collateral management<br />
in terms of its robustness, pricing methodology etc. It is only<br />
in times of crisis that any flaws or weaknesses in the system<br />
become apparent. It is too soon to say whether we will see<br />
any in our little subset of the overall market universe. The<br />
area of the securities finance industry that is probably most<br />
exposed to a potential credit loss is the cash reinvestment<br />
business, run predominantly by the US global custodian<br />
agency lending programmes. Over the course of the history<br />
of this industry, any credit losses have been on the cash<br />
reinvestment side rather than on the actual lending side of<br />
the business. We do have some cash reinvestment business<br />
but ours is all fully collateralised and pretty low risk.<br />
MF: The key questions that Mick partially addressed there<br />
was, “How much of my lending revenue actually comes<br />
from lending? How much of my lending revenue comes<br />
from cash reinvestment? And these are going to be the<br />
questions that people are going to be focusing on, if they<br />
aren’t already doing so, now and in the coming weeks.<br />
There are lots of different ways to make money from cash<br />
reinvestment, as we know. Invariably, the strategies<br />
employed by certain re-investors of cash will come under<br />
scrutiny and the clients will ask themselves and their<br />
providers,“was that a good strategy or a bad one for me the<br />
client who is at risk?” I don’t think for one minute that<br />
anybody engaged in securities lending has deliberately<br />
breached client guidelines. Everybody in securities lending<br />
knows that they cannot do that. Nonetheless, there are<br />
providers who, if you ask them, will say: “We always<br />
operate well within or right in the centre of our clients’<br />
guidelines. We actually do take less risk than our clients<br />
would allow us to take on their behalf because we have got<br />
tremendous understanding of the money markets and<br />
strong internal controls. ”I believe many of them when they<br />
say that. However, they also privately allude to there being<br />
providers that are out there trading on the edge of client<br />
guidelines a little bit and we may find that those might have<br />
some issues. This could be sour grapes at losing business to<br />
high income projections from competitors—but if it isn’t the<br />
clients, the market will find out very soon. In the Financial<br />
Times recently, Deutsche Bank said something of vital<br />
relevance. It had to do with confidence and banking and<br />
noted that crucial questions in the next days and weeks<br />
include “How do you mark your positions to market? What<br />
price are you putting on the securities that you have<br />
invested in?”It is a question that investors want answered<br />
by their cash reinvestment providers and I would really<br />
encourage anyone who is a lender who takes cash as<br />
collateral, to consider asking them now. Some will take<br />
great comfort from the responses – others may not.<br />
FC: What role can ISLA play in encouraging that dialogue?<br />
DR: One of the things that ISLA has been doing is<br />
developing operational best practice guidelines, including<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
interestingly on mark to market. ISLA has facilitated it but<br />
it is really market practitioners who are doing it.<br />
Developing standards for how the operations of the<br />
industry work is important and part and parcel of that is<br />
greater automation of processes.<br />
MF: Does that mark to market best practice extend beyond<br />
the lent securities and the price at which they are marked?.<br />
Does it follow through and actually address the mark to<br />
market of the instruments purchased via the cash<br />
reinvestment?<br />
DR: It does not really focus on cash reinvestment. It is<br />
more about what price sources people would use for<br />
marking to market securities.<br />
MF: I think it would really be helpful to take that best<br />
practice one step further so that clients can ask “how is the<br />
traded and OTC inventory that I own in my reinvestment<br />
portfolio marked to market?” That is where their risk<br />
associated with lending is greatest. But it is important to<br />
note that we are not talking about those kinds of hard to<br />
price OTC instruments being a large component of a<br />
typical securities lending collateral portfolio. That type of<br />
reinvestment trading is a very different type of activity and<br />
it is important that readers of a stock lending article do not<br />
think that it is typical for there to be assets in a securities<br />
lending collateral pool that might be unpriceable. If there<br />
are any concerns they should liaise with their provider and<br />
review their positions.<br />
CJ: Having ample short term liquidity within collateral<br />
portfolios was critical in July and August to avoid any<br />
unnecessary sales of securities into a difficult market. With<br />
few buyers for many short term products during this time<br />
the normal liquidity in the market froze up. This happened<br />
broadly in the market across asset classes unrelated to sub<br />
prime so collateral managers managed through the period<br />
by keeping sufficient overnight cash to meet any<br />
redemption needs.<br />
MC: For the lion’s share of European lending<br />
programmes, non-cash collateral is the norm, so you<br />
don’t have the outright unsecured exposure to credit<br />
product that goes with most cash reinvestment<br />
programmes.Your primary risk is your counterparty credit<br />
exposure. If it is a well managed programme, you are only<br />
dealing with reputable, creditworthy entities. Everything<br />
is done under industry standard documentation, with<br />
exposure marked to market daily. If you are prudent in<br />
your collateral criteria, and you have a sufficiently sensible<br />
policy on haircuts and over-collateralisation, the quantum<br />
of risk in a securities lending programme is actually very<br />
small. That cannot be over-stated.<br />
MF: I can tell you that we regularly review about $1trn worth<br />
of cash reinvestment and non-cash collateral. We see risk.<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
MC: I am not saying there is zero risk. We are a direct<br />
lender, in a sense that we are part of the Aviva Group, but<br />
it is an agency model. Our clients are predominantly the<br />
group life and pensions companies. We do VaR analysis for<br />
these clients in our programme- funnily enough, we use<br />
some of the tools that Mark sells. The problem is that the<br />
numbers look almost too good to be true. You have gross<br />
outstandings in a programme of tens of billions and then,<br />
because everything is done with creditworthy<br />
counterparties, fully collateralised and marked to market<br />
daily, you end up with a VaR figure that is maybe in the low<br />
millions. Some clients have raised a sceptical eyebrow. Is<br />
that your experience as well?<br />
DR: It is a real strength of the industry that risks are<br />
managed well and kept low. Fair enough lenders are<br />
looking again at their collateral guidelines and they should<br />
do that. But heaven help us that they don’t panic because<br />
they do not need to and if they did you would see how<br />
important securities lending is to the liquidity of the capital<br />
markets. In the sterling money markets for instance we’ve<br />
seen a flight from unsecured to secured, and the repo<br />
market would not work without the securities lending<br />
market because banks don’t own gilts any more, they<br />
borrow them all. And that is just one corner. Equity<br />
markets, bond markets, credit markets, they all rely at the<br />
end of the day on securities borrowing, because the people<br />
that own the securities are the institutions and it really is<br />
vital that they continue to lend and there is no sign, so far<br />
that I can see, that they have stopped. One other point I<br />
would like to make is on people now talking of lending as<br />
a form of alpha. That is not particularly healthy, because<br />
alpha is about excess returns from skill in investing. There<br />
can be an element of that with securities lending but it does<br />
not account for the bulk of the lending income. Part of<br />
lending is the market return, that you are missing out on if<br />
you do not lend, and part of the return is from taking credit<br />
risk and leverage, which is what you do with the cash<br />
reinvestment. Telling investors that they are getting alpha<br />
is misleading frankly.<br />
MC: I dispute the assertion that there is not a component<br />
of alpha in the equation, particularly in the current<br />
environment.There has been a flight to quality where there<br />
is a premium on government bond collateral, and we have<br />
been able to make considerable additional revenue.<br />
Liquidity, whether it is in the form of cash or government<br />
bonds, which until recently was cheap and plentiful has<br />
suddenly become scarce and expensive. Because we like to<br />
think we know what we are doing, we’ve been able to<br />
capture that value in the additional returns we have been<br />
able to generate in our programme. I am not sure of the<br />
extent to which that has occurred elsewhere. Mark can<br />
confirm that between similar lending programmes, with<br />
similar collateral profiles and similar mandates, there is<br />
considerable variance in the performance of those<br />
programmes. The fact is that some firms are better than<br />
65
THE SECURITIES LENDING ROUNDTABLE<br />
66<br />
others at extracting value from this product- I’d call that<br />
Alpha. It is not just about what your collateral mandate is<br />
and what the size and composition of your portfolio is. It<br />
is also about the expertise and capability of the people<br />
doing the business.<br />
MF: Broadly, to go back to the point about the collateralised<br />
nature of the markets, right now most people’s fixed income<br />
business is going like gangbusters. To put some numbers<br />
around this, there is $3trn to $4trn a day being generated as<br />
cash collateral (mainly in the US dollar) looking for a home.<br />
Typically some of it is out there on the yield curve, some of it<br />
is nearer the front end. Today, it is nearly all at the front end.<br />
One of the biggest challenges for the re-investors of such<br />
large pools of cash is finding a home for the money on a daily<br />
basis. The supply of commercial paper has dried up and the<br />
risk appetite of the re-investment agents and their<br />
underlying principal clients has dramatically reduced. The<br />
scale of this daily activity and its importance to the global<br />
money markets is quite stunning. The sub prime crisis is very<br />
different than say the LTCM crisis. This time, things are<br />
different because the risk has effectively been syndicated<br />
through hundreds of hedge funds, funds and broker dealers.<br />
In the LTCM crisis the risk was concentrated in the hands of<br />
about ten to 12 significant known counterparts. People do<br />
not know who owns the risk positions today and it is only<br />
going to be as we go through the results season that we will<br />
begin to see where the damage lies. However, the importance<br />
of the securities lending markets to the cash markets is<br />
enormous. Without it, it is almost difficult to see how they<br />
would efficiently function.This is the time when the old stock<br />
lending cliché “that it is the liquidity that helps the global<br />
machine of capitalism function”comes to the fore. It happens<br />
to be true. It is the oil that keeps the machine going.<br />
RS: With quarter end coming up as well that will exercise<br />
everybody’s minds.<br />
FC: Is the securities lending industry very skittish then?<br />
JP: Unfortunately only a few people really understand all<br />
the reasons why people borrow securities and most<br />
borrowing is perceived as being done by a bunch of guys<br />
who want to take a punt on Stock A going down 20% in<br />
the next month, so what we don’t want to see is a blow up<br />
which causes lending to be at the forefront of the client’s<br />
mind, when really they ought to have other things to<br />
challenge them than our lending programme.<br />
THE USE & ABUSE OF VOTING RIGHTS<br />
DR: There is a risk to the industry of unintended<br />
consequences if regulators intervene to try to prevent<br />
borrowing to vote. It is important that the industry presents<br />
its case well to prevent that, but also that the industry<br />
keeps its own house in order so that we don’t get abuses of<br />
people borrowing securities in order to vote. I do think<br />
though that this whole issue is going to get more<br />
complicated with the introduction of long: short funds<br />
alongside long-only funds in fund management houses.<br />
And what we talked about earlier of an index fund lending<br />
to another fund in the group that has a short position, who<br />
decides how they vote? It is quite tricky and it is not<br />
primarily a stock lending issue. Rather it is an inherent<br />
issue of shorting becoming a more normal part of<br />
investment management, which effectively separates out<br />
the two functions of taking a position in a share and<br />
owning a company. People are going to have to wrestle<br />
with how those things are combined.<br />
FC: What role is ISLA playing in encouraging good practice?<br />
DR: ISLA can only go so far. I don’t think that ISLA can set<br />
standards for how fund management houses should<br />
manage themselves.<br />
MC: A lot of equity borrowing is driven by dividend trading<br />
strategies, and that confuses the issue from a corporate<br />
governance perspective when you have a dividend and a<br />
vote happening at the same time.<br />
MF: It makes the charts look very spiky.<br />
MC: Is there not merit in maybe decoupling those two and<br />
having the dividends paid at a different time in the<br />
calendar from the votes? Wouldn’t that make it easier to<br />
spot voting or other corporate governance abuses?<br />
DR: Yes, and we have said that that is more desirable. But<br />
that is really down to the individual companies and again<br />
it may not be at the top of their list of priorities.<br />
MF: A contentious vote is obviously also a trading or arbitrage<br />
opportunity for a trader. A vote for something that is<br />
contentious is most likely to take the company in one direction<br />
or another – positive or negative.That is a good opportunity for<br />
a trader to take a position - be it long or short. So again, if it<br />
really is a hot issue, you may get a lot of borrowing around that<br />
time, not to actually secure a cheap vote, but to actually take<br />
advantage of a market trading opportunity to the short side.<br />
So it is very unfair of people that look at corporate governance<br />
in a vacuum to say,“Another big spike around a vote! Surely,<br />
another abuse of lending” These people would do well to<br />
remember that there are dividends and there is legitimate<br />
trading and the facts simply do not support the fiction on the<br />
alleged charges in corporate governance. One of the best<br />
industry responses to this wrong-headed attack is the detailed<br />
data based research that ISLA and the London Business<br />
School Hedge Fund Studies Group are doing with Data<br />
Explorers. The objective is to get some independent research<br />
concluded and facts established. To date the debate has been<br />
hijacked by people who do not understand securities lending<br />
and want to sensationalise it for their own benefit. I believe<br />
that the facts will set the record straight.<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
DR: It remains true nonetheless that there are very few<br />
empirical cases that you can show. However, it may only<br />
take one high profile one to bring the politicians down on<br />
this industry like a ton of bricks and what I have been<br />
saying to everyone, is: “Do not be tempted to facilitate this<br />
type of trade.”<br />
JP: There are some commercial reasons why this wouldn’t<br />
happen. Our target market, for instance, is pension<br />
schemes and their sponsoring companies and many of<br />
these will be quoted PLCs . We would not want to see<br />
anybody borrowing our stock effectively for no other<br />
reason than to vote against the management of the<br />
companies who are one step removed from our clients.<br />
There have been examples recently, where hedge funds<br />
have taken what are really very small positions for a short<br />
time simply to facilitate challenging incumbent<br />
management, and it isn’t clear they have any long-term<br />
interest in the companies involved. We simply would not<br />
want to facilitate that. Long-term shareholders<br />
challenging incumbent management is one thing, but we<br />
do not see short-term stock borrowing as an appropriate<br />
way to do so.<br />
MC: If you feel that badly about it you simply recall the<br />
stock. There is no inherent contradiction between good<br />
corporate governance and securities lending. What you<br />
need is a clearly articulated and understood policy on the<br />
subject, plus a good working relationship between the<br />
respective areas. Sorry for mentioning this again but there<br />
is an advantage to having securities lending run out of the<br />
fund manager, because we are just 20 yards away from our<br />
corporate governance people.<br />
JP: Just a quickie on spikes close to contentious votes. That<br />
suggests a lack of responsibility. In our programme, we say<br />
we reserve the right to recall stock when there are<br />
contentious votes and I can imagine scenarios where we<br />
will exercise that right. We regard voting as part of our<br />
stewardship of our clients’ assets. If there is a contentious<br />
vote, we should be voting. We have a fiduciary<br />
responsibility to our clients.<br />
FC: A naive question. Does no one ask why some firms<br />
want to borrow particular stock at crucial times?<br />
MF: Typically borrowing motivation is not questioned by the<br />
lenders – be they principal or agents. It is the difference<br />
between an agency relationship were you have a fiduciary<br />
responsibility to protect someone and a principal relationship<br />
where motive is not necessarily questioned and therefore<br />
cannot necessarily be understood. There are many reasons to<br />
borrow a specific security at any given time and it would be<br />
imprudent and inappropriate to assume what the motive was.<br />
In the principal world caveat emptor applies and it does not in<br />
the agency or fiduciary world. Couple that with the adage that<br />
no borrower likes a smart lender and there you have it.<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
JOHN POOLE, chief operating officer - Europe, Mercer Investment<br />
Management<br />
MC: Actually, we are frequently lending it to an investment<br />
bank who is lending it on to someone else in any case. It<br />
may therefore be impossible for a lender to determine who<br />
is ultimately trying to borrow stock and why.<br />
DR: Prime brokers may be able to police it in a limited<br />
sense, but even they can’t fully control it, because a firm<br />
may use multiple prime brokers and in any case they are<br />
not running the hedge funds.<br />
RS: This was discussed some years ago by the UK Takeover<br />
Panel. They were reviewing whether there was a<br />
requirement for every stock lending transaction in an<br />
offeree company to be disclosed to them during a takeover<br />
situation, and after taking soundings in the industry they<br />
concluded that because all offeree and offeror positions<br />
were already being disclosed there was no requirement to<br />
extend the reporting to all transactions.<br />
CONCLUDING REMARKS<br />
FC: Either from a regulatory standpoint, or a market<br />
standpoint, what should people be looking out for?<br />
RS: We are seeing the final confluence of a range of<br />
regulatory issues that the industry has been getting to grips<br />
with, in particular in the European space. MiFiD comes into<br />
force in November and will continue to occupy the industry<br />
in the coming months. Basel II is coming in January next year<br />
and that speaks to the European agent lender disclosure<br />
issue that people are also engaged with at the moment. The<br />
industry is coping with a lot of things that have hit at the<br />
same time and it is difficult to keep all these things in check,<br />
but from what I have seen from JPMorgan’s perspective and<br />
having been on the ISLA board, we are certainly bringing<br />
things to a satisfactory conclusion. From a market<br />
standpoint, the industry will continue to see more of the<br />
same, but also some transformation, particularly in the<br />
67
THE SECURITIES LENDING ROUNDTABLE<br />
68<br />
130/30 space with more<br />
active participation of the<br />
front office in what has<br />
been a largely back office<br />
business for many clients.<br />
Those are the things to<br />
look out for next year.<br />
CJ: There is certainly more<br />
scrutiny from a regulatory<br />
perspective. In the coming<br />
months we will see more<br />
on MiFiD and best<br />
execution and Beneficial<br />
Owners are expecting more<br />
transparency in their<br />
programs. From a client<br />
perspective, more<br />
beneficial owners want to<br />
see where returns are being<br />
generated from, what risks<br />
they are taking to generate<br />
returns, and want to ensure that earnings are being allocated<br />
appropriately and not subsidising other accounts.<br />
MICK CHADWICK, head of trading, securities finance, Morley Fund<br />
Management<br />
JP: For us the next 12 to 18 months, the important areas will<br />
be assistance in helping us come up with products that<br />
allow us to take full advantage of the new UCITs III<br />
freedoms, in particular allowing us to find efficient ways of<br />
financing short trading. In the very short term what we<br />
don’t want to see is for one result of the current liquidity<br />
crisis to be a blow up in someone’s lending programme,<br />
especially on the reinvestment side, which causes fear<br />
across the lending industry generally. Lending really is<br />
relatively safe.<br />
DR: I agree with some of that and certainly one of the<br />
things I want to do with ISLA is to make people outside<br />
the industry understand the importance of the industry to<br />
the capital markets, because I don’t think it is widely<br />
understood by regulators, central bankers, chief<br />
executives, and so on. The risk to the industry is that for<br />
most beneficial owners stock lending is no 59 in their list<br />
of things that they care about. Nonetheless, the<br />
importance of well-functioning stock lending markets to<br />
wider market liquidity has grown significantly over the<br />
last decade? in particular with the growth of the<br />
derivatives markets, the expansion of hedge funds and<br />
the changes in banks’ balance sheets. The stock lending<br />
industry has come out of the recent market turbulence<br />
with a good story to tell. Lending volumes actually grew<br />
and that helped to sustain liquidity in the repo markets<br />
and the cash bond and equity markets. More narrowly on<br />
what regulation is coming up in Europe, Basel II is going<br />
to be a big change, particularly for the dealers, in the way<br />
that they are going to have to calculate their capital on<br />
stock loans, they will have to get granular information on<br />
their exposure to each<br />
underlying principal from<br />
the agent lenders and they<br />
will have to credit assess<br />
all those principals. ISLA<br />
will be doing work to<br />
facilitate that disclosure<br />
from the agent lenders and<br />
we will be planning a<br />
survey of the industry in<br />
the next few weeks.<br />
MF: Eighty percent of the<br />
revenue in this industry<br />
comes from emerged<br />
markets and that the bulk<br />
of the energy of the<br />
industry will be consumed<br />
in making those markets<br />
more efficient and to grow<br />
those and get more<br />
supply. Battle lines are<br />
increasingly drawn between the prime brokers and the<br />
custodians who want to be prime brokers and this will<br />
be interesting to see play out, and the extent to which<br />
they park tanks on each other’s lawns. I actually think<br />
performance attribution will be the next big thing. Much<br />
like they choose an asset manager, beneficial owners will<br />
ask “How do you do it?” and everyone will have to<br />
articulate where the money comes from. The buzz is<br />
about optimisation, not maximisation. I also think this<br />
mark to market issue is huge, and Richard mentioned<br />
quarter end. It will be an interesting end of the year, but<br />
I do predict that there will be a major M&A event next<br />
year in the banking world that at its core will have<br />
finance as its logic.<br />
MC: In terms of the growth and development of the industry,<br />
it may sound prosaic but I see more of the same. In mature<br />
markets there will be increased volume accompanied by the<br />
automation necessary to handle that volume. Across all<br />
markets I see increasing convergence between synthetic and<br />
traditional lending, given that they are driven by the same<br />
goal. As far as the overall industry landscape is concerned,<br />
within the fund management sector there will be an<br />
increasing recognition that securities finance is very much a<br />
front office discipline. My own background is on the sell<br />
side. Back when I started there, securities finance was<br />
regarded as a quasi back office function. Now, securities<br />
finance and prime brokerage sits at the heart of an<br />
investment bank’s dealing operation. For most fund<br />
managers it will never be as core as that- unless a fund needs<br />
to use leverage, securities finance will remain a ‘bolt-on’yield<br />
enhancement strategy. However, given the competitiveness<br />
of the industry, the revenue contribution from this activity<br />
will become ever more important, and it will attract<br />
appropriate management time and attention as a result.<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
So far, automation has helped back offices stay one step ahead of<br />
the game. They have moved away from processing every trade<br />
toward handling exceptions, but that function isn't scalable. If it<br />
takes 50 people in a dealer's back office to sort out 20% of<br />
today's trades it will take twice as many when volume doubles –<br />
and qualified staff are hard to find. At some point, the industry<br />
has to tackle the error rate, through either greater reliance on<br />
affirmation or electronic trading. Photograph supplied by<br />
Istockphotos.com, October 2007.<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
Efforts to automate trade processing have come<br />
a long way since regulators leaned on the<br />
industry to cut the volume of outstanding<br />
confirms on credit default swaps two years ago.<br />
Yet despite the enormous information<br />
technology investment already made, the<br />
summer surge in trading revealed that more is<br />
needed to handle the market’s continuing<br />
exponential growth. Neil O’Hara reports.<br />
THE MOVE TO<br />
AUTOMATION<br />
LIKE THE BATTLE of Waterloo, this summer’s turmoil<br />
was a near-run thing for the over the counter (OTC)<br />
derivatives market. “If what happened in July and<br />
August had happened a year ago or two ago the<br />
consequences could have been catastrophic,” says John<br />
LaVecchia, director of US credit markets at the Jersey City,<br />
New Jersey office of TradeWeb, an electronic trading<br />
platform for fixed income derivatives.<br />
Although derivatives dealers declined to comment,<br />
market participants say back office staff had to burn the<br />
midnight oil and work weekends to keep up when volume<br />
exploded. It is not unusual for dealers’ staff to handle<br />
fluctuations around the average transaction flow during<br />
normal business hours; not two or three times that<br />
amount. Nevertheless, some firms found their operations<br />
side was not as scalable as they anticipated, according to<br />
Mark Beeston, president of T-Zero, a London-based<br />
electronic affirmation service.<br />
The immediate crunch was in booking trades and<br />
executing documents, but the whole operations function<br />
was swamped.“You cannot borrow bodies out of your other<br />
areas,”Beeston says,“At the time you need those resources<br />
they are exceptionally busy doing their own thing.” Error<br />
rates tend to rise when people are working under stress,<br />
too, which makes the processing backlog worse.<br />
Markit’s Quarterly Metrics Report for June 2007 shows a<br />
rapid increase in electronic trading and a steady decline in<br />
non-electronic trading of credit derivatives over the past<br />
AUTOMATING OTC DERIVATIVES<br />
69
AUTOMATING OTC DERIVATIVES<br />
70<br />
Henry Hunter, chief marketing office for SwapsWire in London, an<br />
electronic processing platform for OTC derivatives, says the low level<br />
of automation in interest rate swaps reflects a buy side that includes<br />
a large number of participants who trade so infrequently they aren't<br />
concerned about operational overload from manual confirmations.<br />
Those trades still flow through the two dozen major dealers, however,<br />
where they cause real headaches. Photograph supplied by<br />
SwapsWire, October 2007.<br />
two years. The volume of outstanding confirmations<br />
shrivelled between September 2005 and December 2006,<br />
but crept back up in the first half of 2007 as the market<br />
expanded even faster than before. It’s a safe bet the third<br />
quarter report will show backlogs ticked up over the<br />
summer for both credit derivatives and other contracts.<br />
T-Zero tackles the problem by trying to squelch errors up<br />
front. It receives trade details directly from dealers’ trade<br />
capture systems and transmits it to buy-side counterparties<br />
for affirmation, then allocates the trade among the various<br />
sub-accounts. In effect, counterparties have an obligation<br />
to spot errors before dealers do any further processing. The<br />
system shifts responsibility for allocations over to the buy<br />
side, too. “It makes the middle office more accurate and<br />
scalable,” says Beeston, “It also removes the source of<br />
operational errors before errant trade data flows<br />
downstream to cause them.”<br />
Many market participants expected Depository Trust &<br />
Clearing Corporation’s (DTCC) electronic matching and<br />
documentation services to eliminate all their processing<br />
problems. It hasn’t worked out that way in practice.<br />
Although a huge improvement over manual confirmations,<br />
DTCC’s services do not eradicate settlement risk because<br />
matching still does not occur until one or more days after<br />
the trade date. By the time an error shows up in the<br />
documentation process, it may have already caused a<br />
payment break and possibly a bad margin call as well as an<br />
incorrect calculation of counterparty risk exposure.<br />
Janet Wynn, general manager and managing director of DTCC<br />
Deriv/SERV, says the firm's electronic platform and data warehouse<br />
have already proved their worth. For example, when a troubled hedge<br />
fund is taken over, the entire credit default swaps portfolio can be<br />
assigned to an acquirer through DTCC's platform in just a few days.<br />
In the past, a buyer had to print out and pore over thousands of pages<br />
of documentation just to see what was in the portfolio and how to<br />
handle the assignments, a process that could take several weeks.<br />
Photograph kindly supplied by the DTCC, October 2007.<br />
“Electronic matching addresses a symptom,”Beeston says,<br />
“We address the disease, which is inaccurate trade data.”<br />
It is a disease of epidemic proportions. According to the<br />
International Swaps and Derivatives Association’s (ISDA’s)<br />
2007 Operations Benchmarking Survey, 20% of credit default<br />
swaps, 20% of equity derivatives and 18% of interest rate<br />
derivatives executed by large dealers have to be rebooked.<br />
The ISDA speculates that efforts to cut confirmation<br />
backlogs may have inflated the numbers somewhat, but it<br />
is a huge burden on the back office because every break<br />
requires manual intervention.<br />
The sheer complexity of OTC derivatives provides many<br />
more opportunities for breaks to occur than in<br />
conventional transactions. Cash market trades have just<br />
three fields: price, security identification number and<br />
volume. In addition to those, a derivatives trade has to<br />
specify the precise legal counterparties, margins, collateral<br />
arrangements and fees. Multimillion dollar novations can<br />
be held up over differences as small as $50 because firms<br />
use a different number of decimal points to convert fees the<br />
traders express in basis points into a dollar amount the<br />
back office must enter into DTCC’s system.<br />
For cash instruments, fixing errors a day or two after<br />
trade date inflicts a mark to market gain or loss but no<br />
counterparty risk. In OTC derivatives, which are typically<br />
more volatile than cash securities, participants have to<br />
accept counterparty risk, too. John La Vecchia, director of<br />
credit sales for Thomson TradeWeb LLC, says the failure of<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
several hedge funds this summer left some dealers stuck<br />
with open confirmations that could have caused severe<br />
losses if other players had not stepped in to take over the<br />
stricken funds.<br />
Although electronic affirmation shortens the time errors<br />
that are outstanding from days to minutes or hours,<br />
somebody still has to enter the trade details and the<br />
counterparty has to check them. LaVecchia says dealers have<br />
taken steps to automate the process all the way from trade<br />
capture through matching and confirmation, but except for a<br />
few large firms the buy side has been slow to adopt electronic<br />
processing. He believes—not surprisingly—that electronic<br />
trading is a better solution.“It creates an accurate record at the<br />
time of execution that<br />
can be used to feed all<br />
the downstream<br />
systems,”LaVecchia says.<br />
Markit’s quarterly<br />
report found that<br />
electronic execution<br />
now accounts for<br />
almost 90% of credit<br />
derivatives trading<br />
volume, double the<br />
proportion in<br />
September 2005. Equity<br />
derivatives are less<br />
automated, although<br />
the proportion is<br />
growing, especially<br />
among the major<br />
dealers. For interest<br />
rate derivatives,<br />
conventional trading still represents more than 60% of the<br />
total, however.<br />
Henry Hunter, chief marketing office for SwapsWire in<br />
London, an electronic processing platform for OTC<br />
derivatives, says the low level of automation in interest rate<br />
swaps reflects a buy side that includes a large number of<br />
participants who trade so infrequently they aren’t<br />
concerned about operational overload from manual<br />
confirmations.Those trades still flow through the two dozen<br />
major dealers, however, where they cause real headaches.<br />
Hunter says dealers are encouraging more clients to switch<br />
over to SwapsWire’s electronic system, which requires no<br />
technology integration and is free to the buy side.<br />
The large sell side firms have a strong incentive to<br />
improve back office scalability because they account for<br />
most of the volume whether the market is quiet or<br />
frenzied. Sell side clients have flocked to SwapsWire’s fully<br />
automated interface that feeds interest rate swaps<br />
transactions into their trade capture systems already<br />
confirmed.“The back office has nothing to clear up,” says<br />
Hunter, “It is already being done. They have almost<br />
unlimited scalability with the operations department.”<br />
For interbank transactions, dealers can take automation a<br />
step further with SwapClear, a product offered by<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
According to the International Swaps and<br />
Derivatives Association’s (ISDA’s) 2007<br />
Operations Benchmarking Survey, 20% of<br />
credit default swaps, 20% of equity derivatives<br />
and 18% of interest rate derivatives executed<br />
by large dealers have to be rebooked. The<br />
ISDA speculates that efforts to cut<br />
confirmation backlogs may have inflated the<br />
numbers somewhat, but it's a huge burden on<br />
the back office because every break requires<br />
manual intervention.<br />
LCH.Clearnet. Once SwapsWire has processed a trade, it<br />
feeds the details into SwapClear, which acts as a post-trade<br />
clearing house for cash flow movements, margin calls and<br />
collateral management. “For trades done through the<br />
dealers in the interbank market the whole thing is<br />
completely automated,”Hunter says,“All the ops guys need<br />
is another reel of paper to spew out of the printer saying ‘No<br />
Exceptions’. That’s stunning scalability.”Some dealers who<br />
are SwapsWire clients have just one back office person who<br />
keeps an eye on their entire SwapsWire/SwapClear flow.<br />
A back office that incorporates state of the art<br />
automation does not solve all the problems, however.<br />
Stephen Bruel, an analyst in the securities and capital<br />
markets practice at<br />
Tower Group, a market<br />
research firm based in<br />
Needham, Mass., says<br />
the inability to value<br />
some structured debt<br />
instruments caused far<br />
more trouble than trade<br />
processing backlogs<br />
during the market<br />
turmoil. He<br />
acknowledges that back<br />
office operations still<br />
need work but pricing<br />
OTC derivatives is a<br />
front office function.<br />
“The dangers relate to<br />
proprietary risk that<br />
banks and hedge funds<br />
have taken and not so<br />
much the operational risk associated with these<br />
instruments,”says Bruel.<br />
The back office does need price information, of course.<br />
Margin calculations, collateral movements and quarterly<br />
payments all depend on valuations, and, as so many<br />
investors discovered to their cost, the theoretical price a<br />
computer model spits out bears no relation to what a<br />
willing buyer will pay a forced seller in a volatile market.<br />
Bruel suggests the exchanges, which facilitate liquidity and<br />
provide a consistent pricing mechanism, may have a role to<br />
play. OTC derivatives represent a potential source of<br />
revenue; indeed, Eurex has already listed futures on some<br />
iTraxx credit default swaps indices.<br />
Karel Engelen, policy director and head of FpML at<br />
ISDA, says the summer volume surge spilled over into<br />
novations, which are much less automated than regular<br />
trades. A novation allows a new legal entity to substitute<br />
for one of the original counterparties to a bilateral<br />
derivative contract, so it requires the consent of all three<br />
parties. The market has adopted standard language in<br />
emails relating to novation but people still have to look up<br />
the details and give their consent. Once terms are agreed<br />
by the front office, the back office completes the novation<br />
through an automated confirmation process.<br />
71
AUTOMATING OTC DERIVATIVES<br />
72<br />
Karel Engelen, policy director and head of FpML at ISDA, says the<br />
summer volume surge spilled over into novations, which are much less<br />
automated than regular trades. A novation allows a new legal entity<br />
to substitute for one of the original counterparties to a bilateral<br />
derivative contract, so it requires the consent of all three parties.<br />
Photograph kindly supplied by ISDA, October 2007.<br />
Novations caused much of the paperwork backlog that<br />
drew regulators’ attention to credit default swaps in the<br />
first place two years ago. In response, ISDA developed its<br />
Novation Protocol to standardise and speed up the<br />
procedure. That helped the industry get backlogs under<br />
control, but the process still requires manual<br />
intervention. “There is a renewed focus on looking for<br />
electronic solutions for novation consents,”says Engelen.<br />
Up to now, automation has focused on immediate posttrade<br />
processing but market participants are starting to<br />
explore electronic solutions for the entire product life<br />
cycle, including novations, portfolio reconciliation and<br />
collateral management.<br />
Engelen expects the spread of electronic processing to<br />
facilitate the introduction of new products, too. A higher<br />
degree of automation makes it easier to handle new products<br />
and shifts the point at which automated processing is<br />
economic earlier in the product life cycle. Manual processing<br />
will never disappear, though. It takes time for market<br />
participants to agree on standard terms for new products and<br />
until they do automation is virtually impossible.<br />
Janet Wynn, general manager and managing director of<br />
DTCC Deriv/SERV, says the firm’s electronic platform and<br />
data warehouse have already proved their worth. For<br />
example, when a troubled hedge fund is taken over, the<br />
entire credit default swaps portfolio can be assigned to an<br />
acquirer through DTCC’s platform in just a few days. In the<br />
past, a buyer had to print out and pore over thousands of<br />
pages of documentation just to see what was in the<br />
Mark Beeston, president of T-Zero, a London-based electronic affirmation<br />
service.The immediate crunch was in booking trades and executing<br />
documents, but the whole operations function was swamped, notes<br />
Beeston.“You cannot borrow bodies out of your other areas,”he says,“At<br />
the time you need those resources they are exceptionally busy doing their<br />
own thing.”Photograph kindly supplied by T-Zero, October 2007.<br />
portfolio and how to handle the assignments, a process<br />
that could take several weeks.<br />
Wynn notes that although backlogs increased over the<br />
summer they were nowhere near as bad as when regulators<br />
sounded the alarm in September 2005. She points out that<br />
back office staff had enough capacity to handle other<br />
projects over the summer as well. The big firms finished<br />
loading their historical portfolios into DTCC’s data<br />
warehouse and participated in a test of payment<br />
calculations for the settlement system DTCC will launch<br />
later this year.“There is no paralysis out there,”Wynn says,<br />
“Everybody is working very hard. There are a lot more<br />
exceptions to handle but it is very much under control.”<br />
The industry cannot afford to sit still, however.<br />
Automation frees up back office resources to focus on<br />
novations and breaks, but if OTC derivatives keep up their<br />
breakneck volume growth the need for staff is bound to<br />
increase, too. “Without DTCC’s platform the volume of<br />
trades could not have happened,” says Wynn, “And they<br />
could never have handled this surge.”<br />
So far, automation has helped back offices stay one step<br />
ahead of the game. They have moved away from<br />
processing every trade toward handling exceptions, but<br />
that function isn’t scalable. If it takes 50 people in a<br />
dealer’s back office to sort out 20% of today’s trades it will<br />
take twice as many when volume doubles – and qualified<br />
staff are hard to find. At some point, the industry has to<br />
tackle the error rate, through either greater reliance on<br />
affirmation or electronic trading.<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
Interest in 130/30 strategies is setting off. An<br />
estimated $50bn to $60bn is already invested in<br />
130/30 strategies and this value is expected to<br />
grow rapidly. Some market watchers predict<br />
that up to 20% of the money invested in US<br />
large-cap core long-only strategies will move to<br />
short-enabled strategies during the next<br />
decade. The current level of investor interest is<br />
leading some commentators to posit that<br />
130/30 investing could be the makings of a new<br />
investment paradigm rather than a passing fad.<br />
Neil O’Hara tests the waters.<br />
130/30 portfolios are not hedge funds though. That is<br />
because the risk controls overlaid by 130/30 strategists<br />
on Jones’ model keep the target market exposure at<br />
100%. It is then a relative value play, not an absolute<br />
return strategy. The appropriate risk gauge is therefore<br />
tracking error rather than standard deviation; after all,<br />
if net market exposure is 100%, volatility should track<br />
the market, too. Photograph supplied by<br />
iStockphotos.com, October 2007.<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
getting<br />
noticed<br />
INSTITUTIONS IN SEARCH of alpha are shovelling<br />
money into 130/30 portfolios, which aim to extract the<br />
maximum value from active equity managers’ research.<br />
Is it a new paradigm or another passing fad? The<br />
underlying concept isn’t exactly new. Alfred Jones created<br />
the first hedge fund in 1948 on the premise that if he<br />
levered a long portfolio and took short positions in stocks<br />
expected to lag he could improve performance and cut<br />
market risk at the same time.<br />
130/30 portfolios are not hedge funds though. That is<br />
because the risk controls overlaid by 130/30 strategists on<br />
Jones’model keep the target market exposure at 100%. It is<br />
then a relative value play, not an absolute return strategy.<br />
The appropriate risk gauge is therefore tracking error rather<br />
than standard deviation; after all, if net market exposure is<br />
100%, volatility should track the market, too.<br />
Not all 130/30 programmes are the same, of course. At one<br />
end of the spectrum, managers view 130/30 as a small step<br />
beyond enhanced indexing. For example, Warren Chiang,<br />
managing director responsible for active equities strategies<br />
at Mellon Capital, a division of The Bank of New York Mellon<br />
Corporation, restricts variance from benchmark weight for<br />
individual stocks to ±1% and keeps a tight rein on factor<br />
risks to eliminate any bias toward growth, value or<br />
momentum. Such constraints deliver low tracking error<br />
(between 2.5% and 3%) and a modest excess return target of<br />
2.5%, which is about 1.5% higher than for the equivalent<br />
long only portfolio.“We market 130/30 as a substitute for a<br />
low volatility core equity manager,” Chiang says,“we think<br />
that is where you maximise the alpha given the risk.”<br />
Mellon Capital uses quantitative models to construct<br />
both long only and 130/30 portfolios. The firm is not trying<br />
to shoot the lights out, but aims to earn a bit more than the<br />
THE VALUE PLAY OF 130/30 STRATEGIES<br />
73
THE VALUE PLAY OF 130/30 STRATEGIES<br />
74<br />
benchmark return from diversified<br />
portfolios that minimise risk.“We are<br />
not one of those 130/30 managers<br />
that have really concentrated bets<br />
that are highly deviated from the<br />
benchmark,” says Chiang. Rather<br />
than a separate asset class, he sees<br />
130/30 as a tool that can be applied<br />
to, say, large capitalisation or<br />
international equity mandates,<br />
which accounts for differences in<br />
how managers construct the<br />
portfolios and what fees they charge.<br />
Among the top 130/30 managers<br />
this year is UBS, which has pursued<br />
a fundamental price to intrinsic<br />
value investment approach for more<br />
than 25 years. The firm’s analysts<br />
have always run discounted cash<br />
flow models on the companies they<br />
cover, according to Scott Bondurant,<br />
capability head for long-short equity<br />
products at UBS Global Asset<br />
Management. UBS stock rankings<br />
all the way back to 1980 show that<br />
the most under-priced names<br />
outperformed the market by about<br />
5% and the most overvalued<br />
underperformed by about 3%. UBS<br />
targets an excess return of 200 basis<br />
points (bps) for a long only portfolio<br />
benchmarked to the Russell 1000<br />
Index, but for a similar 130/30<br />
portfolio the firm expects its<br />
leveraged stock selection to deliver<br />
250bps-500bps over the benchmark.<br />
Leverage can cut both ways, of<br />
course. “We believe in active<br />
management,” says Bondurant, “if<br />
you have a manager that doesn’t<br />
have that skill in the first place<br />
130/30 is giving him another shot at<br />
getting it wrong.”<br />
To proponents, the 130/30<br />
structure frees managers to make<br />
more money from stocks they expect<br />
to underperform. In capitalisation<br />
weighted equity indices, a few large<br />
names dominate the list followed by<br />
a long tail of stocks with trivial<br />
weights. For example, Bondurant<br />
says more than 80% of the stocks in<br />
the Russell 1000 have a weighting of<br />
less than 15bps. Long only mandates<br />
that contemplate a maximum<br />
100bps variance from the<br />
benchmark weighting in individual<br />
Brad Taylor, global head of investment finance and<br />
hedge fund services at RBC Dexia, says institutions<br />
are happy to pay for alpha but not for strategies<br />
that only deliver repackaged beta.“Institutions are<br />
looking for the benefit of a long-g- short approach<br />
but they are increasingly seeking this exposure in a<br />
more modest cost structure,”Taylor says. Institutions<br />
like the transparency and controlled risk profile<br />
130/30 portfolios offer, too. Photograph kindly<br />
supplied by RBC Dexia, October 2007.<br />
Warren Chiang, managing director responsible for<br />
active equities strategies at Mellon Capital, a<br />
division of The Bank of New York Mellon<br />
Corporation, restricts variance from benchmark<br />
weight for individual stocks to ±1% and keeps a<br />
tight rein on factor risks to eliminate any bias<br />
toward growth, value or momentum. Such<br />
constraints deliver low tracking error (between 2.5%<br />
and 3%) and a modest excess return target of 2.5%,<br />
which is about 1.5% higher than for the equivalent<br />
long only portfolio. Photograph kindly supplied by<br />
The Bank of New York Mellon, October 2007.<br />
stocks don’t give managers the<br />
flexibility to make that bet against<br />
the smaller names: they can only go<br />
to zero, no matter what the weight.<br />
“If you have a 15bps you identify as<br />
50% overvalued and it<br />
underperforms by 50% then you<br />
have added 7.5 bps,” Bondurant<br />
says, “It is no big deal. However, if<br />
you can go to 85bps short—100bps<br />
less than the benchmark—you add<br />
50bps. That is very meaningful.”<br />
Charles Shaffer, managing<br />
director and product manager for<br />
130/30 in Merrill Lynch’s global<br />
markets and investment banking<br />
division, says quantitative<br />
managers have taken an early lead<br />
in snagging 130/30 mandates,<br />
accounting for more than 70% of<br />
the assets under management. It is<br />
a natural extension of their<br />
investment process, which relies on<br />
factor models to rank stocks from<br />
best to worst. For a long only<br />
mandate, managers buy the top<br />
stocks, but they have a ready-made<br />
list of losers to populate the short<br />
side of a 130/30 portfolio.<br />
Like quants, long only<br />
fundamental managers focus on<br />
picking winners, but they have no<br />
incentive to devote scarce resources<br />
to losers. If a company doesn’t pass<br />
muster, most fundamental analysts<br />
drop it and move on; unlike quants<br />
or shops like UBS, they don’t rank<br />
their entire universe. Fundamental<br />
managers who want to offer 130/30<br />
products have to reorient their<br />
research to generate ideas for the<br />
short book.<br />
Shaffer says sceptics once<br />
claimed that only hedge fund<br />
managers, who know how to<br />
handle shorts, and quants, who<br />
employ rigorous risk management<br />
and a ready ranking of stocks,<br />
would be able to run 130/30 money<br />
well. Experience has proved the<br />
naysayers wrong, however:<br />
fundamental 130/30 managers have<br />
beaten the quants hands down in<br />
2007. “The conventional wisdom,<br />
particularly in the early days of<br />
product development, is often<br />
backwards,” says Shaffer, whose<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
Today’s markets are growing more complex.<br />
To succeed, you need a partner whose<br />
expertise aligns with your goals. Someone<br />
who listens, works with you, finds solutions,<br />
and stays as nimble as you need to be. The<br />
Bank of New York Mellon. Together, we can<br />
put your highest goals within reach.<br />
BNY Mellon<br />
Asset Management<br />
Asset Servicing<br />
Wealth Management<br />
The Bank of New York Mellon<br />
Issuer Services<br />
Treasury Services<br />
Broker-Dealer and Advisor Services<br />
bnymellon.com<br />
The world’s financial markets are<br />
a very different place than they were<br />
10 minutes ago.<br />
Who’s helping you?<br />
©2007 The Bank of New York Mellon Corporation. Services provided by The Bank of New York Mellon and its various subsidiaries.<br />
SM
THE VALUE PLAY OF 130/30 STRATEGIES<br />
76<br />
Ric Thomas, a senior managing director of State Street Global<br />
Advisors (SSgA) and department head of the US enhanced equity<br />
group, estimates that at any particular time only 10 or 15 names in<br />
the Russell 1000 are specials subject to higher borrowing costs.<br />
Even for the small capitalisation Russell 2000 Index, he reckons<br />
85% of the names are general collateral. With so much scope for<br />
shorting general collateral stocks, 130/30 managers either avoid<br />
specials altogether or take small positions in just a few names.<br />
Leverage can cut both ways, of course.<br />
“We believe in active management,” says<br />
Bondurant, “If you have a manager that<br />
doesn’t have that skill in the first place<br />
130/30 is giving him another shot at<br />
getting it wrong.”<br />
team provides advice, analysis, prime broker and securities<br />
lending services to managers who run 130/30 portfolios.<br />
Although Darrell Riley, head of global institutional<br />
marketing at T. Rowe Price, accepts the logic behind 130/30<br />
structures he remains leery of its practical application,<br />
particularly for fundamental managers who often lack the<br />
quantitative tools and risk management systems needed to<br />
handle a short book. He notes that short positions<br />
consume a disproportionate share of a manager’s<br />
emotional energy, too. “It’s the exception rather than the<br />
rule that people are good at it,” Riley says. T. Rowe Price<br />
does not offer 130/30 portfolios today and has no<br />
immediate plans to do so.<br />
Riley sees 130/30 products positioned as high conviction<br />
long strategies with selective use of shorts to capture the<br />
full benefit of a manager’s research knowledge. On the<br />
quant side, it works remarkably well for as long as the<br />
quantitative model works.“Quants are fine when there is<br />
good factor stability and when you combine that with<br />
130/30, it’s fantastic,” Riley says, “But when there is a<br />
turning point, they may really suffer.” It’s no secret that<br />
quantitative 130/30 managers hit a rough patch during the<br />
market turmoil in July and August.<br />
Track records in 130/30 are still short, but so far, UBS,<br />
which has $2.25bn under management, has delivered<br />
about double the excess return of its long only portfolios.<br />
From inception in September 2005 through the end of<br />
June, its institutional 130/30 product is up 17.93%,<br />
compared to 15.76% for the equivalent long only<br />
portfolio and 14.32% for the Russell 1000, the benchmark<br />
for both. At 4.33%, the tracking error has come in at the<br />
low end of the 4%-8% target range, which Bondurant<br />
attributes to unusually low market volatility through<br />
most of the period.<br />
Investors don’t get a free lunch, however. 130/30<br />
portfolios bear incremental transaction costs because they<br />
deploy 60% more capital and have correspondingly higher<br />
portfolio turnover. Managers charge higher fees, too. For<br />
its retail 130/30 product, UBS charges 150bps—about<br />
35bps more than for the equivalent long only vehicle.<br />
Institutional fees are lower, of course, but 130/30 products<br />
still command a 45% premium over long only fees. The<br />
portfolios incur stock borrowing and financing costs, too,<br />
which Bondurant estimates at 15bps provided almost all<br />
the shorts come from the general collateral pool. On<br />
balance, a retail UBS investor pays an extra 50bps for a<br />
shot at up to 300bps of excess return.<br />
Borrowing from the hedge fund world, institutional<br />
130/30 fees often include a performance element although<br />
it typically doesn’t kick in unless the manager beats the<br />
benchmark return. Brad Taylor, global head of investment<br />
finance and hedge fund services at RBC Dexia, says<br />
institutions are happy to pay for alpha but not for<br />
strategies that only deliver repackaged beta. “Institutions<br />
are looking for the benefit of a long- short approach but<br />
they are increasingly seeking this exposure in a more<br />
modest cost structure,” Taylor says. Institutions like the<br />
transparency and controlled risk profile 130/30 portfolios<br />
offer, too.<br />
So far, most 130/30 products are benchmarked to broad<br />
indices, including the MSCI World, the Standard & Poor’s<br />
500 and the Russell 1000. For large capitalisation indices<br />
like these, even the smaller names a 130/30 manager might<br />
want to sell short are usually available in the general<br />
collateral pool.<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
Nevertheless, Taylor says<br />
liquidity dried up in some<br />
names during the recent<br />
upheaval, which caused<br />
problems for a few funds. “In<br />
times of market turmoil,<br />
managers need access to the<br />
widest possible array of<br />
securities and large inventories<br />
of those securities to reduce the<br />
likelihood of a loan being<br />
recalled,”says Taylor, who notes<br />
that RBC Dexia has a large pool<br />
of securities available to<br />
borrowers from its $2.6trn of<br />
assets under custody.<br />
Ric Thomas, a senior<br />
managing director of State<br />
Street Global Advisors (SSgA)<br />
and department head of the US<br />
enhanced equity group,<br />
estimates that at any particular<br />
time only 10 or 15 names in the<br />
Russell 1000 are specials<br />
subject to higher borrowing<br />
costs. Even for the small<br />
capitalisation Russell 2000<br />
index, he reckons 85% of the<br />
names are general collateral.<br />
With so much scope for shorting<br />
general collateral stocks, 130/30<br />
managers either avoid specials<br />
altogether or take small<br />
positions in just a few names.<br />
Thomas also points out that<br />
the emphasis on smaller stocks<br />
on the short side does not<br />
necessarily introduce a<br />
capitalisation bias to the overall<br />
portfolio because the<br />
incremental 30% in long<br />
positions are often smaller<br />
names, too.“People think this is<br />
only a way for you to take advantage of negative<br />
information,” he says,“If your model works down the cap<br />
distribution, you will take more overweights among small<br />
cap names, not just underweights. Net-net, you are not<br />
taking any size bet.”<br />
Thomas acknowledges that leverage and short selling<br />
ratchet up the risk of 130/30 portfolios relative to long only,<br />
but in a way that benefits investors as long as managers<br />
pick stocks well. “None of the increase in risk is due to<br />
uncompensated factor exposure such as a size bet or a<br />
sector bet,” he says, “It’s hard to make the case that long<br />
only is a better structure than 130/30.”SSgA now manages<br />
more than $10bn in its Edge brand 130/30 portfolios.<br />
As a substitute for long only equity, 130/30 products allow<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
Charles Shaffer, managing director and product manager for 130/30 in Merrill Lynch’s global markets<br />
and investment banking division, says quantitative managers have taken an early lead in snagging<br />
130/30 mandates, accounting for more than 70% of the assets under management. It is a natural<br />
extension of their investment process, which relies on factor models to rank stocks from best to worst. For<br />
a long only mandate, managers buy the top stocks, but they have a ready-made list of losers to populate<br />
the short side of a 130/30 portfolio. Photograph kindly supplied by Merrill Lynch, October 2007.<br />
managers to compete for core equity mandates rather than<br />
scarce allocations to alternative investments. Merrill Lynch<br />
estimates that US public and private pension plans alone<br />
hold $3trn in long only equity, about 10 times their allocation<br />
to alternatives. For institutional investors unwilling to seek<br />
or unable to get board approval for a higher alternative<br />
allocation, 130/30 portfolios provide access to a key source of<br />
hedge fund alpha: short selling.“The key to this product is<br />
precisely the fact that it does keep beta at one,”says Shaffer,<br />
who expects the explosive growth in assets under<br />
management to continue. “If these products’ early<br />
performance is any indication our $1trn estimate [of the<br />
potential market] could be quite conservative.” By any<br />
measure, that’s more than a flash in the pan.<br />
77
THE VALUE PLAY OF 130/30 STRATEGIES<br />
78<br />
THE 130/30 PRIMER: WHAT YOU NEED<br />
TO KNOW & A LITTLE BIT MORE<br />
What is 130/30 investing?<br />
The idea is simple. Start with a long portfolio tied to<br />
a benchmark, but give managers room to exploit<br />
stocks identified as dogs by selling short up to 30%<br />
of the portfolio and let them reinvest the proceeds in<br />
expected winners. The net market exposure remains<br />
100% (130% long and 30% short), explains Jeremy<br />
Baskin, global head of active quant strategies at<br />
Northern Trust Global Investors (NTGI) in Chicago. A<br />
successful stock picker should deliver better<br />
performance relative to a benchmark while still<br />
subject to the constraints typical of a long only<br />
mandate, including maximum variance from<br />
benchmark weightings by sector, industry and<br />
individual security. “I think that 130/30 has become<br />
a category reference that includes funds that similarly<br />
net to 100% long,” notes Baskin, “it may not be<br />
right for every investor.” Even so, for the right<br />
investor, 130/30 strategies offer investors a lot of<br />
flexibility. “130/30 removes the constraint on shorts,”<br />
he says.<br />
Is this a new strategy?<br />
It has been around for three or slightly more<br />
years and is sometimes referred to as active<br />
extension or short extension strategies. It is<br />
picking up in popularity quite quickly though and<br />
as of March this year it is estimated that between<br />
$50bn and $60bn worth of assets are invested in<br />
130/30 strategies.<br />
Why 130/30 funds are popular<br />
There is a significant demand from the institutional<br />
market. Pension funds, for example, show a<br />
growing need for alpha-based returns to help<br />
solvency levels. 130/30 strategies also offer an<br />
alternative to those institutions for which pure hedge<br />
fund plays are a little to rich for their liking. 130/30<br />
strategies are attractive because they work around<br />
the usual constraints placed on managers by long<br />
only mandates. “Most managers in this regard have<br />
a benchmark and benchmarks are cap weighted,”<br />
says Baskin, adding, “By definition, if you have a<br />
long only mandate, you simply cannot short.<br />
Therefore, the moderate leverage and shorting<br />
that 130/30 allows means that it is attractive to<br />
beneficial owners, which might be wary of jumping<br />
on the hedge fund bandwagon. The appeal of<br />
130/30 is augmented by the fact that they are<br />
cheaper than hedge funds as well.”<br />
While many beneficial owners are looking to<br />
alternative investments, such as hedge funds and<br />
private equity funds for some of this alpha, up to<br />
now actual allocations to these types of<br />
investments as a percentage of overall assets<br />
under management are still very low. The biggest<br />
bulk of corporate plan assets (over 41%) and<br />
public plan assets (over 45%) are in domestic<br />
equities. Most of these investments are in large<br />
cap stocks, which cuts to the heart of 130/30<br />
investing, as it is principally centred in the large<br />
cap segment.<br />
Additionally, UCITs III provide investment<br />
managers with an opportunity to package these<br />
funds for retail investments. While UCITs III funds<br />
do not borrow stocks to sell, they do use<br />
derivatives to gain the same effect.<br />
Baskin says plans can replicate 130/30 exposure<br />
with equitised long/short strategies, such as investing<br />
in market neutral hedge funds and combining that<br />
exposure with a swap on the S&P 500, or a futures<br />
contract to gain particular market exposure.<br />
Why 130/30 and not 140/40 or 150/50?<br />
It is worth noting that 130/30 is not necessarily a set<br />
ratio. Some managers prefer anything from 120/20<br />
to 140/40 or range between. However, in a 130/30<br />
fund the active risk is similar to traditional long only<br />
fund, although the overall exposure to an investment<br />
manager’s investment process is 160%. However, as<br />
NTGI’s Baskin notes, “130/30 strategies are about<br />
getting more alpha per unit of risk. However, if you<br />
look at the maximum value of going short, after<br />
140/40 and 1510/50, the benefits generally<br />
diminish, so you have to have the right balance that<br />
works for your process, benchmark and level of<br />
active risk.”<br />
Why are so many investment banks<br />
beginning to offer 130/30 support?<br />
Not everyone who wants to launch a 130/30 fund<br />
will have the appropriate technology, operational<br />
processes or culture to support the strategy (strange<br />
though it may appear, not all fund managers are<br />
adept at shorting stock, for example). Prime brokers,<br />
for example, while expensive, do offer constructive<br />
help in this regard offering both broking and<br />
custodial services. Equally, banks offering quant<br />
services can help the asset manager identify over or<br />
under priced stocks.<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
THE <strong>FTSE</strong><br />
IWANT<br />
THE WORLD<br />
INDEX<br />
<strong>FTSE</strong>. It’s how the world says index.<br />
Global markets grow more complex and interconnected every day.To stay abreast, you need a<br />
comprehensive index that can slice and dice markets the way you do. The <strong>FTSE</strong> Global Equity<br />
Index Series was the first benchmark to cover the world seamlessly with a single consistent<br />
and transparent methodology. Because <strong>FTSE</strong> indices are independently verified by a panel of<br />
market practitioners, you can be sure that they will always be in line with investors’ needs.<br />
Wherever you invest, <strong>FTSE</strong> gives you the clearest view of how you are doing.<br />
www.ftse.com/invest_world<br />
© <strong>FTSE</strong> International Limited (‘<strong>FTSE</strong>’) 2007. All rights reserved. <strong>FTSE</strong> ® is a trade mark jointly owned by the London Stock Exchange Plc and The Financial Times Limited and are used by <strong>FTSE</strong> under licence.
DEBT REPORT: ASSET BACKED SECURITIES<br />
80<br />
ABS<br />
ISSUANCE<br />
INHIBITED<br />
While no mass sell-offs had taken place by<br />
late September, some initial casualties<br />
emerged at the end of August. Among the first<br />
was the Cheyne Finance SIV, which was<br />
established in August 2005 and whose $9.7bn<br />
of assets included an unusually heavy<br />
exposure to the US sub prime market through<br />
both direct investments and CDOs.<br />
Photograph © pmphoto, supplied by<br />
Dreamstime.com, October 2007.<br />
After the first six months of 2007, European securitisation was set to<br />
break all records. Analysts were confidently expecting that new issuance<br />
for the year would exceed €500bn for the first time, as asset-backed<br />
bonds appeared to have become a highly liquid option for financial<br />
market investors. Yet within six weeks, the abrupt seizure in short-term<br />
borrowing around the world—driven by concerns over exposures to the<br />
worsening US sub prime mortgage crisis—turned the market on<br />
its head. The consequent funding problems experienced by<br />
many ABS investors sent valuations spiraling downwards.<br />
Bond spreads in the secondary market quadrupled across<br />
the ratings spectrum in some cases, forcing prospective<br />
new issuers to abandon their plans indefinitely. How<br />
did this happen, and where does the market go from<br />
here? Andrew Cavenagh reports.<br />
THE IRONY OF the collapse in the value of European<br />
asset-backed securities market is that—excepting<br />
those assets with US sub-prime exposure—it has<br />
nothing to do with the performance of their underlying<br />
assets. It is entirely down to the way a large chunk of the<br />
investor base has chosen to fund its investments. They are<br />
the conduits and structured-investment vehicles (SIVs)<br />
that are sponsored by banks and others. Worldwide they<br />
are reckoned to hold asset-backed securities worth the<br />
equivalent of $1,400bn. They finance these investments to<br />
a large extent by issuing asset-backed commercial paper<br />
(ABCP), which typically has a maturity of between three<br />
and six months. While rates on ABCP were low—flat or<br />
close to inter-bank rates such as three-month Libor and<br />
Euribor—this model provides a significant arbitrage<br />
opportunity as the ABS investments pay<br />
spreads above Libor.<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
The strategy depends crucially, however, on the ability to<br />
“roll over” the commercial paper as it falls due. As<br />
mounting fears over banks’ sub-prime exposures (both<br />
direct and indirect through collateralised debt obligations<br />
[CDOs]) cause them to stop lending to each other in the<br />
short-term markets, appetite for CP dried up and left those<br />
who relied on it for funding exposed. While the banksponsored<br />
conduit programmes have liquidity facilities<br />
(put up by their sponsors) that cover 100% of the CP they<br />
have issued—which enables them to refinance any debt<br />
that falls due for a period of at least 90 days—the liquidity<br />
facilities in SIVs are not so large. Consequently their only<br />
alternative to meet<br />
debts falling due (if they<br />
cannot refinance it) is<br />
to sell off assets, and it<br />
is the scale of these<br />
potential fire-sales that<br />
has had such a<br />
detrimental impact on<br />
ABS valuations.<br />
The Moody’s rating<br />
agency estimates that<br />
SIVs held $400bn of<br />
various asset-backed<br />
bonds at the beginning<br />
of September, and that<br />
vehicles without bank<br />
sponsors accounted for<br />
$90m of this total.<br />
While banks in most<br />
cases can be expected<br />
to provide the additional liquidity necessary to prevent the<br />
vehicles they sponsor from having to dispose of large<br />
volumes of securities at significant discounts, those set up<br />
by hedge funds and others do not have such an “in house”<br />
liquidity provider. To say the least, they consequently face<br />
an uphill struggle to find an external source of such<br />
funding in the current environment.<br />
Their situation is exacerbated by their high gearing of<br />
the vehicles, which obliges them to maintain mark-tomarket<br />
valuations and other triggers that—if breached—<br />
can also force them to sell off assets. As the values of assetbacked<br />
bonds have plunged, more SIVs have faced<br />
enforced asset sales for this reason, and such disposals can<br />
only drive market prices further down and spread the<br />
malaise to other vehicles.“The problem is that one fund’s<br />
forced liquidation depressing prices would be the next<br />
fund’s trigger point to liquidate, as net asset values<br />
decline,”explains Chris Greener, credit research analyst at<br />
Société Générale in London.<br />
While no mass sell-offs had taken place by late<br />
September, some initial casualties emerged at the end of<br />
August. Among the first was the Cheyne Finance SIV, which<br />
was established in August 2005 and whose $9.7bn of assets<br />
included an unusually heavy exposure to the US sub-prime<br />
market through both direct investments and CDOs.<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
While banks in most cases can be<br />
expected to provide the additional<br />
liquidity necessary to prevent the vehicles<br />
they sponsor from having to dispose of<br />
large volumes of securities at significant<br />
discounts, those set up by hedge funds<br />
and others do not have such an “in<br />
house” liquidity provider. To say the<br />
least, they consequently face an uphill<br />
struggle to find an external source of<br />
such funding in the current environment.<br />
In an announcement to the Irish Stock Exchange on<br />
August 28, the Dublin-listed vehicle said that mark-tomarket<br />
losses in its investment portfolio had breached one<br />
of its key triggers—the major capital loss test—and that it<br />
had sold off assets to raise enough cash to meet its<br />
projected liabilities for the next few months. Cheyne added<br />
that it would “continue to sell assets to meet out liabilities<br />
as they come due” while it attempted to negotiate a recapitalisation<br />
to extend the maturity of its debt.<br />
The same day the €10bn Rhinebridge SIV, sponsored by<br />
the troubled IKB Deutsche Industriebank, sold $176m of<br />
bonds to meet its immediate debt obligations rather than<br />
attempt to draw on<br />
liquidity facilities,<br />
conceding that further<br />
support from IKB and<br />
its owners “cannot be<br />
expected at this stage”.<br />
The impact of these<br />
enforced disposals—<br />
and the threat of a lot<br />
more to come—on<br />
bond valuations was<br />
savage. By mid-<br />
September, the spreads<br />
on triple-A residential<br />
mortgage-backed<br />
securities (RMBS)<br />
issued by the big UK<br />
master trusts—up to<br />
July the tightest priced<br />
bonds in the European<br />
market—had shot out to 50 basis points on the 3-month<br />
Libor benchmark from a level of 11bp just two months<br />
before.The secondary market spreads on triple-A bonds on<br />
all other asset classes widened by between 175% and<br />
400%, which quickly strangled the primary market. Spain’s<br />
Banco Pastor, for example, confirmed on September 20 that<br />
it was postponing a planned €600m issue indefinitely until<br />
conditions improved, and one banker estimated that at<br />
least €20bn of deals out of the country would now be<br />
shelved until 2008.<br />
The only deals of any size that did emerge in September<br />
—like the £5bn Granite 2007-8 issue out of the Northern<br />
Rock RMBS master trust that will be used as collateral for<br />
the beleaguered bank’s emergency loan facility from the<br />
Bank of England—were those that issuers wanted to retain<br />
for repo purposes. One or two smaller deals, such as the<br />
€750m Sound BV 2 and €250m E-MAC BV issues out of<br />
the Netherlands (where in both cases the underlying<br />
assets are covered by NHG guarantees) also came out,<br />
where the issuers managed to pre-place the senior classes<br />
of triple-A notes but were obliged to retain the mezzanine<br />
and junior ones.<br />
In the secondary market, meanwhile, several of the large<br />
repeat issuers began to buy back their own bonds at a<br />
substantial discount.“It makes sense for them to do that,”<br />
81
DEBT REPORT: ASSET BACKED SECURITIES<br />
82<br />
observed Greener at Société Générale. Most asset-backed<br />
analysts are not expecting the situation to change much<br />
before the end of October, as lack of liquidity some SIVs to<br />
sell off more assets.<br />
Priya Shah, structured credit strategist at Dresdner<br />
Kleinwort, says the vehicles that did not have bank<br />
sponsors were looking particularly vulnerable and while<br />
all the SIVs are looking for temporary liquidity lines to<br />
enable them to dispose of their assets in a more orderly<br />
manner not all would succeed in the current climate. “If<br />
you have half of those non-bank vehicles having to sell<br />
their assets, then that’s going to be a pretty big number,”<br />
she pointed out.<br />
Shah added that the $12bn of assets held in the recently<br />
established SIV-lites would undoubtedly have to be sold.<br />
These riskier variants of the SIV structure do not have bank<br />
sponsors (they have been issued by CDO managers), have<br />
larger capital note structures below the issued debt, and<br />
their collateral is much more concentrated into a single<br />
asset class. Four of the five launched to date have funded<br />
themselves exclusively in the CP market, where they have<br />
no chance of rolling over the debt in the necessary timeframe.<br />
“There’s no one now that going to buy that<br />
commercial paper,”she says.<br />
The shadow of these disposals looks set to inhibit new<br />
issuance for at least another two months, as the triple-A<br />
spreads on prime RMBS will need to halve from the mid-<br />
September levels before the big serial issuers (who<br />
dominate European RMBS) return to the market. This is<br />
because the margins on the mortgages average 55-75bp<br />
over Libor, and they need 40-50bp of excess spread to<br />
cover reserve funds, servicing costs and potential losses.<br />
“That’s the only point at which the arbitrage really starts to<br />
work,”explained Laila Kollmorgen, head of secondary ABS<br />
trading at BNP Paribas in London. By the end of<br />
September, however, there were signs that the market was<br />
turning as triple-A secondary spreads came in 10bp in the<br />
final week of the month. Kollmorgen said that indicated<br />
primary market should come back within six weeks.“At the<br />
latest it’s going to be mid-November.”<br />
While the European bank-sponsored conduits, which<br />
hold the equivalent of around $300bn of asset-backed<br />
securities will not be able to start buying again until ABCP<br />
margins come back to at least 10bp over inter-bank rates as<br />
in the US, there are fledgling signs that real-money<br />
investors (insurers, pension funds and rational asset<br />
managers ) are setting up funds to acquire discounted ABS,<br />
as PIMCO and others have done on a large scale in the US.<br />
These buyers should then account for a larger share of the<br />
investor base going forward in as European securitisation<br />
gets back on track—albeit with risk re-priced from the<br />
spread levels that prevailed before July—in 2008.<br />
Don’t work in the dark,<br />
who knows what you might find<br />
Emerging Markets Report provides a comprehensive<br />
overview of the principal deals, trends, opportunities<br />
and challenges in fast-developing markets. For more<br />
information on how to order your individual copy of<br />
Emerging Markets Report please contact:<br />
Paul Spendiff<br />
Tel:44 [0] 20 7680 5153<br />
Fax:44 [0] 20 7680 5155<br />
Email:paul.spendiff@berlinguer.com<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
While there is confusion over the precise definition of an ECN,<br />
at its most basic level it is an electronic marketplace that<br />
facilitates the buying and selling of stocks by lining up brokers<br />
and market-makers that trade on behalf of institutional and<br />
retail investors without sending the order through an exchange<br />
for execution. In Europe, under MiFiD, ECNs and crossing<br />
networks are mostly referred to as MTFs, which can offer a<br />
displayed market as well as dark orders and quotes. They all<br />
differ from the established stock exchanges in that they do not<br />
trade their own list of stocks nor do they hold initial public<br />
offerings. Photograph © Rolffimages, Agency:<br />
Dreamstime.com, supplied September 2007.<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
Although regulation in the US and Europe is<br />
often written about as a catalyst for change, the<br />
trading landscape in both regions has already<br />
been altered thanks to direct market trading,<br />
algorithmic trading, a sharpened focus on best<br />
execution and banks’ internalising their own<br />
orders. Legislation has and will only accelerate<br />
the trends set in motion. New electronic players<br />
have emerged while existing incumbents and<br />
regulated exchanges are busy reconfiguring<br />
their models. Who will survive, of course, is<br />
another question. Lynn Strongin Dodds reports.<br />
KEEPING AN<br />
EYE ON THE<br />
FUTURE<br />
OF ECNs<br />
THE ONE CERTAINTY is that the securities exchange<br />
marketplace will become even more crowded and not<br />
every player will make it to the finishing line. Many<br />
believe that Europe will follow a similar pattern to the US,<br />
which has seen a proliferation of participants in the wake<br />
of the Regulation for National Markets (Reg NMS), which<br />
was introduced in 2005 and came into force earlier this<br />
year. Under the new rules, the onus is put on the exchange<br />
to pass on an order if it cannot provide the best price when<br />
the order is executed.<br />
The Markets in Financial Instruments Directive (MiFiD),<br />
which finally sees the light of day in November this year, is<br />
a broader framework. Under MiFiD, the obligation firmly<br />
rests on an investment firm’s ability to find the best trading<br />
venue. MiFiD also provides for the creation of multi-lateral<br />
trading facilities (MTFs), which allows parties to trade<br />
among themselves away from the exchanges, much like<br />
crossing networks in the US. While the two sets of<br />
regulation may differ, their main objectives remain the<br />
same - to protect the investor by ensuring best price on<br />
every execution.<br />
Moreover, they are both designed to level the playing<br />
field. One of the challenges, though, is that the lines of<br />
distinction seem to be blurring between the various<br />
electronic participants, the exchanges and their value<br />
propositions. For example, in the past three years, the New<br />
York Stock Exchange (NYSE) bought Archipelago<br />
Exchange. NASDAQ meantime, which had bought Brut in<br />
2004, purchased Instinet a year later. With this growing<br />
market complexity and blurring, often times the<br />
ECNS RING CHANGES IN THE TRADING LANDSCAPE<br />
83
ECNS RING CHANGES IN THE TRADING LANDSCAPE<br />
84<br />
characteristics and terminology used to describe these<br />
different platforms can be confusing. In simple terms then,<br />
how do alternative trading systems (ATS), electronic<br />
communication networks (ECN), crossing networks, MTFs<br />
and stock exchanges differ from each other?<br />
The common thread is that most are electronic trading<br />
platforms. Breaking it down further, in official parlance, an<br />
ATS across in North American markets is a networked<br />
application that electronically connects potential buyers<br />
and sellers of securities, matching their trades on<br />
predefined criteria. This can include call markets, matching<br />
systems and crossing networks as well as electronic<br />
communications networks (ECNs).<br />
While there is confusion over the precise definition of an<br />
ECN, at its most basic level it is an electronic marketplace<br />
that facilitates the buying and selling of stocks by lining up<br />
brokers and market-makers that trade on behalf of<br />
institutional and retail investors without sending the order<br />
through an exchange<br />
for execution. In<br />
Europe, under MiFiD,<br />
ECNs and crossing<br />
networks are mostly<br />
referred to as MTFs,<br />
which can offer a<br />
displayed market as<br />
well as dark orders and<br />
quotes. They all differ<br />
from the established<br />
stock exchanges in<br />
that they do not trade<br />
their own list of stocks<br />
nor do they hold initial<br />
public offerings.<br />
It is no surprise, perhaps, that industry participants often<br />
refer to all of these different types of platforms, except the<br />
exchanges, as electronic venues. As Alasdair Haynes, chief<br />
executive officer and head of ITG’s international business,<br />
points out,“You need a dictionary to understand what the<br />
market looks like and I think there needs to be more<br />
clarification. For example, some might ask what is Chi-X<br />
(the first order-driven pan-European equities alternative<br />
trading system launched by Instinet this past March). Is it<br />
an ECN, MTF, ATS or quasi-exchange? The exchanges are<br />
looking at what the MTFs are doing and visa versa in terms<br />
of offering different value products. No one wants to be left<br />
behind and they are encroaching on each other’s territory.”<br />
Alan Jenkins, European head of MiFiD at BearingPoint, a<br />
UK based consultancy, agrees, adding,“It does seem that all<br />
the acronyms are becoming synonyms for each other. In<br />
Europe, ECNs now have a new name - MTFs - although<br />
they do not get off that lightly and have similar obligations<br />
as fully fledged exchanges under MiFiD.The result, though,<br />
will be that liquidity will fragment further and we will see<br />
a proliferation of new data and execution venues in the first<br />
12 to 18 months of MiFiD. Then in the next two to three<br />
year period, people will start to work out which are the best<br />
In Europe, under MiFiD, ECNs and crossing<br />
networks are mostly referred to as MTFs, which<br />
can offer a displayed market as well as dark<br />
orders and quotes. They all differ from the<br />
established stock exchanges in that they do not<br />
trade their own list of stocks nor do they hold<br />
initial public offerings.<br />
trading venues and liquidity will coalesce around a small<br />
number of platforms just as it happened in the US.”<br />
Right now, there is a great deal of buzz around the<br />
advent of dark pools. These are electronic trading venues<br />
that match buyers and sellers anonymously, without<br />
quoting prices. For institutional investors, these deals are<br />
usually done at the mid-point of the underlying market<br />
price, which saves half the bid-offer spread. Another<br />
advantage is that market impact, which can account for up<br />
to 80% of transaction costs, is eliminated.<br />
Although it has been touted as a recent phenomenon,<br />
dark pools are not a new concept, according to Joseph<br />
Cangemi, managing director of BNY ConvergEx, the<br />
agency brokerage, research and technology affiliate of Bank<br />
of New York Mellon. In the old days of floor based trading,<br />
if a broker had received a large order, he would not show<br />
his full hand. Instead, they would work it in smaller pieces<br />
while disclosing the least amount of information possible<br />
and only to those they<br />
trust.<br />
Dark pools have<br />
mushroomed in the<br />
US with estimates<br />
having it that around<br />
40 to 45 are in<br />
operation, although<br />
the types of liquidity<br />
pools vary<br />
dramatically. There are<br />
agency brokers that<br />
only handle client<br />
orders and cross<br />
those, where possible.<br />
These include ITG, which pioneered the dark liquidity<br />
model, Instinet and relative newcomers, Pipeline Trading<br />
Systems and Nyfix Millenium. On the independent front,<br />
Liquidnet is the most prominent player, catering to the<br />
buyside. This means that institutions can trade with each<br />
other without using a broker.<br />
Investment banks, on the other hand, offer crossing<br />
networks that match their own proprietary orders with<br />
those of institutional, hedge funds and retail clients. Many<br />
household names have also banded together to create<br />
Block Interest Delivery System Trading (Bids) in an attempt<br />
to increase competition and liquidity in equities trading.<br />
These include Citigroup, Goldman Sachs, Lehman<br />
Brothers, Merrill Lynch, Morgan Stanley and UBS and<br />
more recently, Bank of America, Bear Stearns, Credit<br />
Suisse, Deutsche Bank, JP Morgan and Knight Capital<br />
Group have invested in the system.<br />
In addition, broker-dealer-owned platforms have started<br />
to link with other broker-owned and/or independent dark<br />
liquidity pools, which again can distort the dividing lines.<br />
For example, Credit Suisse has linked its CrossFinder with<br />
Instinet CAB, Fidelity CrossStream, Lehman LCX,<br />
Liquidnet and others. Merrill Lynch and ITG, on the other<br />
hand, have joined forces to launch Block Alert, a global<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
Joseph Cangemi, managing director of BNY ConvergEx, the agency<br />
brokerage, research and technology affiliate of Bank of New York<br />
Mellon. In the old days of floor based trading, if a broker had received<br />
a large order, he would not show his full hand. Instead, they would<br />
work it in smaller pieces while disclosing the least amount of<br />
information possible and only to those they trust. Photograph kindly<br />
supplied by BNY Convergex, October 2007.<br />
block trading service using agency broker ITG’s Posit<br />
crossing network.<br />
Overall, the new contenders and incumbents have been<br />
successful in wrestling liquidity away from the established<br />
exchanges in US equities. A recent study conducted by Aite<br />
this past autumn revealed that exchanges currently account<br />
for about 75% of domestic equity trade volume, compared<br />
to 25% for ATS’. By the end of 2011, this figure is expected<br />
to be whittled down to about 62%.<br />
Sang Lee, managing partner of Aite, along with others,<br />
believes consolidation is inevitable.“Today, the US equities<br />
market is highly fragmented and it is not easy to navigate<br />
in the short term as liquidity migrates from one location to<br />
another. The displayed platforms have been more<br />
successful, with the four largest – NYSE, NASDAQ, BATS<br />
and Direct Edge - accounting for about 85% to 90% of all<br />
trading in US equities. Market consolidation seems to be<br />
inevitable, and while the share of the four largest players<br />
may fall, I believe they will continue to dominate.”<br />
Cangemi of BNY ConvergEx, which recently launched a<br />
dark liquidity trading venue called VortEx, notes,“I do not<br />
think that the US market can support all these varieties of<br />
liquidity pools. There are about 45 registered ATS/ECN in<br />
the US but that does not mean that they are all having a<br />
critical impact on the market. Looking ahead, I think there<br />
is room for eight to ten but they may be totally different<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
John Barker, head of Liquidnet believes “the next four years will see<br />
several new entrants coming into the European market with both<br />
mainstream and niche offerings. As players such as ITG, Chi-X and<br />
Liquidnet have demonstrated, there is market share to be gained<br />
although I think in the end Europe is smaller than the US and will<br />
only be able to sustain three to four different models.” Photograph<br />
kindly supplied by Liquidnet, October 2007.<br />
than the ones that are currently in the market.”<br />
As for the growth of dark liquidity pools, Lee believes<br />
that their potential is limited despite the hype. “They<br />
currently occupy about 12% to 15% of the US market and<br />
while some predict they will grow to account for 50% of<br />
trading, I think that is unsupportable. First, their growth<br />
creates a credibility problem because by definition they do<br />
not offer displayed quotes and instead rely on the publicly<br />
available quotes to determine crossing points. As the public<br />
market shrinks, the credibility of the public price will come<br />
into question and as a result, trade execution quality in the<br />
dark liquidity pools may come into question as well. Also,<br />
their growth may be curtailed because of the regulators<br />
emphasis on transparency.”<br />
This is unlikely, though, to stop electronic upstarts and<br />
exiting players in the displayed and dark pool space from trying<br />
their luck in the post MiFiD world. At first glance, Europe may<br />
be a harder market to crack. The efficiency of the exchanges’<br />
electronic order books, where average order sizes remain<br />
substantially greater than in the US, has made it difficult for<br />
competitors to win liquidity in Europe. However, as Peter<br />
Randall, director, Chi-X Europe Ltd, notes, “It is difficult to<br />
speculate about how many players there will be but I think the<br />
pie will get bigger as more liquidity is generated.The platforms<br />
that will win are those that can offer access to new liquidity,<br />
better pricing and sophisticated technology.”<br />
85
ECNS RING CHANGES IN THE TRADING LANDSCAPE<br />
86<br />
So far, the recipe has<br />
worked for Chi-X.<br />
Instinet claims that<br />
trading on Chi-X is on<br />
average 90% cheaper<br />
than on the main<br />
European markets. In<br />
August, the trading<br />
platform took a<br />
significant minority of<br />
trading in the largest<br />
shares listed on the<br />
Dutch and German<br />
stock exchanges – two<br />
countries where<br />
domestic law does not<br />
require that all share<br />
trading be routed<br />
through the local<br />
exchange.<br />
A promising start<br />
no doubt but the jury<br />
is out over its long<br />
term performance as<br />
the European<br />
marketplace has yet to<br />
become crowded.<br />
Now, Nyfix intends to<br />
launch Euro-<br />
Millennium, an MTF<br />
for pan-European<br />
listed cash equities in<br />
the fourth quarter<br />
while Liquidnet is<br />
continuing to enhance<br />
its product offering in<br />
Europe. Equiduct,<br />
which was borne out<br />
of the old Easdaq<br />
trading platform,<br />
recently struck a deal<br />
with Börse Berlin -<br />
formerly known as the<br />
Berlin Stock<br />
Exchange. Few details<br />
of their precise<br />
offering are currently<br />
available and there are<br />
concerns that Bob Fuller, head of the venture, is leaving at<br />
the end of October.<br />
All eyes are still sharply focused on the fate of Project<br />
Turquoise, the pan-European exchange being set up by a<br />
consortium of investment banks, including Credit Suisse,<br />
Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan<br />
Stanley and UBS. It has already selected the DTCC<br />
subsidiary EuroCCP to provide clearing and settlement<br />
services; however, a management team is yet to be<br />
announced. The group<br />
has said it will be fit for<br />
purpose by the first or<br />
second quarter of 2008<br />
but industry pundits<br />
remain sceptical. John<br />
Barker, head of<br />
Liquidnet believes “the<br />
next four years will see<br />
several new entrants<br />
coming into the<br />
European market with<br />
both mainstream and<br />
niche offerings. As<br />
players such as ITG,<br />
Chi-X and Liquidnet<br />
have demonstrated,<br />
there is market share<br />
to be gained although I<br />
think in the end<br />
Europe is smaller than<br />
the US and will only be<br />
able to sustain three to<br />
four different models.”<br />
For now, all the<br />
attention is on<br />
equities, but looking<br />
farther down the line,<br />
there could be limited<br />
opportunities in the<br />
over the counter<br />
space. Paul Winter,<br />
global head of OTC<br />
derivatives, at Fortis<br />
Investments, says,“If it<br />
happens we could see<br />
electronic trading in<br />
the simpler products<br />
such as plain vanilla<br />
interest rate swaps or<br />
forward rate<br />
agreements where<br />
there is a lot of<br />
liquidity. I think it<br />
would be harder to<br />
create an electronic<br />
trading platform in the<br />
more complicated<br />
products such as collaterised debt obligations where there<br />
are more problems with pricing and valuations.”<br />
As Richard Balarkas, head of advanced execution<br />
services at Credit Suisse, puts it, “An exchange type of<br />
mechanism may encourage more liquidity in some of the<br />
OTC derivatives markets but by definition, they are OTC.<br />
There is a lack of uniformity and I think the new venues<br />
will be focusing more on developing products for the<br />
equities market.”<br />
Alan Jenkins, European head of MiFiD at BearingPoint, a UK based<br />
consultancy, agrees, adding,“It does seem that all the acronyms are becoming<br />
synonyms for each other. In Europe, ECNs now have a new name – MTFs -<br />
although they do not get off that lightly and have similar obligations as fully<br />
fledged exchanges under MiFiD. The result, though, will be that liquidity will<br />
fragment further and we will see a proliferation of new data and execution<br />
venues in the first 12 to 18 months of MiFiD. Then in the next two to three year<br />
period, people will start to work out which are the best trading venues and<br />
liquidity will coalesce around a small number of platforms just as it happened<br />
in the US.” Photograph kindly supplied by Bearing Point, October 2007.<br />
A recent study conducted by Aite this past<br />
autumn revealed that exchanges currently<br />
account for about 75% of domestic equity trade<br />
volume, compared to 25% for ATS’. By the end<br />
of 2011, this figure is expected to be whittled<br />
down to about 62%.<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
A SNAPSHOT VIEW OF THE SECURITIES LENDING MARKET AS OF OCTOBER 10 2007<br />
Top 10 Equities By Daily Total Return<br />
Rank Stock description<br />
1 Groupe Eurotunnel SA<br />
2 Imergent Inc<br />
3 Home Solutions of America Inc<br />
4 Medis Technologies Ltd<br />
5 Alitalia - Linee Aeree Italiane Spa<br />
6 Raser Technologies Inc<br />
7 Dendreon Corp<br />
8 Delta Financial Corp<br />
9 Sulphco Inc<br />
10 InterOil Corp<br />
Equity by Fee > 10 < 100 Mln<br />
Rank Stock description<br />
1 Groupe Eurotunnel SA<br />
2 Imergent Inc<br />
3 Home Solutions of America Inc<br />
4 Medis Technologies Ltd<br />
5 Alitalia - Linee Aeree Italiane Spa<br />
6 Raser Technologies Inc<br />
7 Delta Financial Corp<br />
8 Sulphco Inc<br />
9 InterOil Corp<br />
10 Interoil Corp<br />
Corp by Fee > 10 < 100 Mln<br />
Rank Stock description<br />
1 Rotech Healthcare Inc (9.5% 01-Apr-2012)<br />
2 Fremont General Corp (7.875% 17-Mar-2009)<br />
3 Magnachip Semiconductor Finance Co (8% 15-Dec-2014)<br />
4 Tembec Industries Inc (8.625% 30-Jun-2009)<br />
5 K Hovnanian Enterprises Inc (8.875% 01-Apr-2012)<br />
6 K Hovnanian Enterprises Inc (8.625% 15-Jan-2017)<br />
7 Beazer Homes Corp (8.125% 15-Jun-2016)<br />
8 Calpine Corp (7.75% 01-Jun-2015)<br />
9 Trac-x North America 2 March 2009 Tr 1 (6.05% 25-Mar-2009)<br />
10 Dura Operating Corp (8.625% 15-Apr-2012)<br />
Govt by Fee > 10 < 100 Mln<br />
Rank Stock description<br />
1 Philippines, Republic Of The (Government) (6.375% 15-Jan-2032)<br />
2 Turkey, Republic Of (Government) (11.875% 15-Jan-2030)<br />
3 Indonesia, Republic Of (Government) (6.875% 09-Mar-2017)<br />
4 Mexico Government International Bond (5.875% 15-Jan-2014)<br />
5 Italy, Republic Of (Government) (2.25% 01-Feb-2010)<br />
6 Argentina, Republic Of (Government) (1.33% 31-Dec-2038)<br />
7 Italy, Republic Of (Government) (5.25% 20-Sep-2016)<br />
8 Resolution Funding Corp (0% 15-Jul-2019)<br />
9 United States Treasury (0% 15-Aug-2021)<br />
10 Turkey, Republic Of (Government) (4.75% 06-Jul-2012)<br />
<strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007<br />
Top 10 Corp Bonds By Daily Total Return<br />
Rank Stock description<br />
1 Rotech Healthcare Inc (9.5% 01-Apr-2012)<br />
2 Fremont General Corp (7.875% 17-Mar-2009)<br />
3 Magnachip Semiconductor Finance Co (8% 15-Dec-2014)<br />
4 Tembec Industries Inc (8.625% 30-Jun-2009)<br />
5 K Hovnanian Enterprises Inc (8.875% 01-Apr-2012)<br />
6 K Hovnanian Enterprises Inc (8.625% 15-Jan-2017)<br />
7 Dollar General Corp (10.625% 15-Jul-2015)<br />
8 Beazer Homes Corp (8.125% 15-Jun-2016)<br />
9 Burlington Coat Factory Warehouse Corp (11.125% 15-Apr-2014)<br />
10 Freescale Semiconductor Inc (10.125% 15-Dec-2016)<br />
Equity by Fee > 100 Mln<br />
Rank Stock description<br />
1 Dendreon Corp<br />
2 Corus Bankshares Inc<br />
3 Cree Inc<br />
4 Force Protection Inc<br />
5 Thornburg Mortgage Inc<br />
6 Indymac Bancorp Inc<br />
7 USANA Health Sciences Inc<br />
8 La-z-boy Inc<br />
9 Mueller Water Products Inc<br />
10 Utstarcom Inc<br />
Corp by Fee > 100 Mln<br />
Rank Stock description<br />
1 Dollar General Corp (10.625% 15-Jul-2015)<br />
2 Burlington Coat Factory Warehouse Corp (11.125% 15-Apr-2014)<br />
3 Freescale Semiconductor Inc (10.125% 15-Dec-2016)<br />
4 Ford Motor Co (4.25% 15-Dec-2036)<br />
5 Realogy Corp (12.375% 15-Apr-2015)<br />
6 Calpine Corp (8.5% 15-Feb-2011)<br />
7 Bon Ton Stores Inc (10.25% 15-Mar-2014)<br />
8 Pilgrims Pride Corp (8.375% 01-May-2017)<br />
9 Spectrum Brands Inc (11.25% 02-Oct-2013)<br />
10 General Motors Corp (8.375% 15-Jul-2033)<br />
Govt by Fee > 100 Mln<br />
Rank Stock description<br />
1 Federal Home Loan Mortgage Corp (5.5% 23-Aug-2017)<br />
2 United States Treasury (0% 15-Nov-2011)<br />
3 Federal Home Loan Mortgage Corp (5.5% 20-Aug-2012)<br />
4 Canada Mortgage And Housing Corp (4.3% 01-Apr-2009)<br />
5 Federal Home Loan Mortgage Corp (5.5% 20-Aug-2012)<br />
6 Federal Home Loan Banks (3.875% 14-Jun-2013)<br />
7 Kfw Bankengruppe (0.5% 03-Feb-2010)<br />
8 United States Treasury (0% 10-Jan-2008)<br />
9 United States Treasury (0% 18-Oct-2007)<br />
10 Italy, Republic Of (Government) (2.2% 01-Jul-2009)<br />
Source: Data Explorers, 2007. All figures kindly compiled by Data Explorers, October 2007.<br />
SECURITIES LENDING DATA<br />
87
MARKET DATA BY <strong>FTSE</strong> RESEARCH<br />
Global Indices<br />
5-Year Total Return Performance Graph<br />
Index Level Rebased (30 Sep 02=100)<br />
800<br />
700<br />
600<br />
500<br />
400<br />
300<br />
200<br />
100<br />
0<br />
2-Month Performance<br />
% Change<br />
1-Year Performance<br />
% Change<br />
Sep-02<br />
12<br />
10<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Mar-03<br />
Sep-03<br />
<strong>FTSE</strong> All-World Index<br />
<strong>FTSE</strong> World Index<br />
<strong>FTSE</strong> Developed Index<br />
<strong>FTSE</strong> Emerging Index<br />
<strong>FTSE</strong> Advanced Emerging Index<br />
<strong>FTSE</strong> All-World Index<br />
<strong>FTSE</strong> World Index<br />
<strong>FTSE</strong> Developed Index<br />
<strong>FTSE</strong> Emerging Index<br />
<strong>FTSE</strong> Advanced Emerging Index<br />
Mar-04<br />
<strong>FTSE</strong> Secondary Emerging Index<br />
<strong>FTSE</strong> Global All Cap Index<br />
<strong>FTSE</strong> Developed All Cap Index<br />
Sep-04<br />
<strong>FTSE</strong> Emerging All Cap Index<br />
<strong>FTSE</strong> Advanced Emerging All Cap Index<br />
Mar-05<br />
Sep-05<br />
<strong>FTSE</strong> Secondary Emerging Index<br />
<strong>FTSE</strong> Global Government Bond Index<br />
<strong>FTSE</strong> EPRA/NAREIT Global Index<br />
<strong>FTSE</strong> EPRA/NAREIT Global REITs Index<br />
<strong>FTSE</strong> All-World Index<br />
<strong>FTSE</strong> Emerging Index<br />
<strong>FTSE</strong> Global Government Bond Index<br />
<strong>FTSE</strong> EPRA/NAREIT Global Index<br />
<strong>FTSE</strong>4Good Global Index<br />
Macquarie Global Infrastructure Index<br />
<strong>FTSE</strong> GWA Developed Index<br />
<strong>FTSE</strong> RAFI Emerging Index<br />
88 NOVEMBER/DECEMBER 2007 <strong>FTSE</strong> GLOBAL MARKETS<br />
Mar-06<br />
Sep-07<br />
Mar-07<br />
Sep-07<br />
<strong>FTSE</strong> EPRA/NAREIT Global Dividend+ Index<br />
<strong>FTSE</strong> EPRA/NAREIT Global Rental Index<br />
<strong>FTSE</strong> EPRA/NAREIT Global Non-Rental Index<br />
Macquarie Global Infrastructure Index<br />
Macquarie Global Infrastructure 100 Index<br />
<strong>FTSE</strong>4Good Global Index<br />
<strong>FTSE</strong>4Good Global 100 Index<br />
<strong>FTSE</strong> GWA Development Index<br />
<strong>FTSE</strong> RAFI Developed ex US 1000 Index<br />
<strong>FTSE</strong> RAFI Emerging Index<br />
<strong>FTSE</strong> Secondary Emerging Index<br />
<strong>FTSE</strong> Global All Cap Index<br />
<strong>FTSE</strong> Developed All Cap Index<br />
<strong>FTSE</strong> Emerging All Cap Index<br />
<strong>FTSE</strong> Advanced Emerging All Cap Index<br />
<strong>FTSE</strong> Secondary Emerging Index<br />
<strong>FTSE</strong> Global Government Bond Index<br />
<strong>FTSE</strong> EPRA/NAREIT Global Index<br />
<strong>FTSE</strong> EPRA/NAREIT Global REITs Index<br />
<strong>FTSE</strong> EPRA/NAREIT Global Dividend+ Index<br />
<strong>FTSE</strong> EPRA/NAREIT Global Rental Index<br />
<strong>FTSE</strong> EPRA/NAREIT Global Non-Rental Index<br />
Macquarie Global Infrastructure Index<br />
Macquarie Global Infrastructure 100 Index<br />
<strong>FTSE</strong>4Good Global Index<br />
<strong>FTSE</strong>4Good Global 100 Index<br />
<strong>FTSE</strong> GWA Development Index<br />
<strong>FTSE</strong> RAFI Developed ex US 1000 Index<br />
<strong>FTSE</strong> RAFI Emerging Index<br />
Capital return<br />
Total return<br />
Capital return<br />
Total return
Table of Capital Returns<br />
Index Name Currency Constituents Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div<br />
Yld (%)<br />
<strong>FTSE</strong> All-World Indices<br />
<strong>FTSE</strong> All-World Index USD 2883 268.48 4.7 10.1 22.2 12.3 2.15<br />
<strong>FTSE</strong> World Index USD 2465 470.32 4.5 9.2 20.8 11.4 2.18<br />
<strong>FTSE</strong> Developed Index USD 2022 254.38 4.4 8.2 19.2 10.4 2.17<br />
<strong>FTSE</strong> Emerging Index USD 861 590.09 7.3 29.1 54.6 31.7 2.02<br />
<strong>FTSE</strong> Advanced Emerging Index USD 443 529.70 5.3 25.4 48.8 29.2 2.36<br />
<strong>FTSE</strong> Secondary Emerging Index USD 418 727.29 10.4 34.5 63.6 35.1 1.55<br />
<strong>FTSE</strong> Global Equity Indices<br />
<strong>FTSE</strong> Global All Cap Index USD 7892 450.93 4.3 9.7 22.6 12.3 2.07<br />
<strong>FTSE</strong> Developed All Cap Index USD 6155 429.84 4.1 7.7 19.5 10.2 2.09<br />
<strong>FTSE</strong> Emerging All Cap Index USD 1737 839.97 6.8 30.2 56.8 33.4 1.95<br />
<strong>FTSE</strong> Advanced Emerging All Cap Index USD 923 767.85 4.4 26.7 51.1 30.8 2.28<br />
<strong>FTSE</strong> Secondary Emerging USD 814 995.08 10.1 35.2 65.5 36.9 1.51<br />
Fixed Income<br />
<strong>FTSE</strong> Global Government Bond Index USD 719 112.02 3.7 3.5 4.4 3.7 3.56<br />
Real Estate<br />
<strong>FTSE</strong> EPRA/NAREIT Global Index USD 302 2647.73 8.4 -4.1 14.5 1.2 3.26<br />
<strong>FTSE</strong> EPRA/NAREIT Global REITs Index USD 193 1171.46 8.8 -6.4 7.1 -3.4 4.12<br />
<strong>FTSE</strong> EPRA/NAREIT Global Dividend+ Index USD 236 2398.27 10.0 -1.5 14.3 2.0 4.01<br />
<strong>FTSE</strong> EPRA/NAREIT Global Rental Index USD 245 1307.82 7.3 -8.6 7.2 -5.1 3.94<br />
<strong>FTSE</strong> EPRA/NAREIT Global Non-Rental Index USD 57 1650.25 11.2 9.0 37.8 21.3 1.62<br />
Infrastructure<br />
Macquarie Global Infrastructure Index USD 226 10398.57 6.5 6.7 25.6 12.2 2.86<br />
Macquarie Global Infrastructure 100 Index USD 100 10170.23 6.6 5.6 24.0 11.2 2.89<br />
SRI<br />
<strong>FTSE</strong>4Good Global Index USD 698 7116.23 4.0 7.0 16.7 8.2 2.54<br />
<strong>FTSE</strong>4Good Global 100 Index USD 105 6106.07 4.5 7.4 13.0 6.3 2.83<br />
Investment Strategy<br />
<strong>FTSE</strong> GWA Developed Index USD 2022 4343.07 3.8 7.3 18.8 9.3 2.44<br />
<strong>FTSE</strong> RAFI Developed ex US 1000 Index USD 1002 7320.11 3.6 8.2 24.9 12.9 2.68<br />
<strong>FTSE</strong> RAFI Emerging Index USD 351 6965.29 8.7 33.9 62.6 36.1 2.43<br />
Table of Total Returns<br />
Index Name Currency Constituents Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div<br />
Yld (%)<br />
<strong>FTSE</strong> All-World Indices<br />
<strong>FTSE</strong> All-World Index USD 2883 311.54 5.1 11.6 24.9 14.4 2.15<br />
<strong>FTSE</strong> World Index USD 2465 732.18 4.9 10.6 23.5 13.5 2.18<br />
<strong>FTSE</strong> Developed Index USD 2022 294.62 4.8 9.7 21.9 12.4 2.17<br />
<strong>FTSE</strong> Emerging Index USD 861 711.65 7.8 30.9 58.2 34.3 2.02<br />
<strong>FTSE</strong> Advanced Emerging Index USD 443 642.51 5.8 27.1 52.6 32.1 2.36<br />
<strong>FTSE</strong> Secondary Emerging Index USD 418 869.52 10.7 36.5 66.7 37.4 1.55<br />
<strong>FTSE</strong> Global Equity Indices<br />
<strong>FTSE</strong> Global All Cap Index USD 7892 499.56 4.7 11.1 25.2 14.3 2.07<br />
<strong>FTSE</strong> Developed All Cap Index USD 6155 475.43 4.5 9.0 22.1 12.2 2.09<br />
<strong>FTSE</strong> Emerging All Cap Index USD 1737 954.52 7.2 32.0 60.3 35.9 1.95<br />
<strong>FTSE</strong> Advanced Emerging All Cap Index USD 923 878.69 5.0 28.5 54.8 33.6 2.28<br />
<strong>FTSE</strong> Secondary Emerging USD 814 1116.95 10.4 37.0 68.6 39.1 1.51<br />
Fixed Income<br />
<strong>FTSE</strong> Global Government Bond Index USD 719 151.40 4.3 5.5 8.3 6.6 3.56<br />
Real Estate<br />
<strong>FTSE</strong> EPRA/NAREIT Global Index USD 302 3720.14 9.1 -2.4 18.2 3.7 3.26<br />
<strong>FTSE</strong> EPRA/NAREIT Global REITs Index USD 193 1253.61 9.7 -4.3 11.5 -0.5 4.12<br />
<strong>FTSE</strong> EPRA/NAREIT Global Dividend+ Index USD 236 2511.81 10.9 0.6 18.9 4.9 4.01<br />
<strong>FTSE</strong> EPRA/NAREIT Global Rental Index USD 245 1399.15 8.1 -6.6 11.2 -2.4 3.94<br />
<strong>FTSE</strong> EPRA/NAREIT Global Non-Rental Index USD 57 1703.31 11.5 9.9 40.4 22.7 1.62<br />
Infrastructure<br />
Macquarie Global Infrastructure Index USD 226 11830.08 7.0 8.7 29.4 14.9 2.86<br />
Macquarie Global Infrastructure 100 Index USD 100 11600.95 7.0 7.6 27.9 13.9 2.89<br />
SRI<br />
<strong>FTSE</strong>4Good Global Index USD 698 8163.90 4.5 8.6 19.6 10.5 2.54<br />
<strong>FTSE</strong>4Good Global 100 Index USD 105 7046.08 5.0 9.2 16.2 8.8 2.83<br />
Investment Strategy<br />
<strong>FTSE</strong> GWA Developed Index USD 2022 4578.66 4.2 8.8 21.7 11.5 2.44<br />
<strong>FTSE</strong> RAFI Developed ex US 1000 Index USD 1002 7720.03 4.1 10.2 28.2 15.6 2.68<br />
<strong>FTSE</strong> RAFI Emerging Index USD 351 7087.80 9.3 36.1 67.5 38.9 2.43<br />
<strong>FTSE</strong> Research Team contact details<br />
Andy Harvell Andreas Elia Kamila Lewandowski Sandra Jim<br />
Head of Research Research Analyst Research Analyst Research Manager, Asia Pacific<br />
andy.harvell@ftse.com andreas.elia@ftse.com kamila.lewandowski@ftse.com sandra.jim@ftse.com<br />
+44 20 7866 8986 +44 20 7866 8013 +44 20 7866 1877 +(852) 223 0-5814<br />
<strong>FTSE</strong> GLOBAL MARKETS NOVEMBER/DECEMBER 2007<br />
89
MARKET DATA BY <strong>FTSE</strong> RESEARCH<br />
Americas Indices<br />
5-Year Total Return Performance Graph<br />
Index Level Rebased (30 Sep 02=100)<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
Sep-02<br />
Mar-03<br />
Sep-03<br />
2-Month Performance<br />
% Change<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
1-Year Performance<br />
% Change<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Mar-04<br />
Sep-04<br />
Mar-05<br />
Sep-05<br />
<strong>FTSE</strong> Americas Index<br />
<strong>FTSE</strong> Americas Government Bond Index<br />
<strong>FTSE</strong> EPRA/NAREIT North America Index<br />
<strong>FTSE</strong> EPRA/NAREIT US Dividend+ Index<br />
<strong>FTSE</strong>4Good USIndex<br />
<strong>FTSE</strong> GWA US Index<br />
<strong>FTSE</strong> RAFI US 1000 Index<br />
90 NOVEMBER/DECEMBER 2007 <strong>FTSE</strong> GLOBAL MARKETS<br />
Mar-06<br />
Sep-07<br />
Mar-07<br />
Sep-07<br />
<strong>FTSE</strong> Americas Index<br />
<strong>FTSE</strong> North America Index<br />
<strong>FTSE</strong> Latin America Index<br />
<strong>FTSE</strong> Americas All Cap Index<br />
<strong>FTSE</strong> North America All Cap Index<br />
<strong>FTSE</strong> Latin America All Cap Index<br />
<strong>FTSE</strong> LATIBEX All-Share Index<br />
<strong>FTSE</strong> LATIBEX TOP Index<br />
<strong>FTSE</strong> LATIBEX Brasil Index<br />
<strong>FTSE</strong> Americas Government Bond Index<br />
<strong>FTSE</strong> USA Government Bond Index<br />
<strong>FTSE</strong> EPRA/NAREIT North America Index<br />
<strong>FTSE</strong> EPRA/NAREIT US Dividend+ Index<br />
<strong>FTSE</strong> EPRA/NAREIT North America Rental Index<br />
<strong>FTSE</strong> EPRA/NAREIT North America Non-Rental Index<br />
Macquarie North America Infrastructure Index<br />
Macquarie USA Infrastructure Index<br />
<strong>FTSE</strong>4Good US Index<br />
<strong>FTSE</strong>4Good US 100 Index<br />
<strong>FTSE</strong> GWA US Index<br />
<strong>FTSE</strong> RAFI US 1000 Index<br />
<strong>FTSE</strong> RAFI US Mid Small 1500 Index<br />
<strong>FTSE</strong> Americas Index<br />
<strong>FTSE</strong> North America Index<br />
<strong>FTSE</strong> Latin America Index<br />
<strong>FTSE</strong> Americas All Cap Index<br />
<strong>FTSE</strong> North America All Cap Index<br />
<strong>FTSE</strong> Latin America All Cap Index<br />
<strong>FTSE</strong> LATIBEX All-Share Index<br />
<strong>FTSE</strong> LATIBEX TOP Index<br />
<strong>FTSE</strong> LATIBEX Brasil Index<br />
<strong>FTSE</strong> Americas Government Bond Index<br />
<strong>FTSE</strong> USA Government Bond Index<br />
<strong>FTSE</strong> EPRA/NAREIT North America Index<br />
<strong>FTSE</strong> EPRA/NAREIT US Dividend+ Index<br />
<strong>FTSE</strong> EPRA/NAREIT North America Rental Index<br />
<strong>FTSE</strong> EPRA/NAREIT North America Non-Rental Index<br />
Macquarie North America Infrastructure Index<br />
Macquarie USA Infrastructure Index<br />
<strong>FTSE</strong>4Good US Index<br />
<strong>FTSE</strong>4Good US 100 Index<br />
<strong>FTSE</strong> GWA US Index<br />
<strong>FTSE</strong> RAFI US 1000 Index<br />
<strong>FTSE</strong> RAFI US Mid Small 1500 Index<br />
Capital return<br />
Total return<br />
Capital return<br />
Total return
Table of Capital Returns<br />
Index Name Currency Constituents Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div<br />
Yld (%)<br />
<strong>FTSE</strong> All-World Indices<br />
<strong>FTSE</strong> Americas Index USD 872 614.99 5.5 9.3 17.7 10.2 1.80<br />
<strong>FTSE</strong> North America Index USD 737 640.14 5.3 8.5 16.0 9.1 1.78<br />
<strong>FTSE</strong> Latin America Index USD 135 881.81 8.3 30.3 67.8 38.2 2.17<br />
<strong>FTSE</strong> Global Equity Indices<br />
<strong>FTSE</strong> Americas All Cap Index USD 2766 390.68 5.3 8.9 18.1 10.3 1.72<br />
<strong>FTSE</strong> North America All Cap Index USD 2565 378.35 5.1 8.1 16.5 9.2 1.70<br />
<strong>FTSE</strong> Latin America All Cap Index USD 201 1327.76 7.8 30.0 68.3 38.1 2.13<br />
Region Specific<br />
<strong>FTSE</strong> LATIBEX All-Share Index USD 38 3338.50 8.8 35.9 67.4 44.1 na<br />
<strong>FTSE</strong> LATIBEX TOP Index USD 15 4954.80 2.9 23.2 51.5 31.1 na<br />
<strong>FTSE</strong> LATIBEX Brasil Index USD 13 13148.70 10.5 43.4 82.3 52.8 na<br />
Fixed Income<br />
<strong>FTSE</strong> Americas Government Bond Index USD 155 110.92 2.2 2.1 1.6 2.4 4.53<br />
<strong>FTSE</strong> USA Government Bond Index USD 135 108.34 1.8 1.3 1.1 1.6 4.59<br />
Real Estate<br />
<strong>FTSE</strong> EPRA/NAREIT North America Index USD 122 2681.25 10.1 -8.1 2.5 -5.2 4.05<br />
<strong>FTSE</strong> EPRA/NAREIT US Dividend+ Index USD 98 2121.28 10.3 -9.2 0.9 -6.8 4.11<br />
<strong>FTSE</strong> EPRA/NAREIT North America Rental Index USD 118 1230.56 10.1 -8.7 1.9 -5.7 4.16<br />
<strong>FTSE</strong> EPRA/NAREIT North America Non-Rental Index USD 4 1341.77 9.5 -2.0 8.0 -0.5 3.03<br />
Infrastructure<br />
Macquarie North America Infrastructure Index USD 98 8679.55 4.8 1.6 16.6 8.0 2.79<br />
Macquarie USA Infrastructure Index USD 91 8623.83 4.8 0.6 16.2 7.7 2.75<br />
SRI<br />
<strong>FTSE</strong>4Good US Index USD 145 5667.27 5.0 6.7 11.4 5.4 2.04<br />
<strong>FTSE</strong>4Good US 100 Index USD 101 5430.04 5.5 7.0 11.3 5.3 2.07<br />
Investment Strategy<br />
<strong>FTSE</strong> GWA US Index USD 679 3853.97 4.3 6.2 13.8 6.6 1.97<br />
<strong>FTSE</strong> RAFI US 1000 Index USD 986 6274.06 3.6 4.9 13.3 6.2 2.06<br />
<strong>FTSE</strong> RAFI US Mid Small 1500 Index USD 1344 5518.03 2.5 0.9 - 3.7 1.28<br />
Table of Total Returns<br />
Index Name Currency Constituents Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div<br />
Yld (%)<br />
<strong>FTSE</strong> All-World Indices<br />
<strong>FTSE</strong> Americas Index USD 872 929.97 5.9 10.3 19.8 11.7 1.80<br />
<strong>FTSE</strong> North America Index USD 737 1026.02 5.7 9.4 18.1 10.6 1.78<br />
<strong>FTSE</strong> Latin America Index USD 135 1095.34 8.7 31.9 71.9 40.6 2.17<br />
<strong>FTSE</strong> Global Equity Indices<br />
<strong>FTSE</strong> Americas All Cap Index USD 2766 424.19 5.6 9.8 20.2 11.7 1.72<br />
<strong>FTSE</strong> North America All Cap Index USD 2565 410.22 5.5 9.0 18.5 10.6 1.70<br />
<strong>FTSE</strong> Latin America All Cap Index USD 201 1542.23 8.2 31.6 72.4 40.5 2.13<br />
Region Specific<br />
<strong>FTSE</strong> LATIBEX All-Share Index USD 38 na na na na na na<br />
<strong>FTSE</strong> LATIBEX TOP Index USD 15 na na na na na na<br />
<strong>FTSE</strong> LATIBEX Brasil Index USD 13 na na na na na na<br />
Fixed Income<br />
<strong>FTSE</strong> Americas Government Bond Index USD 155 163.71 3.0 4.4 6.4 5.9 4.53<br />
<strong>FTSE</strong> USA Government Bond Index USD 135 159.28 2.6 3.6 5.9 5.1 4.59<br />
Real Estate<br />
<strong>FTSE</strong> EPRA/NAREIT North America Index USD 122 4043.58 10.9 -6.2 6.5 -2.5 4.05<br />
<strong>FTSE</strong> EPRA/NAREIT US Dividend+ Index USD 98 2220.96 11.2 -7.4 4.8 -4.2 4.11<br />
<strong>FTSE</strong> EPRA/NAREIT North America Rental Index USD 118 1318.66 11.0 -6.9 5.9 -3.0 4.16<br />
<strong>FTSE</strong> EPRA/NAREIT North America Non-Rental Index USD 4 1423.67 10.4 -0.4 11.4 1.9 3.03<br />
Infrastructure<br />
Macquarie North America Infrastructure Index USD 98 9826.38 5.5 3.1 20.0 10.3 2.79<br />
Macquarie USA Infrastructure Index USD 91 9755.92 5.5 2.0 19.5 10.0 2.75<br />
SRI<br />
<strong>FTSE</strong>4Good US Index USD 145 6287.28 5.4 7.8 13.6 7.0 2.04<br />
<strong>FTSE</strong>4Good US 100 Index USD 101 6044.96 5.9 8.1 13.5 6.9 2.07<br />
Investment Strategy<br />
<strong>FTSE</strong> GWA US Index USD 679 4031.38 4.7 7.2 16.0 8.1 1.97<br />
<strong>FTSE</strong> RAFI US 1000 Index USD 986 6547.21 4.0 6.0 15.7 7.8 2.06<br />
<strong>FTSE</strong> RAFI US Mid Small 1500 Index USD 1344 5630.98 2.8 1.5 14.4 4.7 1.28<br />
<strong>FTSE</strong> GLOBAL MARKETS NOVEMBER/DECEMBER 2007<br />
91
MARKET DATA BY <strong>FTSE</strong> RESEARCH<br />
Europe, Middle East, Africa Indices (EMEA)<br />
5-Year Total Return Performance Graph<br />
Index Level Rebased (30 Sep 02=100)<br />
400<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
Sep-02<br />
Mar-03<br />
Sep-03<br />
2-Month Performance<br />
% Change<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
-6<br />
-8<br />
1-Year Performance<br />
% Change<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
Mar-04<br />
Sep-04<br />
Mar-05<br />
Sep-05<br />
Mar-06<br />
Sep-07<br />
Mar-07<br />
Sep-07<br />
<strong>FTSE</strong> Europe Index<br />
<strong>FTSE</strong> Eurobloc Index<br />
<strong>FTSE</strong> Developed Europe ex UK Index<br />
<strong>FTSE</strong> Developed Europe Index<br />
<strong>FTSE</strong> Europe All Cap Index<br />
<strong>FTSE</strong> Eurobloc All Cap Index<br />
<strong>FTSE</strong> Developed Europe All Cap ex US Index<br />
<strong>FTSE</strong> Developed Europe All Cap Index<br />
<strong>FTSE</strong> All-Share Index<br />
<strong>FTSE</strong> 100 Index<br />
<strong>FTSE</strong>urofirst 80 Index<br />
<strong>FTSE</strong>urofirst 100 Index<br />
<strong>FTSE</strong>urofirst 300 Index<br />
<strong>FTSE</strong>/JSE Top 40 Index<br />
<strong>FTSE</strong>/JSE All-Share Index<br />
<strong>FTSE</strong> Russia IOB Index<br />
<strong>FTSE</strong> Eurozone Government Bond Index<br />
<strong>FTSE</strong> Pfandbrief Index<br />
<strong>FTSE</strong> Gilts Fixed All-Stocks Index<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Index<br />
<strong>FTSE</strong> EPRA/NAREIT Europe REITs Index<br />
<strong>FTSE</strong> EPRA/NAREIT Europe ex UK Dividend+ Index<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Rental Index<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Non-Rental Index<br />
Macquarie Europe Infrastructure Index<br />
<strong>FTSE</strong>4Good Europe Index<br />
<strong>FTSE</strong>4Good Europe 50 Index<br />
<strong>FTSE</strong> GWA Developed Europe Index<br />
<strong>FTSE</strong> RAFI Europe Index<br />
<strong>FTSE</strong> Europe Index<br />
<strong>FTSE</strong> Eurobloc Index<br />
<strong>FTSE</strong> Developed Europe ex UK Index<br />
<strong>FTSE</strong> Developed Europe Index<br />
<strong>FTSE</strong> Europe All Cap Index<br />
<strong>FTSE</strong> Eurobloc All Cap Index<br />
<strong>FTSE</strong> Developed Europe All Cap ex US Index<br />
<strong>FTSE</strong> Developed Europe All Cap Index<br />
<strong>FTSE</strong> All-Share Index<br />
<strong>FTSE</strong> 100 Index<br />
<strong>FTSE</strong>urofirst 80 Index<br />
<strong>FTSE</strong>urofirst 100 Index<br />
<strong>FTSE</strong>urofirst 300 Index<br />
<strong>FTSE</strong>/JSE Top 40 Index<br />
<strong>FTSE</strong>/JSE All-Share Index<br />
<strong>FTSE</strong> Russia IOB Index<br />
<strong>FTSE</strong> Eurozone Government Bond Index<br />
<strong>FTSE</strong> Pfandbrief Index<br />
<strong>FTSE</strong> Gilts Fixed All-Stocks Index<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Index<br />
<strong>FTSE</strong> EPRA/NAREIT Europe REITs Index<br />
<strong>FTSE</strong> EPRA/NAREIT Europe ex UK Dividend+ Index<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Rental Index<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Non-Rental Index<br />
Macquarie Europe Infrastructure Index<br />
<strong>FTSE</strong>4Good Europe Index<br />
<strong>FTSE</strong>4Good Europe 50 Index<br />
<strong>FTSE</strong> GWA Developed Europe Index<br />
<strong>FTSE</strong> RAFI Europe Index<br />
<strong>FTSE</strong> Europe Index (EUR)<br />
<strong>FTSE</strong> All-Share Index (GBP)<br />
<strong>FTSE</strong>urofirst 80 Index (EUR)<br />
<strong>FTSE</strong>/JSE Top 40 Index (SAR)<br />
<strong>FTSE</strong> Gilts Fixed All-Stocks Index (GBP)<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Index (EUR)<br />
<strong>FTSE</strong>4Good Europe Index (EUR)<br />
<strong>FTSE</strong> GWA Developed Europe Index (EUR)<br />
<strong>FTSE</strong> RAFI Europe Index (EUR)<br />
Capital return<br />
Total return<br />
Capital return<br />
Total return<br />
92 NOVEMBER/DECEMBER 2007 <strong>FTSE</strong> GLOBAL MARKETS
Table of Capital Returns<br />
Index Name Currency Constituents Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div<br />
Yld (%)<br />
<strong>FTSE</strong> All-World Indices<br />
<strong>FTSE</strong> Europe Index EUR 595 477.65 -0.4 1.6 10.9 4.0 2.82<br />
<strong>FTSE</strong> Eurobloc Index EUR 2011 139.45 0.7 3.1 14.4 6.6 2.47<br />
<strong>FTSE</strong> Developed Europe ex UK Index EUR 391 258.88 0.4 2.5 13.5 5.7 2.81<br />
<strong>FTSE</strong> Developed Europe Index EUR 528 250.35 -0.4 1.6 10.9 4.0 2.88<br />
<strong>FTSE</strong> Global Equity Indices<br />
<strong>FTSE</strong> Europe All Cap Index EUR 1782 426.11 -0.9 0.9 11.7 3.7 2.73<br />
<strong>FTSE</strong> Eurobloc All Cap Index EUR 867 455.16 0.0 2.2 14.7 6.3 2.83<br />
<strong>FTSE</strong> Developed Europe ex UK All Cap Index EUR 1186 458.68 -0.2 1.8 14.2 5.5 2.72<br />
<strong>FTSE</strong> Developed Europe All Cap Index EUR 1661 420.58 -1.0 0.7 11.4 3.6 2.78<br />
Region Specific<br />
<strong>FTSE</strong> All-Share Index GBP 692 3316.89 0.8 1.0 8.7 3.0 2.89<br />
<strong>FTSE</strong> 100 Index GBP 102 6466.79 1.7 2.5 8.5 4.0 3.05<br />
<strong>FTSE</strong>urofirst 80 Index EUR 81 5605.33 1.8 4.8 14.2 7.6 3.16<br />
<strong>FTSE</strong>urofirst 100 Index EUR 101 4934.95 0.6 3.6 10.0 4.9 3.19<br />
<strong>FTSE</strong>urofirst 300 Index EUR 313 1550.89 0.1 2.3 11.1 4.5 2.93<br />
<strong>FTSE</strong>/JSE Top 40 Index SAR 41 27267.58 5.5 10.9 33.0 20.6 2.21<br />
<strong>FTSE</strong>/JSE All-Share Index SAR 160 29959.19 4.9 9.9 33.9 20.2 2.36<br />
<strong>FTSE</strong> Russia IOB Index USD 10 1287.88 5.6 7.1 23.8 5.2 0.95<br />
Fixed Income<br />
<strong>FTSE</strong> Eurozone Government Bond Index EUR 236 97.49 0.3 -1.6 -4.0 -2.5 4.49<br />
<strong>FTSE</strong> Pfandbrief Index EUR 416 105.33 0.2 -1.7 -3.5 -2.3 4.79<br />
<strong>FTSE</strong> Gilts Fixed All-Stocks Index GBP 29 145.36 0.3 -0.9 -4.4 -3.0 4.82<br />
Real Estate<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Index EUR 99 2353.30 -3.7 -22.9 -8.6 -21.6 2.89<br />
<strong>FTSE</strong> EPRA/NAREIT Europe REITs Index EUR 37 971.59 -1.9 -22.0 -12.3 -21.4 3.04<br />
<strong>FTSE</strong> EPRA/NAREIT Europe ex UK Dividend+ Index EUR 47 2621.10 1.0 -18.3 0.1 -12.2 3.92<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Rental Index EUR 85 1124.09 -3.6 -23.2 -9.4 -22.1 3.01<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Non-Rental Index EUR 14 1319.13 -6.0 -17.5 5.7 -12.3 1.10<br />
Infrastructure<br />
Macquarie Europe Infrastructure Index USD 52 13601.79 8.8 13.5 36.4 18.3 2.98<br />
SRI<br />
<strong>FTSE</strong>4Good Europe Index EUR 294 5106.46 -0.7 0.6 7.7 1.9 3.13<br />
<strong>FTSE</strong>4Good Europe 50 Index EUR 55 4426.07 -0.3 1.6 4.2 0.8 3.46<br />
Investment Strategy<br />
<strong>FTSE</strong> GWA Developed Europe Index EUR 528 4129.01 -0.8 26.9 38.7 29.3 3.20<br />
<strong>FTSE</strong> RAFI Europe Index EUR 468 6295.08 -0.2 2.1 13.3 5.2 3.06<br />
Table of Total Returns<br />
Index Name Currency Constituents Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div<br />
Yld (%)<br />
<strong>FTSE</strong> All-World Indices<br />
<strong>FTSE</strong> Europe Index EUR 595 891.98 0.0 3.7 14.2 6.7 2.82<br />
<strong>FTSE</strong> Eurobloc Index EUR 2011 176.72 0.8 5.6 17.7 9.4 2.47<br />
<strong>FTSE</strong> Developed Europe ex UK Index EUR 391 312.68 0.5 4.8 16.7 8.4 2.81<br />
<strong>FTSE</strong> Developed Europe Index EUR 528 307.34 0.0 3.7 14.2 6.7 2.88<br />
<strong>FTSE</strong> Global Equity Indices<br />
<strong>FTSE</strong> Europe All Cap Index EUR 1782 491.35 -0.6 2.9 14.9 6.3 2.73<br />
<strong>FTSE</strong> Eurobloc All Cap Index EUR 867 524.41 0.1 4.6 18.0 9.0 2.83<br />
<strong>FTSE</strong> Developed Europe ex UK All Cap Index EUR 1186 524.33 -0.1 4.0 17.2 8.1 2.72<br />
<strong>FTSE</strong> Developed Europe All Cap Index EUR 1661 485.42 -0.7 2.7 14.5 6.2 2.78<br />
Region Specific<br />
<strong>FTSE</strong> All-Share Index GBP 692 3952.04 1.6 2.7 12.2 5.7 2.89<br />
<strong>FTSE</strong> 100 Index GBP 102 3734.40 2.5 4.3 12.2 6.9 3.05<br />
<strong>FTSE</strong>urofirst 80 Index EUR 81 6537.36 2.0 7.6 17.9 10.8 3.16<br />
<strong>FTSE</strong>urofirst 100 Index EUR 101 5803.05 1.1 6.0 13.9 8.1 3.19<br />
<strong>FTSE</strong>urofirst 300 Index EUR 313 2015.04 0.4 4.5 14.4 7.4 2.93<br />
<strong>FTSE</strong>/JSE Top 40 Index SAR 41 2905.22 6.3 12.3 36.4 23.2 2.21<br />
<strong>FTSE</strong>/JSE All-Share Index SAR 160 3160.72 5.7 11.3 37.4 22.8 2.36<br />
<strong>FTSE</strong> Russia IOB Index USD 10 1303.08 6.2 8.3 25.2 6.2 0.95<br />
Fixed Income<br />
<strong>FTSE</strong> Eurozone Government Bond Index EUR 236 155.74 1.0 0.6 0.3 0.7 4.49<br />
<strong>FTSE</strong> Pfandbrief Index EUR 416 178.74 0.9 0.3 0.5 0.8 4.79<br />
<strong>FTSE</strong> Gilts Fixed All-Stocks Index GBP 29 1966.08 1.5 1.6 0.6 0.9 4.82<br />
Real Estate<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Index EUR 99 3092.54 -3.4 -21.3 -6.2 -19.8 2.89<br />
<strong>FTSE</strong> EPRA/NAREIT Europe REITs Index EUR 37 1037.49 -1.5 -20.1 -9.3 -19.3 3.04<br />
<strong>FTSE</strong> EPRA/NAREIT Europe ex UK Dividend+ Index EUR 47 2829.40 1.2 -16.1 3.9 -9.4 3.92<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Rental Index EUR 85 1181.70 -3.21 -21.61 -6.89 -20.24 3.01<br />
<strong>FTSE</strong> EPRA/NAREIT Europe Non-Rental Index EUR 14 1348.81 -5.9 -16.8 6.7 -11.6 1.10<br />
Infrastructure<br />
Macquarie Europe Infrastructure Index USD 52 15719.09 8.9 16.4 40.9 21.6 2.98<br />
SRI<br />
<strong>FTSE</strong>4Good Europe Index EUR 294 6147.50 -0.3 2.8 11.1 4.7 3.13<br />
<strong>FTSE</strong>4Good Europe 50 Index EUR 55 5374.54 0.3 4.0 7.9 4.0 3.46<br />
Investment Strategy<br />
<strong>FTSE</strong> GWA Developed Europe Index EUR 528 4416.32 -0.4 3.3 13.9 5.8 3.20<br />
<strong>FTSE</strong> RAFI Europe Index EUR 468 6672.45 0.1 4.4 16.7 8.1 3.06<br />
<strong>FTSE</strong> GLOBAL MARKETS NOVEMBER/DECEMBER 2007<br />
93
MARKET DATA BY <strong>FTSE</strong> RESEARCH<br />
Asia Pacific Indices<br />
5-Year Total Return Performance Graph<br />
Index Level Rebased (30 Sep 02=100)<br />
1600<br />
1400<br />
1200<br />
1000<br />
800<br />
600<br />
400<br />
200<br />
0<br />
Sep-02<br />
Mar-03<br />
Sep-03<br />
2-Month Performance<br />
% Change<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
1-Year Performance<br />
% Change<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
Mar-04<br />
Sep-04<br />
Mar-05<br />
Sep-05<br />
<strong>FTSE</strong> Asia Pacific Index<br />
<strong>FTSE</strong>/ASEAN 40 Index<br />
<strong>FTSE</strong>/Xinhua China 25 Index<br />
<strong>FTSE</strong> Asia Pacific Government Bond Inde<br />
<strong>FTSE</strong> IDFC India Infrastructure Index<br />
94 NOVEMBER/DECEMBER 2007 <strong>FTSE</strong> GLOBAL MARKETS<br />
Mar-06<br />
Sep-07<br />
Mar-07<br />
Sep-07<br />
<strong>FTSE</strong> Asia Pacific Index<br />
<strong>FTSE</strong> Asia Pacific ex Japan Index<br />
<strong>FTSE</strong> Japan Index<br />
<strong>FTSE</strong> Asia Pacific All Cap Index<br />
<strong>FTSE</strong> Asia Pacific ex Japan All Cap Index<br />
<strong>FTSE</strong> Japan All Cap Index<br />
<strong>FTSE</strong>/ASEAN Index<br />
<strong>FTSE</strong>/ASEAN 40 Index<br />
<strong>FTSE</strong> Bursa Malaysia 100 Index<br />
TSEC Taiwan 50 Index<br />
<strong>FTSE</strong> Xinhua All-Share Index<br />
<strong>FTSE</strong>/Xinhua China 25 Index<br />
<strong>FTSE</strong> Asia Pacific Government Bond Index<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Index<br />
<strong>FTSE</strong> EPRA/NAREIT Asia 33 Index<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Dividend+ Index<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Rental Index<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Non-Rental Index<br />
<strong>FTSE</strong> IDFC India Infrastructure Index<br />
<strong>FTSE</strong> IDFC India Infrastructure 30 Index<br />
<strong>FTSE</strong>4Good Japan Index<br />
<strong>FTSE</strong> SGX Shariah 100 Index<br />
<strong>FTSE</strong> Bursa Malaysia Hijrah Shariah Index<br />
<strong>FTSE</strong> Shariah Japan 100 Index<br />
<strong>FTSE</strong> GWA Japan Index<br />
<strong>FTSE</strong> GWA Australia Index<br />
<strong>FTSE</strong> RAFI Aiustralia Index<br />
<strong>FTSE</strong> RAFI Singapore Index<br />
<strong>FTSE</strong> RAFI Japan Index<br />
<strong>FTSE</strong> RAFI Kaigai 1000 Index<br />
<strong>FTSE</strong> RAFI China 50 Index<br />
<strong>FTSE</strong> Asia Pacific Index<br />
<strong>FTSE</strong> Asia Pacific ex Japan Index<br />
<strong>FTSE</strong> Japan Index<br />
<strong>FTSE</strong> Asia Pacific All Cap Index<br />
<strong>FTSE</strong> Asia Pacific ex Japan All Cap Index<br />
<strong>FTSE</strong> Japan All Cap Index<br />
<strong>FTSE</strong>/ASEAN Index<br />
<strong>FTSE</strong>/ASEAN 40 Index<br />
<strong>FTSE</strong> Bursa Malaysia 100 Index<br />
TSEC Taiwan 50 Index<br />
<strong>FTSE</strong> Xinhua All-Share Index<br />
<strong>FTSE</strong>/Xinhua China 25 Index<br />
<strong>FTSE</strong> Asia Pacific Government Bond Index<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Index<br />
<strong>FTSE</strong> EPRA/NAREIT Asia 33 Index<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Dividend+ Index<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Rental Index<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Non-Rental Index<br />
<strong>FTSE</strong> IDFC India Infrastructure Index<br />
<strong>FTSE</strong> IDFC India Infrastructure 30 Index<br />
<strong>FTSE</strong>4Good Japan Index<br />
<strong>FTSE</strong> SGX Shariah 100 Index<br />
<strong>FTSE</strong> Bursa Malaysia Hijrah Shariah Index<br />
<strong>FTSE</strong> Shariah Japan 100 Index<br />
<strong>FTSE</strong> GWA Japan Index<br />
<strong>FTSE</strong> GWA Australia Index<br />
<strong>FTSE</strong> RAFI Aiustralia Index<br />
<strong>FTSE</strong> RAFI Singapore Index<br />
<strong>FTSE</strong> RAFI Japan Index<br />
<strong>FTSE</strong> RAFI Kaigai 1000 Index<br />
<strong>FTSE</strong> RAFI China 50 Index<br />
Capital return<br />
Total return<br />
Capital return<br />
Total return
Table of Capital Returns<br />
Index Name Currency Constituents Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div<br />
Yld (%)<br />
<strong>FTSE</strong> All-World Indices<br />
<strong>FTSE</strong> Asia Pacific Index USD 1276 305.07 4.9 14.4 28.4 17.5 1.86<br />
<strong>FTSE</strong> Asia Pacific ex Japan Index USD 803 532.24 10.3 31.7 56.2 35.5 2.35<br />
<strong>FTSE</strong> Japan Index USD 473 110.85 -4.9 -5.1 1.3 -3.7 1.22<br />
<strong>FTSE</strong> Global Equity Indices<br />
<strong>FTSE</strong> Asia Pacific All Cap Index USD 3148 538.56 4.3 14.8 29.2 18.2 1.85<br />
<strong>FTSE</strong> Asia Pacific ex Japan All Cap Index USD 1821 1199.85 15.9 52.8 75.6 52.1 2.29<br />
<strong>FTSE</strong> Japan All Cap Index USD 1327 392.06 -5.2 -5.4 0.7 -3.8 1.23<br />
Region Specific<br />
<strong>FTSE</strong>/ASEAN Index USD 151 467.14 3.1 18.8 53.7 30.4 2.79<br />
<strong>FTSE</strong>/ASEAN 40 Index USD 40 9188.52 1.7 15.5 45.2 22.9 2.95<br />
<strong>FTSE</strong> Bursa Malaysia 100 Index MYR 100 8697.89 -3.5 6.1 39.1 22.1 2.85<br />
TSEC Taiwan 50 Index TWD 50 6646.84 3.2 17.7 27.6 16.3 3.38<br />
<strong>FTSE</strong> Xinhua All-Share Index CNY 995 12504.01 21.8 89.7 268.0 173.4 0.46<br />
<strong>FTSE</strong>/Xinhua China 25 Index CNY 25 26121.81 25.1 67.1 117.4 57.3 1.30<br />
Fixed Income<br />
<strong>FTSE</strong> Asia Pacific Government Bond Index USD 257 86.63 4.5 2.6 2.7 3.4 1.62<br />
Real Estate<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Index USD 81 2488.26 11.1 9.3 39.0 20.8 2.66<br />
<strong>FTSE</strong> EPRA/NAREIT Asia 33 Index USD 41 1860.50 12.6 6.7 34.2 17.2 4.7<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Dividend+ Index USD 54 2990.99 13.1 18.2 44.4 24.1 3.91<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Rental Index USD 42 1463.56 9.4 4.9 29.8 11.9 4.48<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Non-Rental Index USD 39 1706.78 12.3 12.6 46.3 28.1 1.42<br />
Infrastructure<br />
<strong>FTSE</strong> IDFC India Infrastructure Index IRP 63 1336.01 12.1 61.1 97.0 59.9 0.49<br />
<strong>FTSE</strong> IDFC India Infrastructure 30 Index IRP 30 1401.38 14.0 67.9 98.4 65.1 0.60<br />
SRI<br />
<strong>FTSE</strong>4Good Japan Index JPY 192 5938.05 -4.8 -5.6 0.7 -5.3 1.22<br />
Shariah<br />
<strong>FTSE</strong> SGX Shariah 100 Index USD 100 6544.11 5.7 12.6 23.9 13.2 1.67<br />
<strong>FTSE</strong> Bursa Malaysia Hijrah Shariah Index MYR 30 9781.76 2.2 17.7 57.1 36.0 2.67<br />
<strong>FTSE</strong> Shariah Japan 100 Index JPY 100 1752.93 -2.0 -1.3 9.0 -0.2 1.21<br />
Investment Strategy<br />
<strong>FTSE</strong> GWA Japan Index JPY 473 4262.96 -5.0 -6.4 1.5 -3.9 1.27<br />
<strong>FTSE</strong> GWA Australia Index AUD 113 4716.79 7.2 10.6 27.3 16.3 3.78<br />
<strong>FTSE</strong> RAFI Australia Index AUD 55 6834.23 5.6 6.7 23.7 12.7 4.02<br />
<strong>FTSE</strong> RAFI Singapore Index SGD 19 8413.46 2.8 16.0 48.0 24.5 2.98<br />
<strong>FTSE</strong> RAFI Japan Index JPY 344 5965.57 -4.2 -5.9 3.6 -2.2 1.32<br />
<strong>FTSE</strong> RAFI Kaigai 1000 Index JPY 1008 6304.90 0.8 5.7 17.9 7.2 2.61<br />
<strong>FTSE</strong> RAFI China 50 Index HKD 50 8096.76 23.4 55.0 na na 1.78<br />
Table of Total Returns<br />
Index Name Currency Constituents Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div<br />
Yld (%)<br />
<strong>FTSE</strong> All-World Indices<br />
<strong>FTSE</strong> Asia Pacific Index USD 1276 348.54 5.5 15.7 31.0 19.5 1.86<br />
<strong>FTSE</strong> Asia Pacific ex Japan Index USD 803 660.07 11.1 33.9 60.5 38.7 2.45<br />
<strong>FTSE</strong> Japan Index USD 473 132.36 -4.4 -4.6 2.6 -2.6 1.17<br />
<strong>FTSE</strong> Global Equity Indices<br />
<strong>FTSE</strong> Asia Pacific All Cap Index USD 3148 593.14 4.9 16.2 31.8 20.3 1.84<br />
<strong>FTSE</strong> Asia Pacific ex Japan All Cap Index USD 1821 1395.95 17.2 55.7 81.5 57.0 2.37<br />
<strong>FTSE</strong> Japan All Cap Index USD 1327 414.20 -4.7 -4.8 2.0 -2.7 1.17<br />
Region Specific<br />
<strong>FTSE</strong>/ASEAN Index USD 151 569.64 4.1 21.4 58.7 33.8 2.71<br />
<strong>FTSE</strong>/ASEAN 40 Index USD 40 10032.76 2.8 18.3 49.9 26.1 2.81<br />
<strong>FTSE</strong> Bursa Malaysia 100 Index MYR 100 9114.36 -2.7 8.1 43.8 25.1 2.50<br />
TSEC Taiwan 50 Index TWD 50 7933.71 4.1 21.7 32.0 20.2 3.38<br />
<strong>FTSE</strong> Xinhua All-Share Index CNY 995 13496.30 21.8 90.8 270.4 175.1 0.55<br />
<strong>FTSE</strong>/Xinhua China 25 Index CNY 25 31827.01 25.7 70.1 121.5 60.2 1.49<br />
Fixed Income<br />
<strong>FTSE</strong> Asia Pacific Government Bond Index USD 257 101.02 4.8 4.0 4.9 5.2 1.62<br />
Real Estate<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Index USD 81 3251.70 11.7 10.8 43.1 23.3 2.85<br />
<strong>FTSE</strong> EPRA/NAREIT Asia 33 Index USD 41 2025.91 13.3 8.3 38.4 19.7 5.0<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Dividend+ Index USD 54 3141.80 14.0 20.5 50.3 27.5 3.86<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Rental Index USD 42 1594.88 10.7 7.4 35.9 15.7 4.66<br />
<strong>FTSE</strong> EPRA/NAREIT Asia Non-Rental Index USD 39 1751.78 12.5 13.4 48.7 29.3 1.53<br />
Infrastructure<br />
<strong>FTSE</strong> IDFC India Infrastructure Index IRP 63 1339.48 12.2 61.5 98.3 60.8 0.51<br />
<strong>FTSE</strong> IDFC India Infrastructure 30 Index IRP 30 1405.58 14.1 68.4 100.0 66.2 0.66<br />
SRI<br />
<strong>FTSE</strong>4Good Japan Index JPY 192 6337.31 -4.3 -4.9 2.0 -4.2 1.24<br />
Shariah<br />
<strong>FTSE</strong> SGX Shariah 100 Index USD 100 6767.01 6.1 13.7 26.1 14.9 1.73<br />
<strong>FTSE</strong> Bursa Malaysia Hijrah Shariah Index MYR 30 10378.35 3.1 20.2 63.0 39.5 2.59<br />
<strong>FTSE</strong> Shariah Japan 100 Index JPY 100 1837.23 -1.6 -0.6 10.4 1.0 1.24<br />
Investment Strategy<br />
<strong>FTSE</strong> GWA Japan Index JPY 473 4384.91 -4.6 -5.8 2.8 -2.8 1.23<br />
<strong>FTSE</strong> GWA Australia Index AUD 113 5181.86 8.5 12.7 32.4 19.9 3.77<br />
<strong>FTSE</strong> RAFI Australia Index AUD 55 7485.93 7.1 9.0 29.4 16.8 4.14<br />
<strong>FTSE</strong> RAFI Singapore Index SGD 19 8953.05 4.3 19.1 53.1 28.0 2.96<br />
<strong>FTSE</strong> RAFI Japan Index JPY 344 6120.19 -3.7 -5.3 5.0 -1.1 1.26<br />
<strong>FTSE</strong> RAFI Kaigai 1000 Index JPY 1008 6583.17 1.2 7.4 21.0 9.5 2.65<br />
<strong>FTSE</strong> RAFI China 50 Index HKD 50 8281.84 24.2 58.36 na na 2.05<br />
<strong>FTSE</strong> GLOBAL MARKETS NOVEMBER/DECEMBER 2007<br />
95
CALENDAR<br />
96<br />
Index Reviews November – December 2007<br />
Date Index Series Review Type Effective<br />
(Close of business)<br />
Data Cut-off<br />
9-Nov Hang Seng Quarterly review 7-Dec 28-Sep<br />
14-Nov MSCI Standard Index Series Quarterly review 30-Nov 31-Oct<br />
Early Dec CAC 40 Quarterly review 21-Dec 30-Nov<br />
Early Dec ATX Quarterly review 31-Dec 30-Nov<br />
Early Dec IBEX 35 Semi-annual review 2-Jan 30-Nov<br />
Early Dec OBX Semi-annual review 21-Dec 30-Nov<br />
Early Dec OBX Quarterly review 21-Dec 30-Nov<br />
5-Dec DAX Quarterly review 21-Dec 30-Nov<br />
6-Dec <strong>FTSE</strong> Global Equity Index Series<br />
(incl. <strong>FTSE</strong> All-World) Annual review / North America 21-Dec 28-Sep<br />
7-Dec S&P BRIC 40 Annual review 21-Dec 16-Nov<br />
7-Dec S&P / ASX Indices Quarterly review 21-Dec<br />
11-Dec NZSX 50 Quarterly review 31-Dec 30-Nov<br />
12-Dec <strong>FTSE</strong>/JSE Africa Index Series Quarterly review 21-Dec 7-Dec<br />
12-Dec <strong>FTSE</strong> UK Index Series Annual review 21-Dec 11-Dec<br />
12-Dec <strong>FTSE</strong> techMARK 100 Quarterly review 21-Dec 30-Nov<br />
12-Dec <strong>FTSE</strong> Euromid Quarterly review 21-Dec 30-Nov<br />
12-Dec <strong>FTSE</strong>urofirst 300 Quarterly review 21-Dec 30-Nov<br />
12-Dec <strong>FTSE</strong> EPRA/NAREIT Global Real<br />
Estate Index Series Quarterly review 21-Dec 7-Dec<br />
12-Dec <strong>FTSE</strong> eTX Index Series Quarterly review 21-Dec 30-Nov<br />
14-Dec <strong>FTSE</strong> NAREIT US Real Estate<br />
Index Series Annual review 21-Dec 30-Nov<br />
14-Dec <strong>FTSE</strong> NASDAQ Index Series Annual review 21-Dec 30-Nov<br />
14-Dec NASDAQ 100 Annual review 21-Dec 30-Nov<br />
18-Dec <strong>FTSE</strong> Bursa Malaysia Index Series Annual review 21-Dec 30-Nov<br />
15-Dec PSI 20 Semi-annual review 2-Jan 30-Nov<br />
Mid Dec VINX 30 Semi-annual review 25-Dec 30 Nov<br />
Mid Dec OMX C20 Semi-annual review 25-Dec 30-Nov<br />
Mid Dec OMX S30 Semi-annual review 29-Dec 30-Nov<br />
Mid Dec OMX N40 Semi-annual review 29-Dec 30-Nov<br />
Mid Dec Baltic 10 Semi-annual review 29-Dec 30-Nov<br />
18-Dec S&P MIB Quarterly review - shares & IWF 27-Dec 17-Dec<br />
19-Dec S&P US Indices Quarterly review 21-Dec<br />
19-Dec S&P Europe 350 / S&P Euro Quarterly review 21-Dec<br />
19-Dec S&P Topix 150 Quarterly review 21-Dec<br />
19-Dec S&P Asia 50 Quarterly review 21-Dec<br />
19-Dec S&P Latin 40 Quarterly review - shares & IWF 21-Dec<br />
19-Dec S&P Global 1200 Quarterly review - shares & IWF 21-Dec<br />
19-Dec S&P Global 100 Quarterly review - shares & IWF 21-Dec<br />
19-Dec DJ STOXX Quarterly review 21-Dec 13-Nov<br />
21-Dec Russell US Indices Quarterly review - IPO additions only 31-Dec 30-Nov<br />
Sources: Berlinguer, <strong>FTSE</strong>, JP Morgan, Standard & Poors, STOXX<br />
NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
Jim wondered if there was an easier way to<br />
get his own copy of <strong>FTSE</strong> Global Markets...<br />
<strong>FTSE</strong> Global Markets gives you immediate access to 20,000<br />
issuers, fund managers, pension plan sponsors, investment bankers,<br />
brokers, consultants, stock exchanges and specialist dataproviders.<br />
To discuss advertising insertions, tip-ons, supplements, sponsored<br />
sections, bookmarks or your own special requirements contact:<br />
Paul Spendiff Tel: 44 [0] 20 7680 5153<br />
Fax: 44 [0] 20 7680 5155<br />
Email: paul.spendiff@berlinguer.com<br />
...there is:<br />
Simply fill in the Free registration<br />
form at: www.ftse.com/globalmarkets