Section 2 - FTSE

Global Portfolio Trading 

Roundtable 

Participants: 

Left to right back row: 

DOUG HAMPTON, head of global trading, State Street Global Advisors 

BRIAN BIELINSKI, head of quantitative portfolio management, Trafalgar Capital Management 

MARY McCAVE, senior dealer, Legal & General 

FRANCESCA CARNEVALE, editor, FTSE Global Markets 

Left to right front row: 

MARK WHEATLEY, managing director, portfolio trading, Merrill Lynch 

SCOTT COWLING, European head of trading, Barclays Global Investor 

PHIL HODEY, managing director and head of portfolio trading, UBS 

RICHARD EVANS, managing director, head of portfolio trading, Citigroup 

FTSE GLOBAL MARKETS • MAY/JUNE 2007 

Supported by: 

63

GLOBAL PORTFOLIO TRADING ROUNDTABLE 

64 

WHAT MAKES A GOOD PORTFOLIO 

TRADER? 

SCOTT COWLING, EUROPEAN HEAD OF TRADING, 

BARCLAYS GLOBAL INVESTORS: What comes to mind is 

operational efficiency. The capacity to efficiently return 

executions, confirm the time and manner of trades and 

settle them, without any problems or breaks, is an 

extremely high requirement. 

MARY McCAVE, SENIOR DEALER, LEGAL & GENERAL: 

The ability of the sales trader to fully understand the 

requirements of the client. Having somebody who really 

focuses on your account, and who understands the ins and 

outs of your approach is imperative. Basically someone 

who gets the job done. 

BRIAN BIELINSKI, HEAD OF QUANTITATIVE 

PORTFOLIO MANAGEMENT, TRAFALGAR CAPITAL 

MANAGEMENT: Technology makes a good portfolio trader 

and desk. I think this technology encompasses broker 

efficiency and trading algorithms as well as a bit more 

exposure of the entire portfolio trading process to the 

client.You are seeing more and more brokers provide more 

technology solutions all the way down to the client desktop 

level and it is becoming an increasingly important aspect of 

the client’s relationship with the broker. 

SCOTT: Once that is in place, do you think that it should cost 

you more or less than the basic vanilla portfolio desk service? 

BRIAN: You could argue either way, but putting technology 

in client’s hands does, in many ways, make the job easier for 

the broker. Concerning efficiency gains for the client, you 

may argue that some brokers should bill for it. On the other 

hand, you don’t pay for receiving monthly statements, and 

you don’t pay for receiving fills via email. Many times these 

platforms are just a more efficient way for the broker to 

receive orders from and transmit fills to the client. 

DOUG HAMPTON, HEAD OF EUROPEAN DEALING, 

STATE STREET GLOBAL ADVISORS: Added to what 

everyone else says, it is the breadth and understanding of 

the market offered by a bank. If I have an issue about Polish 

settlement say, and they can handle that, then all well and 

good. Alternately, if I have an issue about a swap and they 

understand how the swap structure works, that is 

important too. We look at portfolio trading as a route to get 

into an investment bank, which is then expected to handle 

all our various settlement and operational issues. I do not 

want a bank that just wants to execute trades and which 

cannot handle the specific issues that come up for us. 

FRANCESCA CARNEVALE, EDITOR, FTSE GLOBAL 

MARKETS: Is the relationship then about value-added and 

not just order execution? 

MARK WHEATLEY, MANAGING DIRECTOR, PORTFOLIO 

TRADING, MERRILL LYNCH: Yes, that is clear. Order 

execution has become commoditised to a degree—both in 

terms of the real-time service level that clients require and 

operational efficiency. Doug’s point is valid. Programme 

trading teams on the sell side have generally attracted 

people that do not want to be compartmentalised and 

therefore they offer, and have an understanding of, a much 

broader area of the business. This is true of all the firms I 

have worked for. At Merrill Lynch, we have a portfolio team 

that is very much at the centre of the floor and is connected 

to every other area of the business. 

PHIL HODEY, MANAGING DIRECTOR AND HEAD OF 

PORTFOLIO TRADING, UBS: Portfolio trading has evolved 

over many years and these days a good portfolio trading 

desk has to have excellence on the operational side and 

excellence in its execution capability. Portfolio traders have 

to be good at everything, because the trades we see are 

diverse in their complexity and we have be able to provide 

an equal level of service and equal quality of execution 

across the spectrum. Moreover, we follow that up with an 

efficient back office and operational process. 

FRANCESCA: Are your clients increasingly giving you the 

harder parts of the business, the very high-touch trading 

requirements, or the most illiquid part of a portfolio to 

trade out? 

PHIL: When you speak to people about portfolio trading 

there is an assumption that it is very much a low-touch, 

vanilla way of getting a lot of business done quickly. Today 

that could not be further than the truth. The level of 

complexity in what our clients are trying to achieve, and 

what they expect from portfolio houses is extensive. The 

use of technology and the use of experienced traders on the 

desk will all combine to give clients the level of complexity 

they require to achieve their objectives, but it is far from 

being the vanilla business that most people assume it to be. 

MARY: One needs to have a certain degree of security. 

Direct market access (DMA) is obviously becoming more 

the norm for people, but some buy side players do not 

quite have the technology that they need, even though 

many houses are working to upgrade their systems. 

However, if you have a difficult portfolio that you want to 

trade on an agency basis—such as an emerging markets 

portfolio, then you are more likely to want to utilise the 

skills of sell side experts.That process will continue until we 

build up our skills on the buyside. The buyside is going 

through a transition. We are upgrading our skill sets and 

trading is migrating over to our side now. 

PHIL: Portfolio trading has always been considered a cheap 

way to execute. It is interesting that when you now look at 

the prices of DMA and algorithms, they do not necessarily 

reflect what they should do relative to portfolio trading. 

With portfolio trading, you are getting people managing 

your trade as well as machines. I do not think a premium 

has been priced in to the marketplace, so that either DMA 

prices go down or portfolio trading prices go up. We have 

found on more than one occasion that for the difficult 

trades, clients are willing to pay us more to look after their 

trades. They recognise the benefits of selecting a capable 

broker and are willing to pay the right price for it. 

SCOTT: A definition of a difficult order is very simply that you 

have a high volume requirement, a high liquidity requirement 

and therefore rationally you are best placed to find the other 

side of your order. Theoretically a client through its many 

MAY/JUNE 2007 • FTSE GLOBAL MARKETS

oker relationships (with, in turn, their many client 

relationships) should give you a better chance of finding the 

other side than one broker and their client relationships. 

PRE-HEDGING: RIGHT OR WRONG? 

RICHARD EVANS, MANAGING DIRECTOR, PORTFOLIO 

TRADING, CITIGROUP: There was a big focus on prehedging 

a few years ago where it was the norm to allow the 

sellside to pre-hedge client orders. Following the 

investigations that took place, we have seen a change in 

the way some clients are happy for you to pre-hedge and 

others are not. This has certainly caused a difference in 

pricing. Everyone is very specific about whether you can or 

can not pre-hedge. In the past it was ambiguous, which 

then resulted in a very wide spread of principal prices. The 

spread of prices is much closer now, as everyone is upfront 

and clear about how they expect you to interact around the 

strike price of the trade. From a Citigroup perspective our 

stance has been never to pre-hedge unless it has been 

explicitly agreed by the customer. What we have seen is 

that we have now become more competitive in the 

marketplace in terms of our principal quoting, because 

other houses have tended to move their prices further 

away.The investigations that took place has been a positive 

thing for transparency in the marketplace. However, as Phil 

says, it could become much more difficult going forward 

following the Markets in Financial Instruments Directive 

(MiFiD) in terms of the transparency and the protection 

that is allowed to the sellside in terms of how immediate 

the publication of that trade is likely to be. 

MARY: We do not allow pre-hedging, but it really comes 

down to whether a buy-side dealer decides to give a broker 

the names and direction upfront and if they choose to do 

that then surely they automatically presume that the 

brokers are going to pre-hedge. We tend to deal on a blind 

basis, so we do not allow brokers to pre-hedge. 

RICHARD: Pre-hedging is very much interacting with the 

official price around the time that you are executing the 

trade. If you are able to source liquidity at or around that 

price by making an assumption about what the customer is 

likely or not likely to be trading then I guess that is the risk 

that you are taking yourself. 

SCOTT: When trading, either principally or agency, one is 

required to look at the total costs. Pre-hedging will affect 

the implicit part of the transaction and the commission is 

obviously very explicit. Historically, some clients perhaps 

were only concerned with the explicit part and wanted to 

see a low explicit charge and did not really care about the 

implicit part. However, that is a very naïve thought process. 

It is necessary to consider the total and if one were to allow 

pre-hedging, which Barclays Global Investors (BGI) does 

not, you would have to give consideration to would that act 

change the sum total costs. 

BRIAN: We monitor our portfolio trades and the market 

action of the trades from before we request the bids to well 

after the time when the whole thing should have been 


BRIAN BIELINSKI, head of quantitative portfolio management, 

Trafalgar Capital Management 

executed. We do pay attention to the fact that there is a 

chance that someone might try to pre-hedge the trade. We 

try to educate our brokers about the nature of our 

underlying strategies. These strategies are not necessarily 

very short term, so the brokers are not taking the other side 

of a very short term trade or a very short term strategy. As 

such, we look for more aggressive risk pricing from our 

brokers. Nevertheless, we do not allow pre-hedging. 

PHIL: The issue for banks that run risk on an inventory 

basis is that it works very well in stable markets but as 

volatility increases, the appetite to run the inventory tends 

to reduce. I am sure you all found two weeks ago when 

volatility did increase, that risk prices came out. Generally, 

the risk parameters that you have been running your 

inventory from become much less attractive in times of 

high volatility and you are forced to close out risk. When 

this happens, the risk prices not only move higher but also 

brokers are potentially sitting on some large losses. There 

are definitely arguments for running inventory type of risk 

management and an unwind type of risk management 

where you do not want to build an inventory. Getting the 

balance between those two elements is the important part 

of understanding what risk you are comfortable running, 

and what risk you do actually want to unwind. 

ACCESSING THE RIGHT DARK 

POOLS OF LIQUIDITY 

FRANCESCA: How do you guarantee clients that you can 

access the right dark pools? 

MARK: In the end it is about the absolute performance that 

you give clients in terms of their total execution cost. It is 

difficult for a client to work out whether you are accessing 

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SCOTT COWLING, European head of trading, Barclays Global Investor 

a dark pool, whether you are internalising, whether you 

have other clients flow to cross that business against, or 

whether simply you are going to the first price point of 

liquidity on an exchange. The end performance that you 

give them is actually what they are looking at and how they 

will judge the result. Most clients do not mind where that 

liquidity comes from. If you have access to an alternative 

liquidity pool that is improving their performance then that 

is the real end game for them. It essential therefore to have 

access to any meaningful liquidity sources that arise. 

PHIL: Brokers by their very nature are looking to match 

buyers and sellers whether that is from their own order 

flow, or from other clients in the market place. It is actually 

brokers being able to find the other side and not just going 

to one of the different electronic venues, but knowing 

either by their trading history or knowing what the clients 

are interested in. Being able to make the right call for the 

right person to find the other side of those difficult trades 

is what dark pools are all about. 

FRANCESCA: Is there a high level matching board, or is it 

just experience that lets you know where a particular group 

of say European Mid Cap stocks resides? 

MARK:You can rely heavily on some of the systematic flow 

and inventory tools, but they do not replace the 

relationships that we have with our clients in the market. 

You are never going to know where every piece of stock 

resides, but the ability to maintain a relationship such that 

you can actually source inventory direct from a client is a 

significant part of our job. In addition, one of the points 

that Doug made about the risk systems that the sell side 

use now, is that they allow them to run much more 

inventory. What we have seen is that this inventory has 

actually become more centralised. Previously, when banks 

had a trading floor with a separate cash business, a 

separate portfolio business, a separate derivatives business 

etc, you were not really looking holistically at that risk.That 

has now changed. There is no-one out there though that 

wants to become a long-term fund manager on the trading 

floor, and people always need to reduce risk at some stage, 

so eventually that is going to require going to either an 

exchange or finding the other side. 

TECHNOLOGY AND ITS IMPACT 

DOUG: Technology has brought down costs and will keep 

bringing costs down. What the sell side needs to do is to go 

back to the stage where service is the important thing. I do not 

think that technology can sell you anymore. It is the quality of 

people that they have in place to provide that technology. 

RICHARD: It is a combination of both actually. A big part of 

it is the service, but it is service that you provide with a better 

toolkit. For example, an airline pilot provides a great service, 

but he can only provide that service because he has a 

dashboard with relevant information that is readily available 

to him. If you compare that to the Wright brothers when 

they originally flew their aeroplane, they just had enough to 

get them 120 feet along the ground. Whereas, today a 

modern airline pilot needs to have the available technology 

to allow him to do a job that may involve intercontinental 

travel and do it well. I think technology still continues to be 

a differentiator, and it is how you interpret information that 

allows you to give your client a better quality service. 

PHIL: Going forward, the successful broker is the one that 

understands that every customer is different. That their 

investment objectives and styles are different; and if these 

are different, you clearly are going to have a different 

trading style to achieve these objectives. A lot of focus over 

the past few years has just been providing product for 

clients without necessary understanding what those clients 

require. For the next few years, the business will be about 

fine tuning product for different client bases, making sure 

that we put the right things in front of the right clients to 

help them to succeed. 

FRANCESCA: Mary, how much is new technology driving 

the growing expertise that you were talking about earlier 

and the confidence in your DMA strategies? 

MARY: Because of the way the markets used to work, and 

the way we once relied on brokers to do all of our trading 

for us, the buy side has not invested in technology in the 

way that the sell side has. Technology is their bread and 

butter and by pumping money into technology, it helps the 

sell side differentiate themselves. Now that the markets 

have opened up and you can have DMA, and clients are 

beginning to realise that they can get cheaper transaction 


costs by executing themselves, then they are beginning to 

chase technology as well. The important thing is to secure 

a sufficient budget to fund it all. 

FRANCESCA: Are you chasing the technology or is the 

technology chasing you? 

MARY: It is probably a bit of both really.There are times you 

could argue that there is not much mileage in being one of 

the first movers, so it suits that the ‘tried & tested’ 

technology that has been around for the sell side, can be 

used by the buy side as well. 

BRIAN: Technology is obviously improving. It is also 

improving the quality and level of interaction between the 

client and the broker, giving the client more ‘say’over what 

is done through the broker and how it is done. This is a 

process of constant improvement and I believe it is a result 

of clients wanting more hands on control of their portfolio 

executions. 

FRANCESCA: Phil, do clients consult with you more about 

execution strategies? 

PHIL: Definitely. I would point out first that technology has 

been responsible for the market fragmenting more than 

anything else to date does. As algorithms are executing 

more of the daily flow, the average trade size on exchange 

has decreased significantly. This has made it much tougher 

to get large orders completed quickly in the market itself. I 

RICHARD EVANS, managing director, head of portfolio trading, Citigroup 


am not saying that that is a good or bad thing, it just means 

that we have to have the technology in place to manage 

this fragmented flow and free up the trader to focus on the 

high-level strategy. On the portfolio side, it is a case of 

looking at the overall risk characteristics of the trade and 

using risk management techniques to achieve our clients’ 

objectives. This is usually an ongoing two-way dialogue 

with the customer. 

FRANCESCA: Richard, do you think technology has changed 

the relationship between the sell side and the buy side? 

RICHARD: It has led to significantly more transparency 

between the person executing the order and the person 

placing the order. Five or six years ago about 25% of the 

business that we received as an entity came in by FIX. That 

is over 50% now. If you look to the US market, it is over 

90%. Inevitably when you connect up the buy and sell sides 

it leads to real-time execution monitoring, real-time 

analytics, and immediacy of information back to the buyside 

rather than relying on someone sitting and monitoring 

the portfolio performance on the sell-side and making a 

phone call every 30 minutes or so. Having the buy side have 

that level of information at its fingertips frankly makes the 

sell side slightly nervous, because you always have 

somebody looking over your shoulder and second guessing 

what you are doing. Even so, it also has led to openness in 

communication and, as Brian says, if you understand 

fundamentally, what your customer is trying to do, it helps 

you achieve better execution for that type of transaction.The 

other thing about technology is that now we are actually 

building the tools, systems and software to provide 

immediately to the buy-side. What the buy side has is just 

as good or if not better than what the sell side has. It just 

comes down in how much you are prepared to invest in the 

technology. This is not for everybody, because certain 

dealing desks—depending on the way that they are 

structured—still ought and need to outsource their 

execution capabilities to someone who has all the capability. 

These clients are not able to invest in every single piece of 

tool kit that would enable them to execute their business. 

SCOTT: Just to clarify who uses programme trading. As I 

see it would be passive funds or quantitatively managed 

funds generally. These are the types of strategy that are not 

picking securities because they think that they are going to 

double in price. They are going for either no alpha because 

they are trying to track an index or they are doing 

something because they believe there is a small margin to 

be made. As a result of this, all of these investors are very 

concerned with the cost incurred—therefore technology is 

very important to them. Bear in mind that a fund manager 

is paid as a proportion of the assets—and that is obviously 

based on their success at gathering those assets—whereas 

technology is a fixed cost. Until you get above a certain 

threshold it won’t make economic sense, so those at the 

lower end rely on those value added services of the brokers. 

Once you get above a threshold, I guess you would have 

less reliance on the services and you would expect to do 

more yourself to minimise the shortfalls and the cost. 

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DOUG: Technology is going to change the market in the 

sense that if you look at other technologies it tends to be 

‘winner takes all’ and you can dominate that market once 

you have a dominant position within it. One needs to get 

desk top space in one space, and once you get comfortable 

with that, you are going to start putting more business 

through it. All of a sudden it is a very concentrated sales 

side with four or five dominant brokers and I am not sure 

whether that is good or bad, but that is the risk that we are 

faced with technology. 

COMPRESSION 

MARK: We have been talking about compression and about 

the number of brokers out there for more years than I care 

to think about. The cost of technology will drive to a certain 

extent the compression of business.The cost of building this 

technology and compiling all the data that is required is not 

cheap. If you do not have the ability to pay those costs it 

becomes difficult to compete, and you out-source or cease 

offering the service. If it is a good thing or not it depends on 

which side of the equation that you end up on. 

MARY: We signed CSA’s with all of our brokers, which is at 

odds with a lot of the street; we did not want to actively 

concentrate the number of counterparties with whom we 

mainly deal. However, although we have signed with 

everyone, we are seeing a natural concentration to some of 

the bigger players really. At the moment this number is 

probably eight, but again you can see that shrinking even 

more. Quite a lot of buy side players have only signed CSA’s 

with a few core brokers, which I find quite interesting. 

FRANCESCA: Is there a flight to quality Mark? 

MARK: Yes, certainly we have no worries at present but 

have seen the situation over the past ten to 15 years 

where very significant names have changed their model, 

failed to keep up with the market, or predict where the 

market place is going, and suffered accordingly. You 

cannot ever be complacent and that is where the 

understanding of the clients, and what we need to 

provide them, is crucial. As Richard points out, in terms 

of the speed with which information passes today, there is 

also now a high speed of execution that causes its own 

problems to the buy side dealer’s ability to manage it. For 

example you have a certain type of buy side trading desk 

that is going to get a continuous flow of orders from any 

number of fund managers, but at what stage do they cut 

that flow off and address how they are trading it in terms 

of portfolio verses DMA etc? It is actually very difficult to 

do, so it is crucial that we understand exactly how the 

dealers are set up and how they interact with the people 

who are making the investment decisions. Again, when 

Mary spoke about the emerging markets earlier, obviously 

technology does not yet help you at many levels in those 

markets, so there is still a long way to go to provide the 

full scale service that clients need, and that in itself will 

delay full-scale broker compression. 

PHIL: It is true, technology is not the solution to everything. 

If you look at the changing relationship between the buy 

and the sell side—does it mean that the brokers that 

succeed will be the ones who look at how they operate and 

interact with their clients and understand where they add 

value? Or effectively decide where we should let the buy 

side trade themselves? Those considerations are crucial to 

whoever succeeds. There is the general opinion that 

liquidity will concentrate towards the bigger houses, and 

here are more reasons to believe that this will happen now 

than at any time in the past, but at the same time, you can 

not just assume that it will happen. Arguably the blue chip 

liquid names will go to a DMA platform and we will be left 

with difficult names. Arguably it could mean that you are 

going to end up going to boutiques and specialist brokers. I 

do not think it is safe to assume that liquidity will 

concentrate towards the big houses. How those houses 

interact with clients and understand their needs and deliver 

upon those; is really going to dictate the success of an 

investment bank going forward. 

RICHARD: The industry is a lot more efficient now than in 

the past. A big driver of that is commission sharing 

arrangements (CSAs) allowing the buy side to execute with 

a more concentrated group of brokers without reducing 

the amount of research that they have available to them. 

Therefore, that is creating efficiency in the market place, 

where you do not have to execute with a broker in order to 

pay a research bill and compromise on liquidity access. As 

Phil says, you are never going to get to the point where all 

liquidity goes to a certain number of bulge brackets, 

because from an efficiency perspective those local broker 

dealers still have more access to the local investors than 

global firms are likely to have. Regulation is often a source 

of frustration, but in this respect I think it is becoming very 

positive to the industry. 

SCOTT: I was interested in establishing whether 

commission sharing arrangements have led to increases in 

business for the houses that are represented here today. I 

was under the impression that perhaps there had been an 

increase but that had subsequently reverted somewhat. 

PHIL: I am not sure they have reverted, I can say that where 

we have signed a CSA there is evidence that those accounts 

have grown at a greater rate than those that have not. 

MARY: I think that some houses went down the line of 

signing just a few CSA’s but they have realised this is 

slightly too restrictive and that they need to sign a few 

more, in order to satisfy their best execution requirements 

within the CSA framework. 

DOUG: Part of the job on the sales side is to gather 

information about the market and I think technology 

allows us control that information ourselves. That is a big 

change in the market from five years ago.The sales side has 

to look at ‘how do they make money from their clients?’The 

relationship has changed. The key thing with the 

technology for us is to have the people on the sell side get 

the best out of it as possible. I think a few people have that 

but across the board there are not enough people providing 

that to the buy side. From our perspective they really add 


value to our processing. We can use our technology to 

make sure that we do not cause disruptions in the market. 

MARK: The idea of expecting the buy side to use all the 

available tools straight away does not wash—though to be 

fair we have seen buy side trading desks get to terms with 

them very quickly. We have an execution consulting desk 

that effectively does some of what Doug just described.The 

desk analyses what the customers own trading style is, and 

tries to help them fine tune it. In the execution process we 

are not trying to intervene at the PM level, because the 

actual investment decision will always be the client’s own. 

However, how they choose to implement that decision 

through their own trading desk is extremely important and 

it is where we try to help minimise slippage. 

FRANCESCA: Doug, who is policing your performance? 

DOUG: We trade with the broker and the broker then 

provides capital. It is hard to measure that and say whether 

that was a good job or not. We really are looking to measure 

performance of our traders not so much the broker’s 

performance anymore. We will try to compare our 

algorithms. We are not at the point where we can compare 

the different tools that they provide to us. In the old days of 

complaining to the broker are gone, it’s now more the case 

that the complaints come to us now. We do not have anyone 

to turn around to blame anymore. The calls are on us. 

MARY: I agree. We use transaction cost analysis but it is 

more to look at how we have performed, rather than broker 

performance. We are in control of our orders –and so we 

are directing where the flow is going anyway; and we are 

asking the broker to trade in a certain way. Having said 

that, we have no offices outside the UK, so we trade global 

equities from our desk. In markets where we are not 

trading in live time then there is potentially more reason 

for using TCA to analyse broker performance. Going back 

to MiFid we are forced to examine how we trade and to 

come up with an execution policy. At the beginning of 

discussions about MiFid there was a lot of worry from the 

sell side that the buy side wanted to pass responsibility for 

best execution on to the sell side in all situations., however 

we are happy to stand by our execution policy and happy 

to be measured and monitored on that basis. 

RICHARD: From a transaction cost analysis perspective 

the time horizons have changed in terms of what is being 

measured. If I think about short term as being within five 

minutes for example; mid term being the day, long term 

meaning multiple days; the long term decision about 

executing which security to invest in is typically the fund 

manager’s decision. The more mid- term decision (hours 

to a small number of days) is more the buy side dealer’s 

decision. Whereas in the past the buy side would measure 

the sell side in terms of the timing of their decision as to 

when to execute an order, that timing is now being done 

by the buy side dealer, and it is the implementation after 

that decision has been made that the sellside are being 

measured on. So back to Doug’s point about measuring 

specific algorithms, you may measure the sell side 

algorithms against each other in terms of the performance 


MARY McCAVE, senior dealer, Legal & General 

after the decision has been made, but when that decision 

is made is what is being measured on the buy sides 

dealing desk? 

MARY: Some houses on the buy side already work in the 

kind of way that others aspire to. With MiFiD coming in, it 

will be a catalyst for a lot more firms to sharpen up their 

processes. More people are using pre-trade models, and 

then they will be using the post trade to compare this with 

the actual execution. 

FRANCESCA: Phil, how do you think MiFiD will effect 

performance measurement? 

PHIL: Irrespective of how individuals are being measured, 

the fact is that there is now a regulatory requirement to do 

so. It is also more than just a quantitative exercise; it is 

actually starting to qualify what is a good job and what is a 

bad job. This is a key problem; there has never been a 

qualitative overview that let us really understand whether a 

trade was executed well or poorly. 

BRIAN: Algorithms can make everyone a lot more efficient. 

Currently they’re great at the easy orders, straightforward 

stuff where there’s the liquidity and the trade frequency 

that the algorithms can work with effectively. Nevertheless, 

you need an algorithm, or a more intelligent process by 

which to separate out the easy orders verses the more 

difficult orders. Right now, most of these decisions are 

being made by the brokers and portfolio trading desks. 

However, as technology improves the ability to make more 

of those decisions will be available to the client. Although 

I am not saying that all clients will want to use it. 

SCOTT: There are many people working very hard to pick 

the right stocks. However, ultimately a client does not 

really make its money from picking stocks, but rather from 

its assets. Asset allocation is the true driver. Therefore, how 

one performed versus a close or a volume weighted 

average is fine, but the big question is should you really 

have been executing in that manner? MiFiD is a big 

concern. Although there is the opportunity to have volume 

data printing in many different venues, if that cannot be 

effectively consolidated, then you will not be able to 

measure performance effectively, and that is worrying. 

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DOUG HAMPTON, head of global trading, State Street Global Advisors 

FRANCESCA: Data management will be really important 

once it comes in to play. Have you invested in the systems? 

I am sure your clients will rely on you even if they want to 

run their trade strategy themselves. Have you prepared for 

that Richard? 

RICHARD: We have been forced to invest just by the fact 

that the regulations have changed. Having to be in a 

position where we are able to justify how we have executed 

the transaction means that we have to store pretty much 

every market data tick and transaction. A lot of behind-thescenes 

work takes place from a technology perspective, 

which does not result in a new front end system. In terms of 

benchmarking, as Scott says, it is a concern. Many people 

target a couple of specific benchmarks at the moment, but 

when you get to multiple liquidity pools it is going to be 

very difficult to monitor what you are executing, what you 

are targeting and what your customer wants you to target. 

I can envisage a lot of ambiguity creeping in. Let me be 

specific. A few years ago, many closing methodologies were 

very different, depending on the index that you were 

benchmarked against. The best example of that is in Italy 

where they had two different closing benchmarks, 

depending on the index that you were benchmarked to. 

Liquidity is likely to fragment across Europe from multiexchanges 

and you could end up with ten different closing 

prices. When you are trying to target a specific benchmark 

this is going to become very difficult, not only to execute 

against, but also measure a performance against.That is one 

of the current unsolved MiFID mysteries. 

MARY: Is there a consensus from the sell side to on how to 

establish the closing price (post MiFID)? 

RICHARD: If you look at the US as an example, the two 

primary markets are losing share on a daily basis.The current 

official closing prices still tend to be what is deemed as the 

primary market. I do not know if that will change once the 

primary market actually falls below a certain percentage of 

market share- or whether it will stick to the primary exchange 

listing of that security. I have no easy answer for it because if 

you think about a number of solutions, whether you take the 

weighted average of a number of exchanges, or whether you 

take the last tick from which ever exchange closed the latest, 

one thing for certain is that there will be more ambiguity. 

MARK: There is always likely to be some sort of 

benchmarking, whether it is to the close or some other 

agreed point. As liquidity fragments there is a tipping point 

beyond which there is no easy monitoring solution. 

Everybody has thought about various potential outcomes 

and some of the technology needed is already built, as we 

all have experience gained from the US markets. We already 

have to store most of the information anyway. Therefore, I 

am not worried that it is not going to be available, it is more 

a matter of collation and dissemination. Another 

interesting point about MiFiD relates to Scott’s comment 

about explicit and implicit costs. The drill down in to the 

absolute cost of a trade now includes differing venues, and 

also looks at settlement/clearing charges etc. Without 

technology, this is almost impossible. If you look at the job 

of a trader in an investment bank, you are asking him to not 

only make a decision where the liquidity and best price is; 

but actually make a split second decision adjusting that for 

the settlement and clearing costs. Technology is really the 

only solution for some of those issues. 

FRANCESCA: Will MiFiD put back the onus of technology 

onto the bulge bracket houses simply because you have the 

resources to fund the necessary developments? 

PHIL: It is clear that there is an enormous investment to be 

made. To be fair, the majority of the collating of data is not 

difficult. However, there is an enormous amount of 

investment required. In fact I read a report this morning that 

said 25% of all servers bought globally are bought by 

investment banks. It is a very good signal that we spend a lot 

of money on technology. We have to, because our customers’ 

requirements are so sophisticated. If investment banks 

stopped making money, and with pricing based around 

portfolios and DMA and the exchange cost of trading, there 

is the possibility that this enormous investment will not 

recoup its costs. If that should happen, then that is going to 

change the structure of the marketplace again. Therefore, 

technology is a key differentiator in the success or the 

potential success of a broker. 

DOUG: Do you think if you were starting your own 

business you could afford this technology? Maybe that is 

why we don’t see many agency brokers out there because 

they can not afford to be in the market place? 

RICHARD: It is becoming more difficult because to 


maintain a competitive edge—which these days is more 

and more about technology— you have to continue to 

invest in it. It is a continual challenge for the agency-only 

brokers to maintain a competitive position in this regard. 

There are however a small number of clients who are still 

concerned about the mix of business within an investment 

bank between agency and principal business. 

PHIL: A cash execution business on its own may not be as 

attractive a prospect as one aligned to other investment 

banking services. For example, 30% of the programme 

trades that we execute at UBS now are not booked as cash 

trades but are in fact part of derivative transactions, so 

there is opportunity to provide alternative solutions to 

clients. That is actually where a real opportunity lies for 

investment banks, starting to align those products in such 

a way that the cash business supports a much bigger 

business. Cash on its own is still a good business, but in a 

standalone business, it is less of an opportunity than what 

you get can offer elsewhere. It is interesting that Scott 

mentions the multi-asset side as well. One of the key areas 

that we are looking at the moment is developing a portfolio 

trading facility that covers both a fixed income and equity. 

FRANCESCA: Brian does that not encourage you to outsource 

all your trading? 

BRIAN: That is part of the discussion about fragmentation 

of market information. It is more difficult for individual 

clients to aggregate all the market information and access 

they require, so in some sense that does make the portfolio 

trading product more desirable. Brokers are already doing 

the work to aggregate this information. They achieve better 

efficiencies of scale having to do it for multiple clients. 

FRANCESCA: We have big and sophisticated players around 

this table who can make their own trading decisions. There 

must be many asset managers who simply cannot access 

multiple markets themselves. Doesn’t that ultimately mean 

more business for the big investment banks? 

PHIL: Most of that becomes a question of scale—probably 

something one of my colleagues across the table should 

answer. At what size team does a central dealing desk on 

the buy side actually have the capacity to trade well in all 

situations? We have 19 people in portfolio trading at UBS 

in London alone. It makes sense for the large buy side 

institution to build a trading operation themselves. What 

size of assets under management does it then become 

unrealistic to be able to achieve that scale, instead of using 

a third party i.e. a broker? 

BRIAN: I think it is a lot easier for us to evaluate, because 

we are much more focussed on a broker’s execution 

services, rather than its research services. For a research 

purchaser value can be much more difficult and subjective 

to evaluate. For us, there are still some subjective measures, 

for example, settlement issues. However, while these 

subjective criteria are important, we consider them 

secondary to execution performance and consistency. 

RICHARD: It is nice to hear that there is going to be 

continued reliance on the large bulge bracket banks.That is 

no different in any other industry. The players in the 


industry with the bigger market share tend to be the most 

successful at innovating and coming up with new products. 

They have the resources behind them to be able to do that. 

BRIAN: I have seen some brokers change objectives over 

time. For example, some may increase focus on risk 

business today, then six months later they lose some of that 

focus. So we cannot say to one broker ‘today you guys are 

doing well, you’ll be our only broker’. We have to maintain 

relationships with several different brokers in order to 

protect our clients from a particular broker’s possible 

change in business focus. 

UNBUNDLING 

FRANCESCA: Can we talk a little about unbundling, and 

the long term impact of that. 

DOUG: It has less effect on us than many others. We do 

not require so much market research. However, to say we 

have no research, that is not true either. We do. What is 

forcing us down the rut is more towards the commission 

sharing rate. We also need to pay people who provide us 

services that can not provide the quality of execution. 

Therefore, for us, it is the commission sharing that has 

happened that probably would not have happened to us 

two or three years ago. 

MARY: We have both sides to our business; our passive 

side is purely execution only, so it never comes in to the 

unbundling discussion really. On the active side we are 

seeing benefits in that we are being able to use our 

commission payments a lot more effectively to target 

firms that provide the most useful research while still 

getting the business done with the houses that provide 

the best execution. 

PHIL: Portfolio trading is already an execution-only service 

so unbundling should have little impact on our business. 

So, will it affect portfolio trading? In theory, it should not, 

however, I am sure that it in some places it will. Looking at 

how the portfolio trading model operates is the correct way 

of understanding unbundling in the broader context of the 

equities business as a whole. 

MARK: I agree. Portfolio trading has always been a service 

used by execution-only clients, and yet many others also 

need research because they have a different side to their 

business. The ability to face-off to clients in differing ways 

across multiple businesses is absolutely crucial. If you look 

at the execution-only charge, where should that end up 

coming out? Currently there is a disjoint between what 

classifies as the execution component of a high touch cash 

order versus where a portfolio trade is priced, and 

following on where a DMA or algo trade is priced. Can you 

take from that there is a problem with the value of the 

execution piece, or does that simply mean overall 

commission rates are wrong? Potentially not, but the right 

balance has yet been to be found. You will also get to the 

stage where the research and the provision of service are 

difficult for some of the smaller brokers to provide due to 

costs. Coming back to Doug’s point, if you are looking at 

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72 

the initial outlay, it is very expensive to start up a 

technology programme. However it is significantly more 

expensive to set up a full scale research product. The 

smaller brokers who do not necessarily have that will be 

forced to compete on execution price alone, and therefore 

there could be some compression due to that. 

MARY: How do you feel about the pricing level of the 

execution component, because now in the UK for example, 

the talk was that component would be seven or eight basis 

points for high touch. That is going to come down as 

technology advances, and so should bring the total 

commission down. 

MARK: You had to start somewhere, and in terms of the 

analysis, most people came out with the same sort of price. 

We manage our client relationships holistically by looking 

at the amount of resource we provide, whether it is 

research, execution, corporate access or capital, and from 

that look at the overall profitability of that client. If that 

execution component goes down significantly, the amount 

of revenue we are getting may not actually net off with the 

value of the service we are giving out.Then, most likely, the 

overall service level will be pulled back. We have a very 

open dialogue with all our clients on the analysis we put in, 

and make sure they understand what we are giving them 

in resource and how we account for it, so it never becomes 

a surprise if resources are re-directed. It is a business after 

all and we do want to make money. In terms of technology 

cost and investment, if it starts not to make any sense 

because we are not getting any pay back for it, then it 

becomes an issue. Likewise, if you get to a stage with a 

client relationship where the overall picture no longer 

makes financial sense, then you have to look at allocating 

your resources where somewhere it will. 

FRANCESCA: The first part of this discussion was about 

all the benefit services that portfolio traders had to offer to 

clients to keep their business- how do you effectively 

price that value added service? –Surely you can not do it 

for nothing… 

RICHARD: Quite often some of the services that we 

provide are seeded from our internal requirements anyway. 

Then it is looking to monetise what we have, by selling it to 

someone else; and whether that is implicitly selling it in 

terms of receiving feed back; or in terms of effectively in 

exchange for order flow if that’s applicable and allowed. It 

is difficult to be specific about the price of a particular 

algorithm for example, and inevitably we determine an 

average cost relative to the flow and set-up cost of the 

product. Client profitability has become much more 

prevalent over the last couple of years and is moving much 

more form an art into a specific quantitative scientific 

process. In a similar way- loss ratios and retention have 

become more standard because communication within the 

industry has become a lot more open about it; that the 

same thing will happen to client profitability. 

FRANCESCA: Does that give you comfort Scott? That it is 

all going to be scientific. 

SCOTT: Yes it does. All the people here today like to look at 

the world in a quantitative manner, so ultimately yes. Mary 

said the sell side suggested an average execution rate as 

maybe in the region of eight basis points. The cost of 

building the technology is huge, but to a large extent is a 

fixed cost once it is done. Then you have exchange costs, 

which are maybe in the region of half a basis point. There 

is therefore 7.5 basis points left to cover the cost of the 

value-add services. Will it become a more scientific 

process? If people know how much something costs then 

they are going to be more aggressive about what margin 

they are going to pay on top of that and that is possibly a 

dangerous place. 

FRANCESCA: Is that why you keep it as an art Phil? 

PHIL: I found the whole cost conversation over the last few 

years is quite interesting, I can’t remember walking in to a 

shop and asking how much something costs before I 

bought it. The cost of executing business is something that 

we have to be focused on. However, should Doug, or Scott, 

or Brian choose to trade with UBS because it happens that 

our internal cost of doing business is different and that 

means that they can pay less? Well, I think it is more than 

that. If I go to look at two TV’s; I am not going to just base 

my decision on which is the cheapest. My decision is going 

to be based on the size, sound and vision quality and so on. 

There are so many different things around portfolio trading 

that you cannot necessarily quantify purely as a cost.This is 

a problem for the buy side to understand. How do they 

effectively measure what things they value from their 

broker and what value they attach to that? They should 

look at that and not how much it costs the broker to a 

trade. That is the difference, and people will pay more for a 

service that gives them more. 

FRANCESCA: Doug, if you measure your brokers’ 

performance against what you value, then why wouldn’t 

you just concentrate all of your business towards one or 

two of the best providers? 

DOUG: First, it is not practical; secondly, risk. I like to 

spread my risk across a number of brokers rather than 

having all on one. Thirdly, one broker can not provide you 

with everything- you can not get the coverage that you 

need. I do not want one broker seeing all the informationthat 

is a lit that you are giving. I do not want to see 5 

global brokers either. It is too much information to be 

giving out to the market. If I could see 5% of the market, 

I knew a lot was going on. If you give someone 20%, then 

they know a significant of what is going on and that is too 

much information. 

WHAT MAKES A GOOD PLATFORM? 

FRANCESCA: Phil, What makes a good platform for you? 

PHIL: Probably the clearest measure that I would use 

would be how much time a portfolio trading individual 

spends processing a trade verses making decisions as to 

how to execute a trade. It has to be connected to all of the 

markets that you trade in. It is basically the automation of 

the process and over-laying that with the technical analysis 


that you need to make the decisions. My focus on 

technology is not to make the tools make the decisions for 

me- it is to show me the decisions that I need to make.That 

is certainly a key area. 

FRANCESCA: Scott are alternative trading systems and 

new trading alliances important factors in deciding who to 

work with? 

SCOTT: We want to access everything that helps us 

optimise our shortfall. That covers it really. 

ILLIQUID TRADES 

FRANCESCA: Is everything accessible? Have you ever been 

given a request that you cannot deliver? 

MARK: I did my first Moroccan trade a few years ago in a 

previous job, where we actually managed to execute for the 

client, but realised after the event that we had no agent bank 

in place. A year later we cancelled it as it was still not settled. 

RICHARD: Smaller firms have less access to those 

execution venues or asset classes. 

FRANCESCA: There must be some assets that are totally 

illiquid. 

RICHARD: Brokers are always happy to say that there is a 

price for everything, but that may not fit with the expected 

alpha for the lifecycle of the holding. 

FRANCESCA: But you would never go back to your client 

and say there is no way I could get this? 

RICHARD: If you look at some of the larger transactions 

there is a time line that you are looking through to reach 

your objective. Depending on the risk and the return of 

those names, you get to the end of that trading period and 

then you make the decision. One thing that is often missed 

is an understanding the time in terms of executing your 

transaction. You may often get an order from a customer 

and just naturally assume that it needs to be completed by 

the end of the day, just because that’s the way the majority 

of orders are. If you understand more of what your client’s 

underlying objectives are, you may have four or five days to 

execute that order. That kind of information is something 

that needs to become more open between the buy side and 

the sell side and it comes back to the quality of the 

partnership between broker and client. 

THE OUTLOOK FOR PORTFOLIO 

TRADING 

FRANCESCA: How will portfolio trading evolve over the next 

five to ten years, and how you are preparing for that change? 

MARK: One of the changes we have been pursuing is the 

integration of all types of execution that exist within 

equities, and how technology helps. Different banks have 

approached integrating businesses at varying rates and 

levels. It might involve fixed income and equity, or cash and 

derivatives, or looking at maybe a region through all assets 

classes. Take, for instance, the evolution of the options 

markets in the US, where almost 95% of the business now 

is listed and dealt on-exchange and it is very easy to 


automate. If you are trading in an OTC market such as 

Europe, the opposite is the case. As we integrate more of the 

trading of different assets it will be interesting to see 

whether on-exchange business and ease of visibility 

prevails and whether any other assets in Europe follow the 

cash equities model. I certainly don’t believe that 

technology solves everything, and when you are looking at 

an OTC market it is far less helpful and lack of visibility is 

the crux of that. However, that’s how the ability to trade 

dark pools evolved, and Portfolio trading has always been at 

the forefront of such technology innovation, and I believe it 

will continue to be there for the foreseeable future. 

SCOTT: In the long term, you have to be flexible to 

changing conditions. If, in terms of our liquidity and 

trading requirements, they break down into a portion that 

will be executed on an electronic platform and a portion 

that will be executed ‘upstairs’. There is a lot that goes on 

‘upstairs’. If we think about the UK market, somewhere in 

the region of 50% occurs off SETS.That is probably the case 

for many markets especially across Europe. There will be 

increased numbers of venues and liquidity pools and we 

have talked about whether you would want to access them 

all. I would suggest that yes, you would like to access them 

all, but with the capacity to subsequently look at ‘was that 

a sensible choice’? Then you can come and back and say 

‘No, perhaps in that particular venue I am incurring 

negative selection’, but at least you would know that. In 

summary it is about flexibility and being clear as to what 

one is going to be doing on and off exchange and how one 

is going to be doing it. 

PHIL: Our focus is going to be on continuing to build a 

large scalable platform that will reliably facilitate our 

customers’business—whether that be a choice of executing 

directly or using one of our traders. We will also focus on 

PHIL HODEY, managing director and head of portfolio trading, UBS 

73


74 

MARK WHEATLEY, managing director, portfolio trading, Merrill Lynch 

providing execution advice, whether that is on 

implementing a particular strategy or other client needs. A 

significant area for us is going to be re-aggregating that 

diverse liquidity pool. We are going to have react quickly to 

the significant changes that we face in the marketplace 

over the next few years. 

BRIAN: Sources of market information and access are 

increasing rapidly. So is the necessity to rely more on 

technology in order to quickly take advantage of that 

information. It boils down to technology. The increases in 

technology which we have seen over the last few years is 

almost nothing compared with what is going to happen in 

the future. In addition to improvements in the brokers’ 

abilities in portfolio trading and execution algorithms, 

there will be massive improvements in getting clients more 

involved in the portfolio trading and execution process to 

whatever level they desire. 

RICHARD: Undoubtedly, it will be more difficult to 

differentiate for the sell side and for the buy side also. It is 

becoming more of a level playing field in terms of access to 

the tool kit available and liquidity pools. More data is going 

to be more available i.e. post-MiFiD in terms of market 

data. This will make peoples’jobs more difficult and we are 

going to continue to rely on technology. From a pricing 

perspective, I expect risk pricing to go up, and agency 

pricing to come down. The reason for that is risk will be 

more focused on the more difficult trades. The cost of 

capital may not necessarily go up, but the make-up of the 

capital that is being requested of the sellside is going to 

become more expensive. Finally, there will be more 

partnership between the buy side and the sell side. 

Technology allows that to happen, everybody is able to see 

what the other side is executing and transacting and the 

conversations that take place. In the past that transparency 

may have been on an hourly or half hourly perspective but 

now it will be much more in real time. 

DOUG: Everyone will adopt diverse strategies to stay 

ahead of the game and there will not be as clear a 

distinction between groups—on both the buy side and the 

sell side— in the future. 

MARK: As everyone says, the key point is flexibility. The 

rate of change in technology has sped up dramatically.You 

can plan a certain amount, but you also have to plan 

flexibility. It would be great to understand exactly where 

the market is going to be in five years time, but it is 

impossible to know for sure. You have to make certain 

assumptions and the plans that you put in place have to be 

flexible enough to adapt. 

FRANCESCA: Portfolio trading accounts for about 30% of 

total trading. Do you expect that to increase over the next 

few years? 

RICHARD: Measuring portfolio trading as a percentage is 

subjective. It depends at which point you are actually 

measuring it. The London Stock Exchange has a definition 

of portfolio trades as does the New York Stock Exchange, 

but their definitions are actually different. The way that I 

tend to measure it is the percentage of our overall cash 

businesses within Citigroup excluding exchange for 

physicals. So, taking into account customer generated 

portfolio trades as a proportion of the over all cash 

business, that has increased by about 30% over the last two 

and half years. Do I expect it to continue going up? Not 

really. It is getting to a point where it is going to start to 

reverse. As more of the buy side get electronic tool kits, 

straightforward trades will be executed via DMA or algo 

routes. However, there will continue to be a need for 

portfolio desk to evolve to take more complicated 

transactions. A multi-billion dollar, multiple-day, multiasset 

type trade is something that the buy side are not 

going to be doing on a weekly basis, so they need to 

partner with an experienced broker to get the best result. 

PHIL: The average size of a portfolio trade is going to up 

significantly, but the absolute number of portfolios or 

proportion of business getting executed by portfolio 

trading is possibly going to fall. If you compare that to the 

US there is an interesting statistic that comes out from the 

New York Stock Exchange (NYSE) on a monthly basis that 

says that the proportion of business comes in from 

portfolio trades. But that is often electronic business that 

goes down a portfolio trading line and may include single 

stock trades. 

RICHARD: I would suggest that number in the US is much 

less than the 70% reported by the NYSE, but instead may 

more accurately be around the 40% level. 

FRANCESCA: Thank you all very much. 


The European market for high-yield bonds is still going from strength to strength. Fuelled by an 

unprecedented volume of leveraged buyouts in a benign environment of low interest rates and 

corporate defaults, a growing base of investors seems ready to snap up almost anything on offer. 

This bull market looks set to reach a record level of issuance this year after virtually doubling in 

2006. Andrew Cavenagh reports. 

HIGH YIELD 

STILL ON THE 

UPSWING 

GROWTH IN THE European high yield market was 

spectacular last year. European companies issued 

€37.5bn worth of non-investment-grade bonds last 

year—about a third of which were dollar denominated— 

against €19.1bn in 2005, and the early signs certainly suggest 

an even bigger market in 2007. According to the inaugural 

quarterly report from the European High Yield Association 

(EHYA) published in mid-April, issuance in European highyield 

bonds the first three months of 2007 totalled the 

equivalent of $9.3bn—an 18.3% increase on the $7.9bn 

recorded in the same period of the year before. The 

association advised that this figure could increase as further 

deals were reported, and investment banks are already 

putting the total higher.“To date we have had €7.5bn against 

€7.2bn for the same period last year,”says Youssef Khlat, cohead 

of European high-yield at BNP Paribas in London. 

An additional boost to the market in 2007 will come from 

an unusually high level of redemptions, as up to €8bn of 

outstanding high-yield bonds are due to mature during the 

year. On top of that, there are companies with call options 

on high-coupon bonds that they issued between 2002 and 

2004 that may well take advantage of current interest rates 

to refinance their debt at lower cost. “They can certainly 

save 3% to 4% if they issued [with coupons] above 10%,” 

explains Axel Potthof, senior vice-president and portfolio 


A continuing pick-up in credit quality of new issues was also evident in the 

first-quarter figures from the European High Yield Association (EHYA), a 

trade association representing participants in the European high yield 

market, as a considerably higher majority of the bonds issued in the first 

three months of 2007, at just over $6.6bn, achieved double-B ratings than 

in the first quarter of 2006, where the figure was just under $4.6bn.The 

total of single-B bonds by comparison was down from just under $3bn to 

just over $2.6bn, while triple-Cs fell away from $318m to $300,000. 

Photograph by SolarSeven, provided by Dreamstime.com, April 2007. 

HIGH YIELD DEBT 

75

HIGH YIELD DEBT 

76 

manager in the Munich office of the specialty fixed-income 

fund manager PIMCO.“They can issue at 7.5% today.” 

Leveraged buy-outs remain the big engine for growth in 

the market. They accounted for around 60% of the total 

European high-yield issuance in 2006, and as the size of 

acquisition that private-equity firms seem prepared to 

contemplate expands further and further into 11-figure 

territory, so inevitably will their requirements from the 

high-yield market. “About 65% of high-yield bonds in 

Europe currently stem from leveraged buyout (LBO) 

financings where bonds are issued to finance a takeover by 

private equity,” says Potthof. “They are the driving force 

behind the volume of issuance.” 

Last year’s £8bn acquisition of Thames Water in the UK, 

for example, should lead to a high-yield bond issue worth 

the equivalent of about £1.2bn within the next few months. 

The Kemble consortium, led by Australia’s Macquarie 

Bank, that bought Thames has signalled its intention to 

refinance part of the £4bn bank loan it raised for the 

acquisition along with the 

water company’s £3.2bn of 

existing debt through the 

capital markets. Kemble has 

told the industry regulator 

The Water Services 

Regulation Authority 

(Ofwat), the economic 

regulator for the water and 

sewerage industry in 

England and Wales, that it 

plans to raise about 75% of 

Thames Water’s regulated 

asset value of nearly £6bn 

from a securitisation-type 

structure and a further 20% 

of the company’s regulatory 

asset value (RAV) as subordinated debt at the holding 

company level. As the latter will have no recourse to 

Thames Water’s revenues—although they will be the only 

means of servicing the debt—the bonds will not be able to 

secure an investment-grade rating and should command a 

commensurately healthy coupon. 

The sheer volume of money that is still pouring into 

private-equity funds means that such LBOs should carry 

on dominating European high-yield issuance for the 

foreseeable future. “You would certainly expect that to 

continue now given the amount of private-equity capital 

that is unspent,” observes Scott Richards, senior portfolio 

manager in State Street Global Advisers’ fixed-income 

group in Boston. However, at the same time there has been 

an increase in the number of large corporate transactions 

from companies seeking to raise additional funding or 

refinance existing debt — including some emerging issuers 

from Eastern Europe.“Some of those have very good credit 

qualities,”says Potthof.“I think, for example, that we have 

had only good experiences with the mobile telecoms 

companies in Eastern Europe so far.” 

An additional boost to the market 

in 2007 will come from an unusually 

high level of redemptions, as up to 

€8bn of outstanding high-yield bonds 

are due to mature during the year. 

On top of that, there are companies 

with call options on high-coupon 

bonds that they issued between 

2002 and 2004 that may well take 

advantage of current interest rates to 

refinance their debt at a lower cost. 

A general improvement in the credit quality of noninvestment 

grade companies across Europe over the last 18 

months has attracted more categories of investor to the 

high-yield market, as low interest rates have reduced the 

returns on investment-grade bonds. By contrast, European 

high-yield bonds delivered overall average returns of about 

10% in 2006—similar to those of US high yield market— 

having outperformed the much larger market on the other 

side of the Atlantic in the two previous years. As a 

consequence, traditional high-yield funds now face 

increasing competition on new issues from hedge funds, 

CDO managers and “cross-over” investment-grade 

investors such as insurance companies and pension funds, 

and this expanding investor base has greatly improved the 

outlook for issuers. 

“Demand for high-yield bonds is very high in Europe 

and new issues are frequently several times 

oversubscribed,” says Potthof.“Many investors are moving 

into the high-yield market in the search of higher returns. 

Pension funds are certainly 

increasing their exposure.” 

While higher valuations 

meant the market would 

struggle to match last year’s 

returns, he says 6% to 7% 

should be achievable given 

stable interest rates and no 

deterioration in corporate 

profitability. The credit 

outlook also remains strong, 

with default rates at 

historical lows. According to 

Moody’s, only 1.75% of 

companies in the high-yield 

market went bankrupt over 

the last 12 months (a figure 

well below the historical long-term average of 4.5%) and 

the market consensus is that the number will not rise 

above the low 3% level in the year ahead—a move that will 

have little impact on investor appetite.“Going from 2% to 

3% is not a big deal,”confirms Richards at SSGA. 

A continuing pick-up in credit quality of new issues 

was also evident in the first-quarter figures from the 

EHYA, the trade association representing participants in 

the European high yield market, as a considerably 

higher majority of the bonds issued in the first three 

months of 2007, at just over $6.6bn, achieved double-B 

ratings than in the first quarter of 2006, where the figure 

was just under $4.6bn. The total of single-B bonds by 

comparison was down from just under $3bn to just over 

$2.6bn, while triple-Cs fell away from $318m to 

$300,000. Potthof points out that most of the double-B 

rated companies in Europe were so-called fallen angels, 

which the rating agencies had downgraded from 

investment grade during the last credit crunch in the 

2001 to 2003 period, and that many of them have now 

recovered to the point where the market is pricing in a 


ating upgrade. Ahold and Alcatel are two examples of 

companies whose bonds were trading at particularly 

narrow spread levels as a result. 

The development of a wider range of high-yield bonds 

over the past five years has also made the market more 

attractive to issuers. Khlat at BNP Paribas pointed out that 

floating-rate and payment in kind (PIK) bonds, in 

particular, offer private-equity firms much more flexibility 

in their financing strategies than the traditional fixed-rate 

instruments and within a short space of time they have 

begun to account for a substantial portion of the market.“I 

think around 30% of the issuance in Europe (€11.5bn) in 

2006 was in the form of floating-rate notes, which is pretty 

significant when you consider it was practically zero six 

years ago,” he explains. “There was also €6bn of 

subordinated PIKs.” 

At the same time, he pointed out that the private 

mezzanine and second-lien markets were offering 

companies an attractive alternative to the public high-yield 

markets. With the dynamics of the market working so 

forcefully in the favours of issuers, it is not surprising that 

there has been a compression of spreads across corporate 

sectors that previously commanded significant 

differentials. Companies with stable cash flows and 

tangible assets no longer price the bonds significantly 

tighter than those without either.“The difference between 

the best and the worst sectors is much tighter than it used 

to be,”confirms Richards at SSGA. 

The issuers’ market has also driven a trend towards 

looser covenants, as these — like spreads — are subject to 

‘pricing’ in the market. Several issues over the last year, for 

example, have not had the standard high-yield covenant 

package. Khlat at BNP Paribas observes that a relaxation of 

covenant protection is an inevitable part of the cycle in a 

bull market, along with companies pushing out the 

boundaries of leverage. Meanwhile, he acknowledges that 

some deals are now “getting stretched”, he says. “Default 

rates remain extremely low, and there is no sign yet that a 

lot of credits are starting to under-perform seriously. But I 

think one needs to be more careful and selective,”he adds. 

Potthof says there is a distinction in the market between 

“seasoned” issuers, who have demonstrated the ability to 

grow profits and pay down debt, and some of the more 

recent LBO-led transactions where the companies still had 

to demonstrate that they could repay higher levels of 

gearing. “The marginal deal is pretty highly levered these 

days,” he says.“Some of the newer issuers are very highly 

geared and those are the first that will face a problem if 

there is a downturn.”He adds that PIMCO is not investing 

in these transactions. 

Despite these concerns about deals on the margin of the 

market, however, the overall view remains optimistic. At 

the EHYA’s meeting in February that reviewed 2006 and 

made its forecast for 2007, most of the speakers expected 

primary volumes of high-yield bonds to struggle to keep 

pace with demand against the projected background of low 

interest rates and default risk. In this environment, 


sponsors are likely to take advantage of the market 

liquidity to drive even more aggressive structures, 

covenants, terms and pricing through further convergence 

of the loan and bond markets. 

Taking into account his caveats over the most aggressive 

deals, Potthof believes the current bull market in European 

high yield could continue well beyond 2007. “The 

fundamentals are pretty stable, and this cycle could 

continue for another two to three years,”he says.“We think 

it could well be comparable to that of the mid-to-late 

1990s, which ended in 2002.” 

There is also a general recognition that the economic 

environment is bound to get tougher at some point—floor 

rates can hardly go any lower—but how severe a correction 

this induces in the European high-yield space is a moot 

point.“Clearly this has to re-adjust,”says Richards at SSGA. 

“But when that happens and how severely it happens is 

something we could argue about all day long.” 

A recession in the US economy or an oil-price could 

clearly hit the profitability of certain sectors hard, while the 

liquidation of one or more hedge funds could impair 

financial liquidity — which Richards says ultimately 

represented the biggest threat to the high-yield investor. “If 

high-yield companies can’t access the equity market to delever, 

or lose the ample liquidity that the banks are 

currently providing. That would be a problem,”he says. 

The ability to restructure companies with high-yield 

debt is a pressing concern of the EHYA at present. Gilbey 

Strub, executive director at EHYA, says the association 

expected the next cycle of corporate restructurings to be a 

challenge under the current insolvency regimes in the UK 

and Europe due to the explosive growth in European 

leverage lending and the greater complexity of deal 

structures since 2001. 

She says the presence of more subordinate debt holders 

in typical corporate financings meant the traditional 

receivership approach (as in the UK) – which favoured 

secured creditors to the virtual exclusion of all others - was 

too inflexible. “Leveraged deals have become a lot more 

complicated since the last cycle because the US hedge 

funds have really fuelled demand for more variety in 

subordinated high-yield debt products such as PIKs, 

hybrids and second-lien deals.” 

Such investors would be disadvantaged by the current 

practice that did not always allow all creditors a say in 

restructurings and was problematic in other ways – such as 

basing plans on liquidation values that did not take 

account of “going-concern” values of enterprises. The 

EHYA’s European Insolvency Working Group is drawing up 

a proposal for the UK government to amend existing 

legislation to promote instead the use of court-appointed 

administration procedures, as the 2002 Enterprise Act— 

which was designed to do just that—had clearly not gone 

far enough in its reforms to do so.“The longer-term effect 

of restructurings that don’t treat subordinated debt 

creditors fairly will be to dry up liquidity in corporate 

finance,”she warned. 

77

INVESTMENT SERVICES: SECURITIES LENDING 

78 

Once considered a back office function, securities lending has come of age 

and moved to the front of the line. Business is booming, thanks to 

surging hedge fund activity and the quest for enhanced returns from 

pension funds. The custodian banks are still major players but 

they now have to prove their mettle against a growing band 

of new third party lending and electronic participants. 

While the bulk of the business still remains with the 

custodian lenders, there are new routes to 

market that offer lenders and borrowers 

more opportunities to match their 

requirements. Will the custodian 

lenders finally meet their 

match? Lynn Strongin 

Dodds reports. 

THE 

RUNAWAY 

RACE 

FOR 

MARKET 

SHARE 

IN THE NOT too distant past custody and securities 

lending went hand in hand. It was seen as a relatively 

mundane, straightforward activity which was parcelled 

out to an institution’s custodian. In the past seven years, 

the dynamics have changed significantly with the hedge 

fund community making its larger than life impact. Their 

voracious appetite for stock has pushed securities lending 

to new lofty levels. Data Explorers put total lendable assets 

at $19trn globally, with $4.3trn on loan at any time. 

In addition, many traditional fund manager have stepped 

up their pace in an attempt to squeeze out those extra rates 

of return. Although securities lending can generate 

between ten to 20 basis points depending on the 

programme, it does not take that much to enhance 

performance. As John Arnesen, managing director, 

securities lending Europe for Bank of New York, notes 

“Generating an additional couple of basis points in the 

equities market, for example, may not sound like a great 

deal but it is enough to differentiate between returns being 

in the top or bottom quartile.” 


Crowded Pool or Exclusive Access? 

or 

eSecLending provides services only to institutional investors and other persons who 

have professional investment experience. Neither the services offered by 

eSecLending nor this advertisement are directed at persons not possessing such 

experience. Securities Finance Trust Company, an eSecLending company, performs 

all regulated business activities. Past performance is no guarantee of future results. 

Our services may not be suitable for all lenders. 

Crowded Pool or Exclusive 

Access? The choice is yours. 

eSecLending takes an active 

approach to securities lending by 

managing customized programs 

for institutional investors. Unlike 

the traditional agency approach, 

where many lenders’ portfolios 

are grouped together and their 

securities sit in a pool waiting to 

be borrowed, eSecLending markets 

each client’s portfolio individually 

and awards lending rights to the 

optimal bidders. 

Our clients receive more lending 

revenue compared to traditional 

programs, because eSecLending 

introduces objective competition 

via a blind auction process. 

eSecLending clients achieve all 

this while maintaining conservative 

risk parameters, retaining 

close control over their lending 

programs and receiving superior, 

customized client service. 

United States +1.617.204.4500 

Europe +44 (0) 207.469.6000 

info@eseclending.com 

www.eseclending.com


80 

John Arnesen, managing director, securities lending Europe for Bank of 

New York, notes “Generating an additional couple of basis points in the 

equities market, for example, may not sound like a great deal but it is 

enough to differentiate between returns being in the top or bottom 

quartile.” Photograph kindly supplied by Bank of New York, April 2007. 

SECURITIES AVAILABLE AND ON LOAN AS OF END 

MARCH 2007 

Number of Value of 

Securities Securities ($bn) 

Securities Available for Lending 206,827 12,808 

Securities On Loan 34,741 3,059 

Securities Transactions 1,743,890 

Source: Data Explorers, April 2007 

Not surprisingly, the increasing level of activity has 

spawned a new generation of providers hoping to win a 

piece of the action. Custodial firms not only had to 

contend with competition from non custodial rivals but 

also technological US based upstarts such as Equilend, a 

screen-based securities lending trading platform started 

in 2001 by 10 leading banks and ESecLending, an 

electronic auction based securities lending manager. 

SecFinex, a European electronic trading platform for 

securities lending was launched in 2000. Although the 

human touch is still preferred and relationships are 

valued, the electronic path has gained traction in the last 

three years. According to a report published last 

November by US based research and consulting firm 

Celent, securities lending via electronic platforms was 

negligible in 2003 but it now accounts for 10% of all 

securities lending in 2006. By 2009, this figure is predicted 

to jump to 20%. 

Faced with a smorgasbord of options, beneficial owners 

such as pension plans, insurance and life companies have 

became much more proactive in deciding how and with 

whom to conduct business. They are carefully scrutinising 

their portfolios in much more detail in terms of the risk and 

returns profile as well as corporate governance parameters. 

Gone are the days when they would simply respond to 

borrowers’ demand and just accept the proposed price 

without comparing and contrasting. 

Beneficial owners also appear to have the upper hand 

when it comes to fees. In the past the typical split was 

60/40 between themselves and the providers, but today, the 

rate is more in the 80/20 range. As one industry participant 

put it,“We have to spin our wheels a lot more to get to the 

same place we were a few years ago. There is more 

competition and it is important to look for new 

opportunities and products.” 

Although the custodial path continues to be welltrodden, 

beneficial owners may use one firm for its custody 

and another for securities lending. They are also turning to 

a lending intermediary such as a securities lending desk at 

a broker dealer, which typically has a prime brokerage link 

to the asset hungry end user hedge fund community. An 

increasingly popular route is the exclusive arrangement. 

This is when a lender agrees to lend all or a designated part 

of a portfolio on an exclusive basis to a borrower selected 

by it. Despite the hype though, the exclusive market 

accounts only for about 11% to 12% of activity, according 

to figures from Data Explorers. 

Other avenues being pursued include auctioning off 

part of the portfolio or using a specialist, for perhaps, the 

Spanish equities or US fixed income component of the 

portfolio. A beneficial owner may also decide to create its 

own securities lending desk. In reality, though, this is only 

viable for the larger pension funds that have deep pockets 

and resources to set up the infrastructure. The organisation 

also has to be willing to take the risk as taking the 

independent route means not being able to fall back on a 

custodial indemnification contract. 

As Fred Francis, head of global markets for RBC Dexia, 

notes, “In the past five years, we have seen the business 

increasingly move from beneficial owners lending directly to 

them using the agency model.This is because the investment 

needed in technology and risk management required to run 

such an operation has become much more complex. The 

market has grown and spreads have fallen, and managers do 

not want to take time away from their core focus of fund 

management. Agents, on the other hand, are geared up to 

deal with many clients. They have the experience and have 

been exposed to all facets of the industry.” 

Custodians may still be dominant but the majority of 

beneficial owners are increasingly adopting a best of breed 

approach and use a combination of venues. Chris Jaynes, 

president of ESecLending notes, “What we have seen is 

beneficial owners unbundling the securities lending piece 

from the custody business. They are using multiple 

providers for different parts of their business. This is 


AT STATE STREET, WE 

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We’ve put that experience to work to achieve significant returns for our 

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With a global presence, a top-quality team and hundreds of lending and 

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securities finance. 

For more information, please visit www.statestreet.com/securitiesfinance. 

INVESTMENT SERVICING INVESTMENT MANAGEMENT INVESTMENT RESEARCH AND TRADING 

This advertisement is not directed to any person in any jurisdiction where the publication or availability 

of such services are prohibited by reason of that person’s nationality, residence or otherwise. 

© 2007 STATE STREET CORPORATION. 07-STT00920107


82 

A SNAPSHOT VIEW OF THE SECURITIES LENDING MARKET AS OF APRIL 1 2007 

Top 10 Equities By Total Balance—showing the scale of 

activity in these equities 

Rank Stock description Change on Previous Mth (%) 

1 DaimlerChrysler AG 54.66 

2 Roche Holding AG -17.45 

3 Novartis AG -19.75 

4 Total SA 0.21 

5 HSBC Holdings PLC -62.39 

6 Nestle SA 26.46 

7 AXA SA 2.61 

8 Banco Bilbao Vizcaya Argentaria SA 22.44 

9 RWE AG 14.20 

10 BNP Paribas -0.70 

Top 10 Corporate Bonds By Total Balance—illustrating the 

scale of activity in these bonds 


1 European Investment Bank (6% 07-Dec-2028) 5.71 

2 Hipototta Plc (3.181% 30-Sep-2048) -0.54 

3 European Investment Bank (5.625% 07-Jun-2032) -8.89 

4 Kreditanstalt fuer Wiederaufbau (3.5% 17-Apr-2009) -0.62 

5 European Investment Bank (4% 15-Oct-2037) 4.22 

6 Freddie Mac Gold Pool (4.5% 01-May-2036) -0.32 

7 Freddie Mac Gold Pool (4.5% 01-Oct-2035) -0.14 

8 General Motors Corp (8.375% 15-Jul-2033) -5.45 

9 European Investment Bank (5.5% 15-Apr-2025) -10.97 

10 Kreditanstalt fuer Wiederaufbau (3% 15-Nov-2007) -3.59 

The amount of security out on loan as a percentage of the amount available is another indicator 

of popular stocks. Data from Performance Explorer Lenders by Data Explorers. 

Top 10 Equities By Utilisation and Balance 


1 TC Pipelines LP 0.00 

2 Cosmo Securities Co Ltd -3.68 

3 First Capital Realty Inc not available 

4 Frontline Ltd 3.04 

5 3D Systems Corp 12.82 

6 National Bank Of Canada (5.85% Undated) -1.57 

7 Parkervision Inc 11.75 

8 Sakata Seed Corp -0.32 

9 American Superconductor Corp 0.98 

10 WCI Communities Inc 28.61 

Top 10 Equites By Change in Balance 

(Total Balance > 10m) 


1 Kier Group Plc 490.00 

2 Willis Group Holdings Ltd 465.29 

3 Bovis Homes Group PLC 448.36 

4 Laird Group Plc 284.26 

5 Commvault Systems Inc 281.25 

6 First Data Corp 258.37 

7 FMC Corp 253.94 

8 Dow Chemical Co/The 253.69 

9 United Dominion Realty Trust Inc 235.07 

10 Dean Foods Co 232.20 

Top 10 Corp By Change in Balance 

(Total Balance > 10m) 


1 European Investment Bank (4.125% 15-Apr-2024) 2859.66 

2 Ayt Cedulas Cajas Global (3.5% 14-Mar-2016) 769.07 

3 Eurohypo AG (4.5% 21-Jan-2013) 578.39 

4 AyT Ced Cajas Fondo d T'zacion de Activos (4% 07-04-14) 488.83 

5 European Investment Bank (3.75% 24-Nov-2010) 366.15 

6 Beazer Homes USA Inc (6.875% 15-Jul-2015) 357.84 

7 Deutsche Genossenschafts-Hypobk (5.5% 01-04-10) 319.51 

8 Bank Nederlandse Gemeenten (5.125% 20-Oct-2011) 301.80 

9 Beazer Homes USA Inc (8.375% 15-Apr-2012) 284.43 

10 Banco Sabadell SA (4.25% 24-Jan-2017) 255.28 

Top 10 Corp Bonds By Utilisation then Balance 


1 Freddie Mac Gold Pool (4.5% 01-May-2036) 

2 Fannie Mae REMICS (6% 25-Mar-2037) 

3 Bayerische Landesbank (4.785% 23-Jun-2009) 

4 Freddie Mac Gold Pool (5.5% 01-Feb-2037) 

5 Structured Adjust Rate Mtg Loan Trust(5.955% 25-06-36) 

6 Freddie Mac Gold Pool (5.5% 01-Feb-2036) 

7 GE Capital UK Funding (5.28656% 01-Aug-2011) 

8 Ctywid MtgTrust(4.72% 9-01-34) (SEDOL:12669EG67) 

9 Ctywide MtgTrust(4.72% 19-01-34) (SEDOL:12669E3D6) 

10 Freddie Mac REMICS (5.5% 15-Sep-2031) 

The following tables detail the top securities by fee within two bands of total balance out on loan. 

Equity by Fee: more than $10m but less than $100m 

Rank Stock description 

1 Hufvudstaden AB 

2 Neurochem Inc 

3 Home Solutions of America Inc 

4 Imergent Inc 

5 Midway Games Inc 

6 Cell Therapeutics Inc 

7 Eurotunnel SA 

8 Sulphco Inc 

9 Parkervision Inc 

10 Medis Technologies Ltd 

Corporate Bonds by fee: more than $10m but less than $100m 


1 Dura Operating Corp (8.625% 15-Apr-2012) 

2 Georgia Gulf Corp (10.75% 15-Oct-2016) 

3 Northwest Airlines Corp (10% 01-Feb-2009) 

4 DJ TRAC-X NA (6.05% 25-Mar-2009) 

5 Calpine Corp (7.75% 15-Apr-2009) 

6 Hawaiian Telcom Communications Inc (12.5% 01-May-2015) 

7 Technical Olympic USA Inc (10.375% 01-Jul-2012) 

8 MagnaChip Semiconductor Finance Co (8% 15-Dec-2014) 

9 Movie Gallery Inc (11% 01-May-2012) 

10 WCI Communities Inc (9.125% 01-May-2012) 

Equity by Fee: more than $100m 


1 Dean Foods Co 

2 NYSE Group Inc 

3 Fairfax Financial Holdings Ltd 

4 Elisa OYJ 

5 OKO Bank plc 

6 Fortum Oyj 

7 Zoltek Cos Inc 

8 Tietoenator Oyj 

9 Pre-Paid Legal Services Inc 

10 La-Z-Boy Inc 

Corporate bonds by Fee: more than $100m 


1 Delta Air Lines Inc (8.3% 15-Dec-2029) 

2 Argentina Govt International Bond (8.28% 31-Dec-2033) 

3 Beazer Homes USA Inc (8.125% 15-Jun-2016) 

4 General Motors Corp (8.375% 15-Jul-2033) 

5 Sherwood Copper Corp (5% 31-Mar-2012) 

6 Turkey Govt International Bond (11.875% 15-Jan-2030) 

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

8 Gaz Capital for Gazprom (8.625% 28-Apr-2034) 

9 General Motors Corp (7.125% 15-Jul-2013) 

10 France Telecom SA (1.6% 01-Jan-2009) 

Source: Data Explorers, 2007 


ecause no one provider can be the best in every asset class 

for every client. I think that most beneficial owners will 

have between two to four providers as opposed to one. In 

many ways they are applying the same principles they use 

for fund management to securities lenders. This means 

choosing providers who can add value in particular asset 

classes and markets.” 

Rob Coxon, head of international securities lending at ABN 

AMRO Mellon, adds: “There is no doubt that the days of the 

bundled service are long gone. The business is much more 

portable and pension funds will more readily move from one 

provider to the next. Accountability and automation are big 

themes, and there is much more transparency than there used 

to be due to the rise of industry consultants and independent 

benchmarking services. Beneficial owners today are much 

more engaged and the degree of scrutiny has increased 

significantly, and that leads to greater competition. It is of 

course also a more competitive marketplace, particularly in 

respect of agency lending, due to the emergence of new 

players such as ESecLending. That has shaken any 

complacency there may have been out of the industry.” 

Paul Wilson, head of sales and client management for 

securities lending at JP Morgan Worldwide Securities 

Services, adds, “Up until a few years ago it was almost 

“I EquiLend.” 

EquiLend.” 

At JPMorgan, we leverage the EquiLend platform to increase 

automation, so that our trading and operational experts can 

focus on value added services for our lending clients and 

borrowers. 

By using EquiLend's AutoBorrow trading service, our on-loan 

balances have increased significantly. AutoBorrow increases 

our scalability, while we believe EquiLend's post-trade 

services improve efficiency and mitigate risk. 

Born leaders choose EquiLend. 

Sandie O’Connor 

Global Head, Securities Lending and Execution Products 

JPMorgan 

North America +1 212 901 2200 

Europe +44 (20) 7743 9510 

www.equilend.com 

* Foreign Exchange,Transition Management, Futures and Options, Commission Recapture 

EquiLend LLC and EquiLend Europe Limited are subsidiaries of EquiLend Holdings LLC. EquiLend LLC is a member of the NASD and SIPC. EquiLend Europe Limited is authorized and regulated in the United Kingdom by the Financial Services Authority. All services 

offered by EquiLend are offered through EquiLend LLC and EquiLend Europe Limited using EquiLend proprietary technology and software. © 2001-2007 EquiLend Holdings LLC. All Rights Reserved. 


Ed Oliver, securities lending product manager for Europe at Northern 

Trust Global Investments, reflects the industry view when he notes, that 

“most large custodian banks operate a third party lending service. We 

can’t always satisfy borrower demand from our custody portfolio and we 

have added assets to lend in order to become more competitive and to win 

business.”Photograph kindly supplied by Northern Trust, April 2007. 

* 

83


84 

The volume of securities lending transactions traded electronically has increased five fold since 2003 and is 

expected to double over the next three years. Certainly electronic trading platforms that specialise in securities 

lending are picking up pace. In Europe at the end of last year, the history of electronic trading of securities 

lending started to be re-written. In December, Euronext bought a majority (51%) stake in SecFinex, enabling it 

to compete effectively with rival Deutsche Börse's Eurex platform, allegedly following an unsuccessful bid by 

interdealer broker ICAP plc for the firm. Not one to take things lying down, ICAP has now launched its own 

platform. Francesca Carnevale reports. 

THE AGE OF 

ELECTRONIC 

TRADING 

FINALLY 

DAWNS 

ICAP INTENDS TO introduce i-Sec, its new electronic 

trading platform for securities lending in late April. 

With i-Sec, ICAP joins a growing band of independent 

firms that facilitate screen-based access to the 

securities lending markets. Roy Zimmerhansl, head of 

electronic securities lending at ICAP explains that: 

“The strong growth in securities lending and continued 

pressure on spreads in the market mean that our 

customers are looking to increase securities lending 

efficiency and reduce cost.” Moreover, he says, 

“commoditisation of many transactions is impacting 

profitability and driving the case for greater automation 

across the industry”. The firm is well positioned to 

cater to these trends,” maintains Zimmerhansl, who 

points to ICAP’s experience in repo, which he says 

puts the firm in a good position to translate client 

needs into an essential industry tool. 

ICAP’s move is timely. While other vendors in the 

European sphere, such as Secfinex and Eurex, have 

provided electronic securities lending trading 

platforms for a number of years, growth in their 

market share has been patchy to date. For two 

reasons, lenders and borrowers are conservative and 

have tended to stick with tried and trusted 

relationships. Second, electronic trading platforms, 

as alternative routes to market, have had to 

compete with the rise in securities lending auction 

providers, such as ESecLending. 

Interest in European electronic trading platforms took 

something of an upturn in December however with 

Euronext’s acquisition of 51% of SecFinex. Reportedly, 

the platform had sought an investor for some time, 

Roy Zimmerhansl, head of electronic securities lending at ICAP 

explains that: “The strong growth in securities lending and 

continued pressure on spreads in the market mean that our 

customers are looking to increase securities lending efficiency and 

reduce cost.” Photograph kindly supplied by ICAP, April 2007. 

and came close to selling itself to ICAP earlier in 2006, 

but allegedly other major shareholders in the platform, 

eventually demanded too high a price. Launched back 

in 2000, SecFinex provides securities lending traders 

with secure access to a live price-driven marketplace. 

Euronext’s acquisition will invariably broaden SecFinex’s 

potential client based to include members of Euronext 

and Euronext.liffe. Euronext clients will enjoy a more 

efficient, cost effective and automated access to the 

fast-growing securities lending market and the pan- 

European exchange now (finally) has an electronic 

securities trading platform that competes effectively 

with Deutsche Börse’s Eurex platform. Société 

Générale Corporate & Investment Banking and Fortis 

Merchant Bank, have joined Euronext in committing to 

develop SecFinex's market position. Some market 

watchers now say that the merger negotiations 

between SecFinex and Euronext purchase have in fact 

slowed down SecFinex’s expansion, leaving the door 

open for ICAP develop and then enter the market with 

its i-Sec product. 

Electronic trading on ICAP’s i-Sec enables market 

participants to improve their distribution and leverage 

their relationships by bringing together “multiple 


sources of supply and demand,” says Zimmerhansl. 

The i-Sec platform has been designed by traders for 

traders,” he adds, offering “functionality not available 

elsewhere in the market.” 

i-Sec is based on ICAP’s BrokerTec platform, and 

allows traders active in securities finance to borrow or 

lend equities via an electronic platform that combines 

the leading order matching system with a high-speed, 

high capacity network. Traders enjoy full anonymity until 

execution, as well as price transparency with full price 

levels and market depth display. Trading electronically 

on i-Sec will allow users to manage a wider range of 

pre-existing counterparty relationships more efficiently, 

enhancing both distribution and access to securities. 

This increased diversity of counterparties will further add 

to the liquidity in the market. Initially, equities from 

France, Germany, Italy, Spain, the United Kingdom and 

Japan will be available for lending and borrowing on the 

i-Sec platform. 

“With our existing client network and strong 

presence in electronic broking, ICAP is well positioned 

to add real value to the securities lending market,” 

says Zimmerhansl. “Widely available blue chip stocks 

certain that the custodian would get the lending contract. 

Today, that is no longer the case and many clients are 

making separate decisions regarding lending and custody, 

albeit they may still select the same organisation for both. 

With so many different routes to market we realised we 

need to provide a platform which can support them all. We 

want to be a one stop shop and not a one size fits all.” 

JP Morgan is not alone. All its rivals have been raising 

their collective bar and are now falling over themselves to 

provide the full gamut of services. This ranges from deal 

negotiation and auctions to the added value of cash or 

collateral re-investment and customised solutions. As a 

result, the lines of distinction are blurring between the 

custodians and the third party agents. 

Ed Oliver, securities lending product manager for Europe 

at Northern Trust Global Investments, reflects the industry 

view when he notes, that “most large custodian banks 

operate a third party lending service. We can’t always 

satisfy borrower demand from our custody portfolio and 

we have added assets to lend in order to become more 

competitive and to win business.” 

The one threat that applies to all is that against the 

backdrop of industry consolidation, there could be a 

concentration of flows into fewer hands. In the past year, 

State Street announced its intentions to acquire Investors 

Financial Services (IFS) from Investors Bank & Trust 

Company while the Bank of New York and Mellon deal 

rocked the custodial world. According to Bill Cuthbert, 

chairman of Spitalfields Advisors,“the bulk of the business 

still goes to 10 custodians. However, the 80%/20% rule 

applies and the lion-share is captured by the [top] six. This 


lend themselves well to a trading platform, that delivers 

the best price for stock, while the platform will also 

bring much needed transparency to the special stocks 

that are traded.” Additionally, ICAP historically has 

enjoyed a strong history and market share in the fixed 

income market, where “all the infrastructure and 

support are in place,” he adds, “and we will be able to 

leverage this network to roll out i-sec. Additionally, 

there is now real convergence between equity and fixed 

income in many firms.” 

With Euronext’s backing, SecFinex will have a new 

lease of life and Eurex will undoubtedly double its 

efforts to maintain and grow market share. ICAP’s 

Zimmerhansl is not fazed by the invariable rise in 

competition. ICAP’s track record in the bond market 

and the firm’s long established relationships in the 

prime broking and repo markets, should provide the 

firm with the necessary fillip to sustain and grow its 

i-Sec business, he stresses. If he is right, the 

launch of ICAP Securities Lending could herald a 

serious pick-up in the use of electronic trading 

platforms by securities borrowers and redraw routes 

to market for a substantial portion of the industry. 

Fred Francis, head of global markets for RBC Dexia, notes,“In the 

past five years, we have seen the business increasingly move from 

beneficial owners lending directly to them using the agency model. 

This is because the investment needed in technology and risk 

management required to run such an operation has become much 

more complex. The market has grown and spreads have fallen, and 

managers do not want to take time away from their core focus of 

fund management. Agents, on the other hand, are geared up to deal 

with many clients. They have the experience and have been exposed 

to all facets of the industry.” Photograph kindly supplied by RBC 

Dexia, April 2007. 

85


86 

will now be the top five 

after the BoNY/Mellon 

merger. In all but 

exceptional cases, small to 

medium sized pension 

funds believe it is much 

more efficient to use their 

custodians for their securities 

lending programmes.” 

Not surprisingly, industry 

participants have mixed 

views on how 

consolidation will impact 

securities lending and the 

custody world overall. 

Those that have found 

partners, of course, are the 

most optimistic about the 

benefits for their customer 

bases. Others, however, are 

hoping there might be an 

opportunity to pinch a 

client or two during what 

can often be often be a 

period of uncertainty. As 

one custodian put it, “One 

of the reasons to merge is 

to create a single platform. 

However, acquisitions can 

be a painful transition and 

there is a period of 

instability from a client and 

employee perspective. It 

also takes up a great deal of 

management time and 

money and in some cases, 

they may take their eye off 

the ball. Although mergers 

create opportunities to 

attract new clients, some may also leave during this period.” 

All concur though, that for now there is plenty of 

business to go around. The mature markets including US, 

Canada, UK and the Netherlands continue to contribute a 

steady flow, while participants have seen more activity 

from Belgium and Spain which have relaxed their 

regulations to allow securities lending. Countries in 

emerging Europe such as Poland, Hungary and the Czech 

Republic are also expected to bring more supply to the 

table as is Asia, especially China, India and Malaysia which 

all have been reported to be interested in opening their 

markets to securities lending. 

However, as Cuthbert points out, these markets may be 

relatively small in the securities lending world.“Despite the 

increased interest in countries such as Russia and India, 

you still need active borrowers and active lenders and there 

is currently not a lot of evidence that they are present. As a 

result, I am not sure whether these countries will generate 

Chris Jaynes, president of ESecLending notes,“What we have seen is 

beneficial owners unbundling the securities lending piece from the 

custody business. They are using multiple providers for different parts 

of their business. This is because no one provider can be the best in 

every asset class for every client. I think that most beneficial owners 

will have between two to four providers as opposed to one. In many 

ways they are applying the same principles they use for fund 

management to securities lenders. This means choosing providers who 

can add value in particular asset classes and markets.” Photograph 

kindly supplied by ESecLending, April 2007. 

a significant amount of 

activity in real money 

terms in the short to 

medium term.” 

One area that does have 

potential for growth is 

synthetics. Chris Taylor, 

head of European 

securities lending at State 

Street, notes, “We are 

seeing and believe that 

there will be further 

growth in using synthetics 

to enter markets where 

traditional stock lending is 

not permitted due to 

regulatory issues. This is 

especially true in the Asian 

emerging markets.” 

For the foreseeable 

future, industry participants 

believe that hedge funds 

will continue to drive the 

growth in securities lending. 

Activity will also stem from 

traditional long only 

managers taking a leaf from 

the hedge fund investment 

hymn book. According to 

Oliver of Northern Trust, 

“We are definitely seeing an 

increase in historically long 

only managers using 

portfolio strategies such as 

the 130/30 which involves 

shorting 30% of the 

portfolio. I think in the 

future we will see an 

increase in client using 

some capabilities that are typically used by hedge funds and 

this will fuel growth in securities lending.” 

There is still some reluctance, however, in certain 

pension fund quarters over the practice of securities 

lending. This is due to a concern that hedge funds would 

use borrowed stock to wield influence on important proxy 

votes such as mergers and acquisitions. Voting rights are 

transferred to the borrower when shares are lent. 

Industry participants, however, believe that there is a 

need for more education across the fund management 

spectrum on the finer points of securities lending. Taylor 

of State Street, adds, “In most jurisdictions, for the 

majority of proxies there is clear evidence the majority of 

shareholders don’t vote. They majority of owners of 

shares don’t lend them either and when stock is on loan, 

the majority isn’t always being lent over the proxy dates. 

Put that all together and it is unlikely that the practice of 

securities lending will influence a critical proxy vote.” 


That said, Taylor adds,“one can cite examples but with 

more than 15 years in the market, I can think of only a 

dozen or so contentious cases where there has been 

clear evidence of a vote being manipulated through 

stock on loan.” 

A 2005 report by The Securities Lending Committee of 

the International Corporate Governance Network (ICGN) 

supports this view. The group found that despite the 

prevalence of share lending, most lenders did not recall 

shares for the purpose of voting them. So far, the 

regulatory bodies do not seem unduly worried. Currently, 

the US Securities and Exchange Commission has no firm 

plans yet while the UK’s Financial Services Authority, is 

currently examining whether to 

introduce rules requiring 

investors to report interests in 

companies held through 

borrowed shares or contracts 

for difference. Hermes, one of 

the country’s largest pensionfund 

managers has called for 

regulators to outlaw voting 

altogether by borrowers of 

shares. Meanwhile in Hong 

Kong, the Securities and 

Futures Commission said it is 

studying “issues relating to 

borrowed shares and voting.” 

Overall, Wilson believes the 

noise surrounding the proxy 

voting issue was much louder a 

few years ago. This is because 

there is not only more 

transparency and information 

available in the market but also 

beneficial owners are 

increasing their use of 

securities lending. 

He adds,“Although there have 

been worries that hedge funds 

will borrow securities to vote at 

annual general meetings, in our 

experience, this has typically not 

been the case. Many clients look 

at every situation and determine 

whether it makes economic 

sense for them to recall the 

shares or keep them on loan. It 

is important to remember that 

this is a relatively new area for 

pension funds. Only in the last 

couple of years have we seen 

many of the largest pension 

funds lending for the first time. 

This is because they are under 

pressure to find new sources of 

alpha and securities lending is 


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Looking ahead, as the market matures and develops, 

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Key to the continued enhancement of sub-custody services is a fast 

and efficient communications system, and to that end, SWIFT is 

currently preparing its XML-based ISO 20022 proxy-voting message 

standards, which will support end-to-end automation and 

transparency of the voting process aimed at improving automated 

meeting notification and cancellation, voting, vote status, confirmation 

and results. Photograph by James Nemec, supplied by 

Dreamstime.com, April 2007. 

SUB CUSTODIANS 

FLEX THEIR 

MUSCLES 

The business of sub custody, like so many other 

facets of the market, has turned into survival of 

the fittest, with the biggest players flexing their 

financial muscle in order to secure a greater 

share of territories once claimed by the smaller, 

regional provider. As competition heats up and 

clients clamor for more services at lower cost, 

the trend towards scale is unmistakable. Dave 

Simons reports from Boston. 

INSTITUTIONAL PLAYERS HAVE made clear their 

desire to utilise as few sub custody agents as possible 

with the goal of containing costs and streamlining 

operational processes. More than ever, global giants are 

demanding from their sub custody clients a greater breadth 

of services to include everything from fund administration 

and derivatives processing to streamlined corporate-actions 

messaging. As has been discussed in recent times, such 

conditions would appear to signal the ultimate elimination 

of the mono-market local agent, particularly as super 

mergers continue to close the ranks of the world’s foremost 

custody players. Still, many smaller, local agents continue to 

hang tough, and can be admired for their tenacity. 

Still, well-established agents such as Standard Chartered 

Bank and HSBC have used their intrinsic understanding of 

the various indigenous markets to good advantage, and 

today these companies have a clear advantage in a 

diminishing field of sub-custodians. With technology 

paving the way for a more efficient brand of custody 

worldwide, increased competition will ultimately force subcustodians 

to tweak their business model the same way 

they have elsewhere, by increasing their client base and 

bolstering their product line. Technological enhancements 

continue to emerge at a rapid pace, providing network 

managers with the tools they will need to minimise risk 

and widen the communications pipeline going forward. 


SWIFT Strides 

Key to the continued 

enhancement of sub-custody 

services is a fast and efficient 

communications system, and to that end, SWIFT is currently 

preparing its XML-based ISO 20022 proxy-voting message 

standards, which will support end-to-end automation and 

transparency of the voting process aimed at improving 

automated meeting notification and cancellation, voting, vote 

status, confirmation and results.The new message set is slated 

for release by year’s end.“We continue to see good progress 

with SWIFT,” remarks Andrew Osborne, head of worldwide 

network management for Chicago-based Northern Trust, a 

buyer of sub-custody services.“I think we are all in pretty good 

shape in terms of the settlement, reconciliation and payment 

types of messaging. And of course there is a lot of effort 

currently being focused on corporate-actions messaging, I 

believe there’s been a nearly 20% increase in the use of CA 

messaging across the SWIFT network within the past year 

alone, which is a pretty positive sign.”Still, Osborne believes 

there is plenty of room for improvement in terms of 

corporate-action messaging standards. “At a recent SWIFT 

seminar, it was noted that out of 116 different local sub 

custodial agents, there were 116 different variances on the use 

of the SWIFT messages! Obviously that is the kind of thing 

that needs to be addressed, going forward.” 

SUB-CUSTODY & THE SEARCH FOR SCALE 

89


90 

Northern Trust is one of several 

global custodians working with 

SWIFT to develop a validation 

service that will allow other 

members to test messages going 

forward. “At that point, I think we 

will have taken the current 15022 

message format to its fullest 

extent,” says Osborne, “and we are 

now looking forward to the 20022 

message standard, which will 

provide an opportunity for more 

flexible and faster data and 

content.” SWIFT maintains a fairly 

aggressive target of having the 

industry converted by 2015, says 

Osborne,“which, though we here at 

Northern Trust believe is 

achievable, may be more difficult 

for other members in the industry. 

And of course, maintaining 

adequate investment in the current 15022 standard is very 

important, even while we are working on converting to the 

new standard. As such, one of the roles of our group is 

staying on top of our sub custodians in terms of managing 

their technological development. And naturally the transfer 

agent is such a critical part of the system, and if we can get 

them fully integrated into the electronic-communications 

chain, everybody wins.” 

Kevin Smith, managing director of global custody at The 

Bank of New York (BNY), continues to see good progress 

being made in the area of SWIFT utilisation and messaging 

as it relates to the sub custody side. “All of the attributes 

that SWIFT has had in this space continue to be relevant— 

the performance of the messaging has been first-class, it is 

independent, reliable and secure, which is absolutely 

critical in this area,”says Smith.“And it has also been very 

well utilised from a geographical standpoint—for instance, 

of the 103 markets we now have in our sub custodian 

network, there’s only a single market in Latin America that 

does not actually have SWIFT deployed as yet, but that is 

mainly a country issue. It has been a cash mechanism for 

30-plus years and has been used extensively as part of our 

trade-processing and reconciliation side, and now it’s 

moving into the asset-servicing messaging space on 

corporate actions, dividends and the like.” 

“At this point, on your plain vanilla products, SWIFT is 

working quite well,”adds Bob Gallagher, senior director of 

global network management, Investors Bank & Trust (IBT), 

the Boston-based custodian recently purchased by State 

Street Corp.“I think where corporate actions is concerned, 

the issue is to get SWIFT more ingrained, starting with the 

issuers and all the way through to the custodians, similar 

to the way an STP might work on a securities trade. Of 

course, getting the issuers on board remains a challenge— 

they have different priorities. So I think that is still a high 

risk area.” 

Kevin Smith, managing director of global custody 

at Bank of New York (BNY) continues to see good 

progress being made in the area of SWIFT 

utilisation and messaging as it relates to the sub 

custody side.“All of the attributes that SWIFT 

has had in this space continue to be relevant— 

the performance of the messaging has been firstclass, 

it is independent, reliable and secure, which 

is absolutely critical in this area,” says Smith. 

Photograph kindly supplied by Bank of New 

York, April 2007. 

Seeking scale 

The recent acquisition of Westpac’s 

Australian sub custody business by 

HSBC, which followed closely on 

the heels of the addition of the Abu 

Dhabi Middle East Stock Exchange 

to HSBC’s global custody and 

clearing network, underscores the 

seemingly insatiable appetite for 

scale among the industry’s biggest 

players. “And we are likely to see 

further consolidation,” notes BNY’s 

Smith. “We’ve sort of adopted an 

approach over the last several years 

where we’ve been less reliant on 

our network and therefore less 

reliant on local, individual country 

providers, and thus we’ve adopted 

a strategy to utilise multinational 

global-type firms that certainly 

have an extensive regional, multi- 

market capability. Clearly, this is a scale business, says 

Smith. In Europe we’re already seeing consolidation on a 

cross-border basis, and that’s something that’s going to 

continue to evolve over the next several years.” 

Says IBT’s Gallagher,“A year ago we had 29 relationships 

covering 92 markets, and this year we are at 21, and our 

stated objective was to get to 15. The point is, any sub 

custodian that can handle only one or two markets is going 

to have a real tough time competing long term. Because the 

world is consolidating, and I think the institutions that 

cover the 10-plus markets—such as Standard Chartered, 

HSBC, Citibank—are already dominating [the space] and 

will really squeeze the individual providers right out of the 

market. Last year alone we terminated with six different 

single-market providers, and we have another four or five 

that we have currently targeted. Moreover, it is not because 

of service issues—it is just that if there is another provider 

in the same market who we also use for other markets and 

who can do an equally good job, we can then leverage our 

services, contracts and fee schedules. It is a clear trend.” 

BNP Paribas, which oversees a multi-market European 

sub-custody network, has been picking up more 

mandates in markets that have typically been provided for 

or supported by some of the mono-market subcustodians, 

says Jason Nabi, head of financial 

intermediaries in the UK. “In the past, the Tier-1 

investment banks and even some of the Tier-2 banks have 

been the main clients of some of those mono-market 

providers. For the most part, that client base remains the 

same, although there has been some consolidation across 

that segment of the financial intermediaries market to 

harmonise their relationships and their providers. In Italy 

and the UK, for instance, there have been strong local 

providers that have not necessarily had a European 

network, and recently there has been a switch to include 

those markets as part of a wider arrangement.” 


Bob Gallagher, senior director of global 

network management, Investors Bank & Trust, 

the Boston-based custodian recently purchased 

by State Street Corp.“I think where corporate 

actions is concerned, the issue is to get SWIFT 

more ingrained, starting with the issuers and 

all the way through to the custodians, similar 

to the way an STP might work on a securities 

trade. Of course, getting the issuers on board 

remains a challenge—they have different 

priorities. So I think that is still a high risk 

area,”he says. Photograph kindly supplied by 

Investors Bank & Trust, April 2007. 

Additionally, there is considerable demand for integrated 

services and products from the more medium-sized Tier-3 

banks and brokers, who are looking for someone who can 

offer them execution DMA with integrated clearing on a 

wide range of markets and who can support them in their 

middle- and back-office processes. “We think all of that 

puts pressure on the mono-market providers,” says Nabi. 

“The ability to bring together execution with clearing, 

settlement and with other services is where we are seeing 

the requirement going.” 

Still, how does one replicate the “personal”attribute that 

regionals have long touted? For one thing, by maintaining 

a “localised” approach to custodial services, says Nabi.“All 

of our main markets across Europe are covered by a branch 

set-up, so that we have local-market employees, as well as 

local-market interfaces with the CSDs, the CCPs, the 

exchanges, the regulators and the central banks, which 

allows us to have the same arrangement we have in the UK 

as we would in Italy, France or Spain. In that way we can 

deliver local expertise, but because it is part of a global or at 

least pan-European set up, we provide a degree of 

integrated scale.” 

While the adoption of technology and standards have 

seemingly pushed the mono-market provider one step 

closer to extinction, opportunity still exists for enterprising 

smaller-scale players through the use of personalised 

services.“We all to a greater or lesser extent make demands 

of our sub custody providers beyond the plain vanilla 

offering,”says Keri Smith, director of network management 

for RBC Dexia Investor Services.“You could look at the old 


Andrew Osborne, head of worldwide network 

management for Chicago-based Northern 

Trust, a buyer of sub-custody services. 

Osborne notes that: “We are all in pretty good 

shape in terms of the settlement, reconciliation 

and payment types of messaging. And of 

course there is a lot of effort currently being 

focused on corporate-actions messaging, I 

believe there’s been a nearly 20% increase in 

the use of CA messaging across the SWIFT 

network within the past year alone, which is a 

pretty positive sign.” Photograph kindly 

supplied by Northern Trust, April 2007. 

Jason Nabi, head of financial intermediaries 

in the UK at BNP Paribas.“In the past, the 

Tier-1 investment banks and even some of 

the Tier-2 banks have been the main clients 

of some of those mono-market providers. 

For the most part, that client base remains 

the same, although there has been some 

consolidation across that segment of the 

financial intermediaries market to 

harmonise their relationships and their 

providers,” he says. Photograph kindly 

provided by BNP Paribas, April 2007. 

adage,‘One person’s meat is another person’s poison.’What 

we may consider to be a personalised service may be a 

standard offering for others. This is one of the reasons why, 

when on paper so many sub custody providers can offer 

similar services, the global custodians may select different 

providers. Unless the markets evolve to the point where 

there is only one effective provider, then there will always be 

choice. That choice means there is an opportunity for the 

local providers to distinguish themselves by aligning 

personalised services to clients. I do not see this form of 

‘value-added’ servicing disappearing from sub custody 

relationships any time in the foreseeable future.” 

Looking ahead 

While there has been extensive interest in the emerging 

markets in the past several years—and this appears to be 

continuing—sub custody providers are being cautious with 

their expansion efforts, still mindful of the market collapses 

which affected places like Kazakhstan, Ecuador and Bolivia 

of the late ‘90s, says RBC Dexia’s Smith. “As we branch 

forward and the investments in emerging markets continue 

to grow at such unprecedented levels, many of the sub 

custody providers have begun assessing and introducing 

offices to support the business in some of these markets. 

However, the trend to do so certainly appears to be done 

based on the historical lessons learned in the past, and not 

solely on the ‘push’ from clients or investors. With that 

being said, as long as the hot markets continue to draw 

investment interest, sub custody providers will continue to 

introduce their support as well.” 

91


92 

In Europe, the single-currency 

platform presents the opportunity 

to consolidate and to eliminate 

cross-border roadblocks, and 

looking ahead, many believe the 

TARGET2-Securities (T2S) 

initiative gives the EU industry its 

best hope of achieving such 

universality. Under the current 

scenario, TARGET2-Securities 

could provide settlement, with 

depositories like Euroclear and 

Clearstream fulfilling the assetservicing 

piece. However, obstacles 

remain. “The proposal only covers 

Euro currencies,” notes IBT’s 

Gallagher,“which cuts out the UK, 

Switzerland and other non-Euro 

trading countries. The real concern 

here is that even if this is 

established as a cost-saving 

venture, the for-profit depositories, 

in an effort to continue to provide shareholder value, are 

going to raise prices on another part of their business.” 

Initiatives such as Europe’s forthcoming Markets in 

Financial Instruments Directive (MiFID) are prompting an 

almost complete renewal process in the STP arena, 

according to Nabi.“You look at the increased volumes, the 

complexity, the numerous additions in terms of execution 

Keri Smith, director of network management for 

RBC Dexia Investor Services.“You could look at 

the old adage, ‘One person’s meat is another 

person’s poison.’ What we may consider to be a 

personalised service may be a standard offering 

for others. This is one of the reasons why, when 

on paper so many sub custody providers can 

offer similar services, the global custodians may 

select different providers,” says Smith. 

Photograph kindly provided by RBC Dexia 

Investor Services, April 2007. 

points, the ongoing changes around 

the various settlements engines, and 

so forth—the whole architecture is 

constantly evolving. As a service 

provider, that’s part of our value 

proposition to clients—they look for 

us to take the lead in these areas in 

an aligned operating model that will 

not cause them or their clients any 

problems. So we spend a lot of time 

and investment capital making sure 

that we’re up to speed not only with 

what the markets are up to today, 

but what they are likely to do 

moving forward.” 

Political changes in the securities 

industry will always affect sub 

custody services in one way or 

another, adds Smith of RBC Dexia. 

“MiFID legislation will add to 

monitoring mechanisms and tighter 

controls, but the Code of Conduct 

and Target2 will require introductions of additional 

requirements as well. It is important to continually 

introduce and enhance legislation with an eye toward 

fostering further growth and not hindering it. To be 

successful, there must continue to be dialogue with all 

parties involved. Doing so will allow us all to learn and 

contribute to builds that make the industry more vibrant.” 

Don’t work in the dark, 

who knows what you might find 

Emerging Markets Report provides a comprehensive 

overview of the principal deals, trends, opportunities 

and challenges in fast-developing markets. For more 

information on how to order your individual copy of 

Emerging Markets Report please contact: 

Paul Spendiff 

Tel:44 [0] 20 7680 5153 

Fax:44 [0] 20 7680 5155 

Email:paul.spendiff@berlinguer.com 


IS OFFSHORE 

STATUS UPDATED? 

Offshore centres face the dual challenge of having to compete with onshore and fellow offshore 

jurisdictions. Onshore, financial centres such as Dublin and Luxembourg, have managed to blur the 

boundaries between offshore and onshore designations. Offshore, competition is stepping up as 

centres seek to make dealing in their jurisdiction cheaper and more cost effective than elsewhere, 

while offering root and branch service provision that competes directly with onshore providers. Are 

descriptions such as onshore and offshore now in need of an overhaul? 


OFFSHORE CENTRES SQUARE UP TO COMPETITION 

93


94 

PPAULA COX, DEPUTY premier and minister of 

finance for Bermuda was on a road show in London at 

the end of March, under the auspices of the Bermuda 

International Business Association (BIBA). Armed with the 

consummate charm of a seasoned and successful politician, 

Cox is frank about the pressures the island centre has been 

labouring under. “Bermuda 

certainly took a beating a 

few years ago from the 

Cayman Islands in the area 

of fund administration. 

Now we have a good 

turnaround story. We 

listened to firms who had 

seriously considered 

coming to Bermuda who 

pointed out that we were 

bureaucratic and that the 

island’s due diligence 

process was onerous. Now 

we have turned that 

around.” Cox thinks there 

are four key elements: the 

existence of a strong 

partnership between 

government and the private 

sector, an island wide 

commitment to providing 

quality service, the 

development of a local, 

qualified and strong 

professional sector and the 

establishment of a 

regulatory regime that is fair 

and consistent. 

Cox was in London to 

sell the island’s updated 

fund legislation package 

because, she says, 

“complacency has no place 

in the new world order. 

Clients walk with their 

feet.” Moreover, Cox 

acknowledges, these days 

clients have a lot of places to walk to, as a key impact of 

globalisation has been to result in the establishment of 

centres of expertise in varied financial centres around the 

globe, including Dublin, Luxembourg, the Cayman Islands, 

the British Virgin Islands, Dubai, Guernsey, Jersey, the Isle 

of Man and Labuan. 

Competition between offshore jurisdictions has helped 

raise the bar for local regulatory standards and improve the 

image of offshore centres worldwide. Greg Wojciechowski, 

president and chief executive officer of the Bermuda Stock 

Exchange (BSX) says that the overhaul of Bermuda’s 

regulatory regime means that “all the pieces are there” to 

leverage the benefits of Bermuda’s strategic location 

Tamara Menteshvilli, chief executive officer of the CSX explains that 

the easing of regulations governing funds listing in Jersey “is a 

proactive set of regulations that allows the fast-tracking of both the 

establishment of a fund and the listing of it.” Menteshvilli also points 

out that although the initiative was introduced by the Jersey 

regulator, CSX will the first port of call for funds intending to list. 

Photograph supplied by Berlinguer Ltd, April 2007. 

between London and New York. Wojciechowski points out 

that in sectors such as insurance; Bermuda has now 

outstripped London and New York. It is a duality explains 

Wojciechowski, offshore investments are coming back into 

vogue and the island “is the beneficiary of flexible, lighter 

touch regulation that does not burden shareholders but 

still offers protection”. 

The BSX he says has 

developed on “those lines 

as well, and is now looking 

at listing a variety of 

products, such as US nonregistered 

144a 

placements, hedge funds 

and special purpose 

vehicles – many of which 

are structure and 

administered onshore.” 

Both Cox and 

Wojciechowski agree that 

what is happening in 

Bermuda, and they 

venture other jurisdictions 

as well, is that business is 

no longer traditional and 

the commercial benefits of 

an offshore designation is 

being adapted to suit new 

market conditions. As 

Wojciechowski would 

have it, “it is about 

seriousness and the level 

of regulation that gives 

investors all the comfort 

they require, and yet being 

commercially flexible.” As 

Cox has it, it is providing 

“regulatory credibility 

with a competitive edge. 

Increasingly it is a story 

about efficiency and 

effectiveness.” 

The Channel Island 

jurisdictions of Guernsey 

and Jersey have also been active in easing the bureaucracy of 

funds listing, without sacrificing quality of standards. Recent 

figures show that the value of funds under administration in 

Jersey, now at a record high of £179.1bn, has risen by 30% 

over 2006. The hedge fund sector along, with private equity 

and property, has been the catalyst for much of the growth 

that began in 2004 when the Expert Fund Guide, the new 

streamlined authorisation regime for alternative investment 

funds, was introduced by the Jersey Financial Services 

Commission (JFSC). Since then, the momentum has shown 

no signs of slowing. In the last 12 months, expert funds 

registered in Jersey have more than doubled to 274, while 

the net asset value of such funds now stands at £29.5bn. 


U n i q u e l y p o s i t i o n e d 

Established in 1971 

the Bermuda Stock 

Exchange (BSX) is today 

the world’s fastest growing 

offshore securities market. 

The BSX is internationally 

recognised as an attractive 

venue for the listing of: 

Hedge Funds 

Investment Fund Structures 

Equities 

Fixed Income Structures 

Derivative Warrants 

Advantage 

Bermuda 

www.bsx.com e-mail: info@bsx.com 

22 Church Street, Hamilton HM 11, Bermuda 

Tel: 1-441-292-7212 • Fax: 1-441-296-1875 

The BSX is a full member of the World 

Federation of Exchanges. 

Bermuda is a British Overseas Dependent 

Territory and is part of the UK for the 

purpose of OECD membership.


96 

GUERNSEY STREAMLINES FUND REGISTRATION 

Following last year’s publication of the so-called 

Harwood Report on the Guernsey’s regulatory and 

legal regime, the island’s independent financial 

services regulator streamlined the consent process 

for registered closed-ended funds at earlier this year, 

simplifying procedures and cutting back the time 

needed to domicile funds in the jurisdiction. There’s 

more to come however. 

Over the last two years, Guernsey like many offshore 

regimes, has undertaken a root and branch review 

of the jurisdiction’s legal and regulatory regime to 

enable it to compete effectively in an increasingly 

globalised market in which new financial centres are 

emerging. In Guernsey’s case, a working party led by 

Guernsey advocate Peter Harwood, undertook a 

comprehensive review of the island’s investment 

regime and issuing a number of recommendations in a 

report, published in the summer of last year. Over the 

remainder of this year, it 

is expected that most if 

not all of Harwood’s 

recommendations will be 

enacted, a move which 

has been described as 

vital for Guernsey, as 

other offshore 

jurisdictions, such as the 

Cayman Islands, continue 

to benefit from 

streamlined fund approval 

processes that can take 

as little as 48 hours. 

Key elements of the 

report’s recommendations 

included the introduction 

of a new Prospectus Law, 

which provided new guidelines for disclosure for all 

Guernsey domiciled entities raising capital, a new 

funds law to cover open and closed ended investment 

funds and the categorisation of funds into ‘regulated’ 

and ‘registered’ funds. Regulated funds will consist of 

traditional UCITs-type funds as well as Guernsey’s 

existing class B schemes, which are commonly used 

for alternative investment funds. The funds will be 

required to have their administration carried out in 

Guernsey and fund promoters and managers will be 

subject to full diligence once the funds are set up. 

The report’s also recommended the removal of 

regulatory obstacles that could make it difficult for 

Guernsey service providers to administer or provide 

services to non-Guernsey funds. Finally, Harwood 

proposed that the consent process for registered 

funds should be streamlined by shifting the focus of 

The GFSC will grant the required fund 

consent within three working days, if the 

Guernsey licensed service provider can show 

that it has carried out sufficient due diligence 

to be satisfied that the promoter and 

associated parties are fit and proper. Second, 

that effective procedures are in place to 

ensure that the fund is not offered to the 

Guernsey public directly by the issuer and that 

the status of the registered closed-end fund is 

specifically referred to in the prospectus or 

offering document. 

regulation and due diligence to the licenced 

Guernsey service provider (fund administrator), than 

the individual investment funds themselves. 

The Guernsey Financial Services Commission 

(GFSC) amended its regulatory framework and 

streamlined the consent process for registered 

closed-end funds as of the beginning of February this 

year. The GFSC will grant the required fund consent 

within three working days, if the Guernsey licensed 

service provider can show that it has carried out 

sufficient due diligence to be satisfied that the 

promoter and associated parties are fit and proper. 

Second, that effective procedures are in place to 

ensure that the fund is not offered to the Guernsey 

public directly by the issuer and that the status of 

the registered closed-end fund is specifically referred 

to in the prospectus or offering document. 

According to Ben Morgan, partner at Carey Olsen in 

Guernsey, the process of self-certification “has worked 

well with QIFs and there is 

every reason to believe 

this process will work just 

as well.” Morgan explains 

that it now takes up to 

three business days for 

the GFSC to approve a 

fund, though it “must 

have a Guernsey 

administrator and all the 

disclosure requirements 

laid out in the APC form 

must be met. There is 

now an onus on the 

administrator to undertake 

due diligence and, let’s be 

clear, there are no 

changes in the actual due 

diligence requirements, but now the responsibility shifts 

to the administrator, rather than the regulator.” Morgan 

adds that the GFSC will still carry out limited checks and 

will still review all filings. “There is no dumbing down of 

regulation, the process of regulation is by no means 

diminished by the new rules,” stresses Morgan. 

The remainder of the proposals can only be 

implemented when legislation is enacted and these 

will therefore come on-stream during the year. 

However, the Harwood report is only one of a 

number of initiatives being undertaken in the 

Bailiwick through 2007. A working group for the 

fiduciary sector has already published proposal that 

are set to introduce the civil law concept of 

foundations into the Guernsey legislature. The move 

offers a counterpoint to Switzerland’s adoption of the 

common law of trusts in 2005. 


At the start of the year Jersey’s funds industry received 

a boost as the regime achieved recognition by the Dutch 

Financial Markets Authority (AFM) and introduced the 

Listed Fund Guide. The decision by AFM to add Jersey to 

the short list of jurisdictions whose regulation is considered 

sufficient to allow a light touch by the Dutch regulator 

enables Jersey funds to be listed on the Euronext exchange 

without the need for a licence in the Netherlands. 

Yatra Capital Limited, an Indian property fund, advised by 

law firm Carey Olsen, was the first fund to take advantage 

of the recognition, raising £100m through a placement on 

the exchange. Jersey’s new listed fund guide ensure that 

closed ended investment funds that are listed on European 

and other leading stock exchanges 

including the London, New York, 

Dublin, Channel Islands Stock 

Exchange (CSX), the Alternative 

Investment Market of the London 

Stock Exchange and Euronext, can be 

subject to a streamlined 72-hour 

approval process. 

Although similar to Jersey’s Expert 

Fund regime in terms of a 

streamlined approach, the Listed 

Fund regime is not restricted to 

‘expert investors’and appeals to fund 

managers and hedge fund service 

providers. The principal benefits are 

certainty of the process and the 

timing - which are both critical in 

any fund launch. According to 

Tamara Menteshvilli, chief executive 

officer of the CSX “It is a proactive set 

of regulations that allows the fasttracking 

of both the establishment of 

a fund and the listing of it. 

Maintaining the list of recognised 

exchanges for that purpose is 

conducive to our exchange, because 

our rules are linked to that regime. 

The first port of call will be to 

consider a listing on our exchange.” 

The regime is available to private 

equity, property and other alternative 

investment funds, such as hedge 

funds and funds of hedge funds. The 

move is widely regarded as a means 

to increase Jersey’s competitiveness 

in the UK REITs sector, which has 

been slow to pick up to date, but 

which is now picking up steam. 

Graeme McArthur, representing the 

Jersey Funds Association, described 

the developments as important in 

making the jurisdiction an even more 

attractive option for fund promoters 

seeking the appropriate location for 


their alternative investment vehicles. “Jersey’s legal and 

fund professionals can compete even more effectively as a 

result of these measures,”says McArthur. 

“The launch of the light touch, fast track regulatory 

regime for listed closed ended funds will help the Island to 

acquire more alternative funds business, taking advantage 

of the current upswing in permanent capital vehicles for 

private equity and hedge fund managers,”he adds.“Finally, 

there is considerable interest from private equity funds and 

other alternative investment vehicles in listing on 

Euronext, so the timing of the AFM’s recognition of Jersey 

is ideal in such a buoyant market.” 

Undoubtedly, Jersey’s moves was a competitive response 

We aim higher. 

The CISX 

A more personal Stock Exchange 

delivering professional services 

efficiently and responsibly 

to the global marketplace. 

P.O. Box 623, One Lefebvre Street, St Peter Port, 

Guernsey GY1 4PJ Guernsey T +44 (0) 1481 713831 

Jersey T +44 (0) 1534 737151 F +44 (0) 1481 714856 

www.cisx.com 

97


98 

Greg Wojciechowski, president and chief executive officer of the 

Bermuda Stock Exchange. 

Both Cox and Wojciechowski agree that what is happening in 

Bermuda, and they venture other jurisdictions as well, is that 

business is no longer traditional and the commercial benefits of an 

offshore designation is being adapted to suit new market conditions. 

As Wojciechowski would have it,“it is about seriousness and the 

level of regulation that gives investors all the comfort they require, 

and yet being commercially flexible.” Photograph kindly supplied by 

the Bermuda Stock Exchange, April 2007. 

to the success of neighbouring Guernsey’s success in having 

Guernsey registered private equity funds, list in Euronext 

and reach a broader investor audience. When it floated on 

Euronext Amsterdam last May, Kohlberg Kravis Roberts’ 

landmark listed fund, the Guernsey-based KKR Private 

Equity Investors LP, provoked euphoria among the private 

equity industry. Heralded as a new way of financing, the 

IPO targeted $1.5bn (€1.15bn), but ultimately, following 

immense appetite from investors, more than tripled its goal, 

raising a massive $5bn. KKR Private Equity Investors IPO 

was swiftly followed by a similar listing from Apollo, which 

in August last year priced $1.5bn-worth of shares through a 

global private placement for AP Alternative Assets LP — 

again based in Guernsey and listed on Euronext. More 

recently, 3i announced that it was seeking to raise £1.3bn 

(€1.9bn) for a listed infrastructure vehicle, amid rumours 

that the FTSE 100 firm is looking to shift its fundraising to 

the public markets. The Carlyle Group is also understood to 

be preparing to float a $1bn fixed-income securities vehicle 

in London or Amsterdam. 

Competition between offshore exchanges looks likely to 

accelerate over the coming years as each jurisdiction strives 

to create a 360 degree service level that not only 

encourages registration, but also local listing and by 

Graeme McArthur, representing the Jersey Funds Association, 

described the developments as important in making the jurisdiction 

an even more attractive option for fund promoters seeking the 

appropriate location for their alternative investment vehicles.“Jersey’s 

legal and fund professionals can compete even more effectively as a 

result of these measures,” says McArthur. Photograph kindly supplied 

by the Jersey Funds Association, April 2007. 

extension, the establishment of a liquid trading 

environment. For all offshore centres, this is a particular 

sticky issue, as they increasingly compete, in a post 

Regulation NMS and Markets in Financial Instruments 

Directive (MiFiD) defined world. What it means is that not 

only do they compete directly with the main exchanges in 

onshore markets but also now with the rise of specialist 

trading pools and dark pools. In response, offshore centres 

can lose as much or as little of the bureaucracy and due 

diligence (without sacrificing quality and the international 

standards they mirror) in order to make it more attractive 

for funds and firms to register in their jurisdictions and list 

on their exchanges. How the different centres will respond 

to these ongoing challenges is only now emerging. The 

likelihood is that business will eventually coalesce around 

centres of excellence, such as the Channel Islands and 

Bermuda, which can boast a multiplicity of expertise, in 

areas as diverse as alternative fund administration, real 

estate funds, Islamic finance, special purpose vehicles 

(SPVs), and the trading of fungible securities, such as 144a 

placements. Some responses will be suprising. Expect at 

least one or more offshore centres to develop a strategic 

tie-up with a leading mainstream exchange. Expect others 

to respond with initiatives in Asia. As Bermuda’s Cox 

emphases,“we are constantly reinventing ourselves to the 

benefit of our customers and we have yet more to do.” 


While in some markets, such as Dublin, competitive pressure is being eased 

by consolidation (Bank of New York’s planned merger with Mellon and 

State Street’s purchase of Investors Bank & Trust) , globally competition to 

provide independent fund administration services continues to thrive. 


Enjoying refulgent growth, the alternative fund 

administration business is still on the upswing. The 

good news is, there is little sign of market 

overcrowding and in the short term, this will 

encourage more firms to establish niche positions. 

Ultimately, the alternative fund administration 

market will become a mirror image of the 

custodian market, where the top ten firms 

dominate the business by a country mile, but that 

is really a consideration for the future. In the 

meantime, as they used to say in the 1960s, it’s a 

happening. Francesca Carnevale reports. 

ALL THE 

FUN OF 

THE FAIR 

THESE ARE DAYS of wine and roses for alternative 

fund administrators and there is still much more to 

look forward to. According to the December 2006 

HFMWeek Hedge Fund Administrator Survey, of 57 hedge 

fund administrators, some $2.1trn of hedge fund assets 

were under administration (AUA), as of the end of October 

last year. Over the six months up to November 2006, the 

number of single and fund of hedge funds under 

administration grew by 7%, to number 18,817, with the 

number of fund of hedge funds under administration 

growing by 20%. 

Celent senior analyst Denise M Valentine, points out that, 

most likely, the US market share of hedge fund managers 

will tail off from 63% of the global market, to around 50% 

over the next two years, as hedge fund growth continues 

outside North America. In particular, she thinks European 

hedge fund assets will grow fastest, increasing their share of 

the global hedge fund market from 27% last year to 35% by 

2009, while Asia’s market share will also increase from a 

little under 5% to around 9% over the same period. 

Crucial to today’s alternative fund administration 

business is the continuing propensity of hedge funds, real 

estate investment firms and private equity funds to 

outsource their back office operations to focus on asset 

building instead. Additionally, Bob Donahoe, director of 

business development at BISYS in New York thinks a 

number of cross-trends add new layers of complexity.“Size 

is definitely a growing phenomenon, funds are getting 

bigger with diverse requirements,”he explains. 

ALTERNATIVE FUND ADMINISTRATION 

99


100 

Second, Donahoe points to the fact that more 

mainstream institutional investors (pension funds and 

endowments) now allocate assets to alternative fund 

managers. A record $126.5bn of new money flowed into 

the hedge fund industry last year, nearly tripling the 

$46.9bn in new money they attracted in 2005, according to 

Hedge Fund Research, which tracks more than 10,500 

hedge funds. This trend is unlikely to diminish for over the 

short term, particularly where pension funds are looking to 

shore up shortfalls. Local developments also add to the 

mix. As Peter Heaps, managing director of RBC Dexia Fund 

Services in Dublin, “as a consequence of UCITs 3, 

mainstream funds can invest in a broader range of 

instruments, allowing traditional clients to migrate into 

alternatives.” These particular trends play directly to the 

house of specialist administrators. 

According to the Bank of New York and specialist 

research firm Casey, Quirk and Acito’s seminal paper on 

Institutional Demand for Hedge Funds: New Opportunities and 

New Standards the two most popular answers to the 

question, “what makes for an attractive hedge fund firm? 

[sic]” were outstanding risk management and operational 

and structural excellence. Appositely, included in 

operational excellence were independent checks and 

balances on asset valuations. The follow on is,“A flight to 

quality,”says Rachel Turner, head of client services, at Bank 

of New York’s fund administration centre in Dublin. “It 

gives institutional investors comfort to know there is a 

capable third party administrator involved. As more 

institutional investors invest in alternative assets, hedge 

funds are much more likely to choose an administrator 

with an extensive track record.” 

Equally, says Donahoe at BISYS the assortment of client 

requirements is becoming increasingly diverse. 

In the midst of plenty however, challenges remain. 

Globally over 70 separate fund administrators already 

compete for business—albeit growing business. 

According to Celent’s Valentine, current market growth 

rates will only spur more firms to enter the fray.“Venture 

capital and investment banking firms are actively pursuing 

fund administration business,” she states.“In some cases, 

encouraging experienced staff in the major houses to set 

up on their own, bringing one or two clients along with 

them. You need expert staff, a high end accounting 

management system that you can buy for a few million 

dollars and the establishment of a particular niche offering 

and perhaps superior technology.” At the time this edition 

went to press, news was emerging that six ex-PFPC staff in 

Dublin were about to do just that, starting a new company 

Quintillion. BearStearns is also rumoured to have a share 

in it. “A number of established houses are still working 

with old, legacy systems,“ notes Valentine, who points out 

that regular investment in new technology is de rigueur for 

administrators these days, pointing to as an example, CITCO’s 

teamwork with Smartstream to upgrade its platform. 

For established houses however, niche expertise is not 

enough. They live in a demand-pull world, where fund 

administrators must continually invest in their 

businesses, extend their global reach, and generally 

upgrade services across the board while keeping costs 

to a minimum. 

It is not as easy as it sounds, even for well established 

operations. “Our clients are constantly trading new 

investment strategies and products. As a result, many 

MERGERS & ACQUISITIONS IN HEDGE FUND ADMINISTRATION 

AQUIRING FIRM ACQUISITION YEAR 

Bank of New York Mellon Group 2007 

State Street Investors Bank & Trust 2007 

Fortis Prime Fund Solutions Hedge Fund Services (HFS) BVI* 2006 

Mourant AIB Fund Administrators (Jersey) 2006 

Mellon DPM 2005 

Northern Trust Baring Fund Administration 2005 

Butterfield Fund Services Deerfield Fund Services 2004 

JP Morgan Tranaut Fund Administration 2004 

Citigroup Forum-Financial Group 2003 

HSBC Bank of Bermuda 2003 

SS&C Technologies Amicorp Fund Services, 2003 

Eisnerfast 2005 

Cogent Management 2006 

Bank of New York International Fund Administration 2002 

BISYS Hemisphere, 2002 

RK Consulting 2005 

State Street International Fund Services 2002 

BNP Paribas Cogent 2002 

RBS International Fund Services 2007 

Source: Celent, Trends in Hedge Fund Administration, August 2006. Various market reports & interview notes, March/April 2007 


ADMINISTRATION OF SINGLE HEDGE FUNDS: ASSETS UNDER ADMINISTRATION AS OF NOVEMBER 2006 

FUND ADMINISTRATOR TOTAL ASSETS UNDER 

ADMINISTRATION (AUA) ($bn) 

% CHANGE (APR-NOV 2006) 

CITCO FUND SERVICES 310.0 29% 

HSBC ALTERNATIVE FUND SERVICES 174.4 17% 

BISYS 151.47 13% 

INVESTORS BANK & TRUST 144.6 19% 

STATE STREET (IFS) 142.5 2% 

GOLDMAN SACHS 142.0 14% 

FORTIS PRIME FUND SOLUTIONS 123.0 19% 

GLOBE OP 100.1 25% 

CACEIS INVESTOR SERVICES 85.79 3% 

SS&C FUND SERVICES 71.0 34% 

Total number of firms in HFMWeek survey: 57 Total of AUA (Single Funds) $1788.46bn Overall growth in period: 17%. 

Source: Source: HFMWeek Hedge Fund Administrator Survey, December 2006. 

ADMINISTRATION OF FUND OF HEDGE FUNDS: ASSETS UNDER ADMINISTRATION AS OF NOVEMBER 2006 

FUND ADMINISTRATOR TOTAL ASSETS UNDER 

ADMINISTRATION (AUA) ($bn) 

% CHANGE (APR-NOV 2006) 




UBS FUND SERVICES 77.07 21% 

SEI 53 13% 

BISYS 51.62 12% 

EURO-VL (SG SS) 51.6 64% 

STATE STREET (IFS) 42.6 22% 

PFPC 30.8 -1% 

OLYMPIA CAPITAL 25.0 0% 

Total number of firms in HFMWeek survey: 57 Total of AUA (Fund of Funds) $954.09bn Overall growth in period: 20%. 

Source: HFMWeek Hedge Fund Administrator Survey, December 2006. 

instruments are difficult to price and require operational 

expertise in understanding cashflows, resets and other 

contract terms. Management and performance fee 

structures are becoming bespoke and therefore more 

complex,” acknowledges Meliosa O’Caoimh, chief 

operating officer, at Northern Trust’s fund administration 

centre in Dublin. The nature of the business renders 100% 

STP virtually impossible, especially in areas like Fund of 

Funds and derivative processing. Our approach is to 

automate as much as possible, to surround the business 

with talented resources and to maintain focus on simple 

control measures that ensure good overall operational 

results,” says O’Caiomh. BISYS’s Donahoe expands on the 

theme. “Some people do view alternative fund 

administration and hedge fund administration in particular 

as something of a commodity,” he says,“but the securities 

traded, the structures, and the fee calculations can be 

complex. It is not simply a question of people on the job, 

following things through; it is having the right people.” 

Business growth from over-the-counter heavy funds, 

derivatives-driven vehicles and credit-based entities has 

been particularly robust of late and Donahoe specifically 

mentions that BISYS is seeing a lot more derivatives—both 


over-the-counter and exchange traded—and “a lot more 

distressed debt and swaps”. 

Alternative fund administration then remains an uneasy 

mix of commoditised and customised operations, which 

means that houses are heavily dependent on the quality of 

inhouse expertise. In a specialist alternative fund 

administration centre, such as Dublin, this has created its 

own peculiar problems (please see box: Ireland seeks 

competitive cost advantage). Phil McGowan, managing 

director of Investors’ Bank & Trust’s Dublin office, 

acknowledges the underlying dynamics.“As hedge funds do 

not lend themselves to a commoditised offering we must 

look at overall value when assessing the price premium of 

specialised administration services.”Bob Donahoe, at BISYS 

is blunt,“some administrators are competing on cost, and we 

tend not to, because it is not economic to do so.” 

Gavin Nangle, managing director, State Street’s 

Investment Fund Services centre in Dublin agrees it is an 

industry-wide challenge and ventures that as the fund 

administration business per se is becoming more varied it 

makes more sense not to differentiate product, but the 

overall service offering. “Progressively, more alternative 

fund administration services have expanded out from 

101


102 

TOP TEN HEDGE FUND ADMINISTRATORS (SINGLE FUNDS AND FUND OF HEDGE FUNDS) 

BY GROWTH OF AUA BETWEEN APRIL AND NOVEMBER 2006. 

FUND ADMINISTRATOR TOTAL ASSETS UNDER % CHANGE 

ADMINISTRATION (AUA) ($bn) (APR-NOV 2006) 

JP MORGAN HEDGE FUND SERVICES 39.40 159% 

RBC DEXIA FUND SERVICES 37.24 30% 

SS&C FUND SERVICES 96.0 28% 


GLOBE OP 123.4 25% 


BANK OF NEW YORK 83.7 19% 

EURO-VL (SG-SS) 60.9 18% 


INVESTORS BANK & TRUST 164.7 16% 

traditional fund accounting, net asset value (NAV), 

secretarial services and investor relations, to full business 

process outsourcing,”says Nangle. That includes the trade 

support provided by front office operations, the operational 

support of mid-to-back office operations as well as the 

traditional fund administration package. 

State Street has built a dominant franchise in the Dublin 

market, based on its comprehensive service range that 

encompasses both alternative and mainstream alternative 

fund administration for both onshore and offshore 

businesses. “About 80% of that is Irish domiciled funds, 

20% is non-Irish, some of which might be domiciled in the 

Cayman Islands or Bermuda, and some of that is 

alternative business, but not all.” What is important says 

Nangle is that State Street “engages closely with the client 

so we can anticipate the precise product cycle of its various 

funds, be they long-only or hedge based”. 

Then again, some alternative hedge fund administrators 

are moving away from either providing hedge fund only or 

private equity fund only administration services. Many now 

provide the whole gamut. BNP Paribas, is one house that 

has adopted an integrated approach. “Our view is that we 

service the underlying asset, whatever the fund type, with 

the primary driver of getting right solution. Some of that is 

automated, some, in the case of OTC derivates for instance, 

is not, which still remains a fax and document based 

operation,” explains Malcolm Pobjoy, head of UK 

institutional investors, at BNP Paribas in London. “Our 

view is that it has to be more integrated, as assets become 

more mainstream.” Right now, however, Pobjoy 

acknowledges that the business remains specialised, with 

the bank operating out of geographic centres, such as 

Luxembourg, Dublin and King of Prussia in Pennsylvania, 

which have their own particular expertise. 

JP Morgan, on the other hand, has distinct hedge fund 

and private equity focused businesses. Like JP Morgan, 

Northern Trust has a split team approach. Northern 

Trust’s Head of Private Equity Fund Administration Paul 

Guilbert, counts some of the United Kingdom’s major 

buyout houses amongst their client base. 

Source: HFMWeek Hedge Fund Administrator Survey, December 2006. 

With regards to the desire for many funds to be 

domiciled offshore: “Historically this was driven by tax 

considerations,”acknowledges Guilbert, though he stresses 

this is no longer such a strong case.“The biggest reason for 

private equity firms domiciling offshore is for VAT 

structuring purposes and there are still some tax break 

benefits to be enjoyed, but one of the other main principal 

determinants is quality of service. Some of the quality 

players such as ourselves are not onshore and in these days 

of real-time technology this is not seen as a deterrent by 

prospective clients who don't actually need to come 

offshore for their administration services.” 

Guilbert says that the bank signed up a record $13bn 

(AUM) in new private equity fund administration business 

last year, into its Guernsey office.“It has also been a record 

year in property as well,” he adds. Private equity fund 

administrators enjoy not only rising business volumes, but 

a degree of market stickiness, that other business sectors 

would envy. Relationships between administrator and 

private equity funds tend to be long term. Northern Trust 

for one, boasts that it has not lost a private equity client in 

this millennium. 

Hedge funds are similar to private equity funds in 

some respects, but not others. Both are lightly regulated, 

private pools of capital that invest in securities and 

compensate their managers with a share of the fund's 

profits. However, most hedge funds invest in highly 

liquid assets and their investors can readily enter or leave 

the fund. Private equity funds, on the other hand invest 

in illiquid assets (private sector firms on the whole, 

although increasingly buyouts involve listed companies) 

and their limited partners tend to commit their 

investment for the full life of the fund. “There is some 

blurring around the edges, as these days hedge funds 

often invest in private equity companies' acquisition 

funds,”notes RBC Dexia’s Heaps. 

Joe Patellaro, senior vice president of BISYS Private Equity 

Services, notes the rise in LBO activity globally has occurred 

at the same time as an increase in the level of sophistication 

in services and reporting that limited partners require for the 


funds they invest in. Although BISYS is retained by private 

equity fund sponsors, the firm spends considerable effort 

providing “institutional grade solutions that limited partners 

are comfortable with,” says Patellaro. It is particularly 

pertinent with private equity funds,“because limited partners 

cannot liquidate their positions, therefore limited partners are 

particularly focused on fair value”, he says. Equally, sponsors 

are “hesitant to move valuations without a substantive 

change based on a subsequent round of financing or material 

changes in operation.” Notes Patellaro, “the end game for 

them is the exit.” Additionally, says 

Patellaro, US reporting rules have 

been refocused and new technical 

guidance “has been issued on 

privately held illiquid assets, which 

will likely result in more frequent 

adjustments to fair value from initial 

cost”. It is a vital consideration in a 

business, which Patellaro 

acknowledges is almost entirely 

transaction driven. 

While in some markets, such as 

Dublin, competitive pressure is 

being eased by consolidation (Bank 

of New York’s planned merger with 

Mellon and State Street’s purchase 

of Investors Bank & Trust) , globally 

competition to provide independent 

fund administration services 

continues to thrive. To further 

complicate matters for the global 

fund administration community, a 

new breed of third-party 

administrators are emerging, some 

of them prime-broker affiliated, 

others hedge funds themselves, 

such as New York-based LaCrosse 

Global Fund Services, created by 

Cargill's Black River Asset 

Management arm, which is building 

a niche franchise to service hedge 

funds around the globe. 

BISYS remains unmoved by 

growing competition in both its 

market specialisations. Patellaro 

and Donahoe believe alternative 

investments are on an up-cycle and 

that this will continue for some 

years to come, albeit the geographic 

spread of that business will change. 

BISYS, following the requirements 

of its clients, was moved to expand 

its alternative fund administration 

business into Asia at the beginning 

of this year, adding to its existing 

operations in US, Ireland, the 

Cayman Islands and Bermuda. 


RBC Dexia’s Peter Heaps thinks the upward cycle will 

continue for some years.“For the time being at least, there 

is plenty to go around. Further consolidation in the fund 

administration business as a whole is likely in the medium 

term, as more custodian houses merge, as in our own case, 

and newer entrants are bought out by larger players 

seeking market dominance, but that won’t stop the 

underlying trend that more institutions are seeking 

alternative investment solutions and more alternative asset 

managers outsource non-trading operations.” 

103

Jim wondered if there was an easier way to 

get his own copy of FTSE Global Markets... 

FTSE Global Markets gives you immediate access to 20,000 

issuers, fund managers, pension plan sponsors, investment bankers, 

brokers, consultants, stock exchanges and specialist dataproviders. 

To discuss advertising insertions, tip-ons, supplements, sponsored 

sections, bookmarks or your own special requirements contact: 

Paul Spendiff Tel: 44 [0] 20 7680 5153 

Fax: 44 [0] 20 7680 5155 

Email: paul.spendiff@berlinguer.com 

...there is: 

Simply fill in the Free registration 

form at: www.ftse.com/globalmarkets

Phil McGowan, 

managing director 

of the Dublin officer 

of Investors Bank & 

Trust. Photograph 

kindly supplied by 

Investors Bank & Trust, 

April 2007. 

Few conversations with Dublin’s fund 

administration experts fails to touch on the issue 

of staff, their availability and cost and the effort that 

individual firms are going to retain staff. 

Now there is a new twist. Dublin’s very success 

has meant that a large concentration of fund 

services providers has developed in the city, pushing 

up retail and staffing costs. In response, fund 

administrators have hived off back office operations 

to other centres in the country. “I do think there is 

still a strong story for Dublin,” maintains Phil 

McGowan, managing director of the Dublin officer of 

Investors Bank & Trust. “Everyone talks of cost and 

retention, and while it makes sense in many 

instances for institutions to set up operations outside 

of Dublin, but people should not discount the value 

of experience provided in the city.” 

Industry professionals acknowledge there is a 

danger of competition for skills turning into an 

inflationary spiral that starts to make Ireland less 

attractive for administrators and their clients. Rachel 

Turner, head of client services at Bank of New York in 

Dublin. “It is definitely an employee's market. We 

have known staff to leave for a year to go travelling, 

and then come back and walk straight into a high 

paid position because of the competition for 

experienced staff. In the short term, market 

consolidation will ease some of that pressure, but 

not for long.” 

Gavin Nangle, head of business development at 

State Street in Dublin acknowledges that staffing is a 

challenge, “for everyone, but it can be tackled.” 

Nangle points to the provision of comprehensive staff 

training programmes and career opportunities that 

provide an attractive “work-life balance,” he says. 

State Street was one of the first of the global 

administration providers to open offices outside of 

Dublin. State Street chose Kilkenny. Now the 

financial services provider employs more than 1500 

people in Ireland, some 300 of which work out of its 


IRELAND’S COST 

EFFECTIVE 

GEOGRAPHY OF FUND 

ADMINISTRATION 

Dublin made its name in the early 1990s as a low-cost 

alternative to the high salary and property costs of Europe’s 

principal financial centres, onshore and offshore. That advantage 

has disappeared as rising salaries and property values are now, in 

turn, redrawing the map of financial services provision in Ireland. 

regional operations at the Loughboy Business and 

Technology Park near Kilkenny. State Street had 

looked at a number of sites, explains Nangle, and 

chose Kilkenny "because it has a good, educated, 

population base and is also close to pools of labour 

in Carlow, Clonmel and Waterford". 

There is also the added attraction, concedes 

Nangle, that it is very near Dublin, which means 

that staff can come into the Dublin offices easily 

and, of course,. "Kilkenny offers a more relaxed way 

of life, which can be a consideration when you are 

competing to retains staff.” It is a strategy 

supported by Ireland’s economic development 

promotion body, the Industrial Development Agency 

(IDA Ireland). IDA has played a leading role in 

encouraging some of the biggest administrators in 

the market, such as CITCO, BISYS, PFPC, as well 

as State Street, to create satellite offices not only 

in the hinterland of the capital but in regional 

centres such as Cork, Drogheda, Galway, Kilkenny, 

Waterford and Wexford. Firms have been able to tap 

into pools of labour and to forge links with local 

educational institutions in order to ensure that the 

skills and qualifications they need are readily 

available. Now the IDA is encouraging the financial 

services provider to help establish Ireland as a 

centre for training and thought leaders. HSBC 

recently opened offices in an outlying suburb of 

Dublin called Sandyford, which provides training for 

its European staff. If the IDA has its way, it is a 

signal indication of things to come. In the 

meantime, service providers are learning to live 

with the price of Dublin's success by efforts to 

increase their levels of staff retention through 

training and career development programmes, and also 

by channelling expansion efforts into satellite offices in 

other towns and regions around Ireland, which not only 

keeps cost levels down but offers access to a broad 

range of potential new recruits provided by Ireland's 

much-admired education system. 

105

HEDGE FUND IPOS 

106 

Traditionally secretive hedge funds are beginning to lose their stage 

fright. Managers long accustomed to flying under the 

regulatory radar and avoiding publicity have started to tap 

the public markets. The trend emerged in Europe, where 

in recent years hedge fund managers have floated 

closed end feeder investment funds as well as hedge 

fund management companies. Initial public offerings 

(IPOs) aside, hedge funds continue to attract more 

money, having reportedly raised a further $44.5bn 

in the third quarter of last year alone, according to 

Hedge Fund Research in Chicago. With so much 

continued interest in hedge funds, Neil O’Hara 

looks at the key reasons why some hedge fund firms 

feel the need to tap the capital markets. 

Why 

hedge funds 

float 

IN FEBRUARY, PRIVATE equity and hedge fund 

manager Fortress Investment Group became the first 

US manager to issue shares, which immediately traded 

at a 70% premium to the offering price. Private equity 

behemoth Blackstone Group, which runs $17bn in hedge 

funds alongside its better-known private equity portfolios, 

plans to follow suit, and more are sure to follow. 

For hedge fund managers, public offerings of the 

management company crystallise the value of the firms 

they have created and allow them to take some cash off the 

table, says Nigel Farr, a partner at Herbert Smith in 

London. Publicly-traded shares also provide a currency 

managers can use to finance acquisitions or for executive 

compensation schemes. Herbert Smith advised 

management companies on two recent flotations: Polar 

Capital on the Alternative Investment Market, London’s 

junior listing venue, and Blue Bay on the main market. The 

firm also handled closed end fund offerings on Euronext 

for Marshall Wace (MW TOPS) and Boussard & Gavaudan. 

Investors in a hedge fund manager get a chance to 

participate in the lavish management and incentive fees for 

which the industry is famous. Everybody wins — or do 

they? In most public offerings, investors expect a significant 

portion of the proceeds to finance the company’s future 

growth. Successful asset management companies generate 

Investors in a hedge fund manager 

get a chance to participate in the 

lavish management and incentive 

fees for which the industry is 

famous. Everybody wins — or do 

they? In most public offerings, 

investors expect a significant 

portion of the proceeds to finance 

the company’s future growth. 

Successful asset management 

companies generate surplus cash, 

however, so the proceeds from a 

hedge fund management company 

IPO typically end up in the 

principals’ pockets. Photograph by 

Susan Findlay, provided by 

Dreamstime.com, April 2007. 

surplus cash, however, the proceeds from a hedge fund 

management company IPO typically end up in the 

principals’ pockets. 

For example, Fortress raised $533m, of which the 

prospectus says $250m was used to repay a term loan that 

financed a $250m distribution to the five principals. Total 

distributions to the principals in the normal course 

amounted to $446.9m in 2006 and $409.2m in 2007 before 

the offering; they received a further $888.0m from the sale 

of a 15% interest in Fortress to Nomura in January 2007. 

It is not unusual for successful hedge fund managers to 

earn large distributions, but privately-held firms do not 

receive a capitalised multiple of future cash flows in 

exchange for a reduced economic interest. David Friedland, 

president of the Hedge Fund Association and president of 

Magnum Funds US, a $500m fund of hedge funds manager 

based in Aventura, Florida, believes that every successful 

manager eventually reaches a point where he or she has 

less incentive to focus all day every day on making money 

for the fund.“There is always a potential conflict of interests 

and it’s something that investors have to consider,” 

Friedland says. 

The highly motivated people who run successful hedge 

funds have a big piece of their wealth tied up in the firm 

even after going public, of course.The principals of Fortress 


still own 77.7% after the Nomura transaction and the IPO, 

a stake worth $8.9bn at the current market price ($28.38), 

while Blackstone’s founders will retain about 90% 

ownership after its proposed $4bn offering. 

The potential conflict has not deterred major Wall Street 

firms such as JPMorgan Chase, Lehman Brothers and 

Morgan Stanley from buying minority interests in hedge 

fund managers, either. Unlike public offerings, however, 

those deals often include lock-in agreements and deferred 

payout arrangements designed to keep the key people 

motivated, according to Talbot Stark, global hedge fund 

relationship manager at BNP Paribas in London. A 

minority partner can help a hedge fund attract additional 

assets, too: Highbridge Capital, which had $6.5bn under 

management when JPMorgan Chase bought in two and a 

half years ago, now manages $17bn. “I think the 

combination has been far more successful in asset growth 

than most people anticipated,”Stark says. 

Although an IPO does not provide access to a dedicated 

distribution channel, it can still attract additional assets to 

the manager’s funds through enhanced name recognition. 

It is an avenue open only to a few, however. In today’s 

market, Stark believes a firm must have at least $5bn under 

management, multiple investment strategies to diversify 

the revenue stream, a robust infrastructure, a 10-year plus 

track record and (critically) principals with impeccable 

reputations in the financial community. “Success in the 

public markets will be dictated by the perception of the 

inner circle of the City or Wall Street,”Stark says,“If people 

do not respect them, it will taint that success.” 

For some people the opportunity to cash out will not be 

worth the price. Hedge fund managers, many of whom 

fled the bureaucracy of large financial institutions, have to 

create a robust regulatory and compliance regime to meet 

the standards of oversight expected at public companies. 

They must tolerate intense public scrutiny from analysts 

and the media, too, including disclosure of fees and 

executive remuneration. Stark sees large hedge funds 

becoming more institutionalised as the industry matures, 

but for some managers “it’s nice to have secrecy and lack 

of transparency.” 

Those who do not want the hassle of a management 

company flotation can still tap the public markets, at least in 

Europe where the rules governing investment companies 

are less restrictive than in the US. Hedge fund and private 

equity managers have started raising permanent capital 

through public offerings of closed end funds that feed into 

the managers’ existing funds. In November 2006, BNP 

Paribas helped underwrite a €440m deal for Boussard & 

Gavaudan listed on Euronext. One month later, in the 

largest closed end hedge fund offering to date, Britain’s 

Marshall Wace raised €1.5bn through MW TOPS, a vehicle 

that will invest alongside other investors in the firm’s open 

end hedge funds. The London-based company sold shares 

of MW Tops, a closed-end investment company, for €10, or 

$13.27 each which on the first day of trading on Euronext 

Amsterdam, the share price rose by a cent to finish at 


Talbot Stark, global hedge fund relationship manager at BNP Paribas 

in London. A minority partner can help a hedge fund attract 

additional assets, too: Highbridge Capital, which had $6.5bn under 

management when JPMorgan Chase bought in two and a half years 

ago, now manages $17bn.“I think the combination has been far more 

successful in asset growth than most people anticipated,” Stark says. 

Photograph kindly supplied by BNP Paribas, April 2007. 

€10.01. Marshall Wace, founded in 1997 by Paul Marshall 

and Ian Wace, has about $10bn under management 

following the public offering. Before setting up the hedge 

fund manager, Wace was head of equity and derivatives 

trading at Deutsche Morgan Grenfell. Marshall previously 

worked at Mercury Asset Management, which was bought 

by Merrill Lynch in 1997. Marshall Wace found that by 

listing it could reach a broader church. Hedge funds in 

Europe have been able to bypass rules restricting the sale of 

the investments to less affluent individuals by listing their 

funds as companies on the stock market and selling shares. 

MW Tops will aim for an annual return of 12% to 16% 

after fees and expenses. The Marshall Wace funds it will 

invest in use a computer programme to gather and select 

investment ideas and take bets on declining and rising 

stocks. By the time Marshall Wace led its IPO, it was 

treading a somewhat worn track. American private equity 

firms got in on the act even earlier; Kohlberg, Kravis & 

Roberts raised $5bn on Euronext in May 2006 and Leon 

Black’s Apollo Management launched a $1.5bn fund last 

August.The buyout firms had found that a European public 

vehicle allows managers to tap investors who cannot 

otherwise – for lack of financial resources or legal authority 

— invest in their open end hedge funds. 

Permanent capital also enables managers to invest in less 

liquid instruments with greater confidence because they no 

107

HEDGE FUND IPOS 

108 

longer have to worry about 

redemptions, according to 

Quentin Nason, managing 

director for equity capital 

markets and head of 

European permanent 

capital at Deutsche Bank. 

That was an important 

consideration for Marshall 

Wace in the MW TOPS 

offering managed by 

Deutsche Bank, Merrill 

Lynch and UBS. To reach 

fragmented distribution 

channels throughout 

Europe, Deutsche worked 

through intermediaries 

Nason calls “client rich, product poor” to access different 

types of investor. “It takes a lot of time but can be quite 

rewarding,”he says,“It’s very powerful if done right.”From 

a marketing perspective, investors in closed end vehicles 

must be seen to rank pari passu with other investors in the 

underlying hedge funds. Nason finds the market more 

receptive if managers absorb the offering expenses, too, 

which avoids immediate dilution of the fund’s net asset 

value. Marshall Wace capped MW TOPS expenses at 1% of 

the offering price, for instance, while Boussard & 

Gavaudan and Brevan Howard defrayed the entire cost for 

their funds. 

However advantageous permanent capital is for 

managers, it’s a different story for investors. Like any closed 

end fund, these vehicles can trade below net asset value, 

The highly motivated people who run 

successful hedge funds have a big 

piece of their wealth tied up in the firm 

even after going public, of course. The 

principals of Fortress still own 77.7% 

after the Nomura transaction and the 

IPO, a stake worth $8.9bn at the 

current market price ($28.38), while 

Blackstone’s founders will retain about 

90% ownership after its proposed 

$4bn offering. 

Nigel Farr, a partner at Herbert Smith 

in London. Publicly-traded shares 

provide a currency managers can use to 

finance acquisitions or for executive 

compensation schemes. Herbert Smith 

advised management companies on two 

recent flotations: Polar Capital on the 

Alternative Investment Market, 

London’s junior listing venue, and Blue 

Bay on the main market. The firm also 

handled closed end fund offerings on 

Euronext for Marshall Wace (MW 

TOPS) and Boussard & Gavaudan. 

Photograph kindly supplied by Herbert 

Smith, April 2007. 

although some have 

incorporated governance 

mechanisms intended to 

minimise the risk of 

persistent large discounts. 

In theory, investors have 

daily liquidity, too. In 

practice, large hedge fund 

investors who cannot buy or 

sell a position without 

moving the market may find 

the redemption right in an 

open end fund more 

attractive despite its 

limitations. 

For private equity 

investors, lack of liquidity is 

a fact of life in both public and private entities. Again, 

traditional open end vehicles have an edge: they permit 

investors to fund commitments only when the manager 

needs money to finance a transaction. “It is funding on a 

just in time basis,”explains Prakash Mehta, a partner in the 

Washington, DC office of lawyers Akin Gump Strauss 

Hauer & Feld,“Permanent capital investors do not get that 

benefit because all their money goes in at the beginning.” 

The burgeoning popularity of closed end hedge fund 

feeders in Europe is unlikely to spill over to the US any time 

soon. Public offerings of these vehicles fall under the 

Investment Company Act of 1940 (ICA), which regulates 

mutual funds. For “a host of reasons”an offering governed by 

the ICA is not practical, Mehta says. He points out that some 

entities — insurance companies, for example – are exempt 


from the ICA, but this 

fund raised €770m, a 

avenue raises other 

respectable sum but only 

complications. The principal 

disadvantage of permanent 

capital from the managers’ 

perspective is additional 

disclosure about their largest 

Permanent capital also enables 

managers to invest in less liquid 

instruments with greater confidence 

because they no longer have to worry 

half the €1.5bn target.“Some 

managers have pulled away 

because they didn’t want to 

risk reputation damage by 

not having subscriptions 

holdings, according to Ana about redemptions, according to 

from the public,” says Stark, 

Haurie, group managing 

director of Dexion Capital, a 

London-based hedge fund 

advisory firm best known for 

its stable of publicly traded 

funds of hedge funds. Its 

Quentin Nason, managing director for 

equity capital markets and head of 

European permanent capital at 

Deutsche Bank. That was an important 

consideration for Marshall Wace in the 

“From a public relations 

perspective, it’s much better 

to double the book than cut 

it in half.” 

Equity deals, whether for 

hedge fund managers or 

$1.5bn flagship, Dexion 

MW TOPS offering managed by 

permanent capital funds, 

Absolute, is managed by 

Harris Alternatives in 

Deutsche Bank, Merrill Lynch and UBS. have grabbed the headlines 

but hedge funds are 

Chicago, Illinois. For a 

beginning to tap the debt 

primary listing under 

markets, too. In November, 

Chapter 15 of the London Stock Exchange (LSE) rules, a fund Citadel Investment Group, a $13bn hedge fund based in 

must publish its ten largest holdings on a quarterly basis. Chicago run by Ken Griffin, launched a medium term note 

Managers who find that obligation too onerous can choose a programme for up to $2bn, a continuous offering under 

secondary LSE listing or they can go to AIM or Euronext, which it raised $500m in December.The deal, which earned 

which do not require equivalent disclosure but lack the a BBB+ rating from Fitch and BBB from Standard & Poor’s, 

prestige of a primary LSE quote. 

gives Citadel an alternative to conventional hedge fund 

The regulatory environment is in flux as the LSE and financing through prime brokers and the flexibility to seize 

Euronext vie to attract new hedge fund listings. Herbert market opportunities, like its purchase of a 4.5% stake in 

Smith’s Farr explains that the Financial Services Authority sub-prime mortgage originator Accredited Home in 

rules for a primary listing now say the directors of a feeder March. “They are starting to run Citadel like a normal 

fund whose assets pass through to another investment corporate where they are looking at the capital structure,” 

vehicle must comprise a majority of the board of the says Stark. If a fund the size of Citadel can shave a few basis 

underlying master fund. In a structure like MW TOPS, a points off its funding cost, it will be worth it — and it will 

requirement for upstream control of the master by a keep a leash on what the prime brokers charge, too. 

smaller listed feeder fund is unrealistic. 

The public markets—debt and equity—are bound to play 

Proposals to amend the listing rules have been in a bigger role in the hedge fund industry in the years ahead. 

circulation since March 2006 with implementation by Q3 2007 And while US hedge funds do not have access to 

at the earliest. Farr says the proposed revisions as drafted do permanent capital in their domestic market, it’s only a 

not go far enough. They drop the board majority rule but still question of time before the most prominent emulate the 

require the listed feeder to control the master fund, he says.“In success of their private equity brethren and launch feeder 

order to be attractive as a primary listing venue for hedge 

funds this requirement should be dropped and the portfolio 

disclosure obligations modified to preserve legitimate 

funds in Europe. 

confidentiality concerns,” Farr adds. Meanwhile, the LSE 

announced that Chapter 14, a little-used secondary listing For a reprint of this or any other 

that has neither the disclosure obligations nor the governance 

provisions of Chapter 15, is available to non-UK investment article in FTSE Global Markets 

companies.The LSE doesn’t want to lose lucrative new listings 

to AIM or Euronext, neither of which has a comparable 

governance rule. Brevan Howard’s feeder fund, BH Macro, 

please contact Paul Spendiff on: 

+44 (0)20 7680 5153 or by email at: 

became the first fund of hedge funds to obtain a London 

listing this way. 

No matter how the regulatory dust settles hedge fund 

managers will try to tap the market for permanent capital. 

Ever since the Boussard & Gavaudan deal, BNP Paribas’s 

Stark says the bank has been approached by a stream of 

managers, including some it declined to help. The recent 

BH Macro experience gave the market pause, however: the 

paul.spendiff@berlinguer.com 


109

THE OUTLOOK FOR FANNIE MAE & FREDDIE MAC 

110 

TIME 

FOR A 

By the time the air went out of the sub prime 

lending balloon, the popularity of such ‘exotic’ 

loans had already helped shift the balance of 

power that once much-favoured longstanding 

mortgage giants Fannie Mae and Freddie Mac, 

the two largest buyers and guarantors of home 

mortgages in the US. With opportunistic firms 

such as Countrywide, Lehman Brothers and Bear 

Stearns pushing ahead in the mortgage-backedsecurities 

business, what does the future hold 

for both Fannie and Freddie? From Boston, 

Dave Simons reports. 

COMEBACK? 

AS ANOTHER SEASON of baseball got underway in 

Arlington,Texas this past April, the Texas Rangers—the 

major league team once under ownership of one 

George W Bush—took to the field in the park formerly known 

as Ameriquest Field, now referred to under its previous 

moniker, The Rangers Ballpark in Arlington. The switcheroo 

was not so much the result of fans ruminating over a 

corporate moniker, but rather management’s effort to distance 

itself from the problems plaguing its financier, Ameriquest 

Mortgage Company, the result of an abrupt shift in the 

prevailing winds blowing over the US lending landscape. 

Ameriquest is just one of numerous upstart companies 

that profited during the boom in so-called sub prime lending 

that began during the latter part of the previous decade and 

re-wrote the rules governing loan origination. Devised 

mainly for otherwise non-qualified homebuyers, sub prime 

loans initiate with a so-called low ‘teaser’ rate of interest but 

then quickly escalate to a higher than average rate after just a 

few years. Because the overall interest charged is considerably 

higher than conventional 30 year mortgages, sub prime loans 

have been highly attractive to the investment community, 

and in particular hedge funds, speculate observers. 

However, in the wake of the Federal Reserve Bank’s 17 

consecutive prime-rate adjustments, foreclosures began to 

touch epidemic levels, bank regulators began tightening 

the screws and the result has been a lending market 

shakeout of historic proportions. 

Ameriquest—owned by ACC Capital Holdings, the 

largest prime sub lender by volume—had lots of company 

in firms such as New Century Financial and Accredited 

Home Lenders. Many of these are now teetering on the 

brink of financial ruin, or have already met their demise. 

By the time the air went out of the sub prime-lending 

balloon, the popularity of such ‘exotic’loans had already helped 

shift the balance of power that once favoured the longstanding 

mortgage giants Fannie Mae and Freddie Mac, the so-called 

government-sponsored enterprises (GSEs) and the two largest 

buyers and guarantors of home mortgages in the US. 


Supported by the Federal 

government, Fannie and 

Freddie secure mortgages 

from loan originators, 

holding some and 

securitising others for the 

investment market. Created 

by Congress (in 1938 and 

1970 respectively), Fannie 

and Freddie’s ultimate goal 

was to provide the mortgage 

market with a steady stream 

of capital by purchasing 

home loans from lending 

institutions, with the 

ultimate goal of making 

home ownership affordable 

to the low- to middleincome 

wage families. 

Not that their mission 

has been altogether 

altruistic, and during the 

early part of the decade 

the explosion in home 

buying helped 

substantially bolster the 

fortunes of the GSEs, 

much to the consternation 

of some lawmakers, who 

claimed that they had 

grown to far and too fast. 

But Fannie & Freddie’s 

period of earnings success 

came to a screeching halt 

beginning in 2003, when it 

was revealed that alleged 

accounting discrepancies 

helped inflate the 

numbers, leading to a 

prolonged bout of 

executive house-cleaning 

at both agencies. 

While the two companies were struggling to regain 

credibility, opportunistic firms such as Countrywide 

Financial Corp., Lehman Brothers and Bear Stearns began 

whittling away at the GSEs’ long-held dominance in the 

mortgage-backed-securities business. 

By 2006, Fannie and Freddie’s combined market share 

had dropped to less than 34%, down from nearly 60% at 

the start of the decade, according to National Mortgage 

News figures. A factor in the GSE retreat was the 

governmentally imposed affordable-housing limits placed 

on loans available for repurchase by both Fannie and 

Freddie (currently $417,000). But the real culprit was the 

explosion in the sub prime lending markets. In 2005, nearly 

37% of all mortgage-backed securities came from sub 

prime loans, mainly marketed to consumers with 


William Poole, president of the Federal Reserve Bank of St. Louis, who 

believes that GSEs business model should be confined to areas “with a 

clear public purpose” by removing inherent Federal guarantees as well 

as imposing portfolio size limits should they keep their governmentbacked 

positions, thinks Poole. Photograph kindly supplied by the 

Federal Reserve Bank of St. Louis, April 2007. 

… in the wake of the Federal Reserve 

Bank’s 17 consecutive prime-rate 

adjustments, foreclosures began to touch 

epidemic levels, bank regulators began 

tightening the screws and the result has 

been a lending market shakeout of 

historic proportions. 

blemished credit records 

who would otherwise have 

been unable to meet 

criteria of ‘prime’ lenders. 

The trend allowed 

private-label lenders to 

cruise past the GSEs for the 

first time ever. Despite 

recent woes within the sub 

prime industry, the 

ongoing presence of 

nontraditional loan 

opportunities continues to 

threaten the GSEs’ 

traditional business model. 

For the fourth quarter of 

2006, Freddie Mac reported 

a loss of $480m, versus a 

profit of $684m in the same 

period during 2005. 

Moreover, Fannie Mae 

and Freddie Mac will have 

to contend with an 

uncomfortably restrictive 

set of governmentimposed 

guidelines while 

they attempt to find their 

groove. The Office of 

Federal Housing 

Enterprise Oversight 

(OFHEO), under the 

leadership of director 

James Lockhart, currently 

requires that Fannie and 

Freddie maintain a 30% 

capital surplus above a 

2.5% minimum capital 

requirement. Additionally, 

the GSEs have agreed to 

restrict portfolio growth to 

2% annually. In a series of 

recent comments, Federal Reserve Chairman Ben Bernanke 

said that the GSEs’ investment objectives “should be 

anchored to a clear and well-defined public purpose…an 

obvious and worthy candidate is the promotion of 

affordable housing.” Meanwhile, the House of 

Representatives has proposed legislation that would create 

an independent GSE regulatory group called the Federal 

Housing Finance Agency (FHFA), which, among other 

things, seeks to place limits on how Fannie and Freddie 

manage their profit-making operations. The bill has 

received bipartisan congressional support. 

For its part, Freddie Mac announced that beginning in 

September it would no longer purchase riskier home 

mortgages in an effort to combat the rapidly rising rate of 

foreclosures, and will initiate tougher standards for the 

mortgages that it continues to buy. The company is also in 

111

THE OUTLOOK FOR FANNIE MAE & FREDDIE MAC 

112 

the process of rolling out a 

set of new fixed-rate and 

hybrid adjustable-rate 

mortgages to appeal to 

lenders with sub primetype 

clients. 

While conceding that a 

period of reckoning was 

long overdue for the 

GSEs, at the same time 

Freddie Mac chief 

executive officer Richard 

Syron suggested that too 

much oversight could 

have a detrimental 

impact. “The loudest 

voices in the debate have 

been those demanding 

not only to tighten 

oversight of the 

GSEs…but to diminish 

our tools and shrink the 

box within which the 

GSEs can operate,” said 

Syron recently. Syron 

defended Freddie Mac’s 

desire to maintain a wellcapitalised 

portfolio, 

saying it would allow the 

company to properly 

respond in the event of a sudden market pullback. “Our 

charters specify that we must be a continual presence in the 

mortgage market, providing affordability, liquidity and 

stability. All of which begs the question—why overly hamper 

us just when you’re going to need us most?” 

“When talking about market share, regulatory issues and so 

forth, it’s really important to remember that, just as the housing 

market has always been a really central part of the real 

economy, over the past decade mortgage products have 

become more important to the financial markets than ever 

before,”says Calvin Schnure, director of economic analysis at 

Freddie Mac.“While there has been a diminishing supply in 

the number of top-quality 

assets, at the same time we 

have had an increase in 

demand for them. With the 

growth of things like hybridinvestment 

funds outside of 

the banking system, the 

market has searched for 

ways to create a highquality, 

stable product. And 

perhaps the most suitable 

investment to fit that need is 

a quality mortgage product, 

and that is where Freddie 

Mac comes in.” 

Nela Richardson, senior economist with Freddie Mac. Going forward, 

the evolving market conditions may prompt some recovery in the 

performance of the GSEs, says Richardson.“The yield curve will 

always play a big role in determining how the market moves.” 

Photograph kindly supplied by Freddie Mac, April 2007. 

STRESSES IN THE SUB-PRIME LENDING MARKET SHOW 

THEIR IMPACT 

Index level rebased (31 Mar 2004=100) 

160 

140 

120 

100 

80 

60 

40 

Mar-04 

Jul-04 

Nov-04 

Mar-05 

Jul-05 

Until very recently, Freddie 

Mac and Fannie Mae set the 

standard and played the 

dominant role in the 

mortgage backed securities 

(MBS) market. Over the past 

few years, however, loans 

that were originated outside 

of the regulated system 

began to be packaged 

together in private-label 

securitisations and funded in 

the capital markets. “Which 

has created a very different 

kind of environment,” says 

Schnure. “A lot of this was 

because of the intense 

demand that had built up 

over a number of years. 

What has happened is that 

Freddie Mac has gone 

back to providing capital 

to the market for the 

higher-quality standards 

of these mortgages.” 

The pronounced shift 

away from the traditional 

30-year fixed rate product 

that the GSEs specialised 

in—the result of steadily 

falling interest rates—coincided with a rapid increase in the 

use of adjustable-rate mortgage products (or ARMs), which 

were typically marketed to lower-income families to 

purchase homes that might not have been affordable 

otherwise. Beginning at the start of the decade, 

nontraditional products such as “2-28”loans (in which the 

interest rate is fixed for the first two years, after which it can 

adjust every year to the index value plus the margin) began 

taking up a much larger piece of the overall market, rising 

from roughly 5% of private-label ARMs to over 37% over a 

four-year period. But with interest rates ticking back up, 

combined with a flattening of real-estate values,“we have 

Nov-05 

Mar-06 

Freddie Mac Fannie Mae 

Jul-06 

Nov-06 

FTSE USA Index – General Financial FTSE USA Index – Mortgage Finance 

Mar-07 

Source: FTSE Group and Datastream, data as at 31 March 2007. 

seen a swing back to the 

traditional sweet spot for 

the GSEs, which is the 

fixed-rate product,” says 

Nela Richardson, senior 

economist with Freddie 

Mac. Going forward, the 

evolving market 

conditions may prompt 

some recovery in the 

performance of the GSEs, 

says Richardson.“The yield 

curve will always play a big 

role in determining how 

the market moves.” 


The original purpose of the GSE—to provide liquidity in 

good and bad markets using quality products—is more 

important now than ever before, says Schnure. “We have 

had a huge expansion of sub prime credit, which has 

caused a lot of concern. You hear about it daily—analysts 

speculating about the broader impact on credit. Our 

presence in the market ensures that qualified mortgage 

borrowers or the mortgage-securities markets will not be 

affected. Before the GSEs were created, such a spillover 

effect could actually occur. As bad as the sub prime 

problem has been, financing has still been readily available, 

and the mortgage-securities markets will not freeze up due 

to these concerns. We’re not reinventing ourselves at all. 

We are saying that our traditional role, even now in the 21st 

century, is still quite important to the economy.” 

However, while a GSE uptrend is not out of the question, 

the bottom line, say many observers, is that the days of 

Fannie and Freddie controlling the MBS market are over. 

“You will see less pressure on Fannie Mae and Freddie Mac, 

and I think [they] will have some breathing room, but I do 

not think they are going to be what they ever were before,” 

remarks Countrywide Financial Corp. chief executive officer 

Angelo Mozilo.“I think what has been demonstrated over 

the last 24 months is that there is another market out there, 

that is ready, willing and able to, and is very liquid, to accept 

the kind of product that Fannie and Freddie generally 

dominated. So Fannie and Freddie are going to have to fight 

like hell to get their market share back.” 

Extending GSE operations into market segments 

“already well served by existing private firms will not 

enhance the efficiency of mortgage markets or reduce costs 

to mortgage borrowers,” notes William Poole, president of 

the Federal Reserve Bank of St. Louis, who believes that 

GSEs business model should be confined to areas “with a 

clear public purpose” by removing inherent Federal 

guarantees as well as imposing portfolio size limits should 

they keep their government-backed positions. 

The problems that have befallen the sub-prime market 

have not been limited to the crop of smaller “specialist” 

players. Should they take effect, proposed Federal 

standards could have a significant impact on much larger 

firms that include mortgage company Countrywide. 

Speaking at a Raymond James Financial Inc. conference in 

Orlando in March, Countrywide chief financial officer Eric 

Sieracki noted that possibly 60% of Countrywide’s 

customers seeking hybrid adjustable-rate mortgages such 

as “2-28” loans would fail to qualify under the new 

guidance, which would place far greater emphasis on a 

buyer’s ability to repay at the highest possible rate. 

While the jury is still out, analysts believe it is possible 

that the current situation could have a more serious impact 

on investment banks such as Bear Stearns & Co. and 

Lehman Brothers, that have profited from the purchase of 

sub prime loans as well as the packaging and re-selling of 

higher-yielding securities backed by such loans. 

“We see the sub-prime situation as being relatively 

contained,”said Chris O’Meara, Lehman’s Chief Financial 


Where to now for Fannie Mae and Freddie Mac? By the time the air 

went out of the sub-prime lending balloon, the popularity of such 

‘exotic’ loans had already helped shift the balance of power that once 

favoured the longstanding mortgage giants Fannie Mae and Freddie 

Mac, the so-called government-sponsored enterprises (GSEs) and the 

two largest buyers and guarantors of home mortgages in the US. 

Photograph by Nsilcock, supplied by Dreamstime.com, April 2007. 

Officer, in a conference call following the company’s firstquarter 

earnings announcement. Though sub prime only 

accounted for roughly 3% of Lehman’s revenues during the 

past six quarters, according to O’Meara, shares of Lehman 

have fallen nearly 16% since February as investors fretted 

over the company’s sub prime involvement. 

How does this affect the GSEs, in light of increased 

competition and the exceedingly volatile mortgage 

environment? “We continue to support oversight legislation 

that would strengthen market confidence and promote the 

company’s mission,” says Schnure, adding,“but we do not 

have a crystal ball, and cannot predict the prospects of 

future events. That said, continue to improve customer 

focus, and we believe our renewed focus on mission and 

customer service will broaden our overall mix of lenders 

securitising our mortgage securities. In a continued tight 

spread environment, it is increasingly important for us to 

innovate and improve efficiency in order to provide 

attractive returns in our mortgage investment business. One 

way we have capitalised on the funding environment was 

through increased issuance of structured debt products, and 

through opportunistic use of debt repurchases. Essentially, 

we have a disciplined approach to investing that allows us 

to keep risk low, while taking advantage of market 

opportunities as they become available.” 

Additionally, says Schnure, Asian investors—including 

central banks, which have increasingly turned to Freddie 

Mac bonds and securities for extra return over US 

Treasuries—are likely to stay large buyers in an effort to 

maintain their well-diversified portfolios. 

The ability to respond to market changes in a timely 

fashion has made the GSEs “a Congressional success story,” 

argues Syron. But, says Syron, that story can only remain 

positive “if we have the right capital and operational flexibility 

to respond quickly to market transitions. Business cycles will 

come and go. But these economic realities should not keep 

families from achieving their dreams of homeownership.” 

113

MARKET REPORTS BY FTSE RESEARCH 

114 

FTSE Global Equity Index Series – Global 

31 March 2006 to 31 March 2007 

FTSE All Cap Regional Indices (USD) 

140 

130 

120 

110 110 110 110 110 110 110 110 

100 

90 90 90 90 90 90 90 90 

80 

70 70 70 70 70 70 70 70 

FTSE All Cap (AC) Regional Indices – Capital Returns (USD) 

% 

FTSE All-Emerging Country All Cap Indices – Capital Returns 

% 

Mar-06 

40 

30 

20 

10 

0 

-10 

Apr-06 

FTSE Global AC Index 

40 

30 

20 

10 

0 

-10 

FTSE All-World Index 

May-06 

FTSE Large Cap 

Jun-06 

FTSE Mid Cap 

Jul-06 

FTSE Small Cap 

FTSE Developed AC 

Aug-06 

FTSE Adv Emerging AC 

Sep-06 

FTSE Secondary Emerging AC 

Oct-06 

FTSE All-Emerging AC 

Nov-06 

FTSE Latin America AC 

FTSE Middle East & Africa 

Dec-06 

FTSE North America AC 

Jan-07 

Feb-07 

FTSE Asia Pacific ex Japan AC 

FTSE Japan AC 

FTSE Dev Europe AC 

Mar-07 

FTSE Emerging Europe AC 

FTSE Australia AC 

FTSE Austria AC 

FTSE Belgium/Lux AC 

FTSE Canada AC 

FTSE Denmark AC 

FTSE Finland AC 

FTSE France AC 

FTSE Germany AC 

FTSE Greece AC 

FTSE Hong Kong China AC 

FTSE Ireland AC 

FTSE Italy AC 


FTSE Netherlands AC 

FTSE New Zealand AC 

FTSE Norway AC 

FTSE Portugal AC 

FTSE Singapore AC 

FTSE Spain AC 

FTSE Sweden AC 

FTSE Switzerland AC 

FTSE UK AC 

FTSE US AC 

FTSE Global AC 

FTSE Developed Europe AC 


FTSE Asia Pacific AC ex Japan 

FTSE Middle East & Africa AC 

FTSE Emerging Europe AC 

FTSE Latin America AC 

FTSE North America AC 

Dollar Value 

Local Currency Value 

Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap 


FTSE All-Emerging Country Indices – Capital Returns 

% 

100 

80 

60 

40 

20 

0 

-20 

FTSE Global All Cap Sector Indices – Capital Returns (USD) 

% 

40 

30 

20 

10 

2-Month Stock Performance 

Best Performing FTSE All-World Index Stocks (USD/%) Worst Performing FTSE All-World Index Stocks (USD/%) 

Partygaming UK 75.8 Health Management Associates A USA -44.1 

International Nickel Indonesia INDO 64.3 Banco Nossa Caixa SA BRAZ -36.9 

COFCO International (Red Chip) HK 63.8 LG Card KOR -29.9 

BMCE MAR 59.2 ACC IDA -26.8 

Leighton Holdings AU 58.9 Catcher Technology TWN -26.7 

Overall Index Return (USD) No. of Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual DIv 

Consts Yld (%) 

FTSE Global AC Index 8,092 411.19 1.3 11.8 14.3 2.4 2.01 

FTSE Global LC Index 1,198 389.09 0.8 9.9 13.7 1.6 2.18 

FTSE Global MC Index 1,684 570.02 2.5 14.0 15.0 4.3 1.67 

FTSE Global SC Index 5,210 518.12 3.1 17.6 14.9 5.2 1.45 

FTSE All-World Index 2,882 243.81 1.1 10.9 14.2 2.0 2.10 

12% 

FTSE Asia Pacific AC ex Japan Index 1,841 539.62 3.8 19.2 24.2 3.2 2.58 

FTSE Latin America AC Index 

10% 

FTSE All Emerging Europe AC Index 

203 

113 

1021.55 

897.48 

4.7 

4.3 

29.5 

20.2 

30.5 

17.3 

6.3 

1.3 

2.74 

1.55 

FTSE Developed 8% Europe AC Index 

FTSE Middle East & Africa AC Index 

1,666 

207 

482.86 

667.37 

3.1 

5.9 

16.2 

31.0 

23.9 

8.3 

3.8 

7.0 

2.51 

2.75 

FTSE North 6% Americas AC Index 2,702 350.06 -0.6 7.7 9.8 1.1 1.72 

FTSE Japan AC Index 1,360 416.63 1.8 6.5 -0.5 2.6 1.06 

4% 


2% 

0% 


-2% 

0 

Dollar Value 

Local Currency Value 

Capital 

FTSE Argentina AC 

FTSE Brazil AC 

FTSE Chile AC 

FTSE China AC 

FTSE Colombia AC 

FTSE Czech Republic AC 

FTSE Egypt AC 

FTSE Hungary AC 

FTSE India AC 

FTSE Indonesia AC 

FTSE Israel AC 

FTSE Korea AC 

FTSE Malaysia AC 

FTSE Mexico AC 

FTSE Morocco AC 

FTSE Pakistan AC 

FTSE Peru AC 

Oil & Gas Producers 

Oil Equipment, Services & Distribution 

FTSE Philippines AC 

Chemicals 

FTSE Poland AC 

Industrial Metals 

Mining 

FTSE Russia AC 

Construction & Materials 

FTSE South Africa AC 

Aerospace & Defence 

General Insutrials 

FTSE Taiwan AC 

Electronic & Electrical Equipment 

FTSE Thailand AC 

Industrial Engineering 

Industrial Transportation 

FTSE Turkey AC 

Support Services 

Automobiles & Parts 

Beverages 

Food Producers 

Household Goods 

Personal Goods 

Tobacco 

Health Care Equipment & Services 

Pharmaceuticals & Biotechnology 

Food & Druug Retailers 

General Retailers 

Media 

Travel & Leisure 

Fixed Line Telecommunications 

Mobile Telecommunications 

Electricity 

Gas, Water & Multiutilities 

Software & Computer Services 

Technology Hardware & Equipment 

Banks 

Nonlife Insurance 

Life Insurrance 

Real Estate 

General Financial 

Equity Investment Instruments 

Total Return 

115


116 

140 

140 

130 

130 

120 

120 

110 

110 

100 

100 

FTSE Global Equity Index Series – Developed ex US 

31 March 2006 to 31 March 2007 

FTSE Developed Regional Indices – Large/Mid Cap (USD) 

90 

90 

80 

80 

% 

Mar-06 

Apr-06 

May-06 

Jun-06 

Jul-06 

Aug-06 

FTSE Developed Regional Indices – Capital Returns (USD) 

40 

30 

20 

10 

0 

FTSE Developed 

FTSE All-Emerging 

FTSE Developed ex US 

FTSE Developed Europe 

FTSE Developed Asia Pacific 

Sep-06 

FTSE Developed Asia Pacific ex Japan 

Oct-06 

FTSE Eurozone 

FTSE Developed ex US Sector Indices (LC/MC) – Capital Returns (USD) 

% 

50 50 

40 

30 

20 

20 

10 

10 

0 

0 

-10 

-10 

Nov-06 

FTSE US 

Dec-06 

FTSE Developed AC ex US 

Jan-07 

FTSE Developed LC ex US 

Feb-07 

FTSE Developed MC ex US 

Mar-07 

FTSE Developed SC ex US 



Chemicals 


Mining 









Beverages 




Tobacco 





Media 




Electricity 




Banks 



Real Estate 





Chemicals 


Mining 









Beverages 




Tobacco 





Media 




Electricity 




Banks 



Real Estate 



FTSE Developed (LC/MC) 

FTSE Developed Europe (LC/MC) 

FTSE Developed Asia Pacific (LC/MC) 

FTSE All-Emerging (LC/MC) 

FTSE Developed ex US (LC/MC) 

FTSE US (LC/MC) 


ex Japan (LC/MC) 

FTSE North America AC (US$) 

Capital 

Capital 

Total Return 

Total Return 




Best Performing FTSE Developed ex US Index Stocks (USD/%) Worst Performing FTSE Developed ex US Index Stocks (USD/%) 

Partygaming UK 75.8 Metrovacesa SP -26.0 

COFCO International (Red Chip) HK 63.8 Round One JA -25.0 

Leighton Holdings AU 58.9 Culture Convenience Club JA -24.1 

Hotel Properties SI 56.4 Techtronic Industries HK -21.6 

Eiffage FRA 49.3 Katokichi JA -20.0 

Overall Index Return (USD) No. of Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div 


FTSE Developed ex US Index (LC/MC) 1,340 281.60 2.8 13.5 17.6 3.4 2.32 

FTSE USA Index (LC/MC) 690 590.92 -1.1 6.8 10.0 0.5 1.81 

FTSE Developed Index (LC/MC) 2,030 235.05 0.9 10.2 13.8 2.0 2.08 

FTSE All-Emerging Index (LC/MC) 852 457.11 3.3 19.8 18.7 2.1 2.28 

FTSE Developed Europe Index (LC/MC) 510 284.93 2.8 14.7 22.4 3.3 2.63 

FTSE Developed Asia Pacific Index (LC/MC) 772 255.00 2.9 11.8 9.0 3.8 1.74 

FTSE Developed Asia Pacific ex Japan Index (LC/MC) 288 453.82 5.2 23.9 31.4 6.5 3.14 

FTSE Developed ex US AC Index 3,892 478.63 3.1 14.6 18.2 3.8 2.23 

FTSE Developed ex US LC Index 569 435.80 2.5 12.7 16.8 3.0 2.44 

FTSE Developed ex US MC Index 1,684 591.61 4.3 17.7 21.6 5.4 1.67 

FTSE Developed ex US SC Index 5,210 649.31 5.2 22.0 22.9 6.8 1.45 

FTSE Global Equity Index Series – Asia Pacific 

31 March 2006 to 31 March 2007 

FTSE Asia Pacific All-Cap (AC) Regional Indices (USD) 

140 

130 

120 

110 

100 

90 

80 

Mar-06 

Apr-06 

May-06 

Jun-06 

Jul-06 

Aug-06 


Sep-06 

Oct-06 

Nov-06 

Dec-06 

Jan-07 

Feb-07 

Mar-07 



Asia Pacific (LC/MC) 



FTSE Asia Pacific (LC/MC) 


Asia Pacific AC 

FTSE Japan (LC/MC) 


117


118 

FTSE Asia Pacific Regional Sector Indices – Capital Returns (USD) 

% 

40 

30 

20 

10 

0 

FTSE Asia Pacific AC 

FTSE Asia Pacific All Cap Sector Indices – Capital Returns (USD) 

% 

60 

50 

40 

30 

20 

10 

0 

-10 



Best Performing FTSE Asia Pacific Index Stocks (USD/%) Worst Performing FTSE Asia Pacific Index Stocks (USD/%) 

International Nickel Indonesia INDO 64.3 LG Card KOR -29.9 

COFCO International (Red Chip) HK 63.8 ACC IDA -26.8 

Leighton Holdings AU 58.9 Catcher Technology TWN -26.7 

Hotel Properties SI 56.4 Round One JA -25.0 

Faraday Technology TWN 53.5 Hindalco IDA -24.8 

Overall Index Return (USD) 


Asia Pacific (LC/MC) 

Developed Asia Pacific 






FTSE Japan Index (LC/MC) 

FTSE Asia Pacific (LC/MC) 

FTSE Asia Pacific MC 

FTSE Asia Pacific SC 

FTSE Asia Pacific LC 



Chemicals 


Mining 









Beverages 




Tobacco 





Media 




Electricity 




Banks 



Real Estate 



Capital 

Total Return 

No. of Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual DIv 


FTSE Global AC Index 8,092 411.19 1.3 11.8 14.3 2.4 2.01 

FTSE Asia Pacific AC Index 3,201 468.93 2.8 12.5 10.4 2.9 1.83 

FTSE Asia Pacific Index (LC/MC) 1,289 266.76 2.6 12.3 11.0 2.7 1.84 

FTSE Asia Pacific LC Index 528 451.78 2.4 12.3 11.6 2.3 1.87 

FTSE Asia Pacific MC Index 761 515.91 3.9 12.3 7.9 4.6 1.66 

FTSE Asia Pacific SC Index 1,912 525.41 4.3 14.1 5.9 4.9 1.77 

FTSE Developed Asia Pacific ex Japan Index (LC/MC) 288 453.82 5.2 23.9 31.4 6.5 3.14 

FTSE Developed Asia Pacific Index (LC/MC) 772 255.00 2.9 11.8 9.0 3.8 1.74 

FTSE All-Emerging Asia Pacific Index (LC/MC) 517 315.93 1.9 13.7 17.6 -0.4 2.12 

FTSE Japan Index (LC/MC) 484 156.56 1.7 6.8 0.7 2.5 1.06 



FTSE Global Equity Index Series – Europe 

31 March 2006 to 31 March 2007 

FTSE European Regional Indices Performance (EUR) 

120 120 120 120 120 120 120 

115 115 115 115 115 115 115 

110 110 110 110 110 110 110 

105 105 105 105 105 105 105 

100 

95 

90 90 90 90 90 90 90 

85 

80 80 80 80 80 80 80 

% 

Mar-06 

Apr-06 

May-06 

Jun-06 

Jul-06 

Aug-06 

FTSE Europe All Cap Indices – Capital Returns (EUR) 

25 

20 

15 

10 

5 

0 


FTSE Europe AC 

FTSE Europe LC 

FTSE Europe MC 

FTSE Europe SC 


FTSE Developed Europe All Cap Sector Indices – Capital Returns (EUR) 

% 

60 

50 

40 

30 

20 

10 

0 

-10 


Sep-06 

FTSE All-Emerging Europe AC 

Oct-06 

FTSE Eurozone AC 

Nov-06 

Dec-06 


ex UK AC 

FTSE Eurofirst 300 

Jan-07 

FTSEurofirst 80 

Feb-07 


Mar-07 



Chemicals 


Mining 









Beverages 




Tobacco 





Media 




Electricity 




Banks 



Real Estate 




ex UK LC/MC 




FTSE Eurobloc AC 



Capital 

Total Return 


119


120 


Best Performing FTSE Developed Europe Index Stocks (EUR/%) Worst Performing FTSE Developed Europe Index Stocks (EUR/%) 

Partygaming UK 75.8 Metrovacesa SP -26.0 

Eiffage FRA 49.3 H. Lundbeck DEN -18.1 

Volkswagen Pfd GER 38.5 Public Power Corp GRC -15.1 

ABN Amro Hldgs. NETH 34.7 Outokumpu FIN -14.0 

Volkswagen GER 34.7 Natixis FRA -13.6 

Overall Index Return (EUR) 

No. of Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div 


FTSE Global AC Index 8,092 355.70 -1.1 6.4 3.9 1.4 2.01 

FTSE Europe AC Index 1,779 422.28 0.7 10.7 12.5 2.8 2.48 

FTSE Europe LC Index 244 444.41 -0.1 7.8 9.8 1.8 2.72 

FTSE Europe MC Index 330 572.72 2.5 16.3 19.3 5.0 1.97 

FTSE Europe SC Index 1,205 626.17 3.1 21.1 22.4 6.4 1.68 

FTSE Developed Europe AC Index 1,666 417.70 0.7 10.6 12.6 2.9 2.51 

FTSE All-Emerging Europe AC Index 113 776.37 1.8 14.4 6.6 0.3 1.55 

FTSE Eurobloc AC Index 853 445.34 1.6 12.3 13.4 4.0 2.48 

FTSE Developed Europe ex UK AC Index 1,187 450.70 1.0 12.2 13.6 3.7 2.33 

FTSEurofirst 300 Index 300 1515.65 0.1 8.5 10.6 2.2 2.69 

FTSEurofirst 80 Index 80 5349.96 0.7 9.0 10.4 2.7 2.88 

FTSEurofirst 100 Index 100 4763.48 -0.4 6.2 7.8 1.3 3.09 

FTSE UK Index Series 

31 March 2006 to 31 March 2007 

FTSE UK Index Series (GBP) 

120 

120 

115 115 

110 

110 

105 

105 

100 100 

95 

95 

90 

90 

85 

85 

80 

80 

Mar-06 

Mar-06 

Apr-06 

Apr-06 

May-06 

May-06 

Jun-06 

Jun-06 

Jul-06 

Jul-06 

Aug-06 

Aug-06 

Sep-06 

Sep-06 

Oct-06 

Oct-06 

Nov-06 

Nov-06 

Dec-06 

Dec-06 

Jan-07 

Jan-07 

Feb-07 

Feb-07 

Mar-07 

FTSE FTSE 100 100 

FTSE 250 


FTSE SmallCap 

FTSE 

FTSE 

All-Share 

All-Share 

FTSE Fledgling 


FTSE AIM All-Share 

FTSE AIM All-Share 

FTSE techMARK 

FTSE techMARK 


Mar-07 


MAY/JUNE 2007 • FTSE GLOBAL MARKETS 

FTSE North America AC (US$)

FTSE All-Share Sector Indices – Capital Returns (GBP) 

50 

40 

30 

30 

20 

20 

10 

10 

0 

0 

-10 

-10 

-20 

FTSE UK Indices – Capital Return (GBP) 

20 

10 

0 

-10 

% 


-20 


Best Performing FTSE All-Share Index Stocks (GBP/%) Worst Performing FTSE All-Share Index Stocks (GBP/%) 

Partygaming 75.4 Jessops -86.5 

Alizyme 58.6 Emblaze -41.7 

MyTravel Group 42.6 Erinaceous Group -41.5 

UK Coal 34.2 Agcert International -41.2 

Pendragon 33.0 Queens Walk Investment -39.9 

Overall Index 8% Return (GBP) 

No. of Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div Net P/E 

6% 

FTSE 100 Index 

Consts 

100 6308.03 1.7 5.8 5.8 1.4 

Yld (%) 

3.05 

Cover 

2.62 

Ratio 

12.51 

FTSE 250 Index4% 8% 

250 11689.30 5.3 16.9 18.7 4.6 1.94 2.78 18.49 

FTSE 350 Index 350 3334.50 2.2 7.4 7.6 1.9 2.88 2.64 13.17 

FTSE SmallCap 2% 6% Index 338 4013.53 1.7 13.3 11.1 2.8 1.69 1.51 39.37 

FTSE All-Share Index 688 3283.21 2.2 7.6 7.7 1.9 2.84 2.61 13.49 

FTSE Fledgling 0% 4% Index 243 4571.37 2.5 14.9 12.2 4.1 1.73 -0.29 0.00 

FTSE AIM Index 1,202 1146.40 6.3 12.8 -4.4 8.7 0.38 0.34 779.37 

-2% 

FTSE techMARK 2% 100 Index 100 1605.30 4.3 13.2 7.9 6.1 1.32 - - 

-4% 

0% 

-6% 

-2% 

-4% 

Mining 


-6% 


Oil & Gas 


Chemicals 

FTSE SmallCap 

Construction & Building 

Materials 

ng 



Chemicals 

Mining 









Beverages 



Leisure Goods 


Tobacco 





Media 




Electricity 




Banks 



Real Estate 





Chemicals 

Mining 









Beverages 



Leisure Goods 


Tobacco 





Media 




Electricity 




Banks 



Real Estate 




Forestry & Paper 

r 

FTSE All-Share 

Steel & Other Metals 

ls 


ce 


Diversified Industrials 

ls 

Electronic & Electrical 

Equipment 

al 

FTSE AIM 

All-Share 

eryEngineering 

& Machinery 

FTSE techMArK 100 


ts 

Household Goods & 

Textiles 

& 

Beverages 

Food Producers & 

Processors 

& 

Health 

old Personal Care & Household 

Products 

Capital 

Capital 

Total Return 

Total Return 

Pharmaceuticals & 

Biotechnology 

& 

Tobacco 


rs 

Leisure & Hotels 

ls 

Media & Entertainment 

nt 


121 

s 

Transport 

Food & Drug Retailers 

rs


122 

FTSE Xinhua Index Series 

31 March 2006 to 31 March 2007 

FTSE Xinhua Index Series (CNY/HKD) 

280 280 280 280 280 280 

240 

200 

160 160 160 160 160 160 

120 

80 

Mar-06 

FTSE Xinhua Index Series 

Actual Div 

Index Name Consts Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Yld (%) 

FTSE/Xinhua 25 Index (HKD) 25 15634.92 0.3 30.2 41.2 -5.8 1.73 

FTSE/Xinhua China 50 Index (CNY) 51 11247.64 9.3 104.3 156.9 22.2 0.73 

FTSE Xinhua All-Share Index (CNY) 1,003 6592.92 22.2 94.0 171.2 44.2 0.75 

FTSE Xinhua 600 Index (CNY) 600 7055.27 19.6 94.8 167.6 40.1 0.81 

FTSE Xinhua Small Cap Index (CNY) 403 4930.98 44.4 89.0 193.9 82.3 0.31 

FTSE Xinhua China Government Bond Total Performance Index (CNY) 31 96.12 -0.2 0.3 1.4 0.2 3.18 

FTSE Hedge Index Series 

FTSE Hedge Management Styles (USD) – 5-Year Performance 

140 

130 

120 

110 

100 

90 

80 

Mar-02 

Apr-06 

Sep-02 

May-06 

Mar-03 

Jun-06 

Sep-03 

Jul-06 

Aug-06 

Mar-04 

Based upon indicative index values as at 28 February 2007 and 30 March 2007 

Sep-06 

Sep-04 

Oct-06 

Mar-05 

Nov-06 

Sep-05 

Dec-06 

Mar-06 

Jan-07 

Feb-07 

Sep-06 

FTSE Hedge 

FTSE Hedge Directional 

FTSE Hedge Event Driven 

FTSE Hedge Non-Directional 


Mar-07 

Mar-07 

FTSE/Xinhua China 25 (HKD) 

FTSE Xinhua All-Share (CNY) 

FTSE Xinhua Small Cap (CNY) 

FTSE/Xinhua China A50 (CNY) 

FTSE Xinhua 600 (CNY) 

FTSE Xinhua China Government 

Bond Total Performance Index (CNY) 


FTSE Hedge – Management Styles & Strategies (NAV Terms) 

Index 2 M 6 M 12 M YTD 5-Year Ann 3-Year 

Level* (%) (%) (%) (%) (%) Volatility (%) 

FTSE Hedge Index 5350.72 -3.5 0.2 0.0 -2.4 4.3 3.4 

Directional 3260.25 -3.4 1.6 -0.1 -2.7 5.8 5.0 

Equity Hedge 2286.70 -5.7 0.0 0.1 -5.0 5.7 6.8 

Commodity Trading Association (CTA) / Managed Futures 2062.19 -5.5 1.2 -0.2 -3.8 8.0 10.0 

Global Macro 1988.61 -1.2 -0.1 -0.6 -1.5 4.1 5.9 

Event Driven 3294.72 -6.4 -2.0 0.0 -4.7 3.7 5.3 

Merger Arbitrage 2102.82 -4.9 -2.8 0.3 -3.7 1.1 4.9 

Distressed & Opportunities 2281.62 -7.5 -1.3 -0.1 -5.2 5.9 6.2 

Non-directional 3063.90 -2.3 -1.3 -0.1 -1.5 2.3 2.1 

Convertible Arbitrage 1987.37 -4.6 -3.7 0.0 -3.9 4.3 4.4 

Equity Arbitrage 2072.07 -3.5 -1.5 0.0 -2.4 2.6 2.9 

Fixed Income Relative Value 2040.72 -0.5 -0.5 -0.1 0.2 1.0 1.6 

* Based upon indicative index values as at 28 February 2007 and 30 March 2007 

FTSE EPRA/NAREIT Global Real Estate Index Series 

FTSE EPRA/NAREIT Global Real Estate Indices – 5-Year Performance (Total Return Basis) 

400 

350 350 350 350 350 

300 300 300 300 300 

250 

200 

150 

100 

50 

Mar-02 

Sep-02 

Mar-03 

Sep-03 

Mar-04 

FTSE EPRA/NAREIT Global Real Estate Indices (Total Return) 

Actual Div 


EPRA/NAREIT Global Index (USD) 316 3811.99 1.3 21.1 32.7 6.2 2.92 

EPRA/NAREIT North America Index Index (USD) 131 4313.07 -4.1 13.6 24.0 4.0 3.64 

EPRA/NAREIT Europe Index (EUR) 100 3931.17 2.4 19.2 29.3 2.0 1.97 

EPRA/NAREIT Euro Zone Index (EUR) 47 4341.73 4.4 22.7 33.6 8.0 2.24 

EPRA/NAREIT Asia Index (USD) 85 2933.95 6.5 29.1 38.9 11.2 2.65 


Sep-04 

Mar-05 

Sep-05 

Mar-06 

Sep-06 

Mar-07 

EPRA/NAREIT Global 

Index (USD) 

EPRA/NAREIT North America 

Index (USD) 

EPRA/NAREIT Europe 

Index (EUR) 

EPRA/NAREIT Eurozone 

Index (EUR) 

EPRA/NAREIT Asia 

Index (USD) 


123


124 

FTSE Bond Indices 

FTSE Bond Indices – 5-Year Performance (Total Return Basis) 

180 180 180 180 180 180 180 180 

160 160 160 160 160 160 160 160 

140 140 140 140 140 140 140 140 

120 120 120 120 120 120 120 120 

100 

FTSE Bond Indices (Total Return) 

Annual 

Redemption 


FTSE All-Eurozone Government Bond Index (EUR) 241 154.84 0.5 -0.3 1.9 0.2 4.23 

FTSE Pfandbrief Index (EUR) 400 178.17 0.6 0.2 2.1 0.4 4.29 

FTSE Euro Emerging Markets Bond Index (EUR) 36 215.86 0.8 2.0 3.4 0.8 5.08 

FTSE Euro Corporates Bond Index (EUR) 329 145.18 0.7 0.7 2.7 0.7 4.64 

FTSE Gilts Index Linked All Stocks Index (GBP) 12 2058.88 1.0 -0.3 3.0 -0.5 1.61* 

FTSE Gilts Fixed All-Stocks Index (GBP) 28 1934.44 0.6 -1.0 0.6 -0.7 4.67 

FTSE USA Government Bond Index (USD) 132 153.69 1.7 2.2 5.8 1.4 4.81 

FTSE Japan Government Bond Index (JPY) 245 111.33 0.4 0.8 2.3 0.6 1.54 

FTSE China Government Bond Index (CNY) 31 96.12 -0.2 0.3 1.4 0.2 3.18 

* Based on 0% inflation 

FTSE GWA Index Series 

FTSE GWA Index Series – 5-Year Performance (Total Return Basis) 

250 

200 

150 

100 

80 80 80 80 80 80 80 80 

50 

Mar-02 

Mar-02 

Sep-02 

Sep-02 

Mar-03 

Mar-03 

Sep-03 

Sep-03 

Mar-04 

Mar-04 

Sep-04 

Sep-04 

Mar-05 

Mar-05 

Sep-05 

Sep-05 

Mar-06 

Mar-06 

Sep-06 

Sep-06 

Mar-07 

FTSE GWA Developed 

Index (USD) 


ex US Index (USD) 


ex Japan Index (USD) 

FTSE GWA Developed Europe 

Index (EUR) 

FTSE GWA UK Index (GBP) 


Mar-07 

FTSE All-Eurozone Government 

Bond Index (EUR) 

FTSE Euro Corporates 


FTSE USA Goverment Bond 

Index (USD) 

FTSE Pfandbrief Index (EUR) 

FTSE Gilts Index Linked 

All-Stocks Index (GBP) 

FTSE Japan Government 

Bond Index (JPY) 

FTSE Euro Emerging Markets 


FTSE Gilts Fixed All-Stocks 

Index (GBP) 


FTSE GWA Indices (Total Return) 

Actual Div 


FTSE GWA Developed Index (USD) 2030 4206.90 1.4 11.8 18.2 2.4 2.25 

FTSE GWA Developed ex US Index (USD) 1340 4638.78 3.2 15.0 22.2 3.8 2.49 

FTSE GWA Developed ex Japan Index (USD) 1546 4184.25 1.2 12.1 19.8 2.2 2.38 

FTSE GWA Developed Europe Index (EUR) 510 4274.69 0.5 10.2 15.2 2.4 2.81 

FTSE GWA UK Index (GBP) 693 4030.89 2.5 8.9 10.9 2.0 3.06 

FTSE RAFI Index Series 

FTSE RAFI Index Series – 5-Year Performance (Total Return Basis) 

250 

200 

150 

100 

50 

Mar-02 

Sep-02 

Mar-03 

Sep-03 

Mar-04 

FTSE RAFI Indices (Total Return) 

Actual Div 


FTSE RAFI US 1000 Index (USD) 1005 6179.19 -0.4 9.2 15.6 1.7 2.13 

FTSE RAFI Developed ex US 1000 Index (USD) 1017 7005.40 4.0 16.4 23.4 4.9 2.50 

FTSE RAFI Kaigai 1000 Index (USD) 1021 6035.56 1.5 12.6 21.3 2.9 2.54 

FTSE RAFI Europe Index (EUR) 478 6394.02 1.4 11.8 16.9 3.6 2.85 

FTSE RAFI Eurozone Index (EUR) 274 6576.50 2.3 13.2 18.2 4.5 2.75 


Sep-04 

Mar-05 

Sep-05 

Mar-06 

Sep-06 

Mar-07 

FTSE RAFI US 1000 Index (USD) 

FTSE RAFI Developed ex US 

1000 Index (USD) 

FTSE RAFI Kaigai 1000 Index (USD) 

FTSE RAFI Europe Index (EUR) 

FTSE RAFI Eurozone Index (GBP) 


125


126 

FTSE LATIBEX Index Series 

31 December 2003 to 31 March 2007 

FTSE LATIBEX Index Series (EUR Terms) 

350 350 350 350 350 

300 

250 250 250 250 250 

200 200 200 200 200 

150 

100 100 100 100 100 

50 50 50 50 50 

FTSE LATIBEX Indices (EUR Terms) 

Index Name Value 2 M (%) 6 M (%) 12 M (%) YTD (%) 

FTSE LATIBEX All Share Index 2455.90 3.5 23.1 17.7 6.0 

FTSE LATIBEX TOP Index 4021.70 3.6 23.0 14.5 6.4 

FTSE LATIBEX Brasil Index 9168.20 3.4 27.1 10.9 6.5 

FTSE Latin America Index 585.59 2.0 22.6 17.6 5.1 

FTSE Brazil Index 505.30 2.6 24.2 12.4 5.2 

FTSE UK Commercial Property Index Series 

FTSE UK Commercial Property Index Series – 5-Year Performance (Total Return Basis) 

250 

200 

150 

100 

50 

Dec-03 

Mar-02 

Mar-04 

Sep-02 

Jun-04 

Sep-04 

Mar-03 

Dec-04 

Sep-03 

Mar-05 

Jun-05 

Mar-04 

Sep-05 

Sep-04 

Dec-05 

Mar-06 

Mar-05 

Jun-06 

Sep-05 

Sep-06 

Dec-06 

Mar-06 

FTSE LATIBEX All-Share Index 

FTSE LATIBEX Top Index 

FTSE LATIBEX Brasil Index 

FTSE Latin America Index 

FTSE Brazil Index 


Mar-07 

Sep-06 

Mar-07 

FTSE All UK 

Property Index 

FTSE UK Retail 


FTSE UK Office 


FTSE UK Industrial 



FTSE UK Commercial Property Indices (GBP Terms) 

Index Name Value 2 M (%) 6 M (%) 12 M (%) YTD (%) 

FTSE All UK Property Index 5603.84 0.9 6.6 14.1 2.7 

FTSE UK Retail Property Index 5544.53 0.5 5.1 13.5 1.0 

FTSE UK Office Property Index 5634.64 1.0 7.1 13.8 5.1 

FTSE UK Industrial Property Index 5634.64 1.0 7.1 15.4 5.1 

FTSE Private Banking Index Series 

120 

115 

110 

105 

100 

95 

Dec-05 

Mar-06 

Jun-06 

FTSE Private Banking Index Series (USD Terms) 


Sep-06 

Annual 

Index Value Volatility 

(31 Dec 2005=100) 3 M (%) 6 M (%) 12 M (%) YTD (%) (%) 

USD Low Risk 106.66 1.3 3.2 5.7 5.3 2.4 

USD Medium Risk 110.59 1.6 5.2 7.3 8.8 4.3 

USD High Risk 113.63 1.8 6.6 8.4 11.7 6.1 

FTSE Research Team contact details 

Low Risk 

Medium Risk 

High Risk 

Andy Harvell Andreas Elia Kamila Lewandowski Sandra Jim 

Head of Research Research Analyst Research Analyst Research Manager, Asia Pacific 

andy.harvell@ftse.com andreas.elia@ftse.com kamila.lewandowski@ftse.com sandra.jim@ftse.com 

+44 20 7866 8986 +44 20 7866 8013 +44 20 7866 1877 +(852) 223 0-5814 

Dec-06 

Mar-07 


127

CALENDAR 

128 

Index Reviews May – August 2007 

Date Index Series Review Type Effective Data Cut-off 

(Close of business) 

10-May FTSE Med 100 Index Semi-annual review 18-May 27-Apr 

11-May Hang Seng Quarterly review 1-Jun 30-Mar 

16-May MSCI Standard Index Series Annual review 31-May 30-Apr 

Early Jun ATX Quarterly review 29-Jun 31-May 

Early Jun KOSPI 200 Annual review 8-Jun 31-May 

Early Jun IBEX 35 Semi-annual review 2-Jul 31-May 

Early Jun CAC 40 Quarterly review 15-Jun 31-May 

Early Jun OBX Semi-annual review 22-Jun 31-May 

Early Jun S&P / TSX Quarterly review 15-Jun 31-May 

1-Jun S&P BRIC 40 Semi-annual review - constituents 15-Jun 

1-Jun S&P / ASX Indices Quarterly Review 15-Jun 31-May 

1-Jun DJ Global Titans 50 Annual review of index composition 15-Jun 30-Apr 

4-Jun OMX S30 Semi-annual review 30-Jun 31-May 

5-Jun DAX Quarterly review 15-Jun 31-May 

6-Jun FTSE UK Index Series Quarterly review 15-Jun 5-Jun 

6-Jun FTSE Global Equity Index Series Annual review - Emgng Eur, ME, Africa, 

(incl. FTSE All-World) Latin America 15-Jun 30-Mar 

6-Jun FTSE techMARK 100 Quarterly review 15-Jun 31-May 

6-Jun FTSEurofirst 300 Quarterly review 15-Jun 31-May 

6-Jun FTSE eTX Quarterly review 15-Jun 31-May 

6-Jun FTSE/JSE Africa Index Series Quarterly review 15-Jun 1-Jun 

6-Jun FTSE EPRA/NAREIT Global Real 

Estate Index Series Quarterly review 15-Jun 1-Jun 

8-Jun NASDAQ 100 Quarterly review/ shares adjustment 15-Jun 31-May 

11-Jun NZSX 50 Quarterly review 29-Jun 31-May 

12-Jun S&P MIB Quarterly review, IWF 15-Jun 8-Jun 

12-Jun FTSE Bursa Malaysia Index Series Semi-annual review 15-Jun 31-May 

13-Jun DJ STOXX Quarterly review 13-Jun 15-May 

13-Jun S&P US Indices Quarterly review 15-Jun 

13-Jun S&P Europe 350 / S&P Euro Quarterly review 15-Jun 

13-Jun S&P Topix 150 Quarterly review 15-Jun 

13-Jun S&P Asia 50 Quarterly review 15-Jun 

13-Jun S&P Global 1200 Quarterly review 15-Jun 

13-Jun S&P Global 100 Quarterly review 15-Jun 

13-Jun S&P Latin 40 Quarterly review 15-Jun 

15-Jun Russell US Indices Annual / Quarterly review 30-Jun 31-May 

Mid Jun VINX 30 Semi-annual review 25-Jun 31-May 

Mid Jun OMX S30 Semi-annual review 29-Jun 31-May 

Mid Jun Baltic 10 Semi-annual review 29-Jun 31-May 

Mid Jun OMX C20 Semi-annual review 25-Jun 31-May 

Mid Jun OMX N40 Semi-annual review 25-Jun 31-May 

1-Jul TOPIX New Index Series Semi-annual review 27-Jul 16-Jun 

11-Jul FTSE Xinhua Index Series Annual Review 20-Jul 18-Jun 

12-Jul TSEC Taiwan 50 Quarterly & annual review 20-Jul 29-Jun 

Mid July PSI 20 Semi-annual review 30-Jul 31-May 

Mid July OMX H25 Semi-annual review - consituents, Quarterly review 

- shares in issue 31-Jul 30-Jun 

10-Aug Hang Seng Quarterly review 7-Sep 29-Jun 

15-Aug MSCI Standard Index Series Quarterly review 31-Aug 31-Oct 

28-Aug FTSE Global Equity Index Series 

(incl. FTSE All-World)_ Annual Review / Japan 21-Sep 29-Jun 

29-Aug FTSE Goldmines Index Series Quarterly review 21-Sep 24-Aug 

Sources: Berlinguer, FTSE, JP Morgan, Standard & Poors, STOXX 

MARCH/APRIL 2007 • FTSE GLOBAL MARKETS

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BOSTON +(1) 617 306 6033 ~ FRANKFURT +49 (0) 69 156 85 143 ~ HONG KONG +852 2230 5800 ~ LONDON +44 (0) 20 7866 1800 

MADRID +34 91 411 3787 ~ NEW YORK +(1) 212 641 6166 ~ PARIS +33 (0) 1 53 76 82 88 ~ SAN FRANCISCO +(1) 415 445 5660 ~ TOKYO +81 3 3581 2811 

© FTSE International Limited (“FTSE”) 2005. All rights reserved. The FTSE/ASEAN indices are calculated by FTSE in conjunction with PT Bursa Efek Jakarta (Jakarta Stock Exchange), Bursa Malaysia Berhad, 

The Philippine Stock Exchange, Inc., Singapore Exchange and The Stock Exchange of Thailand (the “Exchanges”). All rights in the FTSE/ASEAN indices vest in FTSE and the Exchanges. “FTSE®” is a trademark 

of the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE under licence. Neither FTSE nor the Exchanges nor their licensors shall be liable (including in negligence) for any loss 

arising out of use of the FTSE/ASEAN indices by any person. Distribution of FTSE/ASEAN indices index values and the use of FTSE/ASEAN indices to create financial products requires a licence from FTSE.

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Section 2 - FTSE

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