Current Developments in the Securities Lending Industry

Table of Contents What is Securities Lending?3 Market Participants 4 Industry Trends 5 Securities Lending Risks 6 Selecting a Lending Agent 7 Third Party Lending 8 Questions

What is Securities Lending? Securities Lending It is the temporary transfer of securities from a lender to a borrower against collateral in the form of securities or cash The lender receives the full economic rights and benefits of the loaned securities The below outlines the basic structure of a securities lending transaction. Legal Framework Principals in the transaction Lender (Beneficial Owner) Borrower (e.g. Nomura) Agent Lender Borrower Agreements Sec Lending Agreement 3

Who Lends? Who Borrows? Why? Lender’s Perspective An opportunity to generate incremental returns and gain trading insights It offers an attractive risk/reward profile Securities lending operates with minimal impact on a lender’s operations i.e. Agent takes care of the administration; client buy/sell as normal The below outlines the key parties and rationale for securities lending transactions. Lenders Any Large Asset Gatherer Public Pension Funds Corporate Pension Funds Governmental Bodies Corporations Banks Demand Drivers Prevent Market Fails Yield Enhancement Trades Financing Trades Promotes Liquidity Support Trading Strategies Act as an Intermediary Borrowers Broker Dealers Banks Hedge Funds Agent Lender’s Perspective Agent arranges and administers loans to borrowers on behalf of lenders to borrowers Agent has opportunity to provide clients with a value-added service A win-win business where revenues are shared which helps to align agent’s interests with lenders 4

Industry Trends Back to Basics –An emphasis on the intrinsic value of a security as opposed to maximizing the cash reinvestment return Transparency –Lenders are focused on gaining a better understanding of the metrics and potential exposures in their lending program Risk Mitigation –Clients are focused on ensuring their lending activity is conducted in a manner to mitigate any risks Customized Program Management Agent lenders ability to provide separate account management and tailor lending solutions Decision Making –Lending decision is more market / investment decision than custodian The Securities Finance industry has gone through an evolution since the global economic crisis 5

Understanding Risks in Securities Lending There are various risks in securities lending but there are ways to mitigate each one DescriptionSample Risk Mitigations Counterparty Risk Loss as a result of a borrower insolvency Cash Re-Investment Risk Loss as a result of: –Counterparty Risk –Interest/Rebate Rate Risk –Liquidity Risk –Last Man Standing Risk Operational Risk Potential issues arising from: –Late Settlements –Entitlements –Entering new markets Legal and Regulatory Risk Insufficient clarity or completeness Risk of a regulation violation 6

Selecting a Securities Lending Provider Questions institutions should address prior to beginning the search process: Do your assets hold value in the securities lending market? Does your Board approve lending? Should you use an investment consultant or does your staff have the expertise to conduct the search? Narrowing the playing field! Beneficial Owners should take into account a wide array of considerations: Beneficial owners should conduct a thorough due diligence process in selecting an agent lending provider Client Service -Understand Client Needs -Proactive relationship management Transparent Reporting -Customization Strong technology platforms -Open Architecture -Capacity -Links to 3rd Party Custodians -Compliance Experience and Proven track record -Depth of Team -Ability to extract intrinsic value Program Customization -Cash/Non-Cash -Flexibility Commitment to the Business -Invests in people, technology -Innovation -Strong track record Risk Management -Counterparty credit management -Indemnification 7

Third Party Lending Many lenders are utilizing multiple lending agents to provide additional sources of revenue as well as increased diversification and benchmarking purposes –Overall revenue potential is greater as more of the portfolio will be utilized –A greater number of borrowers provides diversification –Multiple agents can be compared for performance purposes Third party lending remains transparent to the lender and requires no additional resources Third party lending implementation does not require lender to complete a custody conversion Third party lending does not result in any additional costs to the lender There are number of benefits to participating in a 3 rd Party Lending structure 8

Questions