Overwhelming Demand by Us Securities Lending Practitioners for Regulatory Reform to Allow Use of Equities As Collateral

New York and London - 27 May 2010

Over 40% of respondents expressed increased appetite for risk in the face of challenging market conditions

Data Explorers, the leading global provider of securities financing data and daily long and short institutional fund flow insight, today released survey findings following the Securities Financing Forum that took place yesterday at the Four Seasons Hotel in New York.

Mark Faulkner, Founder and Director of Innovation, Data Explorers commented: “Against a backdrop of reduced supply from beneficial owners and a heightened focus on risk management, participants at our Forum still expressed a keen desire to explore alternative structures. In these difficult markets, the quest for increased efficiency and higher risk-adjusted returns is driving all participants to consider whether now is the time to change their business models. The industry is dealing with an overwhelming demand for regulatory reform in the face of an uncertain future for this industry”.

The Forum was chaired by Matt Miller, Bloomberg TV and attracted over 200 senior Securities Lending practitioners. Key highlights from the panel discussions and interactive voting revealed:

• In the face of declining securities lending revenues, over 40% of attendees expressed a desire to take more risk to retain or increase revenues
• Over 80% of delegates expressed dissatisfaction with US short selling regulation
• Over 85% called for regulatory change to allow equities to be broadly accepted as collateral
• Participants thought ETFs were a rare bright spot in this multi-billion dollar industry looking for direction
• Delegates were clearly open to new ideas, especially alternative securities lending structures, changing prime brokerage models, new markets and central counter-parties

Research conducted by Data Explorers revealed that US domiciled institutions almost exclusively (95%) rely on cash collateral. This contrasts heavily with other countries, such as the UK, where cash accounts for only 21% of collateral and Canada, which has seen reliance on cash almost half to 20% over a three year period. The report argues the predominance of non-cash collateral, in particular liquid equities, by lenders outside the US was instrumental in mitigating risk following the implosion of Lehman Brothers during the credit crunch.

The risk debate almost divided opinion, with a 60:40 split in favor of those with a reduced risk appetite in driving retention of securities lending revenues. The debate also highlighted an education issue, especially from beneficial owners in light of Lehman collapse.

“While balances and inventory in the securities lending industry may be significantly down on their pre-credit crunch highs, this is still a significant $15 billion revenue industry. It is not all doom and gloom. We heard that against an expectation of an increase in rates, beneficial owners remain committed to securities lending and practitioners are beginning to embrace alternative structures to increase revenues. Continued client dialogue and education will be key as the industry evolves,” added Faulkner.

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