insight and analysis DEMYSTIFYING SECURITIES LENDING

Transcription

1 insight and analysis DEMYSTIFYING SECURITIES LENDING april 2013

2 RBC Investor Services Limited RBC Investor Services Limited is a holding company that provides strategic direction and management oversight to its affiliates, including RBC Investor Services Trust, which operates in the UK through a branch authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and in the DIFC through a branch authorised and regulated by the Dubai Financial Services Authority. In Australia, RBC Investor Services Trust is authorised to carry on financial services business by the Australian Securities and Investments Commission under the AFSL (Australian Financial Services Licence) number All are licensed users of the RBC trademark (a registered trademark of Royal Bank of Canada), and conduct their global custody and investment administration business under the RBC Investor Services brand name. The information is provided for professional clients. These materials are provided by RBC Investor Services for general information purposes only. RBC Investor Services makes no representation or warranties and accepts no responsibility or liability of any kind for their accuracy, reliability or completeness or for any action taken, or results obtained, from the use of the materials. Readers should be aware that the content of these materials should not be regarded as legal, accounting, investment, financial, or other professional advice, nor is it intended for such use. / Trademarks of Royal Bank of Canada. Used under licence. *Trademark of RBC Investor Services Limited.

3 table of contents demystifying securities lending 1 Introduction 2 Headline messages 4 Market dynamics 7 Securities lending overview 11 Risks and risk mitigants 14 Routes to market options and considerations 17 Cash and non-cash programmes 18 Selecting a securities lending provider 19 A guide to securities lending estimates

4 Revenue estimates are important because they frequently form a pivotal part of a securities lending provider s assessment process. 1 rbc investor services

5 introduction I am very pleased to introduce Demystifying Securities Lending, a guide designed to provide beneficial owners and asset managers with clear insight about the market, its value and the key factors to consider when deciding to participate. RBC Investor Services published the original Demystifying Securities Lending in 2009 as a direct response to the unprecedented events of the previous autumn. We felt there was a strong demand from beneficial owners for clear information. Beneficial owners were considering whether to continue their securities lending activity and potential new entrants were asking if it was something they wished to participate in. Their deliberations, however, were being made more difficult by a relative absence of objective information. Revenue estimates are important in the industry because they frequently form a pivotal part of the assessment process of a securities lending provider. However, they have long been a source of curiosity and infuriation for beneficial owners. Often intended to aide the comparison of different providers or form a meaningful benchmark of performance, instead they frequently do the opposite. We provide insight into how estimates are produced and a guide for beneficial owners who wish to assess the revenue generation capabilities of a prospective securities lending service provider. We hope you find this an informative and insightful guide to securities lending, and the key factors to consider when managing your programme or deciding to participate. Without question, securities lending has made significant progress in this regard. In our updated Market Dynamics section, we expand on how this greater transparency was achieved as well as examining the themes driving the industry today. We are even prepared to make a bold assertion there s never been a better time to lend. This may seem at odds given the economic, regulatory and political backdrop which present challenges on every front and retain the ability to surprise. Yet it is precisely how the industry has met these challenges so far and responded to the engagement of politicians and regulators that has given it a stronger platform. Today, securities lending has never been so well understood, so transparent and so important. The importance of this cannot be understated. These remain difficult times, however, and the industry must continue to engage, educate and promote its value to a wide audience. On this theme, in a new update to this edition, we explore one area of securities lending that never fails to puzzle beneficial owners yet appears to have escaped much attention to date. That subject is revenue estimates. Susan Pike Global Head, Market Services RBC Investor Services insight and analysis - demystifying securities lending 1

6 headline messages The key for any beneficial owner is to actively manage, monitor and review their own policies and procedures. securities lending adds value Securities lending is important to the efficient functioning of capital markets and is a highly efficient and relatively low risk method of generating incremental returns from otherwise idle assets. Even through the depths of the credit crisis, securities lending still generated billions of dollars in annual revenues for beneficial owners and asset managers worldwide. clearly defined securities lending policies are essential Every organisation choosing to lend their assets should first have a clear understanding of what it wants and expects from its securities lending programme. When undertaken within an appropriately managed programme with clearly defined policies and parameters, securities lending is a relatively low risk practice that can contribute significant risk-adjusted returns year after year. actively manage, review and communicate these policies regularly The key for any beneficial owner is to actively manage, monitor and review their own policies and procedures and, where applicable, clearly communicate them to relevant parties. not all lending programmes are the same The principles, procedures and structures that underpin each route to market and each provider s programmes may vary significantly. As with any financial product there is a risk-return relationship that must be clearly defined, understood and maintained. securities lending is an inherently conservative product. however, there are real risks that must be understood and managed Counterparty risk is generally accepted as the primary securities lending risk to be managed. However, it is not the only one. All risks should be understood and how they are to be managed clearly documented within a lender s securities lending policies and procedures. securities and cash can be legitimate collateral options but they do have different risk-return profiles Securities and cash can be perfectly legitimate collateral options. The difference between them lies in their contrasting risk-return profiles. Cash reinvestment is a distinct but related activity with a potentially very different risk-return profile of its own. 2 rbc investor services

7 securities lending is complementary with the exercise of good corporate governance The ability of a beneficial owner or asset manager to exercise good corporate governance need not conflict with participating in securities lending. The key is to integrate corporate governance policies into securities lending policies and clearly communicate them to all parties within the securities lending relationship. When a lender s corporate governance policy is clearly understood, securities lending activity can be managed in a way that ensures securities are always available at the appropriate time in order to exercise a vote. securities lending contracts have proven to be robust when enforced in a real default scenario The default of Lehman Brothers in 2008 resulted in previously untested market documentation, when called upon, being shown to be robust. This track record offers securities lending participants greater comfort. there has never been a better time to lend The securities lending industry has made significant progress to demystify itself in the eyes of beneficial owners. The manner with which it has met the economic, regulatory and political challenges means securities lending is in a position where it has never been so well understood, so transparent and so important. insight and analysis - demystifying securities lending 3

8 market dynamics out of the shadows Historically accused of being opaque, the securities lending industry has needed to become more transparent and learn to promote its value to a wider audience. One initiative in particular that has been to the industry s benefit has been the focus by regulators on shadow banking. As an integral part of the shadow banking system, such a spotlight has brought a level of awareness of the mechanics, drivers and value of securities lending not previously seen. Literally and metaphorically, it has had the effect of supporting the industry to step out of the shadows. The process started with initiatives such as the SEC Roundtable of Securities Lending and Short Selling in 2009, and continued as regulators worldwide, spearheaded by the G20, have acted to increase oversight of the global financial system. In November 2011, the G20 leaders in Cannes endorsed the Financial Stability Board s (FSB) initial recommendations on Shadow Banking and approved the creation of five work streams under the FSB to develop policy recommendations to strengthen regulation of the shadow banking system, including securities lending and repos. In April 2012, the FSB published its interim report and provided a comprehensive market overview of the securities lending and repo market, its key drivers, its position within the shadow banking system and an overview of global regulations related to these products and market participants. In November 2012, the FSB published a consultation document in which it presented its recommendations for strengthening existing regulations. The FSB expects to publish final recommendations in September To its credit, the industry has been proactive in providing education and information about itself. Never before had regulators produced such a high-profile reference document which defined securities lending, detailed the way it operated and outlined its systemic importance. For an industry once accused of opacity, the benefits of this work stream will be long felt. clearly adding value The passage of time has also been critical in allowing objectivity to replace subjectivity in characterising the securities lending industry. Until 2008, securities lending was not widely understood and, through its association with short selling, often demonised. Those unfamiliar with short selling could easily be forgiven for concluding it was a practice that facilitated driving down the stock prices of vulnerable companies. This was exacerbated by the absence of independent securities lending and short selling market data in most jurisdictions. This meant it was a perfectly shaped political football and soon short-selling bans in various forms were implemented worldwide. This reaction, in the long-run, proved of benefit to the industry. Short selling was prohibited yet stock prices still fell and markets remained volatile because of the underlying weakness of companies and macroeconomic fundamentals. Furthermore, evidence suggests that the short-selling bans had a negative impact through reduced liquidity and wider bid-offer spreads. This was the conclusion of a US Federal Reserve Staff Report* in September 2011 and was a view further supported by numerous academic and regulatory studies. For example, in spring 2011, the Investment Industry Regulatory Organization of Canada** proposed relaxing short selling rules having examined trends of short selling over the previous three years and found no unusual patterns or evidence of systemic problems. Today, short selling is no longer such an emotive topic. It is better understood, governed by explicit rules and regulators have more data to assess activity. In fact, far from being vilified, the valuable insight that short selling and securities lending data can provide buy-side managers is being increasingly recognised. Portfolio managers have always required sources of diversified returns that have not been discounted by the market. Achieving these in the current environment, however, requires even more diversified thinking not just in portfolio construction, but also in the data used to support decision-making and the way these are combined to capture changes in market valuations. Additional sources of securities lending information will become increasingly available to complement the existing independent data providers. Collecting comprehensive repo and securities lending market data to deliver increased transparency to the public has been explicitly highlighted by the FSB in its consultation document. This expected growth of access to information will give managers greater ability to combine 4 rbc investor services

9 short side flow and analytics with the wealth of long side information they have always had. Managers will increasingly use securities lending and securities lending data in their portfolio management process to optimise portfolio construction, achieve diversified returns and to inform the timing of their trading decisions. As a result, more managers will view securities lending as a diversifying investment asset class and manage it accordingly. all you need is love and collateral While global regulatory initiatives, most notably the FSB s work stream, will further strengthen it, the securities lending market has already shown itself to be a systemically important product for the capital markets. In no small part this is due to its secured nature and this property is a quality regulators value highly. New and upcoming rules such as Dodd Frank, EMIR and Basel III, all have potentially significant impacts on the collateral needs of the financial industry as a whole. Collateral is becoming the gateway to credit. More than ever before, collateral of the right quality is needed by more types of market participant. Whether the need for additional collateral is driven by the move to central counterparty clearing of over the counter (OTC) derivatives, the bilateral OTC market, bank liquidity or the Liquidity Coverage Ratio requirements, what is clear is that the demand for collateral is going to rise and as collateral becomes increasingly important to the buy- and sell-sides alike, securities lending will become even more critical as a source for that collateral. More than ever before, collateral of the right quality is needed by more types of market participant. This trend has led a growing number of institutions to consider the need for enterprise collateral management the process of efficiently mobilising, aggregating, upgrading and optimising the pools of assets available to it for cost, capital and balance sheet purposes. This is no small task. The concepts of cross-product collateral management and multi-asset class financing solutions are not new investment and commercial banks first started to centralise their activities across business units and create collateral trading desks over a decade ago. Today the difference is the scale of collateral required and the diversity of the institutions which need a collateral management strategy. The creation of such a strategy is a challenge because the speed of regulatory change taking place is significant, as are the costs and technology investment. Therefore, an integrated approach will be key. insight and analysis - demystifying securities lending 5

10 It is important, however, to emphasise the opportunities as well as challenges. Those who achieve the right solution to their enterprise collateral management requirements through an in-house or outsourced model may establish a competitive advantage over their peers. Further, any market where demand outstrips supply offers premium rewards to those who can provide that supply. For beneficial owners with high quality assets that may be eligible as collateral such as government bond portfolios, the potential to generate strong returns has never been greater. This is further enhanced when a beneficial owner is prepared to lend their assets for a fixed term so borrowers can match durations with their funding and regulatory liquidity requirements. perceptions altered Securities lending has never been in such a strong position, despite the macroeconomic environment. This strength comes from the regulatory spotlight which has been directed upon it. Its characteristics, qualities and risks are out in the open, its challenges are being addressed and its important place within the financial system is acknowledged. Securities lending is now widely understood, increasingly needed and subject to an unprecedented level of transparency and available data to not only observe activity but leverage positively. There has never been a better time to lend. The expected size of collateral required has raised concerns of a collateral squeeze and prompted debate around which asset types should be acceptable as collateral. The greater use of corporate bonds and equities as collateral has already been noted and this may be expected to continue, not least because additional downgrades of government debt could further reduce the supply of eligible collateral. Market participants, repo counterparties, central banks and clearing houses are all examining the impact on their operations. Equities, in particular, make sense for both liquidity and correlation reasons. One crucial characteristic of collateral is that it is capable of being quickly liquidated in size and at a fair market price. Main index equities in the developed markets provide that comfort. Are there as yet untapped pools of supply that could relieve collateral pressures and offer new revenue opportunities? Yes. The benefits of securities lending to the efficient functioning of capital markets has long been acknowledged and emerging countries gaining comfort and confidence are opening their markets to securities lending, albeit in a phased and controlled way. To see this trend in action, one only has to monitor developments taking place in the BRIC countries, Qatar in the Middle East, and in Asia-Pacific markets such as Taiwan and Malaysia. These markets are all at different stages of alignment with international practices, meaning the way in which securities lending is conducted is centrally controlled to a greater or lesser extent, but these barriers are being gradually removed. As this trend develops, the potential to generate additional returns from securities lending and access currently unavailable sources of collateral will grow. * Federal Reserve Bank of New York Staff Reports. Market Declines: Is Banning Short Selling the Solution? Robert Battalio, Hamid Mehran, Paul Schultz, Staff Report no. 518 ** IIROC Notice Rules Notice - Technical - UMIR - Price Movement and Short Sale Activity: The case of the TSX Venture Exchange (for the period May 1, 2007 to April 30, 2010)(February 25, 2011) ** IIROC Notice Rules Notice - Technical - UMIR - Trends in Trading Activity, Shorts Sales and Failed Trades (for the period May 1, 2007 to April 30, 2010) (February 25, 2011); and 6 rbc investor services

11 securities lending overview background Securities lending is the market practice whereby securities are temporarily transferred from one party to another for a fee with the borrowing party providing securities or cash as collateral. The term of the loan may be open-ended or for a specific duration. By contrast, the supply side of the securities lending market recovered relatively quickly. Beneficial owners, in general, increased and improved their oversight of their securities lending programmes but relatively few suspended activity, or did so for only a short period of time. It is a long-established practice, recognised by central banks, regulators, exchanges and participants, as contributing significantly to the efficient functioning of today s global capital and money markets, and: > > Provides liquidity which drives down trading costs and promotes price discovery > > Facilitates the reduction of settlement fails > > Enables the financing of inventory positions > > Generates incremental income for its participants The resultant increase in efficiency benefits the market as a whole from securities dealers and end investors through to corporate issuers which depend on efficient, liquid markets to raise additional capital. history and size of market The securities lending market as we know it today dates back to the 1960s and, until the credit crisis, had been experiencing one long exponential curve of growth. Since the early 1990s in particular, technology, the derivatives market, the introduction of market standard documentation, ever-increasing numbers of beneficial owners deciding to lend their assets, and, most significantly, the increase in arbitrage and proprietary trading strategies, saw securities lending volumes grow considerably. North America, Europe and the larger Asian economies have the most sophisticated and well established securities lending markets. However, as understanding about the product and its benefits has grown, interest in securities lending in offshore jurisdictions such as Luxembourg and Dublin, and emerging markets, has also risen. attractiveness of offshore funds and emerging markets Offshore centres are of interest for securities lenders and borrowers for many reasons, notably tax, portfolio size, client base, and equity holdings. Equity securities held by funds resident in offshore centres are normally subject to full withholding tax rates. This makes them highly attractive to borrowers because any corporate entitlement, such as a dividend, that they need to manufacture is cheaper. When combined with the size of their local fund management industries, Luxembourg and Dublin-based funds in particular may expect to earn significant securities lending revenue. It is relevant to note, however, that in recent years there have been a number of successful challenges to local tax authorities, especially in Europe, in relation to applicable withholding tax rates. This has resulted in tax harmonisation of rates in certain markets for certain entity types, including some in offshore centres. Offshore centres still remain attractive relative to many other jurisdictions, but the advantage gap is closing. As may be expected, the credit crisis, or specifically the resultant actions of regulators to the crisis, impacted demand. Balance sheet deleveraging, curtailment of proprietary activity, short selling restrictions as well as general softer macroeconomic conditions have all served to dampen demand. To put this into context, according to Markit Securities Finance, at its peak in the mid-2000s total balances on loan exceeded USD 5.5 trillion and gross income from securities lending was USD 20 billion. By 2009 balances had fallen to the USD 1.5trillion-2trillion range and have remained there ever since with gross returns in 2012 globally of USD 11billion - lower but still very significant. The benefits of securities lending to the efficient functioning of capital markets has long been acknowledged and emerging countries gaining comfort and confidence are opening their markets, albeit in a phased and controlled way. As this trend develops, the potential to generate additional returns from securities lending and access currently unavailable sources of collateral will grow. By way of example one only has to monitor developments taking place in the BRIC countries, Qatar in the Middle East, and Asia- Pacific markets such as Taiwan and Malaysia. These markets are at different stages of alignment with international practices, meaning the way in which securities lending takes place is centrally controlled to a greater or lesser extent, but these barriers are being gradually removed. insight and analysis - demystifying securities lending 7

12 There has been an increased level of demand from borrowers for high quality assets. asset class returns From an asset class perspective, equity markets generally experience higher returns than other asset classes. This is principally because of the diverse number of revenue generating strategies that exist which involve equities such as tax, convertible bond or M&A arbitrage. Returns for securities other than equities may be high at times but, with the exception of government bonds, tend to be more security-specific. Typically, government bonds experience a higher percentage on loan than equities but with a lower associated fee resulting in a lower overall return to lendable assets. This remains the case. However, since the credit crisis there, has been an increased level of demand from borrowers for high quality assets for financing, liquidity and eligible collateral purposes and overall returns have subsequently risen. corporate governance In a securities lending transaction, general beneficial rights to securities are retained by the lender as the borrower contractually commits to returning equivalent securities at the lender s request and to make payments equivalent to the entitlements the lender would have ordinarily received had they not lent the securities (commonly referred to as manufactured payments). The one entitlement, however, that cannot be manufactured is the ability to vote. To exercise their right to vote, the lender must recall their securities. This characteristic of securities lending, and whether it means securities lending conflicts with, or compromises, a beneficial owner or asset manager s ability to exercise good corporate governance, has been a common topic of discussion within the securities lending industry and the investment community for many years. But the two need not conflict at all. The key is for beneficial owners and asset managers to integrate their corporate governance policies into their securities lending policies and clearly communicate them to all parties involved in their securities lending relationship. Securities lending activity can then be managed accordingly to ensure securities are always available at the appropriate times in order to exercise a vote. The International Corporate Governance Network, in its Stock Lending Code of Best Practice, echoes this theme. They advocate three broad principles transparency, consistency and responsibility. As they note: By properly following these broad principles best practice with regard to share lending can be achieved.* * lending_code_of_best_practice.pdf 8 rbc investor services

13 While it is technically possible for a borrower to borrow securities for the sole purpose of acquiring the vote, this practice is globally acknowledged as inappropriate. Although there have been one or two exceptions in the last 20 years it would be fair to say the securities lending industry has done an excellent job of regulating itself on this matter. Market practitioners, however, have no doubt that national regulators would step in and take appropriate action should this ever change. short selling Short selling is an investment technique in which a trader, market maker or fund manager borrows securities in order to sell them. Short selling may be used for numerous purposes, the vast majority of which add value to the efficient workings of a capital market and facilitate prudential risk management by individual organisations. Intuitively, given the dominant size of long-only managers relative to those that can short sell, in developed markets it is difficult to see how short sellers can move markets materially and for a sustained period of time. The depth of liquidity in these markets is too great. However, the absence of independent short selling data and analysis has historically made it difficult for practitioners to counter accusations and demonstrate this. This is less the case today as many countries now have introduced explicit short selling regulations to enable the monitoring and control of activity with greater publically available data expected to follow. Furthermore, the evidence from numerous academic and regulatory studies of the post-crisis period suggests the banning of short selling had a negative impact through reduced liquidity and wider bid-offer spreads. Most short sales are either executed by market makers to facilitate more efficient settlement coverage or hedge a client position, or are executed by traders or fund managers as part of a broader trading strategy, typically as a hedge for a related long position that has been in place for many months. It is also important to note that a fund manager or trader can create a short economic exposure in a variety of ways, for example, by using swaps, futures, or contracts for differences. Short selling is just one method of achieving the same aim and would be used once factors such as market liquidity, regulations, costs, capital and settlement ease have been considered. These alternatives are often referred to as synthetic financing. Today, short selling is no longer such an emotive topic. It is better understood, governed by explicit rules and regulators have access to more data to assess activity. In fact, far from being vilified, the valuable insight that short selling and securities lending data can provide buy-side managers is being increasingly recognised. uses of securities lending data Portfolio managers have always required sources of diversified returns that have not been discounted by the market. Achieving these in the current environment, however, requires even more diversified thinking not just in portfolio construction, but also in the data used to support decision-making and the way these are combined to capture changes in market valuations. Increasingly, additional sources of securities lending and short selling information are becoming, and will continue to become, publicly available to complement the existing independent data providers. This growth of access to information presents managers with the ability to combine short side flow and analytics with the wealth of long side information they have always had. More managers today are able to, and do, use securities lending short selling data in their portfolio management process to optimise their portfolio construction, achieve diversified returns and to inform the timing of their trading decisions. As a result, these managers increasingly view securities lending as a diversifying investment asset class and are managing it accordingly. additional resources For beneficial owners or asset managers seeking further information about securities lending in their local markets, please refer to the following industry association websites: > > Risk Management Association > > Pan Asian Securities Lending Association > > Canadian Securities Lending Association > > International Securities Lending Association insight and analysis - demystifying securities lending 9

14 Securities lending is an inherently conservative product from a risk perspective. 10 rbc investor services

15 risks and risk mitigants Securities lending is an inherently conservative product from a risk perspective. However, there are real risks which must be understood and closely managed. These risks, and their mitigants, include the following and should form part of a beneficial owner s securities lending policies and procedures: risk definition risk mitigants Credit/counterparty risk The risk that the borrower of the securities defaults. > Over-collateralisation > Acceptable borrower list > Indemnification Market risk Cash reinvestment risk Recall risk FX risk Legal and commercial risk Mismatch risk Operational risk Settlement risk The risk that the market price of the underlying security or collateral moves adversely in a short period of time. The risk, in cash collateral securities lending programmes, that the instrument purchased with the borrower s cash falls significantly in value, pays a return lower than the rebate paid to the borrower or defaults. It also includes yield curve and term mismatch risk. The risk that the borrower does not return recalled securities in time to enable a sale or corporate action to be met. The risk that arises where the collateral and the securities lent are denominated in different currencies. This covers both contractual risk and enforceability risk. Contractual risk refers to ensuring the terms and conditions for securities lending between two institutions are comprehensive and appropriate. Enforceability risk refers to the enforceability of the contract under prescribed national laws. The risk arising from the collateral and the lent securities being different asset types and their respective price movements showing little or no correlation. The risk that the securities lending participant or provider does not have adequate controls, technology and infrastructure in place to manage a securities lending programme. The risk of daylight exposure due to the delivery/redelivery of lent securities and delivery/redelivery of collateral not occurring simultaneously. > Quality, liquidity and correlation of collateral accepted > Over-collateralisation > Daily and intraday marking to market > Value at risk (VaR) model > Indemnification > Reinvestment guidelines > Daily and intraday marking to market > Value at risk (VaR) model > Over-collateralisation > Recall process > Daily and intraday marking to market > Value at risk (VaR) model > Over-collateralisation > Market-standard agreements and legal opinions > Contractual agreements > Over-collateralisation > Daily and intraday marking to market > Due diligence > Straight-through-processing (STP)of the loan process > Segregation of duties > Use of delivery versus payment (DVP) or delivery versus delivery (DVD) systems > Pre-collateralisation > Use of tri-party collateral managers insight and analysis - demystifying securities lending 11

16 Lenders need to be comfortable that the collateral held is of sufficient quality and liquidity. risk mitigant descriptors > > Over-collateralisation the provision of collateral with a market value in excess of the market value of the securities lent. Although minimum margin levels may be determined by the local regulatory environment of the underlying lender, the actual amount the loan is over-collateralised by can be varied to take into account market, credit, foreign exchange and mismatch risk as well as the costs of liquidating the collateral securities in the event of default. > > Acceptable borrower list only lending securities to borrowers that fulfil the lender s own criteria regarding acceptableness or alternatively seeking protection against borrower default through an indemnity from the lending agent. > > Indemnification the provision by a securities lending provider to the underlying beneficial owner of a commitment to make the underlying lender whole in the event of a borrowing counterparty default. Specifically, the agent may assume responsibility for any shortfall between the realised value of collateral provided, and the total funds necessary for the repurchase of loaned securities at the time of default. > > Quality, liquidation and correlation of collateral accepted collateral held is the lender s first port of call in the event of a borrower default. Although the choice of collateral that may be accepted is generally regulatory driven, lenders need to be comfortable that the collateral held is of sufficient quality and liquidity to facilitate a swift closing out and repurchase of the positions on loan without loss. Attention should also be given to diversification of collateral types, instruments and durations. > > Daily and intraday marking to market a mechanism that ensures the amount of over-collateralisation is maintained. Most mark to markets are done daily but may also be performed intraday if sudden price movements require more immediate action. Marking to market should also be inclusive of all current FX rates for securities involved back to a base currency. 12 rbc investor services

17 > > Value at risk (VaR) model the adoption of a comprehensive and efficient risk, capital and collateral management model. The provider s systems and procedures should have sufficient functionality to facilitate a flexible, rule-based collateral management approach where acceptable collateral is maximised given lender, regulatory and bank rules, including concentration checks and sophisticated inclusion/exclusion rules. The model s underlying assumptions should be reviewed frequently and policies should incorporate robust back-testing and stress testing procedures. > > Reinvestment guidelines clearly defined guidelines that include, among other things, the instruments into which the cash may be reinvested, credit quality thresholds, interest rate durations, maturities, loan and investment duration correlation, asset mix, due diligence on the investment manager (if applicable), inclusion in commingled collateral pools, and secondary market liquidity. > > Market-standard agreements and legal opinions signing market standard agreements between borrowers and lenders, and ensuring a legal opinion is held that confirms the terms and conditions of the contract would be recognised and enforceable under the laws of the countries of both parties, provides considerable legal protection. Specifically, enforceability of contractual terms in the event of insolvency or bankruptcy to one of the parties is a common area that legal opinions focus on. The inability of the non-defaulting party to net the collateral value and the underlying loan value, and the potential risk of re-characterisation of the loan or collateral to something other than an outright transfer of absolute title, are arguably the most important issues focused on because of their implications for bank capital calculations and the non-defaulting party s ability to sell the defaulting party s assets swiftly. > > Due diligence conduct a thorough review of the securities lending provider s programme, including meetings, presentations, documentation, warranties, capital, regulatory approvals and proven track record to help you to determine the infrastructure strength that supports the lending programme. > > Straight-through-processing (STP) of the loan process STP minimises the risk of manual errors, is more secure and improves efficiency. Such STP should include full integration with asset servicing applications and to sub-custody agents. > > Segregation of duties documentation of key internal controls should be reflected in audited reports (e.g., SAS70 Reports). > > Use of delivery versus payment (DVP) or delivery versus delivery (DVD) systems settlement of both legs within a system that facilitates DVP or DVD (simultaneous settlement). > > Pre-collateralisation an agreement between the parties that one delivery must occur before the other. Usually it is the borrower-to-lender delivery that must settle first because the driver of the trade is the borrower s demand for the lender s securities. Pre-collateralisation may be necessary if a settlement system doesn t accommodate DVP or DVD, or if the collateral and lent securities are held within different settlement systems. > > Use of tri-party collateral managers the tri-party collateral management process involves the borrower pre-delivering collateral to the tri-party agent who advises the lender and borrower of receipt. Upon confirmation of receipt the lender delivers the securities to be lent to the borrower. In terms of physical management of securities, the tri-party agent is involved in the collateral leg of the trade only. The tri-party agent does not take delivery of the lent securities. > > Contractual agreements enter into well structured and drafted contractual agreements between the beneficial owner and securities lending provider that equitably address the rights and responsibilities of both parties. > > Recall process establish a clear buy-in and recall management process which details as part of the contractual and service level agreements between parties, the process and timing for dealing with recalls and buy-ins. Recall risk can be further mitigated by being part of a securities lending programme that actively manages recalls through a proactive inventory management system, supported by a large pool of securities that can be readily drawn upon. insight and analysis - demystifying securities lending 13

18 routes to market establishing clear policies and procedures Securities lending conceptually is not difficult to understand. As a result, decision-making processes tend to revolve more around whether to participate and then the method of participation. And there is no right or wrong answer. Determining the optimal route or routes to market is based on individual circumstances and risk tolerance. The first decision of a beneficial owner is straightforward to lend or not lend. There is no obligation to lend ones assets but organisations choosing to lend should first have a clear understanding of what they want and expect from a securities lending programme. When undertaken within an appropriately managed programme with clearly defined policies and parameters, securities lending is a relatively low risk practice that can contribute significant risk-adjusted returns year after year. The key for any lender is to actively manage, monitor and review their own policies and procedures and, where applicable, clearly communicate them to relevant parties. Following the decision to lend, there are two subsequent choices to lend yourself or to outsource the mechanics of lending to a third party. These selections can be applied to an entire portfolio or more strategically (i.e., lending some funds or asset classes but not others; lend equities directly and fixed income assets via a custodian). The criteria for determining the optimal route or routes should be based on management appetite towards risk, returns and operational responsibilities as well as the characteristics of the portfolios themselves. principal and agency models a comparison In the context of securities lending, the term principal refers to the relationship between the borrower of the securities and the owner of the securities being lent namely, counterparty risk. By definition, regardless of model or route to market, a principal relationship always exists. A principal model arrangement is where the owner of the securities has direct relationships with borrowers. They may trade exclusively with a single borrower or they could have multiple direct relationships. Revenue generation, risk management and operational responsibilities remain with the owner of the securities. In an agency model, responsibility for revenue generation, risk management and operations is effectively outsourced to an intermediary typically in return for an agreed percentage of the gross revenues generated. The intermediary facilitates securities lending on behalf of the beneficial owner but is not the borrower of the securities themselves. Counterparty risk therefore remains between the beneficial owner and the borrower and the beneficial owner retains full responsibility for deciding which borrowers their securities may be lent to, against specific parameters. In turn, the agent has accountability to the beneficial owner to undertake securities lending in accordance with the beneficial owner s risk policies, lending parameters and the contractual arrangements between the parties. As noted, there is nothing in theory to prevent the owner of securities (e.g., a UCITS fund, pension fund, or insurance company) lending directly to borrowers. In practice, however, relatively few do and for legitimate reasons. Securities lending is a multi-trillion dollar market and few beneficial owners have the critical mass inventory size that borrowers prefer. Securities lending also involves significant operational and infrastructure costs. Lastly, and possibly most significantly, securities lending is not the institutional investor s or beneficial owner s primary or core focus managing assets is. For these reasons, intermediaries play a vital role. They have the size, resources and commitment to make securities lending worthwhile and enable beneficial owners with all portfolio sizes to participate in, and earn incremental returns from, securities lending. Custodians, as intermediaries, typically best fulfil these criteria and have a large pool of lendable assets at their disposal although they are not the only intermediaries. Specialist non-custodial agents also exist that offer a similar service. 14 rbc investor services

19 While these types of intermediaries could run their securities lending programmes using a principal model it is more common for them to operate agency lending programmes. They do so primarily for capital and conflict of interest reasons and because their business models are such that they are not natural borrowers of securities other than on behalf of their clients. The agency model allows them to bring together their clients assets and lend them on a pooled basis optimising and enhancing returns through scale and the fact that no one borrower has the strongest demand for every asset class. Principal intermediaries, such as broker-dealers or prime brokers do exist, but tend to be focused on satisfying borrow demand such as that of their hedge fund client base. One of the tenets of securities lending that provides comfort to beneficial owners is that loans are nearly all made on a call, or open, basis in other words, either party can cancel the trade with immediate effect at any time. This ensures that the normal investment management process is not impacted. Conversely, borrowers value stability and dislike being recalled. Principal intermediaries perform a valuable service by balancing the needs of both. They also stand in the middle from a credit, or counterparty risk, perspective. Ultimately, few beneficial owners have the credit appetite to agree to lend their assets to, say, start up hedge funds. The term principal refers to the relationship between the borrower of the securities and the owner of the securities being lent. Stability and depth of supply are also important attributes that clients of principal intermediaries look for. For these reasons, principal intermediaries have historically been attracted to arrangements whereby they are given exclusive borrowing rights to a portfolio for a defined period, say one year. Such arrangements are equally attractive to beneficial owners as borrowers potentially may pay a premium above current market levels to secure inventory, and the beneficial owner would be assured of a consistent securities lending revenue stream. But the opportunity cost for that certainty and consistency is a concentration of counterparty risk and the inability to benefit from positive changes in market conditions that could have earned them additional revenues. Exclusive arrangements can be negotiated directly between the beneficial owner and the borrower, or can be organised and managed on their behalf by their agent intermediary. Similarly, the exclusive could be bilaterally negotiated or organised on what is commonly referred to as an auction basis whereby a selected group of borrowers submit closed envelope bids for the portfolio. insight and analysis - demystifying securities lending 15

20 Both cash and non-cash securities can be perfectly legitimate collateral options. The difference between them lies in their contrasting risk-return profiles. 16 rbc investor services

21 cash and non-cash programmes cash collateral programmes When cash is provided as collateral, the borrower receives the securities they have borrowed and, in addition, a rebate is paid to them on the cash provided. The lender (or if applicable agent lender) then reinvests the cash collateral. Revenue is derived from the spread between the return on the investment and the rebate paid to the borrower. Lenders, or in the case of agency programmes the underlying clients, must dictate the reinvestment parameters and how aggressive or conservative they want to be. Further, clients in agency programmes must decide whether the cash collateral is to be commingled and aggregated by their agent from a reinvestment perspective or managed in an alternative manner. Typically, cash reinvestment risk is beyond the scope of a lender s indemnity. non-cash collateral programmes The alternative to cash collateral is to accept other forms of securities. For trades where the loan is versus non-cash collateral the borrower and lender negotiate a straight fee for the transaction in the form of an interest rate applied to the market value of the loan. Borrowers may reward lenders in the form of higher fees paid for accepting a broader range of asset types as collateral. However, the trade-off is the lender may be left with lower quality or less liquid assets as collateral in the event of default. Non-cash collateral may be managed by the lender themselves (or on their behalf by their lending agent) or this function may be outsourced to a third-party, known as a tri-party collateral manager. Tri-party collateral managers are an attractive alternative for some lenders because they take away the operational functions of collateral management, are independent of the borrower and typically the borrower pays the tri-party managers costs. However, there may be a delay in gaining access to the collateral in the event of borrower default by definition, it is held by a third party and there is a due process that must be followed in such events. Also, a lender needs to monitor their rules closely to ensure they are appropriately well defined and correctly reflect their intentions because the systems of tri-party collateral managers optimise collateral allocation based on the strict criteria that are input. For example, a lender may specify OECD Government Debt as acceptable collateral in the belief that the majority of collateral actually held would be expected to be G7 Government Debt. This may not necessarily be the case and without further specification, G7 Government Debt could conceivably constitute none of the collateral. regional differences The US securities lending industry has evolved over time to become almost exclusively a cash collateralised market. Amendments to the Employee Retirement Income Security Act in 1981 restricted acceptable collateral to cash and government securities and although many non-erisa funds also now participate in securities lending the focus on cash in the early days resulted in US custodians creating and developing programmes utilising the cash model. By contrast, in Canada and most European and Asian markets, non-cash collateral is a far more common option again a consequence in many cases of historical regulatory or tax conditions. In the UK, for example, until the mid-1990s the manner in which reinvestment earnings were taxed made cash collateral unattractive and pushed market participants to adopt the non-cash route. how cash and non-cash programmes differ Both cash and non-cash securities can be perfectly legitimate collateral options. The difference between them lies in their contrasting risk-return profiles. In a non-cash programme, securities are lent and different securities are delivered as collateral. The lender does not have to do anything with the securities received as collateral other than pass back to the borrower any coupon or dividend payments received. Conversely, in a cash programme, the lender does have to do something with the collateral received - reinvest it. The lender must reinvest the cash in such a way that it is able to generate a rate of return in excess of the rebate rate of interest payable the borrower. If the asset or assets into which the cash is reinvested either lose value, pay a return lower than the rebate paid to the borrower or default, there is no recourse to the borrower to top up or replace them. The income, or potentially capital, loss would be borne by the lender. insight and analysis - demystifying securities lending 17

22 selecting a securities lending provider considerations Credit worthiness Collateral Robust risk management processes and procedures Indemnification Comprehensive recall management process Strong technology Revenue generation Transparent reporting Commitment Relationship management description Credit worthiness of an institution and their experience and track record in the market A lender may decide to accept cash and/or non-cash collateral. Cash collateral while the most liquid form of collateral introduces cash reinvestment risk. Non-cash collateral programmes focus on achieving each security s intrinsic lending value. An understanding of a provider s overall collateral book is of value as even if a client s parameters are conservative their providers consolidated position, and therefore risk profile, may be less so. Comprehensive and proven counterparty risk, capital and collateral management policies and procedures The first consideration is whether an indemnification is required. No indemnification means the beneficial owner accepts a greater degree of risk but they do receive a larger proportion of the gross returns. If the decision is taken to receive an indemnity it needs to be from a strong financial institution, and clearly cover the risks protection is sought for. Although many indemnities are similar, there are frequently subtle differences between the indemnities of each provider. Size of inventory, security buffers, an automated function to swap loans between clients within their programme and detailed recall monitoring and management processes are core requirements of any securities lending programme. A strong technology architecture and ability to process a high trade volume in an STP environment, extending to both internal and third party securities lending arrangements are essentials as are sophisticated allocation routines to allocate and manage non-cash collateral. Track record of delivering revenues in line with projections, as well as maximising risk-adjusted returns through global scope, efficient infrastructure and market expertise of securities lending traders. Comprehensive reporting with ability to produce customised reports to suit individual client requirements In general, a beneficial owner should look for a strong track record, a commitment to the market and a continual investment in people, systems and product development to ensure they remain a lender of choice. From an executive level, through to client services and operations, the beneficial owner and the securities lending provider will have numerous relationships. Choosing a provider who understands each client s requirements and who will cultivate a strong working, proactive relationship is essential. 18 rbc investor services

23 a guide to securities lending estimates Revenue estimates are important in the industry because they frequently form a pivotal part of the assessment process of a securities lending provider. However, they have long been a source of curiosity and infuriation for beneficial owners. Often intended to aide comparison of different providers or form a meaningful benchmark of performance they instead frequently do the opposite. Beneficial owners look at the diverse responses and ask themselves one question: which is the true figure? When all the major providers have access to the same market data to benchmark their activity, significant variances in performance cannot be expected. So how can variances in projected performance be explained? One might suspect that responses may be being inflated to win their business. After all, it is rare that an estimate is ever guaranteed. While this is possible, the more likely explanation is less suspicious it is merely different interpretations of the data and the assumptions which are made. By addressing this, a beneficial owner can ensure they have real confidence in the process. Here is a guide to any beneficial owner who wishes to assess the revenue generation capabilities of a prospective securities lending service provider. 1. Provide clear data and details of your securities lending parameters. This is the source of most problems. To generate a revenue estimate a provider requires: > > An asset list, usually in Excel format, that provides security identifiers and quantity of security held per account. Market values are usually useful too as a cross-check for the provider. > > A withholding tax table for each market and asset class in the asset list. Without it a provider will have to assume rates. They may get it wrong. Providers will also not know in which markets the beneficial owner reclaims tax. For example, a provider may correctly assume a 25% withholding tax is applied to equities in a particular market. However, they may not know the beneficial owner is entitled to reclaim 10%. In certain markets for certain portfolios this could make a very material difference on the revenue achievable. > > Details of the type of entity/entities whose assets will be lent. This is of relevance for several reasons. It ensures the provider confirms internally that it has completed the due diligence to provide services to a beneficial owner in that jurisdiction and of that type. It also allows the provider to set its response within the context of the applicable rules and regulations. > > Details of the lending parameters to be employed. Within any applicable regulatory framework a beneficial owner is free to define its own parameters. In particular, these should explicitly include: > > the assets that may be accepted as collateral > > the margins to be applied > > any concentration limits to be applied > > any limits on the amount of a particular security or the entire portfolio that may be lent > > the criteria for determining the approved borrowers that assets may be lent to, or alternatively, an explicit approved borrower list > > the instruments, duration and guidelines for cash collateral reinvestment. The key is to be specific. Absent or broad parameters will lead to wide revenue ranges and risk future misunderstandings. For example, when stating acceptance of EU government debt, a beneficial owner may visualise a basket of German, French and UK debt when actually a provider could legitimately accept on their behalf 100% collateral from Greece. The more specific a beneficial owner is, the more likely the responses from providers will be in proximate. Lastly, it is not uncommon for a beneficial owner to ask for revenue scenarios based on different sets of parameters typically categorised as conservative, balanced and aggressive. The beneficial owner simply needs to ensure they define each scenario equally clearly. Trading Style and Proxy Voting Policy. Securities lending programmes are intended to not impact the investment management process. This is only possible if the provider fully understands how the portfolio is traded and managed. A highly active portfolio will, by definition, involve a lot of buying and selling. Similarly, enabling a beneficial owner to fulfil its corporate governance policy may mean holding back, and/or recalling, a certain percentage of a security in order to ensure the client is able to exercise their vote. Both situations involve recalling and holding back securities to ensure the investment management process is uninterrupted. That means the securities are not on loan to generate revenue. Clarity around the percentage of securities to be held back will allow a provider to take this into account in the revenue estimate. Alternatively a beneficial owner can adjust the asset list they provide so that any buffers are already taken into account. insight and analysis - demystifying securities lending 19

24 2. provide a template for how you would like responses to be provided. One objective of managing any process is for it to be efficient and by defining a standard template, or templates, for responses the task of comparing providers will be simplified. A common way to categorise responses is by revenue driver. Other ways may be by asset class, by account, by market or a combination of the above. There s no right or wrong format. The templates should simply be driven by how the beneficial owner wishes to analyse the data. In this regard the beneficial owner may wish to receive the information in Excel format for ease of analysis. Providers will have slightly different approaches to generating revenue estimates but all contain the same elements. RBC Investor Services base approach is to calculate revenues for each asset class per demand driver. We take into account a combination of historical performance, current levels of fees being paid, and future expectations of our experienced global team of traders. From this central intrinsic value we refine and tailor the estimate accordingly and adjust our expectations based on factors such as the number of in-demand securities held and the lending parameters specified. The estimate is then benchmarked against industry data for full confidence that our figures are competitive and realistic. As noted, a common method for presenting a revenue estimate is by demand driver. The following are typical demand driver categories that may be considered: > > Dividend-related: the additional revenue paid by borrowers in circumstances where securities on loan over dividend dates are to borrowers in jurisdictions where their tax treaty entitles them to receive a higher percentage of the gross dividend than the beneficial owner. > > Specials: specific securities that, for one of a number of reasons, experience a period of high demand and high fees > > General Collateral Loans: securities that are not Specials; those with general demand that command low fees > > Term Loans: loans for a fixed tenure that may not be recalled or returned with immediate effect. In return borrowers pay a premium for certainty of supply. > > Cash Reinvestment Returns: revenue generated from the return of the reinvestment asset over and above the return achievable from lending versus non-cash collateral. 3. ask for any assumptions to be presented explicitly. When being presented with a revenue estimate beneficial owners should expect full transparency. All assumptions used to derive valuations should be declared. There is, however, a balance to be struck. There are so many influences on supply and demand that actual revenues will never equal the estimate. A provider can make an educated assumption about some of these influences, such as dividend yields. Others, such as legal, regulatory or tax changes, may legitimately be impossible to foresee. Clarity regarding assumptions made will have value in the future for beneficial owners. When they undertake a review of performance with their provider, they will be much better positioned to identify which factors drove revenues and ultimately assist their evaluation of whether their provider performed satisfactorily or not. To illustrate, assume a provider exceeds their estimate by 25%. At face value this looks to be a good performance. But if the market value of the portfolio has grown 50% during the same period, it could be argued, all other things being equal, that the provider has underperformed. Typical external factors outside of a provider s control include: > > Changes in portfolio composition > > Changes in portfolio size > > Changes in tax rates > > Legal/regulatory changes > > Changes in proxy voting policy > > Changes in programme parameters by the beneficial owner (e.g. approved borrowers, accepted collateral, applicable margins or approval for term trades) Typical factors on which a provider may be expected to have a view include: > > Level of dividend yields > > Level of All-In rates the fees achievable on loans of securities over dividend date expressed as a percentage of the gross dividend > > Level of expected hot stocks or specials These three factors are another source for diversity between estimate values. Two providers one taking a conservative view using historical 12-month dividends and another using a forecasted dividend yield that predicts for example a 5% increase in yields will arrive at potentially significantly different numbers depending on the asset mix of the portfolio. 20 rbc investor services

25 Similarly, assumptions around All-In rates, the colloquialism used to refer to the fee a borrower pays when they have borrowed securities over dividend, will also have the same effect. This factor presents a unique challenge to providers. Of these three factors, service providers would expect to have a firm handle on All-In rates because of their close borrower relationships. However, not all borrowers are equal in their interest for having such outstanding loan positions both generally and/or at a specific market level. The result is ten borrowers could be prepared to pay ten significantly different fee levels, and they may also only be prepared to pay any premium in certain markets. It means a provider in preparing an estimate needs to use its judgement to assess what the blended rate to apply would be. Specials are the variable to which beneficial owners should arguably pay most attention. Specials is the term used to refer to specific securities in high demand for reasons other than dividend-related. Specials, therefore, command higher than average securities lending fees to borrow. There are several reasons why a security may go special. For example, it may be the cheapest to deliver into a futures contract or the company may be involved in an M&A deal. Specials though, whatever the circumstances, are by definition difficult to predict meaning so is the associated securities lending revenue. Predicting securities lending revenue from Specials is akin to predicting rainfall over a long period. You know it will rain, and you know from historical data what an average amount of rainfall will be, however you cannot be definitive about what actual level of rainfall will occur nor exactly what days it will rain. Providers, therefore, need to use their own experience and expertise to arrive at an educated view of expected specials revenue. They are able to achieve this through considering which securities within the portfolio provided are currently trading special as well as looking at historical levels of specials seen in each market. Part of this assessment should include consideration regarding the liquidity of the security. Revenue on a security holding of 100,000 should be pro rata d if the average daily traded volume is, say, only 20,000. Ultimately, however, no provider has a crystal ball so when comparing and reviewing estimates it is important beneficial owners understand the proportion of an estimate comprised of Specials revenue and how such a value was arrived at. Lastly, given the numerous variables that will influence actual performance beneficial owners may wish to consider asking providers to provide a revenue range rather than one single number. Again, if this approach is taken the Low, Mid and High range assumptions need to be explicit. 4. ask about how the trading desk maximises revenues. A revenue estimate is only what it says a forecast of expected revenues. It is equally important to gain an understanding of how a provider s front office is organised and staffed to maximise returns. Experienced traders are an essential element. The traders of a securities lending provider need to understand why a security is in demand in order to form their own view of the correct fee to be applied. This facilitates faster pricing decisions and optimises returns. After all, few borrowers call up and offer to pay more! There are also thousands of securities available to borrow. How do providers ensure they optimise returns on names outside the top 50? Beneficial owners should ensure that a provider has traders dedicated to continually reviewing their entire lendable asset pool to optimise returns. All providers have access to independent market data that they may use to benchmark their activity and initiate re-rates of loans. Complementing the above, it is imperative that a provider also shares the insight of their traders and keeps clients fully informed of market events and conditions. Market conditions may impact the revenue assumptions positively or negatively. Recent market volatility has demonstrated the benefit of an open and consultative relationship. 5. know the asset mix of their lendable inventory and where they trade from. How do beneficial owners gain confidence that a provider has the network and experience to maximise returns for their portfolio? The size of a provider s lendable inventory is the first consideration. In reality, however, the top 15 largest securities lending providers all have a critical mass of lendable assets. A better understanding of the asset mix of the lendable inventory, a provider s borrower network and where they trade is therefore required. When looking at asset mix, a beneficial owner should ensure they understand the balance between fixed income and equities, and the geographic split. If a beneficial owner has a large fixed income portfolio it is unlikely a provider that specialises in equity lending will have the connectivity and in-house expertise to maximise returns. Borrower networks should be considered along similar lines. No single borrower has demand for every type of security. A diverse borrower network optimises the ability of a provider to achieve above average returns. This is complemented by where a provider locates their trading desks. insight and analysis - demystifying securities lending 21

26 Relatively few providers have truly global securities lending trading operations servicing all three time-zones. This matters because, in general, North American, European and Asian borrowers typically mainly borrow local assets. The ability to trade with regional borrowers during their own business day further increases the ability of a provider to secure enhanced returns. summary Estimates have long been a source of curiosity and infuriation for beneficial owners. What appears to be a relatively straight forward exercise often results in confusion. The key is to be clear, comprehensive and unambiguous about expectations and how the process is to be managed, avoiding situations that lead to varying interpretations among providers. It is also important to remember estimates are just one component of assessing the revenue generating capabilities of a provider. Taking time to understand how a provider approaches trading, optimises revenues and shares information with their clients will enable a thorough appraisal of a provider s capabilities and greater confidence both when deciding who to appoint and when benchmarking performance. 22 rbc investor services

27 about rbc investor & treasury services RBC Investor & Treasury Services, part of Royal Bank of Canada (RY on TSX and NYSE), is a specialist provider of custody, payments and treasury services for financial and other institutional investors worldwide. The Investor & Treasury Services segment is comprised of three businesses: Global Financial Institutions, Investor Services and Treasury Services. Active in 15 markets globally, RBC Investor & Treasury Services provides custodial, advisory, financing and other services to safeguard clients assets, maximize liquidity and manage risk in multiple jurisdictions. RBC Investor & Treasury Services is ranked among the world s top 10 global custodians, with USD 2.9 trillion (CAD 2.8 trillion) in client assets under administration. contacts americas John Lockbaum Head, Investor Services, Canada [email protected] Brent Reuter Head, Investor Services, U.S. [email protected] europe, middle east and africa Sébastien Danloy Head, Investor Services, Europe & Offshore [email protected] Padraig Kenny Head, Investor Services, Ireland [email protected] Simon Shapland Head, Investor Services, UK [email protected] Philippe Legrand Head, Investor Services, France [email protected] Marco Siero Head, Investor Services, Switzerland [email protected] José María Alonso-Gamo Head, Investor Services, Spain [email protected] Mauro Dognini Head, Investor Services, Italy [email protected] Marc Vermeiren Head, Investor Services, Belgium [email protected] Cormac Sheedy Senior Executive Officer, Middle East and Africa [email protected] asia-pacific David Travers Head, Investor Services, Asia Pacific [email protected] Andrew Gordon Head, Investor Services, Hong Kong and North Asia [email protected] Diana Senanayake Head, Investor Services, Singapore [email protected] multi-markets Emma Crabtree Head, Investor Services, Asset Manager Sales [email protected]

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