ISLA SECURITIES LENDING MARKET REPORT

ISLA SECURITIES LENDING MARKET REPORT

CONTENTS Introduction... 3 Executive Summary... 4 Global Market Overview and Trends... 6 Government Bonds... 9 Equities... 12 Collateral... 15 Data Methodologies and Sources Used... 16 About ISLA... 17 Disclaimer... 18 2 SECURITIES LENDING MARKET REPORT SEPTEMBER 2015

INTRODUCTION It is now approaching 12 months since ISLA published its first Securities Lending Market Report as part of our drive to promote greater and more consistent transparency across securities lending markets. This is our third report and from feedback and comments received we believe that those original objectives are being met. Using data as at 30 th June 2015, we have continued to develop the report to reflect the factors that are shaping this market today. To ensure continuity and make historical trend analysis relevant we have followed the framework established in our previous reports and therefore concentrate predominately on the traditional securities lending markets that operate between institutional investors (beneficial owners) who lend their securities either directly or via agents, such as custodial banks, asset managers or specialist firms, to prime brokers and other principal borrowers. As before we review the depth and breadth of this market both regionally and from the perspective of the mix of asset classes that are lent and how the relationship with collateral and the borrowers is changing. We also continue to monitor and better understand the market in which banks and broker-dealers lend securities directly amongst each other on a principal basis and have commented on this business as appropriate throughout this report. Another theme that we are beginning to see in this report is the clear interconnectivity between the securities lending market and the impact that regulation is having on market behaviour. Whilst we discuss this throughout this report we see examples where UCITS funds appear to be less able to engage in lending due to regulation, corporate bonds appear to be less attractive as a collateral security due to higher bank balance sheet charges, and the demand to borrow High Quality Liquidity Assets (HQLA) continues to grow as a result of Basel III, EMIR and similar regimes that require the mobilisation of collateral. Further details on the various contributors and the methodologies used to compile the outputs may be found in the annex at the end of this report. We welcome all suggestions as to how this report may be developed for future publications. SECURITIES LENDING MARKET REPORT SEPTEMBER 2015 3

EXECUTIVE SUMMARY In our third ISLA Securities Lending Market Report we have been able to introduce better trend analysis and perspective as we now have 18 months of consolidated data since our first report in 2014. We continue to add better and more granular content including being able to segregate business flows and sectors. Our independent ISLA Global Securities Lending Aggregate 1 now looks back over 18 months of data and we hope provides an interesting reference point for regulators and policy makers as they consider the developing dynamics of this market. As we continue with the development of this report we remain aware of the strategic aims and objectives set by regulators. The last six months has seen the European Commission s Securities Financing Transactions Regulation (SFTR) approved by the European Parliament s ECON committee which will lead to the detailed collection of large numbers of securities lending transactions in Europe. Our report is designed to act as a complement to this type of regulatory development, providing a useful view of trends in the market which might not be immediately apparent from detailed regulatory data. 1 ISLA Global Securities Lending Aggregate is compiled using data from DataLend, Markit Securities Financing (MSF) and SunGard Astec Analytics. Please also see Data methodologies section. 4 SECURITIES LENDING MARKET REPORT SEPTEMBER 2015

Using data as at 30 th June 2015 the following represent the key highlights and themes of this third ISLA Securities Lending Market Report On-loan balances increased by 8.5% globally to Euro 1.8 trillion from Euro 1.7 trillion 6 months earlier. Mutual funds and pension plans continue to dominate the global lending pool. Together they account for 66% of the reported Euro 14 trillion of securities that institutional investors make available for lending. Government bonds accounted for 39% of all securities on-loan. The proportion of government bonds on-loan globally has increased steadily over the past 12 months underlining the growing importance of securities lending programmes as a conduit for mobilisation of High Quality Liquid assets (HQLA). Equity loan balances grew by 13% and still represent the largest proportion of loans outstanding. As at the 30 th June 51% of all outstanding loans were of equities or exchange traded funds. Growth here was seen evenly across Europe, the Americas and Asia. The drift towards the use of non-cash collateral across the industry continued. The proportion of loans collateralised with non-cash collateral increased to 60% of all transactions, up from 55% six months earlier. Fixed income government bond lending continued to record much higher levels of non-cash collateral with, for example, 90% of all European government bond loans being collateralised with other securities. Equities represented 57% of the collateral pool held by tri-party service providers. This is up from the 53% reported as at the end of December and reflects the increasing use of equities as collateral. Corporate bonds fell from 12% of all tri-party collateral to 8% as at 30 th June. The regulatory backdrop appears to be shaping market behaviour. Elements of Basel III such as the Liquidity Coverage Ratio (LCR) are a clear driver of the markets desire to access HQLA on a term basis. Balance sheet and capital charges make the use of equities increasingly attractive for banks to provide as collateral and the absence of any real returns in the short term money markets is making cash collateral less attractive to lenders. Furthermore there is evidence that restrictions on UCITS have undermined the participation of mutual funds in lending programmes. SECURITIES LENDING MARKET REPORT SEPTEMBER 2015 5

GLOBAL MARKET OVERVIEW AND TRENDS As at the 30 th June 2015 the ISLA Global Securities Lending Aggregate indicates that there was just over Euro 1.8 trillion of securities on-loan globally drawn from an available lending pool 2 of just under Euro 14 trillion. This compares to circa Euro 1.7 trillion and Euro 12 trillion respectively as at the 30 th December 2014 and reflects an 8% increase in on-loan balances during the period. Source: ISLA The above chart highlights consistent growth in on-loan balances over the past 18 months. Over the period reasons for that growth appear to be varied. We have seen steady growth in the demand to borrow High Quality Liquid Assets (HQLA) as banks seek to source high quality collateral as part of a broader agenda to comply with Liquidity Coverage Ratio (LCR) requirements and to reduce the impact of balance sheet and capital charges for equity securities. This tends to be supported by the increasing use of equity securities as collateral and the continued growth of term transactions, especially in respect of government bond or HQLA transactions. Also the past six months has seen a 13% overall increase in the lending of equity securities. This growth is broadly the same across all regions globally and does not appear to be solely part of the seasonality normally associated with equity lending in Europe. At the 30 th June 2015 the reportable pool of securities made available for lending predominantly by long term institutional investors was Euro 14 trillion. This has increased from Euro 12 trillion reported at the 31 st December 2014. Although it is certain that some of the growth in securities that are made available for lending can be attributed to the continued strengthening of the US Dollar against the Euro it is clear that a broad and diverse pool of long term investors see value in participating in lending programmes. Mutual funds and pension plans continue to dominate those institutions who participate in securities lending with these two groups accounting for 66% of all securities made available for lending. 2 Available lending pool or lendable is the value of securities made available by institutional investors and other long term investors within securities lending programmes. Source: Markit Securities Finance 6 SECURITIES LENDING MARKET REPORT SEPTEMBER 2015

Some of the trends identified in our previous reports in terms of on-loan balances can also be seen in this latest data set. Source: Markit Securities Finance Institutional investors continue to be the largest lenders of securities with mutual funds and pension plans representing 45% of all securities on-loan. However we note that with regard to mutual funds their dominance in terms of lendable securities (43% of all securities that are available for lending) is not translated into on-loan balances where they only represent 18% of all securities on-loan. The reasons for this apparent disparity may be varied but are likely to reflect, at least in part, the increasingly restrictive regulatory environment in respect of securities lending that is applied to UCITS 3 funds in Europe. Conversely, Sovereign Wealth Funds (SWF) which only comprise 8% of lendable securities, represent 14% of all securities onloan. We have noted the growing importance of this institutional lending group throughout this latest report. The latest data that we have shows that direct lending amongst banks and broker-dealers has fallen back to 11% of total securities on-loan from 23% 3 For example UCITS are unable to engage in term securities lending under Guidelines published by ESMA. as at 31 st December. As we begin to see trends within our data set and as we gain a better understanding of the factors that drive this element of the securities lending market we expect this number to ebb and flow although we feel that the levels seen in this report at the end of June are more typical of where we would expect volumes to be over time. When looking at the distribution of securities on-loan there appears to have been a small proportional increase in the overall level of government bond lending which now represents 39% of all securities on-loan, up from 35% 12 months earlier. Whilst equities still dominate the securities lending markets the drift towards using lending as a conduit to source HQLA is evident. Source: DataLend The steady move away from cash collateral across the industry continues with non-cash collateral 4 now representing 60% of all collateral received by lenders. The following chart highlights the developing trend across all asset classes although as we will discuss in the subsequent review of government bond 4 Collateral may be in the form of cash or other securities and is given by the borrower of the securities to the lender to mitigate the risk of financial loss if the borrower is subsequently unable to return the borrowed securities. SECURITIES LENDING MARKET REPORT SEPTEMBER 2015 7

lending we have seen a more extreme move to non-cash collateral as borrowers seek to both access HQLA and minimise balance sheet costs by mobilising equities held on balance sheet to use as collateral and optimise funding around LCR constraints. Continued very low and negative interest rates and the absence of any real return in the cash collateral reinvestment markets is also a factor in making cash collateral less attractive to lenders. Source: DataLend 1,200,000 Global Securities (Cash & Non-Cash Collateral) 1,000,000 EUR (M) 800,000 600,000 400,000 200,000 200,000 0 1-Jul-14 1-Jul-14 1-Sep-14 1-Sep-14 1-Nov-14 1-Nov-14 1-Jan-15 1-Jan-15 1-Mar-15 1-Mar-15 1-May-15 1-May-15 On Loan vs Cash Collateral On Loan vs Non-Cash Collateral Source: Markit Securities Finance At the end of December 2014 we saw that some 10.5% of all securities lending transactions had a reported term of 3 months or more. This was itself up from the 8% reported 12 months earlier. The LCR requires that banks hold HQLA that exceed their expected net cash outflow for the next 30 days. The LCR would appear to a material factor in driving the development of the term securities lending market with 12% of all transactions being reported greater than 3 months in duration as at the 30 th June. The proportion of government bonds that are lent for over three months is much higher at 24% of all government bond loans. 8 SECURITIES LENDING MARKET REPORT SEPTEMBER 2015

GOVERNMENT BONDS The lending of government bonds continues to grow. As the following chart highlights, at the 30 th June 2015 there was Euro 718 billion of government bonds on-loan drawn from a reported lendable pool of Euro 2 trillion, up from Euro 654 billion and Euro 1.7 trillion respectively 6 months earlier. Furthermore the lending of government bonds now represents 39% of all securities on-loan, up from 35% one year earlier. Lendable (EUR M) 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 1-Jul-14 1-Sep-14 1-Nov-14 1-Jan-15 1-Mar-15 1-May-15 Lendable Source: Markit Securities Finance Total On Loan 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 The link between the demand to borrow HQLA (as evidenced by growth in government bond lending) and the implementation of regulations such as Basel III, EMIR and Dodd Frank was noted in our previous report. This latest data set confirms that securities lending programmes play a crucial role in both recycling HQLA into the market and providing a pool of available securities to support secondary market making in government bond markets. ISLA Members noted that whilst CCPs are widely used in derivatives markets and a material proportion of the repo market is also centrally cleared, only very minor securities lending activities are subject to central clearing. However it is clear that securities lending plays an important role in facilitating the collateral requirements of parties who use CCPs in these other markets. 0 Total On Loan(EUR M) Access to high quality HQLA was recently referenced in the European Commission s Green paper on Building a Capital Market Union in Europe where they stated that The fluidity of collateral throughout the EU is currently restricted, preventing markets from operating efficiently. Securities lending and its ongoing role in the mobilisation of HQLA will have an important role to play as markets develop further across Europe and globally. This latest review also underlines trends seen in previous reviews. Of the Euro 718 billion of government bonds on-loan, Euro 516 billion or 72% was undertaken against non-cash collateral. This is up from 68% in December and 61% at the end of June 2014. The following chart also appears to suggest although overall growth in on on-loan balances has been steadily upwards there has been a marked decline in loans of government bonds against cash collateral. This suggests that borrowers have been switching collateral, preferring instead to provide noncash collateral. This trend is consistent with a broad agenda to increasingly use equities as collateral by borrowers and underlines the lack of real return opportunities for lenders if they opt to accept cash as collateral. Lendable (EUR M) 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 1-Jul-14 1-Sep-14 1-Nov-14 1-Jan-15 1-Mar-15 1-May-15 Lendable Source: Markit Securities Finance Total On Loan 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Total On Loan(EUR M) SECURITIES LENDING MARKET REPORT SEPTEMBER 2015 9

Asset and liability management by banks in the context of the LCR is seen very clearly in the data here. As at the 30 th June with 24% of all reported loans between lenders and banks as being for 3 months or longer. This compares with 21% as at the end of December. The following chart provides a summary of the distribution of government bond lending by client type. It highlights the ongoing importance of SWF and central banks to this sector accounting for 32% of all government bonds on-loan. Source: DataLend Source: DataLend Also we have for the first time been able to gain greater granularity on some aspects of the market where banks and broker-dealers lend directly amongst themselves. We have already noted that this sector of the market accounts for circa 12% of the overall market globally and for the lending of government bonds we would estimate this sector as being no more than 5% of current volumes. However here we do see a much greater propensity to undertake term transactions with up to 50% of these loans for periods of 3 months or longer. This is perhaps understandable when it is considered that banks trading with each other in a principal capacity will have a greater ability to undertake term business and assume the liquidity and pricing risks associated with these types of transactions. Conversely institutional investors may either not have the ability to undertake term transactions (e.g. UCITS) or would prefer not to manage such risks in the context of their lending programmes. North American government bonds continue to dominate representing 57% of all government bonds on-loan as at the 30 th June. Source: DataLend For European government bonds on-loan balances have increased from Euro 278 billion to Euro 294 billion during the six months to 30 th June underlining the growing importance of securities lending as a conduit to mobilise these HQLA in the market. 10 SECURITIES LENDING MARKET REPORT SEPTEMBER 2015

Lendable (EUR M) European Government Bonds 860,000 840,000 820,000 800,000 780,000 760,000 740,000 720,000 700,000 680,000 1-Jul-14 1-Sep-14 1-Nov-14 1-Jan-15 1-Mar-15 1-May-15 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 TotalOn Loan (EUR M) Lendable Source: Markit Securities Finance Total On Loan Of the Euro 294 billion of securities European Government Bonds on-loan over 90% was reported as against noncash collateral. This supports very much the view that borrowers in securing access to HQLA are almost exclusively optimising balance sheet and risk weighted assets by providing other assets, often equities, as collateral in these transactions. On Loan Vs Cash (EUR M) European Government Bonds (Cash & Non-Cash Collateral) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1-Jul-14 1-Sep-14 1-Nov-14 1-Jan-15 1-Mar-15 1-May-15 300,000 250,000 200,000 150,000 100,000 50,000 On Loan vs Cash Collateral On Loan vs Non Cash Collateral Source: Markit Securities Finance The above chart highlights how the overall collateral picture has changed in the past 12 months with most, if not all, of the growth in this particular market being supported by non-cash rather than cash collateral business with a proportional and ongoing decline in cash collateral related transactions. The regulatory driven picture is further underlined by reference to the reported term structure of the business. Of the Euro 294 billion of on-loan balances reported as at the 30 th June 24% was for periods of 3 months or more. 0 On Loan Vs Non-Cash(EUR M) Source: DataLend Reference to the smaller interbank/ brokerdealer market confirms the trends seen elsewhere with up to 50% of this market being comprised of transactions with duration of 3 months or more. However as this data set represents less than 5 % of this overall market we would not want to draw too many conclusions at this point and will continue to monitor this data over time. Unlike Europe, where non-cash collateral has been part of the market structure for many years, in North America the cash collateral model has prevailed. However in previous reports we have seen a gradual shift to a broader cash and non-cash collateral mix in respect of North American government bonds as borrowers look to optimise their balance sheet and capital charges. In this latest report we have seen for the first time the proportion of non-cash collateral exceed cash collateral in this asset class. Further analysis of the data also reveals that although the overall level of North American bond lending rose by circa 10% non-cash collateral balances actually increased by 35% as cash collateral balances fell by 11% during the period. EUR (M) 250,000 200,000 150,000 100,000 50,000 North American Government Bonds (Cash & Non-Cash Collateral) 0 1-Jul-14 1-Sep-14 1-Nov-14 1-Jan-15 1-Mar-15 1-May-15 On Loan Vs Non-Cash Collateral Source: Markit Securities Finance On Loan Vs Cash Collateral 300,000 250,000 200,000 150,000 100,000 50,000 0 SECURITIES LENDING MARKET REPORT SEPTEMBER 2015 11

EQUITIES Equities still represent the single largest asset class within lending programmes accounting for 49% (Euro 761 billion) of all securities onloan as at the 30 th June. In terms of reported lendable assets equities represent Euro 9 trillion of the total of Euro 14 trillion of securities made available for lending by long term institutional investors. Unlike fixed income securities and particularly government bonds, equities typically see much lower levels of utilisation 5 with the average amount of equity securities onloan being between 8% and 9% of available lendable assets over a 12 month period. Whilst there is some seasonality in these numbers, especially in Europe during the spring, and specific securities can see much higher levels of demand and therefore utilisation, equities generally see lower levels of utilisation than government bonds that will see utilisations normally in excess of 35%. During the review period the value of equities on-loan increased by some 13% and reflects an increased level of demand to borrow equities globally. Some of this apparent increase may be the result of a steady strengthening of the US Dollar/Euro exchange rate over the period that has led to some inflation of the predominantly Euro reported numbers that we use for this analysis. However it would also appear to reflect an increasing demand to borrow equity securities as part of various active asset management strategies. The following chart highlights how equity lending globally has been a predominantly cash collateral driven business with, in 5 Utilisation represents the percentage of any given security or asset class that is on-loan as a percentage of the total value of that security or asset class that could be lent. part, the preponderance of North American investors, some of whom have historically been restricted from a regulatory perspective from accepting many forms of non-cash collateral making any changes to the operating model slower here than in other asset classes. Source: DataLend However the past 6 months has seen a narrowing of the gap between cash and noncash collateral with equity lending now split evenly between the two at the end of the period. This clearly demonstrates the drive towards the greater acceptance of non-cash collateral across the broader market and is a trend that we expect to continue. Whilst the exact details of the underlying reasons for the overall growth in equity lending are likely to be varied, typically such loans support trading and hedging strategies. The absence of any real term market in the equity lending markets has not changed with less than 5% of all equity trades being reported as being for periods in excess of 3 months. This is little changed from the data that we analysed at the end of December last year. We will continue to monitor this particular dynamic as borrowers think more about how they have to adapt both trading and funding strategies to reflect the demands of the Net Stable Funding Ratio (NSFR). 12 SECURITIES LENDING MARKET REPORT SEPTEMBER 2015

North American equities showed a similar growth pattern to that seen elsewhere with both lendable and on-loan balances increasing over the period with the latter showing a 13% increase over the 6 month period. North American Equities: Lendable & On Loan Source: Markit Securities Finance As we would expect the long term equity focus of many mutual funds means that this sector holds disproportionately more of the lendable asset base. Although understandable it does also present certain challenges for these types of investors and for example UCITS funds are regulated and restricted in terms of their securities lending activities. Consequently although they represent in excess of 50% of the available lendable equity securities they only account for 25% of onloan balances as at the 30 th June. Partly as a reflection of the relative size and maturity of the equity markets in North America and the sheer number of US based institutional investors (who will have high levels of domestic assets in their portfolios) that participate in lending programmes, North American equites dominate representing 67% of all equities on-loan as at the 30 th June 2015. Source: SunGard Securities Finance As already discussed there is likely to be an element of foreign exchange translation in these numbers as the US dollar strengthened against the Euro over the period but we feel that we are also seeing an overall increase in borrowing activity as banks borrow securities to support their clients various trading and hedging strategies. It is also possible that the overall increase in demand seen across all equity classes in the past 6 months could reflect the premise that in previous periods, banks and brokers have been actively optimising internal sources of securities as part of a drive to improve funding and balance metrics. So in previous periods some of the demand to borrow securities would have been met by better internal management of long and short positions within a given bank. With that process delivering essentially a one off dip in the demand to borrow securities externally it is possible that the demand is now driving the need to borrow securities again externally. Source: DataLend d SECURITIES LENDING MARKET REPORT SEPTEMBER 2015 13

The pure North American equity lending market is one of the last major markets where cash collateral still dominates. North American Equities: Collateral Mix Source : DataLend Source: SunGard Securities Finance Although there has been some drift towards non-cash collateral in this market, circa 70% of all loans are collateralised with cash collateral. It is likely that the non-cash element of this market relates primarily to European beneficial owners who own these securities rather than a shift to non-cash collateral lending by US based beneficial owners. This chart also highlights the element of seasonality seen within this market in the spring although the cash/ non-cash collateral mix appears to remain broadly unchanged suggesting that the move away from cash collateral to non-cash collateral may have now reached its natural equilibrium. In Europe we do see the expected greater concentration of non-cash collateral lending with 79% of all loans of European equities being collateralised with non-cash collateral. 14 SECURITIES LENDING MARKET REPORT SEPTEMBER 2015

COLLATERAL As at the 30 th June 2015 we have estimated that there was circa Euro 1.8 trillion 6 of securities on-loan globally. Of this 60% or Euro 1 trillion were loans that were collateralised with non-cash collateral. This is up from the 55% of non-cash collateralised loans reported at the end of December and reflects the steady drift towards the greater use of noncash collateral globally. Although the greater use of non-cash collateral was seen across all lending markets, some markets particularly in North America are still heavily reliant on cash collateral. In contrast other markets in Europe and more specifically in respect of the lending of government bonds are now almost undertaken only against non-cash collateral. The greater use of non-cash collateral reflects the ongoing impact of the strong regulatory push behind new regulatory regimes such as EMIR and Basel III that are forcing borrowers to think about different forms of collateral particularly when they want to access and borrow HQLA assets. Non-cash collateral securities are normally held and managed in one of two ways. First the lender can take delivery of the collateral securities directly from the borrower and hold them in a custody account. Alternatively the collateral securities are delivered to a specialist tri-party service provider 7 who holds the collateral on behalf of the lender. In our last report we were able for the first time to bring together information from the 6 ISLA Global Securities Lending Aggregate 7 Tri-party collateral management is where the parties to a bi lateral non cash loan transaction pass responsibility for the management of the agreed collateral to a specialist collateral management service provider. The tri-party agent then maintains the value including any agreed haircut, quality and performance of the collateral over the life of the loan. 8 Data provided by BNY Mellon, Clearstream, Euroclear and JP Morgan four principal tri-party service providers active in Europe today 8. Working with the triparty agents and our members it is clear that the vast majority of non-cash collateral received by lenders is held and managed by these specialist service providers. At the 30 th June 57% of all securities held in tri-party were equities, up from 53% six months earlier. This increase is in line with expectations as borrowers look to pledge equities especially against HQLA assets. Source: BNY Mellon, Clearstream, Euroclear, JP Morgan Equity securities present additional complexities over and above either fixed income securities and or cash collateral as they require specific monitoring to protect clients interest around corporate actions and other distributions. Consequently the scale of these holdings and the increase in the use of equities as collateral has required the establishment of extensive technical infrastructure within the tri-party service providers businesses where the benefits of investment and scale can be developed to ensure timely and efficient risk management. Corporate bonds being taken as collateral fell from 12% to 8% of total tri-party collateral over the period. The reasons for this are not immediately clear and may well be varied but are likely to include less corporate bonds being held by brokers and bank as trading inventory due to penal capita regimes and heighted risk and liquidity concerns from lenders who may be less willing to see these securities in their collateral pools. SECURITIES LENDING MARKET REPORT SEPTEMBER 2015 15

DATA METHODOLOGIES AND SOURCES USED This ISLA Securities Lending Market Report has been compiled using a range of data contributors together with specific information provided directly by our members through surveys and questionnaires. We would like at this point to thank all of the various contributors for their efforts in assisting ISLA in the production of this report. Loan information that includes details of securities on-loan across different asset and client types has been provided by three institutions that provide commercial data and benchmarking services for the securities financing industry. DataLend, Markit Securities Finance (MSF) and SunGard s Astec Analytics Analytics all collect data from industry participants on a high frequency basis and provide a range of securities lending benchmarking analytics that allow firms and their clients to better understand and assess the relative performance of any given lending programme. Whilst each of these data providers covers broadly the same market we have chosen to use data from each to reflect the fact that each has a slightly different business model and client mix and therefore provide different perspectives across certain asset classes or regions. By adopting this approach we have been able to develop and publish the ISLA Global Securities Lending Aggregate. This aggregate, that will be used to develop consistent trend indicators over time, has been compiled by combining information from each of the commercial data providers. The ISLA Global aggregate was compiled to provide the most representative global estimation of the size and scope of the securities lending markets. In compiling the aggregate we took the largest securities lending on-loan balance provided by the three commercial data providers as a starting point for the calculation. This global on-loan balance was then adjusted to reflect incremental data from the other commercial data providers where their reported on-loan balances across different asset classes or regions created a more representative overall global number. All regional and geographic analysis reflects the location of the issuer of the securities (as opposed to the location of the lender or borrower) as this is the basis on which the providers collect and analyse their data. For the first time in this report we have been able to incorporate securities lending collateral information from all of the principal tri-party service providers active in the European market today. We have also been able to incorporate data received from our members during a recent survey that was undertaken that looked at collateral and trends in this area. We hope to add additional material to this report by using surveys and similar techniques in the future. 16 SECURITIES LENDING MARKET REPORT SEPTEMBER 2015

ABOUT ISLA The International Securities Lending Association (ISLA) is a trade association established in 1989 to represent the common interests of participants in the securities lending industry. ISLA works closely with European regulators and in the United Kingdom has representation on the Securities Lending and Repo Committee, a committee of market practitioners chaired by the Bank of England. The Association has contributed to a number of major market initiatives, including the industry standard lending agreement, the Global Master Securities Lending Agreement (GMSLA). ISLA s Objectives include: Providing a safe and efficient framework for Securities Lending. Highlighting new market development. Ensuring sound industry practices. Enhancing the public profile of the Securities Lending industry. Fostering good communication and co-operation with other trade associations. Promoting the use of the Global Master Securities Lending Agreement (GMSLA). ISLA has approximately 100 full and associate members comprising of insurance companies, pension funds, asset managers, banks, securities dealers and service providers representing more than 4,000 underlying clients. Based in London, ISLA represents members from more than twenty countries in Europe, the Middle East, Africa and North America. ISLA has an elected Board of fifteen industry professionals representing firms from all parts of the industry. Further details may be found at: www.isla.co.uk SECURITIES LENDING MARKET REPORT SEPTEMBER 2015 17

DISCLAIMER While we have made every attempt to ensure that the information contained in this Report has been obtained from reliable sources, International Securities Lending Association (ISLA) is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this Report is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. Nothing herein shall to any extent substitute for the independent investigations and the sound technical and business judgment of the reader. In no event will ISLA, or its Board Members, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this Report or for any consequential, special or similar damages, even if advised of the possibility of such damages. 18 SECURITIES LENDING MARKET REPORT SEPTEMBER 2015