FTSE Global Markets

I S SUE 31 • J A N U A RY / F E B R U A RY 2 0 0 9

MANPOWER INC: JOERRES TEMPERS THE EMPLOYMENT BELLWETHER

MTFs reap theuptick in European

trading

The problem withcounterparty risk

Why CACEIS stayson the up and up

AIG: how muchmoney to save a

company?

BANCO ITAU & UNIBANCO: A MARRIAGE MADE IN HEAVEN?

THE GLOBALLEADERS REPORT:

CAN NOMURA RETURNTO ITS GLORY DAYS?

GM Cover Issue 31.qxd:. 6/1/09 21:13 Page FC1

GM Cover Issue 31.qxd:. 6/1/09 16:43 Page FC2

EDITORIAL DIRECTOR:Francesca Carnevale, Tel + 44 [0] 20 7680 5152email: [email protected]

CONTRIBUTING EDITORS:Neil O’Hara, David Simons, Art Detman.

SPECIAL CORRESPONDENTS:Andrew Cavenagh, John Rumsey,Lynn Strongin Dodds, Ian Williams, Mark Faithfull,Vanja Dragomanovich, Paul Whitfield.

FTSE EDITORIAL BOARD:Mark Makepeace [CEO], Imogen Dillon-Hatcher,Paul Hoff, Andrew Buckley, Jerry Moskowitz,Fran Thompson, Andy Harvell, Sandra Steel,Sylvia Mead, Nigel Henderson.

PUBLISHING & SALES DIRECTOR:Paul Spendiff, Tel + 44 [0] 20 7680 5153email: [email protected]

EUROPEAN SALES MANAGER:Nicole Taylor, Tel + 44 [0] 20 7680 5156email: [email protected]

OVERSEAS REPRESENTATION:Adil Jilla [Middle East and North Africa],Faredoon Kuka, Ronni Mystry Associates Pvt [India],Leddy & Associates [United States],Can Sonmez [Turkey]

PUBLISHED BY:Berlinguer Ltd, 1st Floor, Rennie House, 57-60Aldgate High Street, London, EC3N 1AL.Tel: + 44 [0] 20 7680 5151; www.berlinguer.com

ART DIRECTION AND PRODUCTION:Russell Smith, IntuitiveDesign, 13 North St.,Tolleshunt D’Arcy, Maldon, Essex CM9 8TF,email: [email protected]

PRINTED BY:Southernprint - 17-21 Factory Road, UptonIndustrial Estate, Poole, Dorset BH16 5SN

DISTRIBUTION:Air Business Ltd, 4 The Merlin Centre,Acrewood Way, St Albans, AL4 OJY.

FTSE Global Markets is published eight times a year. No part of thispublication may be reproduced or used in any form of advertising withoutthe prior permission of Berlinguer Ltd.

[Copyright © Berlinguer Ltd 2008. All rights reserved.]

FTSE™ is a trade mark of the London Stock Exchange plc and theFinancial Times Limited and is used by Berlinguer Ltd under licence.

FTSE International Limited would like to stress that the contents,opinions and sentiments expressed in the articles and features containedin FTSE Global Markets do not represent FTSE International Limited’sideas and opinions. The articles are commissioned independently fromFTSE International Limited and represent only the ideas and opinions ofthe contributing writers and editors.

All information is provided for information purposes only. Every effort ismade to ensure that all information given in this publication is accurate,but no responsibility or liability can be accepted by FTSE InternationalLimited and Berlinguer Ltd for any errors or omissions or for any lossarising from use of this publication. All copyright and database rights inthe FTSE Indices belong to FTSE International or Berlinguer Limited or itslicensors. Redistribution of the data comprising the FTSE Indices is notpermitted. You agree to comply with any restrictions or conditionsimposed upon the use, access, or storage of the data as may be notifiedto you by FTSE International Limited or Berlinguer Ltd and you may berequired to enter into a separate agreement with FTSE InternationalLimited or Berlinguer Ltd.

ISSN: 1742-6650

Journalistic code set by the Munich Declaration.

Subscription Price: £399 per annum [8 issues]

1FTSE GLOBAL MARKET S • J A N U A R Y / F E B R U A R Y 2 0 0 9

Outlook

THIS EDITION IS all about managing change. Among the brightspots in the issue is a profile of US enabler, Manpower Inc, whichappears to be able to buck today’s recessionary trends and build on

employment opportunities around the world. Art Detman talks to itschief executive Jerome Joerres about the firm’s flexible growth strategy.Additionally we are running the first in an occasional series called GlobalLeaders, where we highlight those institutions who may make adifference in difficult times and challenging markets. We look at some ofthe banking leaders in this edition; a theme we will revisit in subsequentissues, where we hope to cover other financial industry segments, such asasset management, private equity, and the capital markets.Neil O’Hara opens the discussion about change in our Market Leader,

focusing on new ways of handling counterparty risk in the aftermath ofthe collapse of Lehman Brothers. For hedge funds, short sellers andleveraged players, counterparty risk is a key consideration.These investorsrely on prime brokers not only to settle trades but also to finance positionsand facilitate stock borrowing. The additional functions introduce anongoing bilateral credit relationship in which funds face severe disruptionif the broker-dealer fails. The stakes ratchet up again when funds begin totrade over the counter derivatives in which both sides expect the other tostand behind obligations that often run for many years. Neil highlightsways in which investors have responded to new challenges, includinglooking at portfolio liquidity as a proxy to determine whether managerscan move assets away from a troubled counterparty before it fails.Managers are also reviewing the segregation of assets.In the trading area, Ruth Liley looks at the impact of multi-lateral

trading facilities (MTFs) on the European trading landscape one year onfrom the introduction of the Markets in Financial Instruments Directive(MiFID). Lynn Strongin Dodds takes the analysis one step further andlooks at the way that MTFs have encouraged changes in the debate aboutthe provision of settlement and clearing services on the continent. Onceupon a time, debate hung around whether Europe’s settlement andclearing infrastructure required a vertical or horizontal solution.Thankfully, the debate has moved clicks and parsecs away from that andis now firmly rounded upon issues of cost, efficiency and global ratherthan regional solutions.On the sector side, we look at the fallout from the $150bn bailout of the

American Insurance Group (AIG). Current government thinking seems tobe that the combination of capital infusions to key institutions, plus thesequestration of toxic assets,will restore confidence in the credit-worthinessof those key institutions and the financial markets at large. Dave Simon’squestions whether AIG’s bailout burning tax payer money to no avail.In Kurt Lewin’s much vaunted Theory of Change (published in 1995), he

theorised a three stage model that basically requires establishedknowledge to be rejected and replaced if meaningful change is to takeplace. The first stage requires motivation to change; the second involvesactual change and the third entails the adoption of new beliefs. If theturbulence that rocked the financial markets in 2008, which opened withsub prime woes and ended with the Madoff scandal, does not provide theimpetus to take us all to that first stage, we do not know what will. Howfast that change will take place; and how tightly the financial markets willadapt to new parameters is still in question; but change we all must. Wewill continue to cover those processes that will hurry or halt that change.

Francesca Carnevale,Editorial DirectorJanuary 2009

GM Cover Issue 31.qxd:. 6/1/09 16:43 Page 1

Contents

2

BACK TO THE FUTURE ..................................................................................................Page 6Neil O’Hara explains why investors should take more notice of counterparty risk.

THE SEARCH FOR THE PERFECT DATA SET ..................................................Page 12Colin Wheeler of HSBC Actuaries & Consultants, assesses the issues for DC pensions.AIN’T LOVE JUST GRAND?..............................................................................................Page 15John Rumsey reports on the marriage between Unibanco and Bank Itau.THE REGULATION OF TAKAFUL FUNDS ....................................................Page 20Peter Casey, director, policy and legal services, DFSAexplains the issues.

KEEPING CACEIS ON AN UPWARD TRACK....................................Page 24Paul Whitfield talks to CACEIS chairman Francois Marion about the bank’s growth strategy.

MEXICO: THE NEW GROWTH CHALLENGE..........................................Page 27What now for Mexico? Will the current crisis highlight the country’s weaknesses?.

IS INDEX STABILITY HERE AT LAST? ................................................Page 30Simon Denham, managing director, Capital Spreads on key index trends

TRADING PLACES ................................................................................................Page 32Ruth Liley reports on the impact of MTFs on Europe’s new trading landscape.CHANGING PLACES............................................................................................Page 36Lynn Strongin Dodds reviews Europe’s clearing and settlement infrastructure.

THE UPS AND DOWNS OF GOLD ..................................................................Page 68Ian Williams reports on the counter-cyclical trends running through the sector.

THE ETF UPDATE..............................................................................................................Page 79The latest in ETF and ETC trends.THE INDEX BACKBONE OF ETFs ......................................................................Page 82The role of index providers in ETF growth.

Fidessa Fragmentation Index ......................................................................................Page 86ETF Data, supplied by Barclays Global Investors ....................................................Page 88Securities Lending Trends by Data Explorer ............................................................Page 91Market Reports by FTSE Research ..............................................................................Page 92Index Calendar ..............................................................................................................Page 96

DEPARTMENTS

COVER STORY

MARKET LEADER

DATA PAGES

COVER STORY: GLOBAL BANKING LEADERS ................................................Page 45With most of the G8 countries banks in disarray, we look at the successes of the bankingindustry through one of the most turbulent financial markets in living memory. Not all thenews was bad and some banks managed to keep their head above the fray at key moments;while others took one knock after another. We highlight some of the success stories andsingle out the banks that might be better placed to leverage the upturn, if and when it comes

J A N U A R Y / F E B R U A R Y 2 0 0 9 • F T S E GLOBAL MARKET S

TRADINGREPORT/MTFs

INDEX REVIEW

SECTOR REPORT

INVESTOR SERVICES

FACE TO FACE

COUNTRY REPORT

IN THE MARKETS


Thinking New Perspectives.

Dark pools are last year’s news. CrossFinder+ is Credit Suisse’s dynamic order router with access to multiple dark pools and MTF’s using hidden orders. Integrated into every AES® strategy, CrossFinder+ gives you the potential to tap into a

® algorithms take advantage of this new landscape and can get you out of the dark pools and into the dark oceans. Europe: +44 (0)20 7888 0006 US: +1 212 325 5300 Japan: +81(3) 4550 7331 Hong Kong: +852 2101 7221www.credit-suisse.com

AES – The Standard in Algorithmic Trading®

This advertisement has been approved solely for the purposes of Section 21 of the Financial Services and Markets Act 2000 by Credit Suisse Securities (Europe) Limited of One Cabot Square, London E14

All rights reserved.

Turning dark pools into dark oceans.

CrossFinder+


FEATURES

4 J A N U A R Y / F E B R U A R Y 2 0 0 9 • F T S E GLOBAL MARKET S

Contents

AFTER THE FLOOD: INVESTOR SERVICESTHE NEW ARC OF TRANSITION MANAGEMENT ..................Page 41There are substantive changes in asset allocation among key investment funds. Moreover,there has been something of a fallout in transition management over the last two years.Together these trends have benefited those transition managers who have stayed thecourse. Which houses will continue to benefit going forward?

FUND ADMINISTRATION: BACK TO BASICS ..............................Page 52While putting added pressure on fees, the recent market contraction has at the same timehastened the flight to quality. Well-established, highly diversified administrators who arecapable of providing the full range of asset servicing needs, from performance calculationto trade processing and more, will likely weather the seismic shifts better than most. DaveSimons reports from Boston.

ASIAN CUSTODY: NEW ROADS TO FOLLOW............................Page 56The financial crisis has provided a challenging time for Asian asset service providers.Institutional investors are more concerned now about counterparty risk and certain assetclasses as well as the fund managers they are using. As a result, there has not been thatmuch new business and providers are helping clients adjust to market conditions. LynnStrongin Dodds reports.

PROFILE: MANPOWER INCTHE PROFESSIONAL EDGE ........................................................................Page 60From its unlikely base in Milwaukee, Wisconsin, Manpower Inc. has become aworldwide powerhouse in employment services, with offices in 80 countries andterritories and revenues approaching $22bn. After years of strong and profitable growth,the company is facing the most threatening economic environment in its history.However, by controlling costs and focusing its resources on growth markets, Manpowerexpects to emerge from this recession stronger than ever. Art Detman explains why.…

AIG’S BLANK CHEQUE ..................................................................................Page 65With its latest relief package - more flexible terms, more payoff time, and even moremoney - the government believes it has finally found the formula that will allowinsurance giant American International Group the most realistic chance of recoveringfrom its ruinous credit-related investment activities. Dave Simons reports.

COVERED BONDSUS COVERED BONDS: EMULATING EUROPE? ..........................Page 72In the wake of the credit crisis, however, American regulators are pushing hard todevelop a domestic market for an instrument that has long provided an inexpensivefunding source for large banks in Europe. Neil O’Hara reports on the outlook forcovered bonds in the New World.

ROUND ROBIN: SURVIVING THE CRISIS ........................................Page 74Questions are still extant as to the true nature of covered bonds: either as a ratings or acredit product. Whatever the ultimate outcome of that debate, we asked some of theleading market makers in the covered bond market to give us their views on thesustainability and future of this deep and diversified market through 2009 and beyond.



6 J ANUARY / F E B RUARY 2009 • F T S E GLOBAL MARKET S

FUNDS THAT ALLOWEDLehman to rehypothecate theirassets in a commingled pool had

no priority claim when the bank wentbelly-up and had to wait in linealongside other unsecured creditors ina bankruptcy court proceeding.Always a concern for the broker-dealer community, counterparty riskhas now grabbed the attention ofmoney managers as well.In a bygone world, the buy side

could afford to downplay counterpartyrisk. Even today, long-only managerswho trade cash securities and do notuse leverage have little reason toworry. For equities and otherinstruments that trade on an exchangeor settle through a central clearinghouse the counterparty is backed by

collateral from member firms and therisk is limited to three business days inmost markets. In effect, thesemanagers have a simple agencyrelationship with their broker-dealers.For hedge funds, short sellers and

leveraged players, it is another story.These investors rely on prime brokersnot only to settle trades but also tofinance positions and facilitate stockborrowing. The additional functionsintroduce an ongoing bilateral creditrelationship in which funds face severedisruption if the broker-dealer fails.“Itis a big difference,”says Robert Sloan,managing partner of S3 Partners, aNew York-based financing specialistand advisor to hedge funds, “Peopletend to underestimate the tail risk intheir business.”The stakes ratchet up

again when funds begin to trade OTCderivatives in which both sides expectthe other to stand behind obligationsthat often run for many years.Sloan says his hedge fund clients are

well aware of the mismatch induration between their assets andliabilities but the speed with whichfunding can disappear came as asurprise to many. “It is a rentedbusiness model,”he says,“Redemptionterms are quite short and a hedgefund’s hold on capital can be tenuous.”Of course, it is rather hard to model

counterparty risk. Unlike market risks ina trading portfolio, the outcome isbinary: a counterparty is either good forthe money or not. Sloan says peoplewho chase hedge fund-like returns tendto ignore the implications of an incentivefee structure that encourages funds toclose up shop when they start to losemoney.The notion that the independentinvestment banks were hedge funds indrag may be uncomfortably close to thetruth.“To get those returns, more oftenthat not you bring into risk things thatcan’t be modeled but can put you out ofbusiness,” says Sloan, “The investmentbanks’ hold on capital was no greaterthan the other people trying to earn thesame payoff.”Jack MacDonald, president and chief

executive officer of Conifer Securities, ahedge fund middle and back officeservice provider based in San Francisco,traces the heightened awareness ofcounterparty risk to the summer of2007, when two hedge funds managedby Bear Stearns hit the wall and mostfunds that relied on quantitativestrategies took severe losses. Ever sincethen,more and more hedge funds havechosen to diversify their counterpartyrisk through multiple prime brokerrelationships—either at their owninitiative or in response to pressurefrom investors.“Having more than onewell-established well-capitalisedcounterparty has become the norm for

Market Leader

AREN

EWED

FOCUSON

COUNTER

PARTY

RISK

“There are no magic metrics to help you managecounterparty risk,”Jack MacDonald says,“It’s anintuitive process, but diversification is believed toprovide some protection.”Photograph byistockphoto.com, supplied December 2008.

What, me worry? To many asset managers, the demise of a majorbroker-dealer was never more than a theoretical possibility. Theimplosion of Bear Stearns should have been a wake-up call, but thefirm’s shotgun marriage to JPMorgan Chase may have reinforced thebelief thatWall Street’s titans were too big to fail. An age of innocenceended when Lehman Brothers went bankrupt and hedge funds thatheld assets at the firm discovered they could not get immediate accessto their money. The lesson? Do not downplay counterparty risk,particularly if you are a hedge fund. Neil O’Hara reports.

Back to the future

REGIONAL REVIEW 31.qxd:RR ISS 31 6/1/09 14:49 Page 6

EuroCCPA new era dawns for pan-European

clearing and settlement

Europe’s securities markets are changing dramatically, and nowhere is that more obvious than in clearing and settlement.

For a trading firm, EuroCCP offers the lowest clearing fees for trades across European platforms. Your trades are netted down into a single position in each security, regardless of the platform they’re executed on – with savings you can pass on to your customers.

For an MTF or an exchange, EuroCCP gives a more competitive, all-in cost for trading, clearing and settlement.

EuroCCP is backed by DTCC’s three decades of experience in central counterparty risk management, an unparalleled track record in ensuring trades settle at the agreed price, even if a trading counterparty defaults. With all this also comes world-class reliability, resiliency, capacity and an industry-governed, at-cost model that returns excess revenues to participants.

For more information, go to www.euroccp.co.uk

www.euroccp.co.uk



managers who are looking to growtheir business,”MacDonald says.The trend accelerated after Lehman

failed. The asset threshold at whichhedge funds add a second or third primebroker used to be between $400m and$500m.The decisionwas typically drivenby a desire to improve access tosecurities lending portfolios, get betterpricing through competitive bids, orexpand into international marketswhere the existing prime broker had alimited presence. In the last couple ofmonths, however, MacDonald has seenmanagers with as little as $50m to$100m under management looking foradditional relationships. It is anexpensive proposition.A hedge fund that has only one

prime broker can rely on a single set ofreports for a complete picture of itspositions and balance sheet. Themoment it adds another counterparty,manager’s back office must not onlyreconcile each account but alsoconsolidate reports, which may not bein the same format, to get acomprehensive view. Although someprime brokers offer shadow reportingfor positions held elsewhere, the serviceis usually reserved for larger clients anddoes not include daily three-wayreconciliation of trade and cashbalances. In any case, most managersdo not want a single prime broker tosee what they have elsewhere. “It is asignificant undertaking to supportmultiple relationships,” saysMacDonald, whose firm has offered amulti-prime service for many years,“Weare seeing a lot of demand. It is notsomething you can turn on overnight.”Investors have begun to focus on

portfolio liquidity as a proxy todetermine whether managers canmove assets away from a troubledcounterparty before it fails.MacDonald says asset allocators havebegun to ask how quickly managerscould go to cash if they had to. Some

managers have embraced the conceptin marketing documents that touttheir ability to liquidate in a matter ofdays or raise enough cash to meetredemptions even in a distressedmarket.“There are no magic metrics tohelp you manage counterparty risk,”MacDonald says, “It is an intuitiveprocess, but diversification is believedto provide some protection.”Beyond diversification, MacDonald

says managers are also reviewing thesegregation of assets. Althoughbroker-dealers have to keep customerassets separate and cannot lend outthe securities in a cash account, thegame changes when they extendcredit to customers. Broker-dealerstake a pledge over the securities inmargin accounts, which act ascollateral for the loan, and have theright to re-pledge those assets at will.As hedge funds which had assets atLehman discovered to their cost,rehypothecated securities weretypically pooled with assets thatbelonged to other customers and thefirm itself, which left individual fundswith only an unsecured creditor’sclaim against the bankruptcy estate.Managers should have known

about the risk, but economics mayhave played a part in their decision toignore it. Broker-dealers charge moreif they cannot commingle a customer’sassets in the securities lending pool,an insurance premium managers aremore willing to pay now thatcounterparty failure has become anall-too-real possibility.MacDonald says some hedge funds

have taken segregation even further andmoved surplus cash to custodian banks.Other managers have entered intotripartite agreements for securitieslending, which also puts assets in thehands of a custodian. Thesearrangements all cost money, of course,and MacDonald wonders whetherhedge funds will reverse course when

the markets settle down. “Moveswere done more as an emotionalresponse than a real concern,” hesays,“The fear and paranoia seems tohave abated somewhat.”In many cases, managers have been

able to reduce counterparty risk simplyby exercising rights they already had. It’san open secret in the OTC derivativesmarket that buy side firms seldom calledfor collateral from dealers when theywere entitled to it, andwhen they postedcollateral to a dealer they did not call itback on a timely basis if prices moved intheir favour. That all changed after theBear Stearns hedge funds bit the dust.RichardMetcalfe, head of policy at the

International Swaps and DerivativesAssociation (ISDA) points out thatfifteen years ago collateralisationwas theexception rather than the rule but it hadbecome common practice even beforethe Basel II regulatory framework,whichgives capital relief for secured lending,came into force. ISDA has tried topromote collateral use throughrecommendations on technical matterslike reset thresholds and minimumtransfer amounts as well as whatresources a collateral department needsto handle legal, risk management andoperational concerns. ISDA has noenforcement power, so it has to rely onmoral suasion.“It’s a ‘lead the horse towater’approach,”says Metcalfe.Collateral has proved its worth in

mitigating losses time and again, but it

Market Leader

AREN

EWED

FOCUSON

COUNTER

PARTY

RISK

Michael Conover, a partner in the financialrisk management group at accounting firmKPMG, says that although money managershave ratcheted up their counterparty risk

assessment they often gravitate toward firmsthey believe are too big to fail. Photographkindly supplied by KPMG, December 2008.




only works if firms take possession ofit. A promise to post collateral at somefuture date won’t do the trick, as thecounterparties to credit default swapssold by AIG discovered. They had noright to collateral until AIG’s debtrating soured, by which time thestricken firm couldn’t come up withenough cash to meet its obligations.Metcalfe points out that market

participants are all paid to makedecisions about risk, which includesthe credit risk they assume in tradingwith a particular counterparty. Thepresumption that AIG or Lehmanwould always be there was a riskdecision, albeit one that most moneymanagers were prepared to live with.Metcalfe also acknowledges thatcounterparty risk is only one of manycredit decisions firms have to make.“It’s important that firms are on top oftheir counterparty risk,” he says, “Butthe bigger credit risk decisions aretaken on other matters; for example,whether or not to invest in securitiestied to sub prime mortgages.”The credit crisis has galvanised

efforts to create a central clearing housefor over the counter (OTC) derivatives,which would eliminate counterpartyrisk almost entirely. The concept tookroot several years ago in the interbankmarket for interest rate swaps, wheremost transactions now settle throughSwapClear. DTCC is already workingon a clearing house for credit defaultswaps. ISDA’s Metcalfe notes that acentral counterparty backed by capitalcommitments from its members createsan entity that is stronger than any of itsindividual participants. It also permitsmultilateral netting of transactions,which dramatically reduces requiredmoney flows and risk.Despite these advantages, Metcalfe

cautions that central clearing onlymakes sense for standardised products.While many participants can meettheir requirements within a standard

framework, the big advantage of OTCderivatives lies in the ability to tailorcontracts to handle specific risks.“Central clearing exists as a possibilityfor some contracts within the OTCcontinuum as well as all those in theexchange listed environment,” saysMetcalfe,“To move custom contracts toa centrally cleared environment isdifficult if not impossible.”Money managers value the ability to

hedge specific risks through bespokeOTC derivatives contracts, however.Counterparty risk will not go away,either in the OTC market or elsewherein the financial system. The myth ofsell side invulnerability dies hard,however. Michael Conover, a partnerin the financial risk managementgroup at accounting firm KPMG, saysthat although money managers haveratcheted up their counterparty riskassessment they often gravitate towardfirms they believe are too big to fail.KPMG is working with the

Economist Intelligence Unit (EIU) ona global survey of senior risk officersabout future risk managementpractices in the financial servicesindustry. Conover says preliminaryresults indicate that respondents willpay more attention to risk culture andhow they incorporate riskmanagement into their businessstrategy. “It’s not about putting in anew system or creating a new report,”he says, “People are going to start atthe top of the house for riskmanagement and examine how to doit better on an enterprise-wide basis.”It will require a significant change in

attitude at many firms.A startling 76%of KPMG/EIU survey respondents stillfeel that risk is a support function.Conover suggests that regulators mayhave to take the lead, perhaps byrequiring a risk expert on the board ofdirectors. “Why wouldn’t we want tohave a risk specialist at the board of arisk taking organisation?” he asks.

Conover also expects chief risk officersto become peers with business unitheads, a recognition that riskmanagement has not always had theright seat at the table at some firms.A majority of survey respondents

blamed compensation as the singlebiggest cause of the credit crisis.Although Conover does not expectrisk officers to set individual packagesor compensation levels in the future,they may have a say in structuringcompensation to reflect the risks in aparticular line of business. “You haveto change the risk culture, using thecarrot and the stick,”he says,“That iswhy chief risk officers have to be moreinvolved in the business strategy.”No matter how best practices evolve

in the risk management industry, It isa safe bet that hedge funds, assetmanagers, pension plans and otherinvestors will not get lulled back into afalse sense of security aboutcounterparty risk any time soon. It is anew dawn, and not before time.

Market Leader

AREN

EWED

FOCUSON

COUNTER

PARTY

RISK

Richard Metcalfe, head of policy at theInternational Swaps and Derivatives

Association (ISDA) points out that fifteenyears ago collateralisation was the exception

rather than the rule but it had becomecommon practice even before the Basel IIregulatory framework, which gives capitalrelief for secured lending, came into force.ISDA has tried to promote collateral usethrough recommendations on technical

matters like reset thresholds and minimumtransfer amounts as well as what resources acollateral department needs to handle legal,risk management and operational concerns.ISDA has no enforcement power, so it has torely on moral suasion.“It’s a ‘lead the horse towater’ approach,” says Metcalfe. Photographkindly supplied by ISDA, December 2008.




THE LATEST INITIATIVE fromthe UK’s Pensions Regulator,the national regulator of

work-based pension schemes,which stresses the importance ofgood record-keeping in thegovernance of pension schemes, iswell-intended. To that extent, it isto be applauded. The questionremains: how practical is it?Many DB schemes have been going

for decades in the United Kingdom.Although of late, many haveundergone substantial changes as aresult of merger and acquisitionactivity, disposals, benefit changesand, of course, the multitude oflegislative change that the pensionsindustry has faced. There are threekey reasons why a typical DB schememight have data of poor quality. Thefirst and most obvious is legacyissues. Most long-establishedschemes have changed administrator,

possibly several times, and movedbetween different systems. Thesechanges increase the possibility ofdata being lost or wrongly amended.In some cases, data for members wholeft in the early days is still kept inpaper format.Two, legislative and scheme design

changes have also played their role.Thepensions industry has been subject tocontinual changes in legislation,affecting, for example, revaluation ofdeferred benefits, increases to pensionsin payment and contracting outprovisions. Additionally, in recent yearsfunding difficulties have led to manyscheme sponsors changing benefits tomake a scheme more affordable. Someschemes have ceased accrual andswitched to some other basis for futurebenefits under the same trust. All ofthese changes impact on administrationand make the task of maintaining goodquality records challenging.

In the Markets

PENSIO

NSREG

ULA

TORCONSU

LTSON

REC

ORD-KEEPIN

G

The pensions industry has been subject to continual changes in legislation, affecting, for example,revaluation of deferred benefits, increases to pensions in payment and contracting out provisions.

Additionally, in recent years funding difficulties have led to many scheme sponsors changingbenefits to make a scheme more affordable. Some schemes have ceased accrual and switched to

some other basis for future benefits under the same trust. All of these changes impact onadministration and make the task of maintaining good quality records challenging.

Photograph © Xyzproject/Dreamstime.com, supplied November 2008.

Perfect data flow:an unattainable goal?

Everyone recognises thebenefits of working with goodquality data. Administratorslove to work with accurate andcomplete information, but areused to getting by with what isprovided. The argument hasalways been that completeaccuracy is essential only whenbenefits come to be paid, butwith increased buy-out activityand closure of defined benefit(DB) schemes to future accrual,problems which were beingstored up for a future date areactually coming to fruition now.Colin Wheeler, national projectsmanager at HSBC Actuaries &Consultants, considers the UKPensions Regulator’s latestconsultation, which is aimed atthose responsible for record-keeping and those whoadminister schemes.


If you would like to discuss UCITS III or any

other risk analysis issues, please contact us:

www.emapplications.com+44 (0) 20 7397 [email protected]

EMA’s Excerpt meets regulatory and fund

manager risk analysis and attribution needs,

including:

• coverage of portfolios of equities, bonds,

currencies, and derivatives

• historical and monte carlo VaR

risk analyses with factor based attribution

• fully repriced stress test using user defined

or historical scenarios

• long, long-short, 130/30 and absolute

return portfolios.The EM Applications risk model is based onoriginal work by Al Stroyny

EM Applicationsanalysis into action

Looking for a risk management processfor sophisticated UCITS III funds?


14

In the Markets

Three, there is the question of theavailability of data. Some employers areunable to trawl historic records to pluggaps, at least not withoutdisproportionate effort, and thereforethey can provide only incomplete data.Sometimes, employers find thatrequired historical data no longer exists.Increasingly, however, it is vital thatthose responsible for data provisiongive full co-operation to schemeadministrators on such matters.Corporate transactions,

sometimes leading tofrequent changes of theemployers participating ina scheme, can mean that itis increasingly difficult toask the employer torespond to data queriesabout particular members.The recent regulator’s

consultation documentacknowledges that “manytrustees do not monitoradministration performanceeffectively”. Better managedschemes will include aconsideration of specialStewardship Report orsimilar document in thegovernance section of theirtrustee meetings. It isimportant that whateverdocument is used the informationconveyed is clear, complete, andunderstood by the trustees. It can andshould create an opportunity for theadministrator to comment on theoverall data quality and point out otherissues that the administrator wishes toraise with the trustees.With quality of data now firmly on

the regulator’s radar, trustees need togive greater consideration to thesubject.This could entail less toleranceof poor quality or incomplete data andthey may have to work withemployers to improve accuracy. Whatmust be a sobering thought for many

trustees and employers is theconsultation document’s claim thatpoor data can add as much as 5% tothe cost of buyout. Furthermore,experience tells us that the day-to-dayrunning costs of a scheme can also bereduced by improving the quality ofthe data.The Regulator’s document

addresses two principal groups:those responsible for record keeping(the trustees) and those to whom the

day-to-day administration isdelegated. This may ultimately beextended to a third key party, theemployer, which is responsible forproviding the data. Historicalrecords are often incomplete and, insome cases not accessible at allbecause an employer no longerexists, though the scheme continues,and verifying salary or contributionhistory may not be possible.Confirming contracting-out recordswith National Insurance Services forthe Pensions Industry (NISPI) is afurther area that has frustratedadministrators for many years. So

even when all parties are workingtogether to clean the data, it mayprove to be an incomplete exercise.The consultation document details

what it describes as“core data”; a listof all the bits of data that schemesshould already have. The list is by nomeans extensive enough. This coredata does not provide enough of thebasic detail required for totallyaccurate administration. Theoperational validity (and even past

actuarial valuation results)of any scheme failing topossess at least the coredata would have to be calledinto question.However, even the

existence of comprehensivecore data does notnecessarily equate topossession of accurate data.For example, do the salaryhistories held actually reflectthe scheme’s definition of‘pensionable salary’? Howaccurate are the spouses’pension records for deferredmembers and pensioners?Therefore, in addition toplugging the missing gaps indata, we must also considerthe validation of existingdata. Therefore, while the

document is to be welcomed, it seemsthat the regulator may not have gonefar enough, and underestimated thedifficulties involved. Trustees shouldask more questions of schemeadministrators about the quality oftheir data records and be prepared totake action, such as a comprehensivedata audit together with appropriateremedial action if the answers are notacceptable.

The Pensions Regulator’s consultationdocument is available on(www.thepensionsregulator.co.uk/onlinePublications/index.aspx).

The regulator’s consultation documentacknowledges that “many trustees do

not monitor administration performanceeffectively”. Better managed schemes

will include a consideration of aStewardship Report or similar document

in the governance section of theirtrustee meetings.

PENSIO

NSREG

ULA

TORCONSU

LTSON

REC

ORD-KEEPIN

G

J ANUARY / F E B RUARY 2009 • F T S E GLOBAL MARKET S


15FTSE GLOBAL MARKET S • J ANUARY / F E B RUARY 2009

BRAZIL:

BANCO

ITAU

MER

GES

WITH

UNIBANCO

THE ANNOUNCEMENT OFthe proposed merger of Itaú-Unibanco in early November took

the Brazilian markets completely bysurprise. Its audacity—the bank will bethe largest in the southern hemisphereand become one of the largest 20 banksin the world by market capitalisation—makes the secret negotiations all themore surprising.

The ability of the chief executiveofficer (CEO) of Itaú, RobertoSetúbal, and his opposite number atUnibanco, Pedro Moreira Salles, tonegotiate the deal over a clutch ofmeetings in an apartment in a poshsouthern suburb of São Paulo andkeep it a secret from the bankingcommunity underlines theimportance of family ownership in

the structure of the Brazilian bankingsystem. Ultimate control of Itaú lieswith the Egydio de Souza Aranhafamily while the Moreira Salles familycontrols Unibanco.At a stroke, the estimated R26.5bn

($12.5bn) deal creates one of thebiggest and most profitable banks ofthe Americas. Itaú-Unibanco willdispose of R575bn in assets, anetwork of 4,800 branches, and 19%of the local credit market. If the deal isapproved, the new bank will becomethe largest in Brazil, leapfroggingcurrent top dog in the private sectorBradesco and even the country’slargest bank, the publicly-ownedBanco do Brasil.Itaú-Unibanco does not just have

clout through size but performancetoo. By third quarter results, thecombined Itaú and Unibanco entitywould rank as the second mostprofitable bank in the Americas andbe placed top among Brazilian bankswith $1.33bn in profits, according tothe investment analysis firm

Roberto Setúbal, left, Itaú bank president, and Pedro MoreiraSalles, Unibanco bank president, attend a press conference in SaoPaulo,Monday, November 3rd, 2008. Brazilian banks Itaú andUnibanco announced they plan to merge and create SouthAmerica’s largest private sector banking group.The new bankwill be called Itau Unibanco Holdings SA and will havecombined assets of R575.1bn (about $261bn). Photograph byAndre Penner, supplied by AP Photo/PA Photos, December 2008.

HAPPY DAYS ORFORCED BONHOMIE?The merger of the Brazilian giants, Banco Itaú and Unibanco,creates Brazil’s biggest bank and a leader in the Americas. Thearchitects of the merger want to create a global leader andexploit a moment when Brazil’s global stature is growing andthe banking industry at large is in disarray. At home, though, thenews is a mixed blessing. As customers seek safety in thestrongest institutions, the merger has prompted the governmentto push state banks to keep up, using new powers. Consumerswill pay a premium for the safety of size. John Rumsey reports.



In the Markets

Economatica. OnlyWells Fargo postedmore profit at $1.637bn. Indeed,Economatica shows that of the 20most profitable banks in the Americas,five are Brazilian. Stripping out themerger, Bradesco comes top amongBrazilian banks with $977.9m in thethird quarter, followed by Banco doBrasil with $975.3m, Itaú with$965.2m and next in line Unibanco,which revealed profits of $367.5m.Themerger also opens up the gapbetween the Brazilian banks and themost important foreign competitor inthe market, Santander which postedprofits of $259.5m.

Pros and consThere are a number of obviousadvantages to scale in an era whenclients are desperate for the security ofa bank that is seen as too large to fail.A broader deposit base is also criticalat a time of scarce credit. The mergerwill also allow for some cost cutting,although both banks have repeatedlystressed that there are no plans to losestaff except through natural wastage.That said, the new entity may be ableto squeeze out R3bn to R4bn insavings, including through tax and theability to trim technology spend,according to Henrique Navarro,

analyst at Santander InvestmentSecurities. The new entity will alsobenefit from Unibanco’s strengths inconsumer credit while enjoying Itaú’slower fund-raising costs, he pointsout. The bank sees itself becoming aLatin powerhouse, and indeed its ownbackyard is the first area for expansion.Mexico is a priority, according toMoreira Salles, as is Chile. Itaú doesnot have a substantial presence there,making it high on the list ofinvestment plans.“I always thought itstrange that Brazil does not have a[banking] multinational, given itsconcentration of talent and developed

BRAZIL:

BANCO

ITAU

MER

GES

WITH

UNIBANCO

Don’t work in the dark,who knows what you

might find

Paul Spendiff

Tel:44 [0] 20 7680 5153

Fax:44 [0] 20 7680 5155

Email:[email protected]

Emerging Markets Report provides a comprehensive

overview of the principal deals, trends, opportunities

and challenges in fast-developing markets. For more

information on how to order your individual copy of

Emerging Markets Report please contact:



financial system. Nowthis opportunity exists.We want to build aunique business inwhich the country cantake great pride,”Moreira Salles adds.The deal also opens

up opportunities insecondary sectors, themost obvious beinginsurance. Since theannouncement of itsmerger with Itaú,Unibanco has saidthat it is buying out a48% stake held byrescued US insurerAIG in an insurancejoint venture betweenthe two. Unibanco hasagreed to pay $820min the deal, giving itfull control overBrazil’s fourth-largestinsurer with totalassets of R12bn. Thesector has been booming on the backof areas including credit protection,private health care and life insurance.Behind the bombast, the reasons for

the merger often look more prosaic.The purchase by Santander of ABNAmro’s Brazilian operations hadraised the uncomfortable spectre of aforeign bank competing for the topspot among private banks, long heldby the duopoly of Itaú and Bradesco.There was the strong possibility thatSantander and ABN Amro, withEuropean roots, could leverage theirexperience of domestic mortgagemarkets to capture a big slice of thenext great opportunity in Brazilianbanking, the flourishing of thenascent mortgage market. Already,Santander had shaken up theBrazilian credit market, for exampleintroducing fee-free credit cards,which were quickly copied.

Unibanco, long the third privatebank, had a franchise which had lostspace in some critical areas, such ascorporate banking. Its business wasseen as being the clincher for eitherItaú or Bradesco to take the final stepto becoming the dominant bank andas such it had long been rumoured asa takeover target, althoughmanagement constantly repeated thatit was not up for grabs. The financialcrisis, which emphasised theimportance of strong ratings and deeppockets, was already challengingUnibanco. Then rumours startedswirling that the bank had beendeeply involved in selling US dollarforward contracts to clients, whichhad gone sour as the real reversed itsgains and slumped against thegreenback. Moreira Salles was clearlyaware of what was pressuring thebank and looked to scotch those

rumours. “We heardstories about ourderivatives losses thatwere completely out ofproportion.” In lateOctober, he announcedthat bank clients wouldforfeit one billion reaisto cancel leveragedpositions and pointedout that thisrepresented less than0.5% of total assets.Thewriting, however, wasalready on the wall.The question now is

what the effect will be onthe overall bankingsector and itscompetitiveness. Brazilhas a relativelyconcentrated bankingsector with the fivelargest banks accountingfor 65% of the market.Concentration has beenincreasing and as

recently as 1995, there were 240 banksin Brazil. That had fallen to 156 by June2008. Still, it is by no means the mostconcentrated market in the region: thetop five banks in Peru enjoy 86%marketshare, while the figure is 79% in Mexicoand 75% in Chile.The financial crisis means that

customers are already suffering withhigher fees. According to the Brazilianbanking federation, Febraban, averagespreads in September consumerlending were up by 3.6 percentagepoints year-over-year at a hefty 53.1%per annum. Even in the corporatesector, the average spread is up 2.1percentage points in 12 months withan average charge of 28.3%. Furtherconsolidation clearly does not bodewell for customers and probablyreduces the likelihood that attemptswill be made to win market sharethrough competitive pricing.

Behind the bombast, the reasons for the merger often look more prosaic. Thepurchase by Santander of ABN Amro’s Brazilian operations had raised theuncomfortable spectre of a foreign bank competing for the top spot among

private banks, long held by the duopoly of Itaú and Bradesco. There was thestrong possibility that Santander and ABN Amro, with European roots, couldleverage their experience of domestic mortgage markets to capture a big slice

of the next great opportunity in Brazilian banking, the flourishing of thenascent mortgage market. Already, Santander had shaken up the Braziliancredit market, for example introducing fee-free credit cards, which were

quickly copied. Photograph © Alexandre Fagundes DeFagundes/Dreamstime.com, supplied December 2008.



Smaller banksWith the merger, Unibanco hasavoided the fate of many of its muchsmaller brethren, which have had toslam the brakes on all expansionplans. The elimination of smallerbanks is also effectively exacerbatingthe concentration in the Brazilianbanking industry. The last six monthshave been a gruelling time for smallerbanks. Many had thrived in theprevious three years by moving swiftlyinto new areas of the credit boom.Starting in the payroll-deducted creditmarket, they had spread out intoniches including lower income credit,auto and motorbike loans, includingfor second hand-purchases, as well aslending for small- and medium-sizedenterprises. With ready capitalthrough equity markets andsecuritisation, they had beenwitnessing lending growth of morethan 30% per annum.The scale of the turnaround can

already be seen. São Paulo-basedDaycoval saw net profits fall 18.4% inthe third quarter to R47.1m and, moreworrying still, a steep decline indeposits, which tumbled 10.8%between the second and thirdquarters to R2bn. The financial crisishas hit smaller banks hard for anumber of reasons. The closing ofequity and structured debt marketsmeans that these banks no longerhave access to new financing to growand do not have sufficient balancesheet clout to sustain lending.The inability to raise reasonably

priced financing calls into questionthe very business model, according toCelina Vansetti-Hutchins, senioranalyst at Moody’s in New York. Atleast until markets re-open, thesebanks will find themselves frozen out,adds Plinio Chapchap, professor offinance at Profins Business School andpartner at Queluz Gestão de Ativos, aboutique asset manager and corporate

advisor. He sees zero credit growth inBrazil next year. Chapchap also pointsout that one of the most dynamiccredit segments, that of lending for carpurchases, is likely to decline sincemanufacturers are already idlingplants for weeks as demand outstripssupply. Extremely long tenors forloans enabling lower incomeborrowers access to consumer goodshas all but disappeared, he notes.

Chain reactionThe predictable effect of the proposedItaú-Unibanco merger has been tostimulate further moves towardsconsolidation in the belief that biggeris better. This comes at a time whenthe Brazilian government is desperateto ensure that the credit downturndoes not exacerbate the economicslowdown already underway.To maintain credit growth, the

government has pushed throughmeasures including a lowering ofwhat have been very high reserverequirements. More controversially, ithas pushed a measure (MP433)through Congress to allow publicsector banks to take over otherfinancial institutions. In the case ofCaixa Econômica Federal, the giantmortgage bank, the government wenta step further and allowed the bank tobuy stakes in real estate companies.Banco do Brasil has been on

something of a rampage. OnNovember 21st, the bank announcedthat it had bought a 71.2% stake inBanco Nossa Caixa, a state bankowned by the government of SãoPaulo, for R5.39bn, representing apremium of 38% over the previoustrading day’s closing price. Thesubsequent reaction of the share pricesuggested that investors believedBanco do Brasil overpaid, with itsshares tumbling 14% for a decline ofover 60% year-to-date while NossaCaixa shares ended up.

The acquisition spree has notstopped there. Banco do Brasil hasalso been negotiating to buy Banco deBrasilia, has already agreed to buy thestate bank Banco do Estado de SantaCatarina for R685m and more recentlysaid it would pay R81.7m for theBanco do Estado do Piaui. It has alsobeen widely rumoured that Banco doBrasil is negotiating to buy a stake inBancoVotorantim of some R7bn.

CinderellasThe big question now is how themighty Bradesco and Spain’sSantander keep up in this morecompetitive environment in whichBanco do Brasil seems willing to spendsignificant premiums to buy up banks.Marcio Cypriano, president ofBradesco, has been at pains to stressthat the bank is not going to bebounced into making a precipitateacquisition to keep up.“What interestsus is efficiency (and) returns for ourshareholders,”he said. The bank is notimminently going to look forexpansion overseas to keep up withItaú-Unibanco either, he adds.Bradesco is pessimistic about Brazil’sexpansion next year, predictinganaemic growth of 2.5%.Meanwhile, Spanish banking giant

Banco Santander’s plans to becomethe most profitable bank in Brazilseem to have retreated further fromreality. Santander Chairman EmilioBotín recently said his bank wouldinvest R2.6bn over two years toexpand its business by 15% with 400branch openings. Customers ofBrazil’s banks may be thankful for themoment that the money is in safehands, though down the line theymay rue the day that the bankingsector consolidated still further. As forItaú-Unibanco, it is likely to find thatthe lower fees charged in LatinAmerica make these markets lessappetising than staying at home.

In the Markets

BRAZIL:

BANCO

ITAU

MER

GES

WITH

UNIBANCO


© FTSE International Limited (‘FTSE’) 2008. All rights reserved. FTSE ® is a trade mark jointly owned by the London Stock Exchange Plc and The Financial Times Limited and are used by FTSE under licence.

THE FTSEHOW DOI GET INTOREAL ESTATEINDEXFTSE. It’s how the world says index.

Real estate has outperformed both equities and bonds over the last 10 years. But getting intoreal estate hasn’t always been easy.That’s changed.Whether you are looking at REITS or want directexposure to commercial property, FTSE has the world’s leading range of Real Estate Indices,helping you measure the performance of global real estate markets and invest more easily.www.ftse.com/invest_real_estate



FORTUNATELY FOR THE fundsindustry, regulatory issues forIslamic funds are in many ways

simpler than for other areas of Islamicfinance. This is because the operationof Islamic funds can generallyreplicate structures and processeswhich are familiar from conventionalfinance. Whereas other Islamicfinance structures, such as profit-sharing investment accounts, ortakaful, sit rather uneasily withinconventional regimes, and significantmodifications are necessary, withfunds the situation is much simpler.An Islamic fund must operate within

Sharia principles. The prohibition inIslam against riba will prevent a fundlending or borrowing at interest, orinvesting in interest-bearing securities.Moreover, the fund may not invest

in unclean or unethical activities suchas those involving pork, alcohol,pornography or prostitution. It mayalso not invest in conventionalfinancial institutions, or enterpriseswhich receive or pay substantialamounts in interest.

In the Markets

REG

ULA

TORYISSU

ESFO

RISLA

MIC

FUNDS SHARIA

COMPLIANTINVESTING

Photograph supplied by istockphoto.com, December 2008.

The Islamic funds industry is growing rapidly, as investmentmanagers seek to tap into the high levels of liquidity which stillexist in the Gulf countries, and as Muslim investors recognisethat there are viable alternatives to conventional funds. At thesame time, as Islamic finance grows, there is an increased focuson its regulation. There are, in fact, relatively few regulatoryissues specific to Islamic funds but, outside the very importantone of Sharia governance, the similarities to conventional fundsare much more important than the differences. Indeed, therelatively conservative models forced on Islamic funds by Sharialimitations will tend to limit the regulatory difficulties that mayarise. Peter Casey, director of policy in the Dubai FinancialServices Authority’s policy and legal services division, outlinesthe issues.


THE FTSEI WANT TOINVEST MOREINTELLIGENTLYINDEX


Because investors always want superior returns, FTSE has developed a range of investmentstrategy indices that are designed to offer an enhanced risk / return profile. Alongsidetraditional indices, we offer indices that use alternative weighting criteria, which include sales,cash flow, book value and dividends, instead of market capitalisation.www.ftse.com/invest_intelligent

FTSE. It’s how the world says index.



In the Markets

REG

ULA

TORYISSU

ESFO

RISLA

MIC

FUNDS

There are standard“Sharia screens”,some operated by third parties, fordetermining whether investments areacceptable. Where an investmentproduces a small proportion of itsreturn from unacceptable sources —for example a trading company whichalso arranges interest-bearing loansfor its customers — that investmentmay be regarded as acceptable if it is“purified” by giving the unacceptableproportion of the return to charity. Afund may not sell goods orinstruments which it does not (or willnot certainly) own. This limits theability to sell short or to enter intosome types of futures contract.The prohibition against gharar (risk)

will also limit some types of contract,including for example contracts fordifferences. Debt obligations aregenerally not considered to betradable. (The situation is, however,complicated and baskets whichcontain a proportion of debtobligations may be accepted astradable.) The main contractualarrangements, especially those withinvestors, will be conducted underone of the contractual forms knownfrom the early Islamic period.In the conventional funds area,

international standard for evaluating aregulatory regime is the InternationalOrganisation of SecuritiesCommissions (IOSCO) Objectivesand Principles of SecuritiesRegulation, especially Principles 17 to20, and the supporting evaluationmethodology. These principles arenaturally focused on funds ofsecurities, and would need someadaptation to deal with, for example,commodity or real estate funds. Onemanifestation of the increased interestin the regulation of Islamic financewas the setting up by IOSCO of aWorking Group to consider theapplication of the IOSCO Principlesto Islamic finance. The report of this

group, on which the Dubai FinancialServices Authority (DFSA) wasrepresented, was published inSeptember 2008, and this particulararticle draws heavily on its analysis.The key issue for Islamic funds is, of

course, Sharia governance. By holdingitself out as Islamic, any fund makes atleast an implied claim that its activities,and specifically its investments, conformto Sharia principles. What is the role ofthe regulator in relation to this claim?Some regulators would take the viewthat they should not be involved in anyway with this claim, seeing anythingwith a religious overtone as beingoutside their remit - though somemightmodify this by relying on generaldisclosure obligations to achievedisclosure of Sharia compliance, assomething relevant to an investor’sdecision. Other regulators see it as theirduty to oversee Sharia compliancedirectly, and to impose consistentinterpretations in their jurisdictions.They generally do this by creating asingle Sharia Board of their own,though there may be further boards atfirm or fund level. The third approach,which the DFSA has followed, is tofocus the role of the regulator on Shariasystems: that is, to ensure that a firm, ora fund, has the systems in place toensure Sharia compliance, but withoutdictating interpretations centrally.Such an approach would typically

require a fund, or its operator, toestablish a Sharia board of competentscholars, to have mechanisms forensuring that its rulings areimplemented, and to conduct periodicSharia audits. Of course much of thisapproach would also be present inthose jurisdictions where Sharia ismore directly regulated.Associated with any active approach

to Sharia governance, there are likelyto be disclosure requirements, in linewith the IOSCO view that “fulldisclosure of information material to

investors’ decisions is the mostimportant means of ensuring investorprotection.” These disclosures wouldtypically include the names of therelevant Sharia advisors, and theirroles and responsibilities. They mightalso include the basis on which thefund is deemed to be compliant, andstrategies to address the possibility ofnon-compliance, for example when aninvestment ceases to pass the Shariascreens. Where this involves givingpart of the fund’s income to charity,this would certainly need to bedisclosed as a material departure fromnormal fund principles.The requirement for Sharia

compliance, and for disclosures, alsohas effects on the competences that aregulator would expect to see in thefund operator. It will clearly need tohave the ability to deal with Shariaissues and, at point of sale, to makethe necessary disclosures. It may wellbe possible to acquire some of thenecessary competencies throughoutsourcing. There is a growingindustry base of consultanciesoffering various Sharia advice andcompliance services. However, aswith other outsourcing, regulatorswill hold the operator ultimatelyresponsible, so that it will need at veryleast to have the competence tomanage its service provider.As regards issues such as accounting

and valuation, an Islamic fund may bemore likely than a conventional long-only fund to invest in securities whichare not traded in deep, liquid andtransparent markets. However, theproblems are conceptually no differentfrom those faced by many conventionalfunds. The fund will also need to useappropriate accounting standards.There is, of course, increasingconvergence worldwide onInternational Financial ReportingStandards (IFRS), but to date theInternational Accounting Standards



Board (IASB) has given little attentionto the specificities of Islamic financeand instruments. This led to thecreation of the Accounting andAuditing Organisation for IslamicFinancial Institutions (AAOIFI), whosestandards have been adopted forIslamic finance in some jurisdictions. Itis essential that Islamic accountingstandards remain consistent with IFRS,and there is currently debate about howthis should be achieved. Fortunately,however, the issues are less significantfor most Islamic funds than in someother areas, such as Islamicbanking.As far as funds of

securities are concerned,Islamic funds have tendedto be relativelystraightforward, becausethe Sharia compliancerequirements set out at thebeginning of this article aresubstantial impediments toeither leverage or shortselling. Although therehave been attempts to structureIslamic hedge funds, none of thetechniques employed has yetachieved general recognition as beingacceptable to Sharia. Some existingfunds claim to be hedge funds, but itis difficult to see where the element ofhedging enters, or that they havemuch in common with the strategiesof conventional hedge funds (exceptpossibly in the remunerationstrategies of their managers). Shouldfurther“Islamic hedge funds”emerge,those regulators who take an interestin Sharia will need to scrutinise theirclaims carefully.There are, however, some ways to

obtain leverage. There are borrowingstructures, often based on themurabaha contract, and the arbouncontract has been used effectively toreplicate a call option over shares.Thislatter use is, however, not accepted as

yet by all the Islamic schools ofthought, and this would inevitablydiminish the marketability of a fundbased on it. Islamic commodity fundsexist, and in general pose fewproblems from a regulatory point ofview. The inhibition on short selling,and the fact that a seller must haveconstructive possession of anycommodity he sells, combine to makethese rather conservative in character.Real estate funds, however, are

another matter. Real estate is inprinciple an attractive investment in

Islamic finance, because it clearlyinvolves tangible assets. However,there is much less consensus than inequity funds about how far non-Sharia compliant income may betolerated, and how it should betreated. The Sharia screens familiar inequity investment do not exist in thesame way for real estate. So there isno consensus, for example, onwhether a fund can invest in abuilding 90% of whose rental comesfrom residential tenants, but whichhas a conventional bank on theground floor.In addition, real estate is a

notoriously illiquid investment, andregulators adopt various devices toensure, so far as possible, that fundscan meet redemptions without beingforced into a fire sale of assets. Thiscan of course be achieved by retainingpart of the fund in cash, but the next

resort is normally to borrow againstthe assets. Although this should inprinciple be possible, it is not clearthat it will be as simple to arrange inan Islamic fund as a conventional one,especially since regulators normallyprefer funds to retain good title totheir assets, while Islamic mortgagestructures often involve the lenderassuming full or partial ownership.In brief, therefore, there are a few

regulatory issues specific to Islamicfunds but, outside the very importantone of Sharia governance, the

similarities to conventionalfunds are much moreimportant than thedifferences. Indeed, therelatively conservative modelsforced on Islamic funds bySharia limitations will tend tolimit the regulatory difficultiesthat may arise.All this, however, is subject

to one very important caveat:it assumes the existence of ageneral fund regime

conforming to IOSCO Principles.There are many jurisdictions which donot have such a regime, includingsome in which Islamic finance issignificant. In addition, modernIslamic finance was originally driven bythe banking sector, and often regulatedby banking rather than securities (orintegrated) regulators. It therefore hasa legacy of fund or fund-like structuresestablished within banks, but withoutthe governance structures (trustees,oversight committees, independentcustodians, etc) that are normal forcollective investment schemes. Forfunds established in this way — andindependently of their Islamiccharacter — there are frequently acuteissues of conflict of interest which needto be managed. As the Islamic financeindustry matures, these funds need tobe brought within the establishedparameters of governance.

Although there have been attempts tostructure Islamic hedge funds, none of

the techniques employed has yetachieved general recognition as being

acceptable to Sharia.



Face to Face

CACEIS:

THEHIDDEN

MOTO

ROFTH

EFIN

ANCIALMARKETS

CURRENT SPECULATION ASto the fate of CACEIS is not aslur on its business. Instead it is

testament to the rapid rise and successof the Paris-based asset servicing firm,that was established in September2005 when Crédit Agricole andGroupe Caisse d’Epargne combinedtheir custody, asset administrationand asset services operations.In the subsequent three years Credit

Agricole-Caisse d’Epargne InvestorServices (CACEIS) has cemented aprominent position in fundadministration in both France andEurope, and a third place ranking inthe key Luxembourg fund market. Italso ranks number one in France indepositary/trustee custody, andnumber four in Europe. A rapidexpansion of operations, coupled withsteady returns and resilience in theface of the wider stock market andeconomic downturn, have madeCACEIS one of Natixis’s most saleableassets. The investment bank’s 50%

stake in CACEIS could be worth about€1bn, according to speculation in theFrench press.The man who has overseen and can

rightly take much of the credit forCACEIS’s success is its chairmanFrançois Marion. He joined thebusiness in June 2004 as managingdirector of Crédit Agricole InvestorServices (CA-IS), then became chiefexecutive of CA-IS Bank andchairman of CA-IS Bank Luxembourg.“My first task was to find a way togrow the business,” he says. “So wenegotiated the partnership withCaisse d’Epargne.”Assets under custody at CACEIS

topped €2.2trn at the end of the thirdquarter of 2008, ranking it number tenin the world by that measure. Assetsunder administration came inmarginally above €1trn, while netincome from CACEIS operations was€366m for the first three quarters ofthe year, according to Crédit Agricole’smost recent quarterly report.

OUT OF THESHADOWS

CACEIS chairman François Marion.Photograph kindly supplied by CACEIS,

December 2008.

Asset servicing does not tend to grab headlines. When all goeswell, firms operate happily in the shadows of their higher profilebank, broker and investment fund clients. Of course not all is wellof late, and in mid-November CACEIS, the investor servicesbusiness jointly owned by France’s largest retail bank CréditAgricole and France’s number three investment bank Natixis,found itself at the top of the French business pages. A story, whichfirst appeared in French daily La Tribune, claims Natixis, which hasbeen buffeted by sub prime-related losses, had hired Rothschild tofind a buyer for its stake in CACEIS. Natixis declined to comment,though a spokesman noted the bank was conducting a strategicreview of all of its operations. In the meantime, Paul Whitfieldtalked to CACEIS chairman François Marion about the changingmarkets and their impact on his asset servicing business.



If Marion is concerned by therumours of an impending sale byNatixis, and the corresponding arrivalof a new shareholder, or shareholders,he shows little sign of it. He claims heis not aware of Natixis’s intentions andwhen pressed says that he has not evenspoken to the investment bank aboutits plans for CACEIS. It is perhapstelling, though, that when asked ifCredit Agricole might also considerselling up he has no hesitation in rulingout the possibility. “The commitmentfrom Crédit Agricole is total,” he says.Separately, press reports havesuggested that Crédit Agricole couldseek to raise its 50% stake by 1%, togain outright control of CACEIS, ifNatixis pushes ahead with a sale.However, neither Natixis nor CACEISwould comment on this presumption.A sale of the stake makes sense for

Natixis. The investment bank needscash to offset losses of about €500mresulting from trading operations, subprime exposure and its exposure tothe bankruptcy of Lehman Brothers.In September it sold €3.7bn of newshares to shore up its depleted capitalbase but only after offering the stockat a huge discount to its then tradingvalue. Further falls in its share pricemean going back to the market is outof the question for Natixis, leaving itwith little option but to sell assets.The bank had put its insurance

business in the window but pulled thesale after bids came in about a thirdlower than its asking price of €1.6bn.CACEIS, which escaped the bankingcollapse relatively unscathed, couldprove a more attractive target, thoughthe offer of only a 50% stake, andpossibly less if CréditAgricole chooses toboost its position,may limit interest fromboth trade and financial buyers. ForCACEIS, which still harbours acquisitiveintentions of its own, a new owner,without the financial woes of Natixis,could provide the financial muscle to

expand at a time when the cost ofmaking acquisitions has fallen.Marion isclear that CACEIS is in the market fornew investor services operations—when the opportunity presents itself.Acquisition, he insists, is the only way toexpand his operation beyond its existingborders.“If you are already in a market,and established, you canwin clients andgrow in that way but if you want tomove into a new market you can notsimply set up an operation and hope todevelop a business. It is impossible,”says Marion.“You have to go there andbuy assets,”he notes.CACEIS has no option but to

undertake that kind of acquisitionthinks Marion. He divides theinvestment services world into threeparts.The top table consists of those USfirms large enough that there is noimperative for them to expand. Theyinclude Bank of New York Mellon, theworld’s biggest custodian business, andits three smaller compatriots JPMorganChase & Co, State Street Corp andCitigroup Inc, all of which benefit fromtheir presence in their homeUSmarket,which accounts for about 60% of theglobal asset servicing market. At theother end of the spectrum, Marionclaims the smaller firms have alreadymissed the opportunity to be anythingother than fodder for the larger firms’expansion plans.“They have to sell,”saysMarion. That leaves the middle tier ofoperators, including CACEIS and itsEuropean peers, such as French banksBNP Paribas and Société Générale,Britain’s HSBC and UBS of Switzerland.Marion suggests that these

investment services operations willnever rise to compete on size with theUS giants, principally because they donot have the exposure to the USmarket. They do still have room togrow in alternative asset markets andin some of the more peripheralEuropean markets. “Italy and Spainare interesting, because we do not

have a presence there,”he says.“Theyare also attractive because [profit]margins are higher than in otherEuropean markets mainly because thecompetition is not as intense.”Marion has no shortage of

experience in making acquisitions.CACEIS has made four majoracquisitions and sold off a subsidiary.In July this year, CACEIS took control

of a €200bn custody and €100bn fundadministration business from Natixis.The most significant of those deals,however, came in July 2007 with thepurchase of the custody interests ofGermany’s HypoVereinsbank (HVB)for €461m. That purchase added€400bn of assets to CACEIS’s assetsunder custody and gave the Frenchgroup about a 15% share of theGerman custody market and afootprint in one of Europe’s biggestasset services markets. The transfer ofHVB’s business, now called CACEISBank Deutschland, onto the CACEISplatform has not been a simpleoperation.“We have had to disentanglethe HVB business from its parent,”saysMarion. “It has not been a simpleintegration, but it is proceeding well.”CACEIS also landed a second,

important, albeit smaller, deal just daysafter the HVB acquisition when it paid€243m for Olympia CapitalInternational, an independent investorservices operation with $70bn of fundsdomiciled in Bermuda, the CaymanIslands, British Virgin Islands, Ireland,Canada and the US.The deal marked itsfirst foray into the North Americanmarket, albeit in the niche alternativefunds sector. Marion dismisses anysuggestion that Olympia might be usedas a stepping stone into the mainlandUS market as fanciful. “We are in theoffshoremarket and that is very differentto the mainland market,”he says.“Thereis no way we can compete in thedomestic US market. No European firmcan enter that market in my opinion.”



Face to Face

CACEIS:

THEHIDDEN

MOTO

ROFTH

EFIN

ANCIALMARKETS

The barriers to entry do not justoperate in one direction, however. USfirms have paid a hefty price for theirefforts to expand into the Europeanmarket and have struggled to build onthe assets that they have acquired. “USfirms have found it much more difficultthan expected to integrate and turn aprofit in businesses they acquired inEurope,” says Marion. Part of theproblem has been the US companies’reluctance to put senior people on theground in the markets in which theirEuropean operations operate, accordingto Marion. “They have to understandlocal regulations and practice and if theyare trying to do that fromBoston orNewYork, I am not sure that it iseasy for them.”For the time being at least

the merger and acquisitionthat have characterised thebattle for market share in theasset services industry hasstalled in the face of theglobal financial crisis.Marion says he has noimmediate plans to expandCACEIS’s operations.“By most measures CACEIS has not

had a bad financial crisis. Thecompany responded early to signs oftrouble in the credit markets byimplementing what Marion describesas “crisis measures” in the summer of2007. It notably decided to round offits exposure to failed US investmentbank Lehman Brothers before it filedfor bankruptcy on September 15. “Wecut all exposure to their [Lehman’s]prime broker service before thecollapse and did not lose a penny as aresult,”says Marion.“Not many of ourcompetitors can say the same.”No asset servicing operation or

custodian has been able to completelyescape the fallout from the recentmarketcollapse, not least because, like many ofthe asset managers they serve, fees arecharged as a percentage of the total value

of funds in their care. Yet as Marionpoints out the decline has not been allbad for his group’s revenues.“We have abalanced business model that includes alot of cash products and the crisis hasmeant that the spreads on thoseoperations have moved in our favour.”The financial crisis has also helped manycustomers to realise the value of a goodasset servicing and custodian partner.Nowhere has that been more true thanin the alternative funds market, a sectorthat includes hedge funds, where hugeredemptions have forced many funds toliquidate assets quickly, leading thefunds, in many cases, to suspendwithdrawals temporarily to give them

more time to liquidate assets and raisecash. “We are speaking with ouralternative asset managers every day atthe moment,” says Marion.“There havebeen a lot of redemptions and we clearlyhave an important role to play infacilitating that process. That has notchanged our commitment to the sectorthough. It is not going to disappear andwe are in it for the long run.”Given the pressure on the asset

service operations from increasedclient demands and the decline in feesas a result of the declining value ofassets, the importance of keeping a lidon costs has become paramount.CACEIS has proven particularly sharpat keeping its cost base down, a focusthat has allowed it to operate at a costto income ratio on a par with its largerUS rivals.“We operate at a cost income

ratio of about 70%, the same as Mellonand State Street,” says Marion. Thatratio is better to most of his Europeanpeers, he says. It is all the moreimpressive given that CACEIS’s homemarket of France, in which it has anabout 40% share of the investorservices business, is one of the mostcompetitive and thus lowest marginmarkets in Europe.Marion’s professional experience

would seem to make him the idealcandidate for watching the pennies ina business that is at once a sprawlingtechnology network, and yet alsohighly labour intensive — CACEISemploys 3,500 staff. In the years

immediately prior to takingthe reins at CACEIS, Marionwas in charge of budgetplanning for Crédit AgricoleIndosuez and ofinformation technology forthe entire Crédit AgricoleIndosuez group.While other asset service

businesses have tried toimpose their operationalprocesses on new markets,

Marion says CACEIS is not governedby any specific operational doctrine.“We do what is necessary to complywith local regulation and to bestservice the needs of clients. You can’tapply a single model across differentcountries,” he insists. “The Frenchmodel won’t fit into Italy and the USmodel won’t fit into France. TheCACEIS model is to be pragmatic, tokeep common elements where we canand to adapt where we have to.”With the expectation of a long-term

downturn in the financial marketsputting pressure on fees, recordvolatility buffeting client funds, andthe prospect of an imminent changein its ownership structure,pragmatism and a willingness toadapt is something that CACEIS mayneed in spades in the coming months.

By most measures CACEIS has nothad a bad financial crisis. The companyresponded early to signs of trouble inthe credit markets by implementing

what Marion describes as "crisismeasures" in the summer of 2007.



THE FACTORS THAT have helpedMexico thrive since the beginningof the century, above all its

proximity to the United States, are nowshowing their downside. Havinghitched a lift on the rising prospects ofits neighbour and North American FreeTrade Agreement (NAFTA) partner,Mexico is now being dragged down bythe recession and economic turmoilnorth of the border.The peso,which hadbeen rising against the dollar, has begunto fall, and over 7% inflation isenvisaged for the year 2008.Over 80% of Mexican exports go

north, and the emigrant workers’remittances are the second biggestearner after oil. Together they makeMexico uniquely vulnerable to

shrinking American consumption,whether from a potential slowdown ofthe flow of remittances from emigrantworkers, or slackened demand fromconsumers for the goods made in themaquiladoras, the bonded factoriesproducing goods for export.Similarly, American institutions

facing cash calls as the credit crunchbit had been repatriating theiroverseas investments, above all in theemerging markets such as Mexico,leading to a rapid exit of capital, which,thanks to NAFTA, flows out as easilyas it recently flowed in. In October,even well established and globallyoperating Mexican companiesincluding CEMEX were havingdifficulty rolling over credits as

liquidity froze both south and north ofthe border. Adding to liquiditydifficulties, worried by the rising pesoseveral companies had heavily hedgedbased on a falling dollar, and thegreenback’s somewhat anomalousrise during the crisis drained theircash reserves.Illustrating the effect, the market cap

of The Mexico Fund, a NewYork StockExchange (NYSE) listed fund investingin companies south of the border,dropped its market capitalisation from$975m the year before to $351m by theend of October, and no less than$190m of that evaporated in that lastmonth. Several scheduled Mexicaninitial public offerings (IPOs) havefollowed the current global habit ofprocrastination and have beenrescheduled for an indeterminate datein 2009, while the government hasbeen sitting on several plannedinfrastructure projects.Soaring oil prices through much of

2008 should have helped both theMexican economy and PEMEX, thestate controlled oil monopoly.However, constrained by political andconstitutional barriers to foreigninvestment, not to mention a policy ofsubsidised fuel supplies to domestic

Country Report

MEX

ICO

BRAVES

STORMYWEA

THER

FROM

THENORTH

Smiles in the eye of the stormMexico’s President Felipe Calderon, left,waves as Brazil’s President Luiz Inacio Lulada Silva looks on during the summit of LatinAmerican and Caribbean for Integration andDevelopment, CALC, in Costa do Sauipe,Brazil, Tuesday, December 16th 2008.Thetwo-day summit covered the strengthening ofpolitical and economic ties in the LatinAmerican sub-continent. Photograph taken byLucio Tavora, for Associated Press. Suppliedby PA Photos, December 2008.

With more than 80% of its exports going north and workers’remittances crucial to its balance of payments, Mexico isespecially vulnerable to shrinking American consumption. WithUS investors repatriating funds as the credit crunch bites, thecountry faces a tough time. There is, however, still investmentinterest despite security fears, Ian Williams reports.



consumers, the gains were relativelylimited. One unexpected side-effect oftemporarily soaring oil prices that didbenefit Mexico was the surge inshipping costs of goods from Asia.Suddenly, maquiladora productionbecame more competitive thanChinese manufactures.PEMEX is, paradoxically perhaps,

almost too successful. It accounts for35% of federal revenue, and sendsover 80% of its revenues to thegovernment. That government, is inturn addicted to PEMEX’s funds.Moreover, it cannot safely forgo thoserevenues to allow the company toreinvest in new refining capacity andexploiting deep offshore reserves.Mexico imports about 40% of thegasoline it uses, according to theInternational Energy Agency (IEA).PEMEX meantime estimates thatimports of oil could actually grow to50% of total domestic consumption in2009. Industry experts also predict thatfrom being currently the third biggestoil supplier to US, it may become a netimporter in the near future.At the end of October 2008,

President Felipe Calderón finallymanaged to get his Energy Reform lawpassed, which will allow some verylimited private and foreign investmentin the oil industry, whose domesticcontrol is enshrined in the constitution.“The reform guarantees that onlyMexicans will own our oil,”he declaredpatriotically, adding for the benefit ofthe business pragmatists:“The stimulusthe reform gives our oil industry willallow us to reactivate our economy.”Texan offshore rig specialists arealready looking forward to thecontracts to drill offshore, but othersare less sanguine about the immediateeconomic effects of the reform.Eurasia Group’s Enrique Bravo

comments:“In reality the reform leavesvery little opening for privateinvestment. Private companies will

only be able to continue providingservices to PEMEX and will not be ableto participate in profit or productionsharing contracts. The governmentbacked off from a far-reachingtransformation of the energy sector inMexico because it knew it did not havethe necessary political backing for it. Itwould have entailed a constitutionalreform and the Calderónadministration did not have the votes.”Albeit limited, the reforms should

make PEMEX more efficient, and giveit greater operational autonomy,flexibility in its budgetary allocationand the ability to establish servicecontracts, with some additionalincentives based upon contractperformance. But Bravo cautions:“Given the conditions of the industryand potentially lower oil prices, all thiswill not really help the company rampup its exploration and futureproduction. Even so, it’s possible thatin a few years, once it becomes clear itwill not solve the problems of thecompany, the political elite in Mexicowill have no choice but to open up itsoil sector. At that point it will have todo so without much room to controlthe process, especially if productionfalls to a degree that the publicfinances take a serious toll.” That isprecisely what most analysts foresee.There is a golden mean between

selling out to foreigners and stagnatingindependently, as some miningcompanies have demonstrated.Nonetheless analysts considerCalderón’s ability to get anything at allin the way of reforms, no matter howattenuated, to be a significant politicalvictory. After all, the opposition, someof whom still refuse to recognise hiselection, had physically blockadedMexico’s Congress earlier in the year inan innovative pre-emptive filibuster toavert any such legislation.Overall, however, despite his highly

qualified success over Energy, Bravo

comments,“Calderón has managed toadvance his reform agenda much moresuccessfully than his predecessor, eventhough his tenure began under a muchmore conflictive political environmentafter a much contested presidentialelection. His approach has been to tryto move things forward, even if this hasbeen with very gradual, incrementalchanges. No reform so far has satisfiedanyone, but given the currentdistribution of power in Mexico, hisreforms are no minor achievements.Much work remains ahead, and thereis, of course, the perception that Mexicohas no time to waste, which createssome frustration for the people whoknow that the Mexican economy couldbe growing more and that it could beway more competitive than it is today.”The relative political stability

implied by the reform process iscountered by what Bravo calls “a verycomplicated public safety situation”.During a downturn, such factorsbecome more important than beforeand Ulysses de la Torre, director ofResearch at Distributed Capital Group,explains from his personal experience:“One of the biggest constraintsforeigners find themselves accountingfor much more than they planned isactually personal security—assaults,kidnapping threats and the like.”To illustrate the point, two hand

grenades were thrown into the crowdscelebrating Mexican independenceday in September, which was linked tocompetition between drug cartels.Thegovernment itself reported a rise incommercial kidnappings for ransom.Despite such tangible evidence, De laTorre points out, “Mexicans reallydon’t like it when anyone refers toMexico as ‘becoming the newColombia.’How much of an issue thisbecomes probably depends on wherein the corporate hierarchy theforeigner in question sits and whatsort of ‘investing’ one is getting

Country Report

MEX

ICO

BRAVES

STORMYWEA

THER

FROM

THENORTH



involved in, whether it is thephysical/hard asset sort involvinginfrastructure, buying a factory, etc orthe financial sort involving buyingMexican stocks, bonds, etc.”De la Torre points out that there are

ripple effects. “From an investingstandpoint, this may manifest for thehard asset investor in the precautionshe or she will have to take whenvisiting the site of whatever asset isbeing invested in. For the financialinvestor, this may manifest in a price

differential or risk premium on anyinstrument whose underlyingexposure more directly faces the areaswhere personal safety is an issue.”Despite the temporary uncertainty

unleashed by the credit crisis in theUS, whose effects are scarcely uniqueto Mexico, Bravo and others report acontinuing level of interest ininvestment in the country, between oil,relative political stability, and above alllocation. He comments: “Corruptionhas been a problem in Mexico for

many years, and while it is a seriousproblem, it has not preventedinvestors from coming into thecountry. I think this will not changeanytime soon, neither to reducecorruption, nor to impede greaterinflows of foreign investment.”If one assumes that the US will

recover, thenMexico’s proximity, relativefiscal sobriety, low costs and free tradepolicies will keep foreign investmentcoming despite the constraints of vestedinterests in oil and telecoms.

THERE’S GOLD IN THEM THAR’ HILLS– if miners mind their manners!

While the nationalists parade about Mexican oil,they have, perhaps fortunately, overlooked thetreasures of the Sierra Madre. Mexico is one of

the world’s major gold producers and many foreigncompanies are operating there.Colin Sutherland, chief executive officer (CEO) of

Toronto-listed Nayarit Gold, lists Mexico’scomparative advantages as he extols the businessclimate in the country as “friendly to miningcompanies like us when we do development andexploration work on properties. Mexico, at federaland state level, recognises that mining is veryexpensive, it takes a lot of time and funding todevelop your deposits and as you go along here youwill be spending a lot of money in your local area,before producing an ounce of gold.”However, it takes investment in the community as

well. “From a community, environmental, political andsocial standpoint we are very active. The companies thatdo not do a good job on those four issues get intotrouble. We recognise that it can be very invasivecoming in, drilling, so we agree on infrastructure projectsfor local towns, sewage system, enhancing a bridge,schools, churches and so on to give them improvedquality of life. Any problems are likely to be related to alack of communications with the local community andgovernment, or your hiring practices,” says Sutherland.He had had experience in Mexico before so he

knew. “The companies that do not do a good job onthose issues are those that get into trouble. If youare lax in those areas it will create problems and so

if you have experts helping you then it becomeseasier.” Ethical corporate practice is critical, hesuggests. “We are transparent, a publicly tradedcompany. We report our revenues, 95% of ourmoney is invested in Mexico and more is on the wayas we expand.”Sutherland explains that NAFTA makes US and

Canadian investment in Mexico a special case.“Unlike some other Latin American countries thathave created significant challenges for Canadian andUS companies to develop minerals, in Mexico there’sno left-wing move to create challenges and roadblocks to mining. The rules are fair, they’ve promotedthe mining community for some years, and they’revery progressive on their tax rates as well.”Most of the capital for his operation was raised

through Toronto’s TSX Venture Exchange—$10m lastsummer—since Canadian investors are mining-savvy.“We have had some financing inside Mexico fromsome fairly wealthy individuals taking part, but wenever approached the investment banks up till now,since there has been no need since the flow ofcapital into the mining sector has been very goodsince the bull run started in 2001, and it was just aseasy going to Toronto or New York to raise money asMexico City. In this environment, as we move to thenext stage of development, we may need to look atother sources of financing. If there is an appetite inLatin America then we may go there.” In Mexicothough, he will continue to dig for treasure, employingas many Mexicans as possible.



THE CITY APPEARS to havereached a kind of stalemate withmany units looking to cut costs

but senior management anxious notto leave themselves short-handed ifan upturn should materialise. There isa perception that redundancies arebeing delayed until February/Marchnext year, firstly to avoid a period ofbad PR close to Christmas andsecondly to cling on a bit longer just incase. This could be a long and dismalwinter across the London tradingfloors with slow dribbles of job lossesrather than the headline-grabbingswathes of the last three months.With huge government issuance

likely to dominate the markets overthe next few years there may beprecious little spare liquidity for bigdeals and in any case the appetitefrom the banks to lend will be mutedcompared to their desire to get rid ofthe various state stakes built up intheir businesses. These factors mayconspire to make the outlook forM&A particularly grim and this willaffect many areas of City deal making.Many satellite industries have grownfat on the continued churn, from legalto accounting, and while there will bemoney to be made from the recession(administration and restructuring etc)this is much tougher and lessrewarding than arranging deals

between units in good health.Most recessions require the failure

of some iconic brand as a turningpoint for financial historians toidentify as the spot where theeconomy began to turn and with GMand Chrysler struggling for survival itis tempting to speculate that thedemise of one or both will be just sucha moment. Unfortunately for thecapitalists amongst us this is neither anew nor a likely scenario. There hasbeen a huge surplus in auto supply formany years but (as with state airlines)no political appetite for any country toshut excess production. Too muchnational pride and status involved!Better to continue with quasi statesupport in the hope that someone elsewill blink first.To bite this particular bullet would

be a major step even for a countrywhich almost worships capitalism.Funds which would be better spenton saving the walking wounded oron major infrastructure projects willalmost certainly be diverted in a vainattempt to save a few hundredthousand jobs for another few years.The expense will probably cost twicethat number in failed companieswith better prospects but a smallervoice and fewer political friends andin the cancellation of sorely requiredmajor projects.

So we will probably have to wait alittle longer for that iconic failure (unlessLehman was just such a moment).My last message on the equity

markets, written at the end of October,indicated that after almost a year ofpessimism I was willing to betentatively optimistic, as the prospect ofa year end bull rally seemed good.Withthe indices holding their own since themiddle of that month a nice little beartrap would be just the thing to really gettraders excited over the next quarter.Themarkets like to say that they predictthe turning point of the economyaround a year prior to the actual event.Many respected commentators aredoing just that. I salute their bravery butI fear that the time is not here yet.Hopeover the new president-elect willprobably push a concertedmove higherin the markets but printing money tosolve a problem caused by too much ofit in the first place does not seem to meto be a suitable or sensible solution.With companies big and small just

about clinging on, the expected increasein unemployment across the OECDnations will be viewedwith dread.“If weare only just surviving now what will itbe like in another 12 months after theimpact on consumer consumption ofmass redundancies?” is probably themantra on many a board member’s lips.Over-leveraged companies are stillclinging on. There will be some majorcasualties yet. As ever, place your betsLadies and Gentlemen!

Index Review

INDEX

REV

IEW:WHEN

WILL

THESTA

LEMATE

BREA

K?

Indices seem to have reached a point of stability (albeit withheavy swings in either direction) as the FTSE 100 oscillatesviolently around the 4,200 level. Every time it looks set to slide,western central banks announce yet another stimulus packageso up we go. Then, as we all put on our buying boots some direpiece of economic or corporate news slams us back down in tothe mud. The resulting gyrations are beginning to hampertrading volume as it becomes ever more difficult to measure oneday’s activity from the last. Simon Denham, managing director ofspread betting firm Capital Spreads, gives us his personal view.

The turning point?Simon Denham, managing director of spreadbetting firm, Capital Spreads, October 2008.




EXCHANGESADAPTTO

AMIFID

WORLD

THERE IS A new battleground in Europe.The arrival ofpan-European exchanges called multilateral tradingfacilities (MTFs) on the trading landscape during

2008 is redrawing the trading map of Europe. BATSTrading launched the MTF BATS Europe on October 31st2008, almost exactly one year on from the Markets inFinancial Instruments Directive (MiFID), which came intoforce on November 1st 2007. The directive blew open thedoor to competition among exchange venues in Europe bydispensing with the concentration rule that trades shouldbe conducted on a local exchange. Trading venues had toregister with their local regulatory body either as aregulated market or as a multilateral trading facility (MTF)or in the case of internal crossing networks as a“systematicinternaliser”. No fewer than 120 entities have applied forapproval and are listed on the MTF database of theCommittee of European Securities Regulators. They rangefrom small dark pools with market share of less than 1%,

JOSTLING FORMARKET SHAREIn November 2007, the European Union shook upsecurities trading with the Markets in FinancialInstruments Directive (MiFID). Newcomers havetaken market share from the establishedexchanges, which have smartened up their act.Even so, the main boards are not quaking in theirboots. Why? Well the size of the overall cake hasgotten much bigger. Additionally, they arecomforted by the experience of the NorthAmerican market, which exploded with newelectronic communication networks (ECNs)venues as this century opened, but have nowbeen left with only three principal contendersand those are now owned by exchanges. Mightthat same outcome be true in Europe over thelonger term? Ruth Liley reviews the multilateraltrading facilities (MTF) scene a year after theintroduction of MiFID.

Photograph © Michael Currie/Dreamstime.com, supplied December 2008.

GM EDITORIAL 31.qxd:Issue 31 6/1/09 20:12 Page 32


to MTFs such as Chi-X which is regularly seeing marketshare of more than 10%.

A natural consequence, the first to feel the competitionfrom MTFs were the incumbent exchanges. Shares in somestock exchanges lost 4% of their value on the day thatTurquoise was first announced as a concept in November2006. Moreover, incumbent exchanges at first glance havemuch to ponder. Financial markets research firm TABBGroup estimates that the plethora of MTFs will win 21%market share over the next three years. Even so, seniorconsultant Miranda Mizen of TABB Group, co-author of areport on liquidity, trust and competition in the Europeanequity market structure, thinks we should notunderestimate them: “These exchanges also have the top600 stocks in Europe and it is hard to take what belongs tosomeone else. They have revamped their pricing modelsand some have launched dark pools. They have a richhistory of continuum and constant mutation.”

In response to the MTFs, the primary exchanges havewidened their offering. The London Stock Exchange (LSE)has announced much faster turnaround of trades and nowoffers trade clearing services and Börse Berlin has almostcompletely rebranded. With the acquisition of EquiductSystems, the 323-year-old German exchange describes itselfas a “start-up” with its Equiduct Trading platform due tolaunch early in 2009. Equiduct Trading is not registered as anMTF but rather as a regulated market and joint ChiefExecutive Artur Fischer says that Börse Berlin, which is still aseparate entity, has taken a brave step to set up the Equiductmodel to address a public need: “We can see that thetraditional model will not last in the medium to long term, sowe wanted to prepare ourselves to exist for 323 years more.”

Equiduct’s offering includes a real-time consolidatedtape, processing 140m quotes a day from seven exchanges:LSE, Xetra, Euronext, Chi-X, Turquoise, BATS Europe andNasdaq OMX.

Deutsche Börse is also used to competing for order flow;the federal system of government in Germany has led overthe centuries to seven exchanges in the country.“We havealways had to adapt,” says Michael Krogmann, head ofsection cash market development at Deutsche Börse. Theexchange has been monitoring market share volumes forseveral years and to compete with MTFs’ lightning speedtechnology, will roll out an even faster version of its lowlatency technology in June 2009.

Krogmann stresses: “It is like comparing apples andoranges. The service we provide can’t compare to that of theMTFs.We offer the full range of services through to post tradeservices and even IPOs. Many MTFs outsource all theirextras.” He believes that Deutsche Börse will keep marketshare.“Nobody knows what volumes are traded so we don’tknow whether it is new volumes which are passing to thenew MTFs or whether they are stealing share from theexisting exchanges.We are analysing order flow and can’t seeany negative impact and in fact we could even see an increasein trade as the buyside posts bids and offers on MTFs buthave to hatch their plans on the regulated markets.”

Since launching in March 2007, well before MiFID, Chi-XEurope has steadily built substantial market share.“Whenwe launched Chi-X was up to ten times faster and ten timescheaper than the closest incumbent exchange,” says PeterRandall, chief executive of Chi-X Europe. “We had an 17-month first mover advantage and everyone else has had todefine their offer in relation to us. But we are notcomplacent. We know that we have still got some way to goin terms of market share.”

In 2008, Chi-X doubled its turnover from quarter toquarter, going from €74bn in the first quarter to €132bn inthe second and €246bn in the third. Meanwhile, Turquoisehad launched with the support of nine major investmentbanks and within two weeks had 1,500 stocks available,actively trading 270 each day. By the end of its first monthof trading, it had a turnover of €1.5bn, topping €2bn one dayin October.

The second half of 2008 saw a ramping up of MTFlaunches, many based on the US model of ECNs but allseeking to differentiate themselves from each other as theyjostle for market share. BATS Europe, based on its USplatform counterpart, launched in October with ten UKFTSE 100 securities but quickly grew to include stock fromall the top European indices. MTFs scheduled for launch in2009 include Pipeline, based on its US model, which willtrade blocks without fragmenting the order and Burgundy,which will specialise in Nordic equities and is backed by 11Swedish financial institutions and a Danish firm. Turquoisemeanwhile is differentiated through its visible order book

Richard Hills, head of electronic services of Société Générale, says:"The MTFs are selling themselves on the basis of lower cost and low

latency technology, but in the end the main differentiating factor will beliquidity. Based on our experience of the 60 or so venues in the US, youcan’t realistically be in all of them simultaneously. Photograph kindly

supplied by Société Générale, December 2008.



EXCHANGESADAPTTO

AMIFID

WORLD

which interacts with dark orders to complete the trade. Notto be outdone, Chi-X has launched Sponsored Access,which allows the buyside to trade directly with them whilestill maintaining their normal brokerage channels, savingprecious time.

Exchanges themselves are launching their own MTFs,among them NYSE Euronext which is creating Arca Europe,again based on the US model to focus on high speed highfrequency trading and SmartPool, a dark pool for large blockorders and which is a joint venture with JPMorgan, HSBCand BNP Paribas. The London Stock Exchange (LSE) willlaunch its own dark pool MTF, technically a dark poolaggregator, called Baikal, named after Lake Baikal (thedeepest lake in the world) in the second quarter of 2009. Itwill have up to three technology partners replacing theoriginal Lehman Brothers participation.

As the number of trading venues has increased, liquidityhas fragmented, bringing benefits to the statistical arbitrageplayers through tighterspreads and to the brokerswho can afford to invest inbetter technology. TheFidessa FragmentationIndex gives a daily analysisof how many venues anorder must visit to beexecuted. So on one day inNovember, it showedshare of trades in FTSE 100stocks were split withLondon at 80%, Chi-Xwith 14%, Turquoise with5%, BATS with 1% andNasdaq OMX with 0.05%.

This fragmentation of liquidity has led to fragmentationof post-trade reporting, throwing up transparency as anissue for the buyside, an unintended consequence of MiFID,which put responsibility for best execution with the brokerand the buyside rather than the trading platform.“MiFID isa child of the regulators, so they will have to make sure it ismanaged properly,”says Peter Randall.“Having started thebest execution hare running, they need to keep it runningand make sure that people are using decent policies toensure best execution. The buyside might not be gettingbest prices, but without regulatory incentive to move, theymight not change to another provider to get them.”

George Andreadis, head of Advanced Execution Services(AES) Liquidity Strategy in Europe at Credit Suisse, sayscompetition is good for the market:“It is good because it hascreated new liquidity as well as introducing newfunctionality to the exchange landscape. Ultimately thewinners will be the platforms that have the best prices andvolumes for the stocks they support. BATS as an ECN cameto the party late in the States, but quickly swept up 10% ofmarket share. So just because you aren’t first to the partydoesn’t mean you are not going to be successful as a newtrading platform.”

Many are asking whether or not market share is soimportant when the cake seems to have grown. When Chi-X launched it took share from the LSE, but many believedextra liquidity had been created. Roland Bellegarde, head ofEuropean cash equity markets at NYSE Euronext, for onenotes:“The bulk, but not all, of what MTFs are trading nowis new volumes. Since the pricing has become morecompetitive, they have attracted intra-day customers whodo not usually trade on exchanges. There are morecustomers and more own-account handlers because thepricing system is low enough to make it worthwhile.”

Moreover, Randall admits that Chi-X Europe has drawnout new liquidity: “A lot of incumbent exchanges weresluggish in terms of innovation and pricing and technology.Our participants have conducted research showing that byoffering new competition it has attracted new liquidity toEurope, which we believe can only be good for the buy sideand fund performance.” It is hard to assess volumes, as

Duncan Higgins, clientrelationship manager withTurquoise, explains:“Thereare three concepts. Youhave a new source ofliquidity either throughlower pricing orcommitted market makingfrom shareholders; you seemore arbitrageopportunities because ofthe existence of multipleplatforms; or there is clientorder flow being sentstraight to the MTFs thatwould otherwise have

gone to the exchanges. But how do you measure it? It is verydifficult to separate these and analyse which works best.”

All the players in the new trading environment haveupped their technology game and incumbent exchangeshave invested an estimated €229m to compete with theMTFs in developing faster technology to cope with largervolumes and the demand for speed and increased data flow.The LSE is anticipating a huge rise in volumes in spite of thefall-off at the end of 2008 and has invested in high speeddata delivery mechanisms as well as responding to strongdemand for hosting firms’black boxes from within the LSE’sdata centre to try to eliminate network latency from theirtrades. From day one, NASDAQ OMX Europe was alsooffering space to clients to“co-locate”their trading enginesphysically next to NASDAQ’s servers to shave millisecondsoff trading time and BATS Trading claims a best speed of200 microseconds or two milliseconds and trades 80% of allorders at under 400 microseconds.

Andreadis thinks speed is vital:“If you are in a boxing ringand you are five times slower at pulling a punch than youropponent you are five times more likely to be hit before youhave even pulled the first punch. If you are providingliquidity to the market it is very important in a fragmented

The London Stock Exchange (LSE) willlaunch its own dark pool MTF,

technically a dark pool aggregator,called Baikal in the second quarter of

2009. It will have up to threetechnology partners replacing the

original Lehman Brothers participation.



market to be able to get in and out of positions veryquickly. Likewise if you are smart order routing to a tradingvenue that you know is 10 times faster than another youwill preference the faster venue when both show the sameprice point and volume.”

Brokers have also been investing heavily: an estimated€714m on market data and trading infrastructure during2008 and this is expected to rise in the next two years asbrokers maintain and update their software and hardwaresystems, particularly in smart order routers to seek outliquidity across all venues and to be able to capture the bestprice in a millisecond.

“Smart order routers are at the heart of differentiation,”says Richard Balarkas, CEO of Instinet, an execution-onlyhouse.“You can’t eyeball 25,000 prices a second and standwondering about which MTF to connect to. You needconnectivity to all the exchanges but you also needdynamic queue management to help you know how tosplit your orders and you need to chase invisible pricesbased on probability that the liquidity is there.

“Budgets were cut in 2008 and it will be difficult to investin 2009 so we’ll see a different pecking order beginning todevelop,” adds Balarkas. However, Richard Hills, head ofelectronic services of Société Générale, says:“The MTFs areselling themselves on the basis of lower cost and lowlatency technology, but in the end the main differentiatingfactor will be liquidity. Based on our experience of the 60or so venues in the US, you can’t realistically be in all ofthem simultaneously. The brokers will create preferencesin their smart routers to the venue where you are mostlikely to execute and this will drive out the winners andlosers. The question is, will we follow the US model, or willwe jump straight to the end game with a handful ofsuccessful MTFs creating competition withoutunreasonable fragmentation.”

Certainly the costs of trading have fallen sharply as MTFscompete. NASDAQ OMX gives a 25 basis points (bps)rebate for posting or making liquidity and charges 25 bpsfor taking liquidity, meaning trading will be free for some.Additionally, they cut their prices for onward routing ordersto the LSE, so that it became cheaper to trade on the LSEvia NASDAQ OMX than directly. BATS and Turquoise alsoemploy the maker-taker model, and prices are comingdown as competition bites. Data is being offered free by thetop four and other special pricing models have emerged.

Although TABB Group does not expect to see significantconsolidation for three years, there are signs thatcollaboration at least has started to occur. BATS, NASDAQOMX and others have set up forum to discuss efficiencies,including the adoption of common stock symbols, toenable smart order routers to read orders more easily. Inthe area of price formation, some MTFs are collaborating toproduce a consolidated tape to encourage price formationon MTFs as well as primary exchanges, where most pricesare currently formed.

In an increasingly global market, US platforms are beingused to launch their European version MTFs. Bellegarde

points out: “From next year NYSE Euronext clients will beable to trade European and US shares with a singleconnection, whether through our regulated markets or ArcaEurope. MiFID says anyone can create an MTF, so there is areal opening for globalisation of the market.”

So what of 2009? Many expect a tough year with businesslevels low, with the trend continuing through most of 2010and possibly beyond. Higgins believes that just having agreat product will guarantee success:“Our members want asustainable business model and the four things that willdetermine who wins among the MTFs are pricing,technology, having a different model and liquidity.”Othersmay not be as lucky. As the magazine went to press,rumours are running through the market that an existingMTF is already up for sale. Even while more entrepreneurswill chance their arm on a continuing uptick of liquidityacross the continent over the medium to long term: not allMTFs will survive. The experience of the US market mustgive some houses pause for thought.

Duncan Higgins, client relationship manager with Turquoise, explains:“There are three concepts.You have a new source of liquidity either

through lower pricing or committed market making from shareholders;you see more arbitrage opportunities because of the existence of multipleplatforms; or there is client order flow being sent straight to the MTFsthat would otherwise have gone to the exchanges. But how do you

measure it? It is very difficult to separate each effect.”Photograph kindlysupplied by Turquoise, December 2008.



THROUGH 2008 THE focus in the clearing andsettlement arena was on three areas: the EuropeanCommission’s Code of Conduct; interoperability and

the European Central Bank’s Target 2 Securities (T2S)initiative. While these considerations have motoredthrough changes in the European clearing and settlementinfrastructure, it has been the launch of multilateral tradingfacilities (MTFs) launched under the EU’s Markets inFinancial Instruments Directive (MiFID) that has ignited afire under the clearing community. MTFs have not onlyfragmented liquidity across Europe’s trading venues, butalso they have resulted in more choice for traders andinvestors in clearing and settlement.

The fledgling execution venues have sought a non-traditional and broader response to the clearing and settlementequation. Instead of turning to tried and tested providers,MTFs have made their own arrangements. As PhilippeRobeyns, head of clearing services at Société GénéraleSecurities Services (SGSS), notes:“The main difference [is that]

new platforms such asTurquoise and Chi-X are pan-Europeanand [are] looking for clearing facilities that could offer this typeof service for blue chips stocks across 14 European markets.They did not want to use purely local players.”

Right now, Europe’s clearing landscape is dominated bysix players: Deutsche Börse’s Eurex Clearing, LondonStock Exchange’s Italian clearer CC&G, SWX Group’s SISx-clear and EMCF, owned by Fortis, the Belgo-French bankwhich is now majority owned by the Dutch government,together with NASDAQ OMX (which has a 22% stake).EMCF in turn has a 5% stake in NASDAQ ClearingCorporation (NCC), a clearing and settlement system forUS cash equities that the exchange plans to launch in 2009.The remaining providers are the US Depository Trust &Clearing Corporation’s (DTCC’s) European arm, EuroCCPand LCH.Clearnet, which are about to merge.

Up to now, the main beneficiaries of the new businessemanating from the MTFs have been EuroCCP and EMCF.There were concerns, through the autumn of 2008 that thefinancial problems wreaking havoc at Fortis would affectconfidence in EMCF. Those concerns, however, have beenallayed by a €16.8bn government bailout. As one marketparticipant says: “There were many hearts in mouths overFortis. MTFs were worried about what would happen totheir business if EMCF collapsed.”

New trading regulations in Europe have led toa plethora of choice in clearing and executionbut consolidation is already under way andsome say only the strong will survive,Lynn Strongin Dodds reports.

A driving force behind the changing clearing landscape hasbeen the financial crisis and the aftermath of the collapse ofLehman Brothers. Counterparty risk suddenly became a hottopic as the spotlight fell on how the clearers were going tohandle exposures.Wayne Eagle, director of equities forLCH.Clearnet, says: “The development of the clearing

industry has been born out of incumbents slow to react interms of the new MTFs. However, the seismic shift in themarkets in September and October and the continuingturmoil has focused investors’ attention on safety andsecurity. I think looking ahead we will see a flight to

quality.” Photograph ©Vladimirdreams/Dreamstime.com,supplied December 2008.

THEIMPACTOFMTFS

ONEUROPEA

NCLEA

RING&SETTLEM

ENT

New Enginesof Change


BNP Paribas Securities ServicesTHE CLOSER WE ARE, THE BETTER YOU PERFORM

With our precise understanding of each market’s internal workings, you maximise your market and investment opportunities.At BNP Paribas Securities Services, the closer, the better.

BNP Paribas Securities Services is incorporated in France with Limited Liability and authorised by the French Regulators (CECEI and AMF). BNP Paribas Trust Corporation UKLimited and Investment Fund Services Limited are authorised and regulated by the Financial Services Authority.BNP Paribas Securities Services London Branch is authorised by theCECEI and supervised by the AMF and subject to limited regulation by the Financial Services Authority. Details on the extent of our regulation by the Financial Services Authorityare available from us on request. BNP Paribas Securities Services is also a member of the London Stock Exchange.

securities.bnpparibas.com



EMCF currently clears for Chi-X Europe, NASDAQ OMXEurope and BATS Trading Europe while EuroCCP hasTurquoise under its remit as well as NYSE Euronext’s Europeantrading offering; which is set to make its debut in early 2009.The MTFs are also forcing the hand of interoperability underthe Code of Conduct, which requires that marketinfrastructures offer reciprocal open access. Progress has beenslow because of national regulatory barriers and a fear amongsome exchange-owned clearers that they could lose clearingrevenue. More than 80 requests for “interoperability” areoutstanding between various clearers and exchanges with theirown clearing operations, but few have moved to finalagreement and implementation.

Chi-X recently announced its plan to extend its clearingoperations beyond EMCF while NYSE Euronext alsointends to allow EuroCCP’s rivals to join the party in 2009.In addition, the LSE agreed to let SIS x-clear to create a linkwith its long-time central counterparty (CCP),LCH.Clearnet, allowing customers to clear trades througheither. LSE will use X-TRM, the post-trade router of Italiansecurities depository Monte Titoli, (a subsidiary of BorsaItaliana, which LSE acquired last year) to manage the tradeflows between the clearers.

The other driving force behind the changing clearinglandscape has been the financial crisis and the aftermath ofthe collapse of Lehman Brothers. Counterparty risksuddenly became a hot topic as the spotlight fell on howthe clearers were going to handle exposures. Wayne Eagle,director of equities for LCH.Clearnet, says: “Thedevelopment of the clearing industry has been born out ofincumbents slow to react in terms of the new MTFs.However, the seismic shift in the markets in Septemberand October and the continuing turmoil has focusedinvestors’ attention on safety and security. I think looking

ahead we will see a flight toquality.”

Hugh Cumberland,strategic businessdevelopment manager at BTGlobal Services, says: “Therehas been a great deal ofdiscussion on theinteroperability piece but Ihave always had my doubts.The collapse of Lehmanproves that. LCH.Clearnetdealt more than competentlywith the open trades and theposition fallout caused by thedemise of Lehman. I am notconvinced multiple systemswould have fared as well. Asfor the MTFs, the explosion ofnew trading platforms hasdefinitely encouraged homegrown responses but I am notsure this is a long term

solution from a risk mitigation and cost reductionperspective.”

Alan Cameron, head of clearing, settlement and custodyclient solutions at BNP Paribas, adds: “We have certainlyseen the knock-on effect that the fragmentation of liquidityhas had in the clearing space. In the short term, there willbe a plethora of solutions but in the long term, there will bea Darwinian selection of the fittest. This will lead toconsolidation among trading venues as well as clearers andwe are already seeing evidence of that with the mergerbetween LCH.Clearnet and EuroCCP.”

Some market participants believe that it will be thecreation of this behemoth transatlantic clearing house andnot interoperability that will be the ultimate driver behindreducing clearing costs. The objective is to create a user-owned, user-governed model, with LCH.Clearnet movingto an at-cost based structure comparable to DTCC’s withinthree years. The terms involve DTCC, the largest USclearer, acquiring all of the shares in LCH.Clearnet,Europe’s largest independent clearing house. In turn,LCH.Clearnet shareholders would receive up to €10 ashare, which gives the European group an equity value of€739m. Euroclear, currently the largest shareholder inLCH.Clearnet with a 15.8% holding, intends to support thetransaction in principle and remain a shareholder ofLCH.Clearnet HoldCo.

It is anticipated that the proposed merger will yieldsignificant cost savings deriving from technology synergies,enhanced economies of scale, integrated and efficientcollateral management and other operational efficiencies.Initial estimates undertaken by both clearing houses revealthat the merger should generate synergies worth between7% and 8% of the combined group’s operating costs.Negotiations are still under way and detailed terms are

Frank Reiss, director and head ofequity product at Euroclear, says:

“We have definitely seen anincrease in transaction flows due tothe introduction of MTFs. The

strategy we are pursuing is to havean open architecture model in orderto serve clients that chose to tradevia an MTF.We are not sure whothe winners will be among the

MTFs or CCPs, but there definitelywill be further consolidation. As for

settlement, there are differentsolutions but it is equally difficult

to predict if there will be anultimate solution.” Photographkindly supplied by Euroclear,

December 2008.

THEIMPACTOFMTFS

ONEUROPEA

NCLEA

RING&SETTLEM

ENT



expected to be announced byMarch 15th 2009. Diana Chan,chief executive officer ofEuroCCP, also notes that thetwo together would offer marketparticipants a more cost effectiveand independent option.“If youlook at the way the market hasdeveloped, with theintroduction of MTFs, we areback in some cases to thevertical model that trading firmswanted to get away from in thefirst place. For example, oneMTF has openly invested in theCCP it has chosen, and theremay well be other CCPs whichare offering trading venueseconomic benefits in an attemptto get them to use theirservices,” she says. “In theEuroCCP model, which is user-governed and at-cost, 100% ofthe economic benefits arepassed to the users. There is nomisalignment of interest. Themerger will further reduce thecosts. In the vertical, part-vertical or hidden-verticalstructures, the business model isone in which the trading venuesuse clearing as an additionalsource of profits,”she adds.

EuroCCP entered the marketwith the intention of being thelowest cost provider to bothexchanges and MTFs, andaccording to a study itconducted in July 2008 it has achieved that goal. It chargesan average of just 2.9 euro cents per transaction, with amaximum charge of 6 euro cents compared to itscompetitors’ average charge of 26 euro cents. Based onEuroCCP’s calculations, CCG had the second-lowest pricetag (9 eurocents a side) while Eurex Clearing’s was thehighest, ranging from 32 eurocents in Ireland to 55eurocents in Germany. LCH.Clearnet charged an average19 euro cents for LSE trades and 23 euro cents for theNYSE Euronext markets. The report estimated that SIS x-clear charges an average 20 eurocents, while EMCF, whichalso touts its cost-effectiveness, was at 14 eurocents.

By contrast, in the US, where, all securities clearing ishandled by DTCC, the cost is just about 0.33 eurocents pertransaction. Paul Bodart, executive vice president at BNYMellon Asset Servicing, says“We think the merger betweenDTCC and LCH.Clearnet is a positive step in the rightdirection although it should have happened six years ago. Ithink it will reduce the cost of clearing even further as the

combined platform will be able to leverage off the economiesof scale from the US market infrastructure. In general,though, I do not believe that there will only be one platformin Europe. I envision two dominant players—the combinedentity and Eurex, and possibly a few smaller players but itdepends on how they can compete with the lower pricing.”

As for settlement, market participants are waiting to seehow the different initiatives, namely T2S, Euroclear’s singleplatform and Deutsche Börse’s Clearstream’s Link-Upprojects, pan out. T2S aims to set up a single settlementengine that would become the platform to which the eurozone’s 17 central securities depositories (CSD) wouldoutsource settlement of securities trades. The EuropeanCentral Bank has said that T2S, which could create a singleeuro zone settlement hub beginning in 2013, could savebanks as much as €207m a year in back-office costs. Ithopes to have all EU countries signed up by the firstquarter of next year but there are doubts in the marketplaceas to whether this will happen.

Philippe Robeyns, head of clearing services at Société Générale Securities Services (SGSS).The fledglingexecution venues have sought a non-traditional and broader response to the clearing and settlement

equation. Instead of turning to tried and tested providers, MTFs have made their own arrangements. AsRobeyns notes: “The main difference [is that] new platforms such as Turquoise and Chi-X are pan-

European and [are] looking for clearing facilities that could offer this type of service for blue chips stocksacross 14 European markets.They did not want to use purely local players.”Photograph kindly supplied

by Société Générale Securities Services, December 2008.



THEIMPACTOFMTFS

ONEUROPEA

NCLEA

RING&SETTLEM

ENT

Euroclear’s project hopes to create a unified securitiesprocessing system and depository across its five markets(the UK, Ireland, France, the Netherlands and Belgium) aswell as the Finnish Suomen Arvopaperikeskus Oy (APK)and Swedish VPC central securities depositaries.Clearstream’s Link-Up, on the other hand, is a jointventure between seven CSDs (including Greece’s HellenicExchanges, Spain’s Iberclear, Austria’s ÖsterreichischeKontrollbank, Switzerland’s SIS SegaInterSettle,Denmark’sVP Securities Services and Norway’sVPS).

Right now, the market plays to incumbents; for manyreasons. One is the complexity of trading behaviour.Different CCPs may have different buy in rules, for instance,which could have an impact on the ways that clearingmember firms manage the settlement of trades. Equally,because trades executed on a regulated exchange and tradesexecuted in the same securities on an MTF will result in twoseparate settlement instructions (one for each CCP),initially there does not seem much scope for settlement costsavings from the use of new CCPs. Moreover, as MTFstypically settle on an over the counter (OTC) platform, asettlement instruction originating from an MTF might evenbe disadvantaged as some CSDs have different platformsfor the settlement of on-exchange and OTC trades.

Other issues are infrastructure based. Incumbent CCPs,

such as LCH Clearnet, for example, have settlementarrangements already in place for trades in currencies thatare not normally eligible for settlement in the local CSD.Settlement of these trades are invariably done in aninternational CSD (such as Euroclear Bank); but these arearrangements that are not yet fully in place across all MTFsor their new CCPs. All this may change however asEuroclear and others work on developing generic, netting-model and neutral interfaces for multiple CCPs to CSD andinternational CSD data flows.

Robeyns of SGSS points out however that any progresswill be gradual.“There will be consolidation but it will beslower because settlement is a more difficult area to dealwith. Even with Target 2 you are dealing with different taxsystems, regulations and cultures. It tends to be stickier andmore complex to harmonise.” Frank Reiss, director andhead of equity product at Euroclear, says: “We havedefinitely seen an increase in transaction flows due to theintroduction of MTFs. The strategy we are pursuing is tohave an open architecture model in order to serve clientsthat chose to trade via an MTF. We are not sure who thewinners will be among the MTFs or CCPs, but theredefinitely will be further consolidation. As for settlement,there are different solutions but it is equally difficult topredict if there will be an ultimate solution.“

GETTING THERE IS EASYFTSE Global Markets is your passport to 20,000

issuers, fund managers, pension plan sponsors,

investment bankers, brokers, consultants, stock

exchanges, and specialist data providers.

If you would like to order reprints of any of the articles

in this issue or discuss advertising insertions, tip-ons,

supplements, sponsored sections, bookmarks or

your own special requirements

Contact: Paul Spendiff

Tel: 44 [0] 20 7680 5153

Fax: 44 [0] 20 7680 5155

Email: [email protected]



TRANSITIO

NMANAGEM

ENT:THENEXTPHASE

Transition management has been buffeted by fair winds and foul through the last two years. Notall transition management houses have stayed the course; but those that are still in the businesshave benefited from rising volumes and report a positive outlook for 2009. Historically, transitionmanagement was used almost exclusively for the movement of equity portfolios, but nowadaysthe complexity of asset movements vary widely and include fixed income and more occasionallyforeign exchange, derivatives and private equity. The complexion of the business changedsubstantially through 2008 and will continue to evolve over the coming year as transitionmanagers increasingly focus on mitigating opportunity cost, market impact and other trading andinvestment risks. What now in 2009? Francesca Carnevale reports.

After the seismic shifts in the global markets through2007 and 2008, who should have been surprised by

the equally powerful changes running throughtransition management? Back in heady days of

2005/2006, transition managers sat prettily on a risingvolume of business and a blossoming profile in theasset management industry.There was much to lookforward to: a substantive movement away from directbenefit (DB) towards direct contribution (DC) pensionschemes; the onset of a muscular and seemingly far-reaching trend away from passive towards active andhigh growth asset investment styles; the explosion offunds of funds and the materialisation of a raft of

alternative investments in mainstream assetmanagement. Photograph supplied by istockphoto.com,

December 2008.

THE NEWARC OFBUSINESS



TRANSITIO

NMANAGEM

ENT:THENEXTPHASE

THE NEWS THAT Citi shut its transitionmanagement (TM) businesses in Europe and the UScame in a 2008 year-end shocker for both asset

managers and rival transition management teams. Theindustry was rocked in the immediate pre-Christmas run upby the announcement, as Citi was among the longest servinginvestment banking providers of transition managementservices and its TM team consistently ranked in the top fivetransition client surveys. The bank’s Asia-Pacific transitionmanagement operations, run under Michael Jackett-Simpson will however remain open for business.

The closure of Citi’s US and European TM operationsended extensive discussions (carried on through lateNovember and December) over proposals to restructurethe business model. Various options were reportedlyconsidered, including relocating the teams into the bank’sGlobal Transaction Services (GTS) operations (essentiallycustody) or move it directly into the bank’s trading floor(which, as every follower of modern day post-T Chartertransition management knows is something of a no-go).Some of the nine jobs at risk over the announcementhowever might be saved by this latter proposal.

Citi’s decision comes after the bank announcedsubstantive cuts in overall headcount within its globalcapital markets business, where employee numbers arereckoned to be reducing by up to 20% across the board.Even so, the decision was something of a surprise as Citi’stransition management business was understood to beprofitable as a business unit, with a high revenues to costratio throughout 2008. No one in Citi’s TM team have beenavailable for comment.

Citi’s loss could be another financial institution’s gain ifthe team is swept up en masse, with a bulky client portfolioin their pocket. Equally possible is that the team will becherry picked for their particular expertise by any one of theextant TM businesses that are now enjoying the fruits of ahighly concentrated market. However, transition managerssay privately that they expect market consolidation tocontinue through 2009 and that the number of transitionmanagers who actively pursue transition mandates willcontinue to drop over the next two years, especially amonginvestment bank providers.“Given the current cost-cuttingenvironment, along with the transition business’s relativelyslim margins,”says one transition manager,“I expect one ortwo houses to make either a soft exit from the business, orbe swallowed up in a larger bank merger.”

Citi’s move is interesting nonetheless and perhapsindicative of the sometimes ambivalent relationshipbetween equity trading and transition management ininvestment banking operations. The often arcane nature ofthe portfolio transition process, which is highly methodical,thoughtful and project based, often escapes the day to dayconcerns of trading operations. Moreover, whileresponsible for a sizeable chunk of trading flow throughtrading desks, transition management teams operate at asubstantial distance from cash equities and portfoliotrading. Although most of the time the relationship

between in-house TM teams and the trading desks isoptimal; at crunch times when headcount against revenueand trading flow is calculated, the benefits of sometimesfee-based business over flow-based (commission) revenuecan be overlooked. It is particularly pertinent at a timewhen the relationship between transition managementand portfolio trading has rarely been closer.

Nomura, for instance, was quick to pick up on thepossibilities offered by a shrinking TM provider landscapewhen it bought the European trading operations ofLehman Brothers in the autumn of last year. The transitionmanagement team at Nomura is already understood tohave a number of transitions under its belt in its new guiseand will officially open for business in the early months of2009. Other houses, such as JPMorgan’s TM business, havebeen leveraging the body count elsewhere. JPMorgan nowcounts Jody Windmiller (ex UBS and Bear Stearns) amongits 26 strong global transition team and is continuing toexpand headcount as more business gravitates towards keyhouses.“We took advantage of the Bear Stearns acquisitionto restructure our team,” notes John Minderides, globalhead of transition management at JPMorgan.“We have hada net/net increase of five people, slightly against the trend,and we have brought Mike Gardner to London from theUS to add strength in Europe.”he adds.

John Minderides, global head of transition management, JPMorgan.Minderides is adamant however that the expertise of transition

managers is not in alpha generation,“but in minimising the risks andcost of the transition and in finding necessary liquidity”.While

implementation shortfall remains the most cited headline risk and themain measure of the success of transitions, some of the greatest risks

in a portfolio transition continue to be “market impact and opportunitycost,” he says. Even so, Minderides concedes that transition managers

have evolved into trusted advisers for pension funds as marketcircumstances have changed. Photograph kindly supplied by

JPMorgan, December 2008.



After the seismic shifts in the global markets through2007 and 2008, who should have been surprised by theequally powerful changes running through transitionmanagement? Back in heady days of 2005/2006, transitionmanagers sat prettily on a rising volume of business and ablossoming profile in the asset management industry.There was much to look forward to: a substantivemovement away from direct benefit (DB) towards directcontribution (DC) pension schemes; the onset of amuscular and seemingly far-reaching trend away frompassive towards active and high growth asset investmentstyles; the explosion of funds of funds and thematerialisation of a raft of alternative investments inmainstream asset management.

Transition management looked set for a golden era. Somuch so, that it felt able to pull itself up by its bootstrapsand connect in an extensive debate on the merits of thebusiness practices of a by then overly bulky transitionmanagement service sector. The resulting T-Charter set abenchmark from which both asset owners and transitionmanagers could engage in meaningful and measurabledebate and from which emerged a set of governingprinciples that are now undergoing further revision andupgrading. In its current iteration, the T-Charter is chairedby Inalytics chief executive, Rick Di Mascio, who is leadinga specialist working group (comprising transitionmanagers and consultants as well as representation fromthe National Association of Pension Funds [NAPF]) whichis honing the charter into a substantive mechanism forpension funds to help them identify key issues whentransitioning assets, including actuarial evaluationassessments; asset and liabilities study evaluation and thehiring and firing of managers.

Now though, and rather like its charter, transitionmanagement itself is changing. There are fewer TMproviders for one thing.At its peak four years ago beneficialowners had to choose from more than 29 headlineproviders of the service. Today some 17 transitionmanagement operations are listed on the Inalytics site(though as mentioned earlier, the European and USoperations of Citi are now closed). Credit Suisse, anothermainstay of transition management, restructured itsoperations, losing a few members of its London-basedteam headed by Graham Dixon, and restructuring alloperations on global lines through its NewYork-based USteam, guided by Hari Achuthan and LanceVegna.

Second, there is a something of a fault line developingbetween the US and Europe in the scope, if not the practiceof transition management. The US walks to the tune of adifferent beat where there is a different relationshipbetween transition managers, which are regarded asfiduciaries, and trustees. Moreover, in the US, the evolutionof trading and risk management technology has shifted theprimary focus of transition management from operations torisk management, with the preservation of the value of aclient’s assets the most important aspect of the transition.In last year’s report by the Boston based TABB Group on

The Optimal Transition: Mitigating Risk and MinimisingMarket Impact the introduction of new tradingtechnologies, such as dark pools and crossing systems,were held to have helped minimise the execution risksassociated with information leakage and opportunity cost.In addition, the report cited the agency-only brokeragemodel as being“on the cutting edge of trading technology,”because of the need to be efficient at finding liquidity.

In the event, this was fine as far as it went with equitytransitions and the US marketplace. In Europe, the heart ofthe matter lay elsewhere as fewer transitions were equityonly. Over the last two years fixed income has become anescalating feature in portfolio transitions in Europe.“FixedIncome has accounted for around 50% of transitionbusiness in 2008,” notes Lachlan French, head of TM atBarclays Global Investors (BGI). Moreover, alternativeassets, such as hedge fund strategies and occasionallyprivate equity have also featured with multiple asset classtransitions increasingly the norm,“with some of the largertransitions involving multi-managers. We’ve restructured abroad range of strategies including active to passive equityand bonds, corporate bonds, two way flow in index linkedbonds, government bonds, sovereign wealth funds andemerging market debt,”explains French.

This growing level of complexity is set against particularmarket challenges, of which“Liquidity is the key challengein this environment,”notes Hari Achuthan, global head oftransition management at Credit Suisse. In fixed income,for example, credit spreads have been healthy and

Mark Dwyer, vice president UK sales, Mellon TransitionManagement, transitions involving non-governmental bonds

sometimes forced transition managers to hold assets longer thanusual. As Dwyer notes,“you can spend a long time looking for a

competitive price for a particular bond,” however, he adds, a lot of theissue is “price discovery. Photograph kindly supplied by Mellon

Transition Management, December 2008.



TRANSITIO

NMANAGEM

ENT:THENEXTPHASE

increased significantly compared with 2007, he notes withdemand continuing high in 2008.

The market in asset backed and mortgage papers inparticular stagnated, turning them into virtuallyuntradeable assets. That means says Mark Dwyer, vicepresident UK sales, Mellon Transition Management,transitions involving non-governmental bonds sometimesforced transition managers to hold assets longer thanusual. As Dwyer notes,“you can spend a long time lookingfor a competitive price for a particular bond,”however, headds, a lot of the issue is “price discovery. The recordedvalue you have for an asset is not necessarily the same asa price traded in the market; while this may be anopportunity for a buyer, it might also be a problem for theseller. Our job is to secure maximum value.”

The rise of fixed income transitions does have animpact on who can deliver the best TM process and thatmeans: “those houses with a strong fixed incomecapability who are also a strong counterparty,” saysAchuthan. The ability to tap into fixed income tradingexpertise or fixed income asset management expertise iskey. Moreover, the growing complexity of some of thelarger transition mandates sometimes require transitionmanagers, “to integrate their approach with assetmanagement skills,” adds Mellon’s Dwyer. That plays tothe strength of houses such as BGI, BlackRock (for MerrillLynch) or Standish (in the case of Mellon). Key to successin any transition, especially complex transitions,Achuthan adds is“the specialist expertise and experiencehe can provide in physicals and derivatives, dedicatedresources and true multi-asset class capability”.

JPMorgan’s Minderides is adamant however that theexpertise of transition managers is not in alpha generation,“but in minimising the risks and cost of the transition andin finding necessary liquidity”. While minimising “marketimpact and opportunity cost” (implementation shortfall)remains the main measure of the success of transitions,some of the greatest risks in a portfolio transition continueto be market and exposure risks, the tracking errorsbetween legacy and target portfolios and thecorresponding delays in implementation, he says. Even so,Minderides concedes that transition managers haveevolved into trusted advisers for pension funds as marketcircumstances have changed.

Going forward, the picture is not yet clear, though CreditSuisse’s Achuthan thinks there will be something of arebound in equities by the end of the first quarter this year,“or at least the beginning of the second quarter, thougheveryone is waiting for the markets to stabilise,” heconcedes. JPMorgan’s Minderides believes that “whenvolatility reduces, then funds will likely need to buyequities to rebalance to their benchmarks,”though he notesthat the workings of benchmarks may need to be revisitedafter the current crisis is over. “Either there may be ademand for new indices or for the methodology of someexisting indices to be revisited: current approaches torebalancing exposures and weightings in markets that have

moved dramatically can result in large increases inexposures to particular issues, which may not be desiredfrom a specific risk perspective.”

According to BGI’s French, “The value of fixed incomehas increased as a percentage of the average fund. Ingeneral, I think we find people are moving back to basicsand moving away from the more complex and opaqueinvestment structures. We are also seeing funds takingadvantage of investment anomalies as they occur, forexample we have recently seen buyers of index linked giltswhich are currently yielding more than index linkedinflation swaps despite the superior credit risk. Will thisincreased weighting towards fixed income change? Willdeficit schemes go into equities or bonds? These are thelong term questions that need answers; but few areforthcoming. We will have to let the dust settle before theway forward in terms of asset allocation becomes clear.”

In terms of transition management itself, some thingswill remain constant for the foreseeable future. Outside ofAustralia and New Zealand, which remain competitivemarkets, Asia remains a new frontier; though with fewerhouses providing transitions, Europe, the US and theMiddle East remain fertile grounds. “RFPs remainimportant,” says Mellon’s Dwyer, though as Dwyer andBGI’s French note, some clients are by-passing the RFPaltogether as repeat business and relationships come to thefore. As Dwyer observes:“there is the beginning of a flightto quality in transition management, and well-establishedhouses with multi-asset capability will be the ones tobenefit from this trend.”

Lachlan French, head of TM at Barclays Global Investors (BGI).“We’ve restructured a broad range of strategies including active topassive equity and bonds, corporate bonds, two way flow in index

linked bonds, government bonds, sovereign wealth funds and emergingmarket debt,” explains French. Photograph kindly supplied by Barclays

Global Investors, December 2008.



GLO

BALBANKINGLEA

DERS:MEETIN

GTH

ECRISIS

HEA

DON

Jiang Jianqing, chairman of theIndustrial and Commercial Bank ofChina (ICBC), participates on a panelon financial reform at the 2008 BoaoForum for Asia in Boao, HainanProvince, China in an archive phototaken on April 12th 2008.The BoaoForum is a non-government, non-profit international organizationmodeled after Davos. Photograph byNelson Ching for Bloomberg News/Landov, supplied by PA Photos,December 2008.

AFTER THE FLOOD:THE BANKING CHALLENGE

WHILE QUESTIONS STILL circle over the efficacyof government and central bank policy measuresto combat global recession and re-boot the

capital markets, the global banking sector remains firmly indefensive mode. Even so, while fears of deflation becomemore real by the day and G8 currencies look increasinglyover-valued, the role of banks in returning the world tosome kind of normalcy is increasingly important.

The story of the financial meltdown is well documentedand will not be revisited at length here. Exacerbated by aseemingly endless process of asset price deflation anddeleveraging in the financial system, the financial crisis hasnow evolved way beyond the housing market. Large loanwrite-offs are the order of the day shrinking bank capital, thelifeblood of lending, along the way. Banks have been selling

Some banks take the world by storm. Others failand yet others take a slow, steady and sometimescircuitous route to greatness. This sectionfeatures a cross section of the bold and thecautious; innovators and those institutions whichhave honed traditional skills to a new level. It isnot meant to be comprehensive. It is writtenmore in a spirit of hope; to highlight in thesegloomy days that an end to the current financialcrisis will come; the global financial markets willrebuild and here are at least some institutionsthat could reap the whirlwind when it arrives,even if today’s challenges seem insurmountable.



GLO

BALBANKINGLEA

DERS:MEETIN

GTH

ECRISIS

HEA

DON

assets and cutting back on lending to help heal damagedbalance sheets. How much damage that process in turn thathas inflicted on the productive global economy will becomeincreasingly apparent through the first half of 2009.

To date, total banking sector write offs among G7 banksare reckoned to be north of $600bn, though new capitalinjections are thought to be much lower than that (ataround $450bn).As the recession deepens bank loan lossesmust invariably rise (taking us all into perhaps unthinkableterritory). The IMF reckons that eventual loan losses in theglobal banking system will top $1.4trn; and an importantquestion to address is whether the banking sector as awhole and G7 governments can absorb write offs of thismagnitude and whether more banks will disappear (evenperhaps one or two mentioned here).

The same late October 2008 IMFWorld Economic Outlookposits that a gradual recovery is likely in late 2009 based onthe stabilisation of commodity prices, the assumption thatthe US housing market will hit rock bottom during the yearthereby ending its intense drag on US growth and,“notwithstanding cooling of their momentum emergingeconomies are still expected to provide a source ofresilience, benefiting from strong productivity growth andimproved policy frameworks.”However, it acknowledgesthat the longer the financial crisis lasts, the more likely it isthat emerging markets will be affected. Certainly, in theUnited Kingdom, the likelihood is that the crisis will stretchon for a protracted period, as already there are rumoursthat the £36bn already injected into the system through2008 will not be sufficient. UK banking analysts expectlocal banks to continue rationing capital and liquidity untilthe recession troughs or until the Brown governmentintervenes either to guarantee borrowers or by providingcheap bank funding against new loans (as has beensuggested by the Crosby report). Multiply those samedynamics over the G8, G15 or even G18 countries and youhave some measure of the barriers that financialinstitutions (lenders or investors) face over the coming yearin returning to health and positive bottom lines.

Against this background the reality is that some banks willbe more resilient than others to the emerging new worldorder in the financial markets. The banks highlighted in thisparticular segment have not been immune to the vagaries ofthe market. In fact, all of them have been through the mill inmore ways than one. The selection rests on a number offactors: in the case of Nomura and JPMorgan, it is that abilityto shake a fist at fate and roll the dice with brio. In the caseof BNP Paribas, and Banco Santander, it is the ability to rollwith the punches and still come out smelling of roses:backed by a steady and considered accretion strategy thatevolves their global footprint. In the case of HSBC and TheBank of NewYork Mellon, it is a recognition of their glowingexpertise in their selected fields, while in the case of ICBC itis squarely about the opportunities it (and others like it) willbe able to leverage in the new world order of the seconddecade of this century.

Some commentators have posited that the global

banking system is in the last throes of vomiting up toxicrisk exposure and that 2009 should witness a gradualsettling down; others point to growing concerns aboutthe ability of banks in the G8 countries to retain theirmarket positions.

Whatever the ultimate outcome of the current crisis atleast bank on the fact that things will never quite be thesame. If that sentiment causes doubt: remember LehmanBrothers. Remember too, the immediate repercussions ofthe decision by Deutsche Bank, Europe’s biggestinvestment bank by revenue, to pass over an opportunity toredeem €1bn (about $1.4bn) of subordinated bonds, sayingit would be more expensive to refinance the debt.The bankhad the option to buy back the 3.875% notes on January 16or pay a so-called step-up coupon of 88 basis points morethan Euribor, Frankfurt-based Deutsche Bank said in astatement. The cost of protecting the bank’s debt fromdefault jumped and its shares dropped more than 7% onthe day of the announcement.

The decision shook note holders as issuers are expectedto repay callable notes at the first opportunity and notes arevalued on that basis.As well, where Deutsche Bank has led,others might follow (thereby redrawing the configurationsof the interbank lending market). A psychological barrierhas been breached for sure, with possible downside effectson prices, particularly if the exercise is repeated. However,let’s not overstate the case. On sustained considerationmove is eminently sensible. The bank was battered bylosses of €1.26bn from trades made for its own account inthe third quarter of 2008, and continues to face soaringborrowing costs; in part because of its results, in partbecause investors continue to appear to shun all but thesafest government debt. By accepting the step-up and notcalling the bonds it will pay annual interest of some 4%compared with as much as 7% if it tried to raise new debt(thereby the right move in anyone’s book).

Nomura Holdings President & CEO Kenichi Watanabe photographedduring a press conference in Tokyo, Japan, in late November 2008.The

head of Nomura Holdings Inc., Japan's biggest brokerage, told journaliststhat while the immediate liquidity crisis may be receding, global leaders

must now find ways to bolster their faltering economies.Watanabepraised financial authorities from major countries who met in

Washington earlier in the month for cooperating amid the turmoil andhelping restore liquidity flows. Photograph by Shizuo Kambayashi for

Associated Press. Supplied by PA Photos, December 2008.




GLO

BALBANKINGLEA

DERS:MEETIN

GTH

ECRISIS

HEA

DON

Nomura’s gambleFortune favours the brave, goes the old chestnut and fewhave been braver this year than Nomura Holdings. Whatdo you do if your business is losing money and your homemarket is shrinking fast? If you are Nomura’s presidentand chief executive officer (CEO) Kenichi Watanabe youput the remaining pot behind an acquisition, refocus yourfirm on an overseas strategy and redraw your client profilein the process.

The past year has been something of a curate’s egg forNomura; in other words, generally awful but actually good inparts. With Watanabe in place since only April last year, themarkets wondered whether 2008 was the year that Nomuraretook its crown among the pantheon of global brokerages.After all, the Nomura Holdings had been the brains and thefinance behind new and successful multi-lateral tradingvenue Chi-X and broker dealer Instinet and claimed somehistorical branding rights (extending as far back as pre-BigBang days in the 1980s. Even so, despite the innovation andthe bravura that Nomura has exhibited of late, it has alsoendured a year of high highs and painful lows.

On the surface Nomura appeared to be on the upswingfor most of last year. When Lehman Brothers Holdings Inc.collapsed, the bank pounced, snapping up Lehman’soperations in Asia, Europe and the Middle East for a measly$2bn in what Watanabe described at the time as a“once-in-a-generation”opportunity. It later added three of Lehman’ssubsidiaries in India. Having snaffled up Lehman’s muchvaunted trading operations, will the acquisition really heralda new dawn for the Japanese bank?

The market is divided; in part, because Nomura remainsa hostage to fortune. Much of its success depends largelyon factors outside the company’s control, at least in theshort term. Moreover, Nomura’s financial acumen has beenhammered in three consecutive quarters through 2008 dueto deteriorating market conditions, trading losses and realestate write-downs, thereby putting the company’soverseas acquisitions strategy under sharp scrutiny. Mostrecently, the firm reported a net loss of Yen72.9bn($754.5m) for the July-September 2008 period, whichundershot the consensus analysts forecast by a countrymile. Ratings agency Standard & Poor’s (S&P) was quickoff the block, highlighting the level of residual doubt overthe efficacy of the bank’s overall strategy, downgrading itscredit rating outlook on Nomura Holdings and unitNomura Securities Co. to its lowest“negative”level.

Even so, it has to be acknowledged that Watanabe and hismanagement team took a bold but necessary step inmoving its focus outside of its home market. Japan has beena quasi-comatose market for decades and shows few signsof bursting through the current market storm. Watanabealso needed a substantive response to Mitsubishi UFJFinancial Group’s investment in Morgan Stanley (for whichit paid $9bn for a 21% stake) and which also recentlyfinalised the purchase of UnionBanCal Corporation.

The group has much to play for. In December 2008Nomura Holdings announced its new management structure

for its global wholesale business in preparation for theopportunities and challenges ahead. It is a move that alsoeffectively brings to an end the transition process followingits acquisition of parts of Lehman Brothers, Watanabe, saysthe new management structure is “aimed at further drivingthe build up of our international franchise. We have nowcompleted the transition process and are moving into theintegration phase. We are bringing together the best aspectsof both firms to create a new business model focused on ourclients.” While Nomura’s main equities clients are pensionand mutual funds, he noted, Lehman’s customers weremainly hedge funds. The Lehman takeover also diversifiedthe Japanese company’s overseas fixed income business andadded considerable weight to its European mergers andacquisitions operations. If Watanabe’s calculations are spoton, then Nomura will emerge from 2009 with much tocelebrate and an extended client franchise, which will re-brand it as a serious global player once more.

Notwithstanding these elements, the integration andretention of 8,000 ex-Lehman workers poses a rather bigtest of Watanabe’s mantra of change. Rivals includingJPMorgan, Credit Suisse, Barclays Capital and UBS havelanded some high-profile Lehman departures, raisingquestions about Nomura’s ability to keep top talent. Thecompany is quick to point out that more than 95% of ex-Lehman employees have accepted employment withNomura, and Watanabe downplayed suggestions of anyfriction.“It’s not about trying to keep the old Nomura or theLehman culture,”he said.“We want to transform ourselvesto become the new Nomura.”Watch this space.

ICBC: the emerging powerhouseWinner of The Banker’s“Bank of theYear in Asia”for the firsttime, the Industrial and Commercial Bank of ChinaLimited (ICBC) has enjoyed a banner year. A popularcontender among banking analysts as a bank that is clearlylifting itself out from a domestic to a clearly internationalplayer, the ICBC cemented its growing popularity byannouncing steady growth and profits for more than sixconsecutive quarters, no mean feat in these times of meanliquidity and pressure on profits. The bank came into itsown in 2006, when it comfortably raised $21.9bn on itsOctober debut on the Hong Kong Stock Exchange. It was asignificant turnaround from its days in the late 1990s when

Alfredo Saenz, chief executive officer of Banco Santander CentralHispano SA, gestures during a press conference in Madrid, Spain in anarchive photo, dated April 2008. Banco Santander SA is Spain's biggest

bank, Photograph by Santi Burgos for Bloomberg News /Landov,supplied by PA Photos in December 2008.



it was refinanced by the Chinese central bank andcleansed, together with China’s other top three lenders ofmore than $27bn of non performing loans (G8 banks takenote). To its credit, once cleansed and revitalised, it thenwent on to swoop on new fee income and regularlymanaged to raise quarterly revenues by a regular 35% bybetween 2000 and 2006; helped also by widening interestrate margins on its own lending. With its shares rising invalue by more than 60% in the year following its marketdebut, ICBC overtook Citibank as the world’s largest bankby market capitalisation; a crown it is unlikely now torelinquish any time soon. Its shareholders have agreed tosubstantive investments in the bank’s infrastructure andthe upgrading of its banking network at home and abroad,as well as new investment in staff training and customersatisfaction surveys. ICBC is the nation’s largest lender interms of assets and branch network, but complaints overweak customer service has made it a target of increasingpublic criticism in its home market: to which it hasattended of late with alacrity; refocusing customer facingstaff and reducing waiting times.

Like those much vaunted sovereign funds which carrysubstantive political clout, ICBC, rather like Citigroupbefore it, carries substantial political capital in its wake.Until now, the global banking market has not beenimpacted too greatly by the growing power of ICBC; andthe current crisis may temper its reach for some monthsto come. However, the once mighty power of Citigrouphelped define the globalisation of investment andcommercial banking expertise and in recent years, setdown an important marker in the provision of assetservices. Whether ICBC yet understands what its futurerole will be, is not yet fathomable, but its eventual impactis unavoidable.

JPMorgan: good luck or fine judgement?In spite of continuing write-downs JPMorgan madesubstantive gains through 2008, positioning itself well toride the rough winds of the coming years. While the overallprofit outlook for the bank remains soft (analysts atCitigroup and Fox-Pitt Kelton noted at year end that theirfourth-quarter estimates have been cut to reflect the recentcompany outlook of higher-than-expected loan lossreserve additions, likely write downs as well as privateequity losses), the bank made impressive gains across itscorporate finance, investment banking and asset servicingbusinesses. The bank, however (which bought Seattle-based thrift Washington Mutual’s banking units inSeptember) is still highly exposed to consumer credit, a factwhich analysts continue to highlight vociferously as theydowncast its short term equity price outlook. Even so, thosesame analysts concede that the bank will continue tooutperform for those investors wanting exposure infinancials. The reasons are obvious: the upside from theultra-cheap purchases of Bear Stearns and WashingtonMutual and the bank’s ability to leverage its globalfranchise across a raft of capital markets, investment

banking and asset servicing products.JPMorgan clearly showed in 2008 that outside of a

massive uptick in consumer risk exposure, it also had otherfish to fry. In terms of mergers and acquisitions, JPMorgandid the unthinkable, and together with UBS, toppledGoldman Sachs and Morgan Stanley from their historicperches at the top of the global mergers and acquisitionsleague tables. While Goldman Sachs managed to retain itslead in the US by volume of deals, JPMorgan topped it interms of deal values. Moreover, Goldman Sachs wasroundly replaced by JPMorgan at the top of the global valuetables (sourced by UK based specialist research firmMergermarket), while UBS proved to be the most activefirm. Even so, JPMorgan managed a more than respectablethird placing in the global deal ranking, with 260 dealscompleted last year. No surprise then that the bank securedmore top ratings than any other administrator, according tothe Global Custodian 2008 Private Equity FundAdministration Survey. The firm was rated “excellent” and“top notch”for the second year in a row by private equityfund managers. “JPMorgan has somehow managed toimprove on the already astonishingly high scores of a yearago. In every service area, the averages are either excellentor as close as makes no difference,”the magazine said.

Aside from its corporate banking services and assetservice provision, the bank recently unveiled a globalinvestment plan (worth $1bn) to strengthen its cashmanagement and treasury liquidity capabilities, as well asinvesting further in technology and expansion of its globalfootprint in this regard. Like BNP Paribas (below)JPMorgan has made significant contributions incommercial banking through up to and through 2008;strengths upon which both banks will build new businessas the markets go full circle and return to traditional tradefinancing, pure project financing and ECA-backed credits.Additionally, both will be bolstered by recent investmentsin supply chain, logistical advisory services provision andrisk mitigation solutions. More than many other banks,JPMorgan’s rigorous internal processes will help bringcredit and risk management back into full focus over thecoming years.

Stephen Green, chairman of HSBC, speaks at a CBI conference in centralLondon, on November 24th 2008. Photograph by Chris Ratcliffe forBloomberg News /Landov, supplied by PA Photos, December 2008.



GLO

BALBANKINGLEA

DERS:MEETIN

GTH

ECRISIS

HEA

DON

BNP Paribas: market focusFrance’s banking powerhouse BNP Paribas has never beenafraid of reinvention and 2008 caps another year of change,customer focus and accretion. Baudouin Prot, BNP Paribas’chief executive officer noted in December last year that:‘“BNPParibas’robust business model has a track record of deliveringstrong and diversified earning streams from all its businesslines. This is thanks to its excellent client franchises and thequality of its teams. While obviously not immune to thefinancial crisis, BNP Paribas’ stringent risk policy culture andgood cost control during these difficult times have positionedit well to continue growing organically over the cycle.”

With the recent acquisition of Fortis, BNP Paribas is thenumber one bank in Europe by deposits and significantlystrengthens its capital position. The last few years haveseen the bank expand its footprint globally and acrossretail, investment banking and asset servicing, the banklooks likely to continue this expansion relativelyunhindered over the coming decade. One of the few banksto utilise the French State’s scheme on entrepreneurial,rather than distressed terms, BNP Paribas intends to utilisea recent $2.55bn debt issue (entirely bought by SPPE, acompany created by the French State for this purpose) tofund its organic growth strategy.

Like JPMorgan (above), BNP Paribas has strength indepth; an element that will increasingly come into play asthe global wholesale and commercial banking approachesgo ‘back to basics’. It has spent the last eighteen monthsundergoing a major overhaul of its major business line;revamping its wealth management brand and serviceoffering, and expanded its asset servicing and post tradeservice offering to take account of substantive changes inthe European trading and settlement landscape post theintroduction of the Markets in Financial InstrumentsDirective (MiFID). The bank has also refocused its globalfootprint in the retail space (of its 6,000 branches globally,more than 4,000 are outside France), overhauling themanagement team and rolling out new client serviceinitiatives in this segment.

The acquisition of Fortis in 2008 cemented the bank’sposition in its natural European hinterland, while at thesame time, the bank has carefully prepared its emergenceas a truly global player. In spite of the difficulties of lastyear, BNP Paribas’ innnovation in key service areas (and inasset servicing in particular) has prepared it well to weatherfurther changes and an eventual uptick in the globalfinancial markets.

HSBC: intellectual capitalWhile HSBC continues to go from strength to strengthacross the spectrum of banking services, we have decidedto highlight the bank’s quiet contribution to intellectualcapital and market change. While the markets have beenin convulsion over the provision of financing to high creditrisk sectors, HSBC got on with the establishment of a new$5bn global working capital fund for small and medium-sized businesses (SMEs) to ensure that they continue to

have access to appropriate credit through the currentfinancial and economic crisis.

The fund represents new money, over and above whatHSBC would normally expect to lend in the currentbusiness environment, and will be funded from HSBC’sown resources. That can-do approach, and the capitalstrength with which to provide it has been the mainstay ofthe bank’s local and global success.

Continuing in the intellectual theme, the bank is one ofonly five institutions to sign a new code, titled The ClimatePrinciples, which is the first comprehensive industryframework for the sector’s response to climate change.Other early adopters include Crédit Agricole, Munich Re,Standard Chartered, and Swiss Re. The principles guideoperational greenhouse gas (GHG) emission reductioncommitments, but also provide strategic direction acrossthe full range of financial products and services includingresearch, asset management, retail banking, corporatebanking, insurance and re-insurance, investment bankingand project finance. It is intended to align with, and buildon, existing initiatives to ensure a consistent and effectiveapproach to addressing climate change. The bank isfollowing this up with key initiatives in carbon trading, newcarbon indices as well as developing a range ofenvironmentally aware investment initiatives.

The bank continues to set the pace in emerging marketfinancing and development, adding to its alreadyimpressive array of global banking operations, havingopened new offices in Central Asia, Algeria,Vietnam and ahost of other frontier markets. It continues to be wellpositioned in key emerging markets, increasing its share inKorea Exchange Bank and opened a range of sophisticatedbanking services in Poland through 2008. The bank’s DailyQuant report, remains the most comprehensive indicatorof global trading activity in emerging markets.

Bank of New York Mellon: asset service kingsWith a specialist focus on asset service provision, The Bankof New York Mellon has extended its service range, in thepost merger period. From initiatives in the provision ofspecialist fund administration services to Islamic funds,through enhancements to its over-the-counter (OTC)derivatives services which enable the bank to deliver daily,

automated OTC position reconciliation and market valuereconciliation with counterparties, to the closure of theprocess of absorbing the remaining elements JPMorgan’strust business in 2008, the bank has continued to extend itsproduct range on a steady basis.

The bank’s natural strength in custody and specialistfund administration was highlighted by the fact that it hasbeen able to grow alternative assets under

administration by more than 77% over the past threeyears and a half years, as well as the global expansion of itsfund administration team in Europe, Asia and theAmericas. In addition to hedge fund administration thecompany offers a wide range of accounting, cashmanagement, collateral management, custody, corporate



trust, asset management and wealth management servicesto the hedge fund industry.

The bank’s strength in the depositary receipt area hascome under pressure of late, due to market conditions andgrowing competition from Deutsche Bank, JPMorgan andCiti; however the bank has shown flexibility and resilienceand exhibited its ability to respond to opportunities thrownup by the current market crisis, including its participationin the FDIC’s Temporary Liquidity Guarantee Program,which provides 100% insurance coverage for domesticnon-interest-bearing transaction accounts. The FDIC firstannounced the expanded deposit insurance program inmid-October, and eligible institutions were automaticallyenrolled during an introductory period through earlyDecember. The company also is participating in anotherprovision of the program that provides for the guarantee ofnewly issued senior unsecured debt of eligible financialinstitutions. Funded through insurance premiums onnewly issued debt.

In similar vein, the bank has always had an ability to spotan upcoming trend at fifty paces and its investment inEagle Investment Systems, now looks prescient asdemand for data management solutions, and issuer andrisk exposure reporting is skyrocketing, as recent marketvolatility that has left many institutional investorsscrambling to quantify their true exposure to distressedinvestments.

The bank’s ability to innovate has never been in doubt,the question is whether it can keep pace with thestaggering changes ahead in asset servicing over thecoming decade and growing competition from Asianhouses anxious to establish their own global footprint.

Banco Santander: the retail kingIt has been a period of sustained accretive growth forSpanish banking giant Banco Santander. While its mainstomping ground continued to be continental Europe,where its main commercial units include the Santanderand Banesto networks in Spain, SantanderTotta in Portugaland Santander Consumer Finance, and Abbey in theUnited Kingdom; the group’s key expertise has also been inthe now fashionable markets of Latin America. Here

Santander is the biggest financial franchise in the sub-continent and holds a substantial market share in the keyeconomies of Brazil, Mexico and Chile. Most recently it hasexpanded its international footprint through the acquisitionBanco Real in Brazil, of the retail specialists Alliance andLeicester and more latterly Bradford and Bingley in the UKthroughAbbey and then in October 2008 it secured SovereignBancorp in the United States; giving it a triple crown in termsof market share in retail and the commercial sectors and all atknockdown prices. Juan Inciarte, executive board member ofBanco Santander, noted last October that the acquisition“represents an excellent opportunity ... We know Sovereignvery well. It is a strong commercial banking franchise in one ofthe most prosperous and productive regions of the UnitedStates, with high growth potential, which will further diversify

Banco Santander’s geographical reach.” It was a bold move fora European bank; as its peers have tended to find the UnitedStates something of a commercial graveyard, requiring longterm investment, patience and a willingness to adapt to thecountry’s particular ways.

Santander is notable for doing what it does best (retail andcommercial banking) well. Billionaire Emilio Botín has nowfulfilled his lifelong ambition: to transform a small regionalbank once run by his grandfather into an international player.Already the largest bank in Latin America by assets, the bankcame to prominence after its $15bn purchase of Britain’sAbbey National in 2004, bring the bank into the world’s topten banking institutions by market capitalisation. Mostrecently the bank is noted for maintaining capital integrity.Following its November 2008 €2.7bn rights issue, Botínnoted, “Banco Santander has always had a very clearapproach to capital strength. That is why, although we arestarting from a very strong position – our core capital ratio atSeptember 30th was 6.31% - the Group has raised its goal to7%, in response to our higher expectations in the currenteconomic environment.” Banco Santander had a series ofasset sales underway which would have served to raise itscapital, but in view of market conditions decided to postponethose divestments until prices have recovered to acceptablelevels. The likelihood is however, that Santander’s inexorableexpansion will continue for some time, as it establishes itselfas a benchmark in the retail financing sector.

What next is a key question for this bank. Like all theone’s highlighted, the coming decade will throw upincreased competition from a new set of players which mayredraw business lines. Certainly the new batch ofnewcomers have capital strength with which to play in astraightened field. Interesting times ahead for all then.

The Bank of NewYork president, Gerald L. Hassellin, left, and chairman,Robert P. Kelly, speak at a news conference in Pittsburgh, Pennsylvaniain an archive photo dated November 2006. Photograph by AndrewRush for Associated Press, supplied by PA Photos, December 2008.


While the savaging of the major market indices has kept manyplayers frozen in their tracks, Kathleen Cuocolo, managing director ofUS fund and ETF services for The Bank of NewYork Mellon,nevertheless sees a return to the kind of dynamics that have beendriving the market all along.That is, investment managers assessingwhich responsibilities they need to keep in house, and which can beoutsourced.“I think that will continue—with the issue for alladministrators going forward being the level of assets on which feesare paid, governing all types of services,” says Cuocolo. Photograph ©Sebastian Kaulitski/Dreamstime.com, supplied December 2008.

THE UNPREDICTABLE AND erratic investmentclimate—which in turn has increased demands fortransparency and the need for accounting and reporting

independence—continues to work to the advantage of theindustry’s leading fund administrators. Though licking theirwounds from a brutal fall while adjusting to life without bigleveraging, hedge funds remain the heart and soul of theadministration business. With budgets being trimmed andcompetition on the rise, alternatives will continue to offloadnon-core activities in order to make room for the business ofgenerating alpha, depositing even more business at the doorof well-placed service providers“We anticipate that, in an analogy to the hedge fund

industry, the administration space will experience further‘barbelling,’[sic]”says Isabel Schauerte, analyst with Boston-based research groupCelent and coauthor of the recent reportTrends in Hedge Fund Administration 2008. “The ongoinginstitutionalisation of hedge funds will ultimately lead to a

two-tiered market, with large multi-service administrators onthe one hand and niche players left to service startups andindependent boutiques on the other,”she notes.While the savaging of the major market indices has kept

many players frozen in their tracks, Kathleen Cuocolo,managing director of US fund and ETF services for TheBank of NewYork Mellon, nevertheless sees a return to thekind of dynamics that have been driving the market allalong. That is, investment managers assessing whichresponsibilities they need to keep in house, and which canbe outsourced.“I think that will continue—with the issuefor all administrators going forward being the level ofassets on which fees are paid, governing all types ofservices,”says Cuocolo.Despite the ongoing spate of redemptions, hedge funds

continue to build out their infrastructure with an eyetoward the future, says Marina Lewin, managing director,alternative investment services for Bank of New York

While putting added pressure on fees, the recent market contraction has at the same time hastenedthe flight to quality. Well-established, highly diversified administrators who are capable ofproviding the full range of asset servicing needs, from performance calculation to trade processingand more, will likely weather the seismic shifts better than most. Dave Simons reports from Boston.

THE HEARTOF THE MATTER


FUNDADMINISTR

ATIO

N:GOINGWITH

THEFLO

W



Mellon. “It is true that there has been real retrenchmentwithin the fund business, and yet from our point of view,the industry will still move forward, particularly as toxicdebt is absorbed.” Lewin sees hedge funds continuing tooperate with a lean infrastructure, affording considerableback- and middle-office outsourcing opportunities foradministrators. “More and more, these funds are askingtheir service providers to get involved in performancecalculation, trade processing and trade flow, liquidity andso forth. That’s where we’ve seen the greatest emphasis.”While putting added pressure on fees, the market

contraction has at the same time hastened the flight toquality, says Lewin. Diversified administrators who canalso provide custodial support are much better suited toweathering seismic shifts within the market.“Many of ourcurrent customers have legitimate concerns aboutcounterparty risk, and are looking for a safe haven. As afinancial institution that can offer custodial, short-termmoney management as well as corporate-trust services, inaddition to administration services, we feel we are in a verygood position, particularly as the industry finishes itsretrenchment and begins to gradually recover.”Peter Cherecwich, head of global product and strategy for

Northern Trust’s asset servicing business, agrees that

administrators with custodial ties have a competitive advantagein this type of environment.“Custodians have the flexibility toshift clients in and out of strategies with much greater ease, hesays, adding:“If your entire infrastructure is only geared towardsalternative classes, you may not be able to adapt as quickly.”Though the momentum has slowed for the time being,

Cherecwich believes that alternative classes will not bedown for long.“We’ve seen anywhere from 30% to 50%growth in the derivatives market over the past few years,and that has obviously flattened out. In the meantime,there has been this great push towards risk managementand, along with that, better administrative tools to helpmeasure that risk. Which, in turn, compels us to go toprovide our clients with the kind of tools and informationthat can help them better understand what they’regetting into.”The overriding factor, says Lewin, is the constant need

for reporting independence, and those who haven’t yetoutsourced will likely get on board over the near term.“Inorder to keep their institutional investors satisfied,managers are looking to go to the highest-quality type offinancial institution for their administrative needs—whether it is an accounting division looking forindependent price verification, or providing institutionalinvestors the security of knowing that their portfolio isbeing carefully monitored. All of these things will work asa benefit to the stronger administrators.”

Tech Still TopsA report issued by Celent calls for a decrease in technologyspending among investment managers throughout 2009.As a result, managers will likely continue to outsource IT inan effort to keep pace while lowering costs, says AlanGreene, executive vice president and head of USInvestment Servicing for State Street Corporation. “Theweakening economy will lead managers to trim thisportion of their budgets at a time when implementing newfunctions could be more necessary than ever. Thishighlights the benefit in shifting the expense obligationand responsibility for technological enhancements to athird-party provider.”It is difficult to envisage any administrator maintaining a

competitive offering in the fund services industry withoutinvesting in the kind of software that canmeet the increaseddemand for transparency, argues Richard Harland, businessdevelopment manager for Mourant International FinanceAdministration. “Mourant continues to invest in marketleading software solutions across our global office networkand our systems enable bespoke solutions to client needsand serve as powerful reporting tools,”he says.Servicing alternative fund structures, the impetus

behind last year’s acquisition of Bisys, remains a corecompetency for Citi, says Andrew Smith, head of thebank’s North America funds and securities services.Robust investments in technology that allow alternativemanagers to access data in real-time and meet clients’need for transparency and performance evaluation

Marina Lewin, managing director, alternative investment services forThe Bank of NewYork Mellon.“It is true that there has been realretrenchment within the fund business, and yet from our point of

view, the industry will still move forward, particularly as toxic debt isabsorbed,” she says. Lewin sees hedge funds continuing to operate witha lean infrastructure, affording considerable back- and middle-officeoutsourcing opportunities for administrators.“More and more, these

funds are asking their service providers to get involved in performancecalculation, trade processing and trade flow, liquidity and so forth.

That’s where we’ve seen the greatest emphasis,” she adds. Photographkindly supplied by The Bank of NewYork Mellon, December 2008.



FUNDADMINISTR

ATIO

N:GOINGWITH

THEFLO

W

reporting is key to this effort. “To the extent that thesystems, products and processes can be leveraged acrossall of our business lines, we certainly welcome thesesynergies where they make sense,”he adds.Nor does Smith rule out the opportunity to make

strategic acquisitions where applicable. “The ability toinnovate and stay ahead of the next wave of alternativeinvestment managers drives the desire to acquire anotherservice provider. If you have time and money to reinvest inthese businesses you will win your fair share of mandates.If you lack technology or expertise and you want to be aleading servicer of alternative funds, it becomes a necessityto buy functionality and technology.”A hallmark of any bona fide administrator is the ability to

adapt to radically changing market conditions, and havingthe proper tools on board makes the job that much easier,thinks Lewin.“Our approach has been to build out nativetechnology systems that can allow us to work through themany kinds of investment structures, from fund-of-fundsto private equity to hedge funds, with all the varioushybrids in between,”she says. Commitments to technologyare more vital now than ever before, concurs Seán Páircéir,managing director, Brown Brothers Harriman (BBH), inDublin. “BBH will continue to invest to support thesophisticated business needs of our clients as part of ourcore strategy. We are committed to enhancing ourcompetencies with innovative technology solutions likevirtual pooling which meet and anticipate our clients’development,”says Páircéir.Rather than actively seeking bolt-on providers, however,

BBH, in keeping with its established business model,prefers a more organic approach technological growth.“Wecan tailor our ability to service sophisticated assetmanagers by bringing ever more specialised pricing

capabilities from the market,”says Páircéir,“participating inautomation initiatives in the OTC marketplace, andattracting product expertise in specialist areas like realestate fund servicing.”

Pension pinchingPoor returns and bad press have put a dent in the onceimpenetrable veneer of the hedge-fund industry since thecrisis began.While some continue to forecast tough times foralternative strategies as mainstream investors rush to thesidelines, observers like Lewin remain optimistic.“We firmlybelieve that absolute and alternative strategies will continue tobe an integral part of the investment portfolio in the long run.”One group that is likely to stay put are large public

pension funds, which have come to depend on the extraoctane provided by alternative classes in order to help coverpotential liability gaps.“Pension plans [such as] MassPRIMor CalPERS are looking at liabilities that run 40 years out inactuaries, if not longer,”says Smith.“Clearly, finding alpha istheir main objective.”Which in turn points to more assetclasses, more complexity, and more customised reporting.“While the traditional asset manager might be focused on a‘back-to-basics’strategy, the alternative manager, by nature,is driven to find value even in the worst of markets.”Accordingly, Smith says that Citi has not made any changesto its core strategy based on current market conditions.“Wecontinue to reinvest in these businesses and develop newproducts and services, and we are working with a widevariety of independent pricing sources to help with securityvaluations, particularly as hedge funds seek returns fromesoteric asset classes and securities.”Despite the current and seemingly perpetual havoc onWall

Street, Richard Harland, business development manager forMourant International Finance Administration, says that

Andrew Smith, head of North America funds and securities services.Robust investments in technology that allow alternative managers toaccess data in real-time and meet clients’ need for transparency and

performance evaluation reporting is key to this effort.“To the extent thatthe systems, products and processes can be leveraged across all of ourbusiness lines, we certainly welcome these synergies where they makesense,”he says. Photograph kindly supplied by Citi, December 2008.

Richard Harland, business development manager for MourantInternational Finance Administration.“Mourant continues to invest inmarket leading software solutions across our global office network and

our systems enable bespoke solutions to client needs and serve aspowerful reporting tools,” he says. Photograph kindly supplied by

Mourant International Finance, December 2008.



individual investors have not been completely deterred. Onthe contrary, many may well be considering a shift in theirown investment allocation into alternatives. “Equities arephenomenally volatile and a large number of investors areseeking a longer term yield, including the kind of returnswhich are offered through alternative investments such as aclosed-ended structure, as well as investments in privateequity or real estate,” says Harland.“We are seeing a greatdeal of activity and there is a feeling that investing in thecurrent climate could prove the next few years to be vintage.”

Turning up the heatIn the United States, a new administration and a morepowerful Democratic congressional majority point to aneven greater emphasis on transparency and regulatoryoversight. Meanwhile, the universal crackdown on shortselling is evidence that governments everywhere are just aswilling to tighten the screws. “In September alone therewere at least 15 regulatory changes dictated from theSecurities and Exchange Commission (SEC), the FederalReserve Board (FRB), the Commodity Futures TradingCommission (CFTC) and from the Financial AccountingStandards Board (FASB),”notes State Street’s Greene.Manyof these changes require adaptation and implementationwithin weeks of their announcement, he adds. “Changes inregulation will drive up the cost of compliance, requiringcontinued investment in order to keep pace.” This onceagain points to the value of outsourcing in order to achievethe goal of lowering costs while implementing newstandards, says Greene.Mourant’s Harland agrees that the recent economic

turbulence has led to increased pressure for the regulationof certain financial markets. “A key requirement of theadministrator is to maintain granular data of the fund orfunds which it administers, which is managed by informedclient-relationship teams with a broad knowledge offinancial reporting standards as well as regulatory andinvestor requirements. We believe this enables us torespond to the changing reporting requirements ofinvestors, clients and regulators.”For instance, in the United Kingdom the guidelines for

transparency outlined in last year’s Walker Report serve asan example of how the reporting environment is changing.“We have seen a number of clients, from start-ups to bluechip firms, acknowledging and taking steps towardsadopting the Walker guidelines,”says Harland.“Our teamsare well placed to provide clients with guidance on how toimplement the various aspects of the report.”Given the current regulatory environment, BBH’s Páircéir

is hopeful that forthcoming policy procedures are moderateand can be easily leveraged. “Daily NAV production andunderlying delivery of portfolio information to investors,transparency of information to stakeholders in investmentvehicles, and directors’ oversight and responsibility all leadto an already significant volume of reporting. We supportthe current level of necessary oversight measures, but seeno real need for an increase in this burden.”

Seán Páircéir, managing director, Brown Brothers Harriman (BBH), inDublin.“BBH will continue to invest to support the sophisticatedbusiness needs of our clients as part of our core strategy.We are

committed to enhancing our competencies with innovative technologysolutions like virtual pooling which meet and anticipate our clients’

development.” Photograph kindly supplied by Brown BrothersHarriman, December 2008.

Peter Cherecwich, head of global product and strategy for NorthernTrust’s asset servicing business, thinks that administrators with custodial

ties have a competitive advantage in this type of environment.“Custodians have the flexibility to shift clients in and out of strategieswith much greater ease, he says, adding: “If your entire infrastructure isonly geared towards alternative classes, you may not be able to adapt asquickly.” Photograph kindly supplied by Northern Trust, December 2008.


UNTIL RECENTLY, THERE was a view that Asiawould remain on the periphery of the financialcrisis rockingWestern economies. As time went on,

those expectations proved unfounded. Global custodians,though, have not lost heart and are prepared to wait it outbased on the region’s long-term growth prospects. Thelarger, better capitalised firms are also hoping to be thebeneficiaries of a flight to quality to providers who havestrong balance sheets and high investment grade ratings.

ASIANCUSTODY:HELPINGCLIENTSADJUST

The financial crisis has provided a challengingtime for Asian asset service providers. Institutionalinvestors are more concerned now aboutcounterparty risk and certain asset classes as wellas the fund managers they are using. As a result,there has not been that much new business andproviders are helping clients adjust to marketconditions. Lynn Strongin Dodds reports.

For now, all the major global custodians such as HSBC,Standard Chartered, BNY Mellon, BNP Paribas, SociétéGénérale Securities Services and Northern Trust, arestaying the course.The short-term forecasts may begloomy but they are all banking on the bigger picturewhich places the Asia Pacific region as one of the long-term drivers of worldwide growth. One reason is thateconomists expect that emerging markets in the Asianregion will be more resilient than their Westerncounterparts and will recover much faster.This isbecause the de-leveraging purge will not be as great ingeneral in emerging markets. Photograph © DawnHudson/Dreamstime.com, supplied December 2008.


ASIANINVESTO

RSER

VICES:

CUSTO

DYSOLDIERSON



Over the past couple of years, global custodians haveeither bolstered their existing operations or forged a newpath in the Asia Pacific region in order to capitalise on thebusiness opportunities. Growth has been fuelled by thecreation of new sovereign wealth funds, a burgeoning localinvestment community as well as the outsourcing of globalequity and fixed income mandates to foreign assetmanagers by large public pension schemes in countriessuch as Taiwan and Korea.In addition, asset securities service firms intend to cater to

the growing Asian cross-border fund market taking shapeunder the Undertakings for Collective Investment inTransferable Securities (UCITS) banner. Differentregulations and tax structures, not to mention the absenceof a regional body such as the European Union, had madeit difficult to create a common framework for funds acrossthe multiple Asianjurisdictions. However,fund centres in Dublin andLuxembourg have beenbusy developing UCITSproducts for bothEuropean as well as Asianinvestors.When the sub prime

crisis began in the summer2007, many marketparticipants predicted thatthe region would besomewhat insulated dueto its strong liquidityposition, its relativelywell protected bankingindustry and distance fromthe US epicentre. However, the bankruptcy of Lehmanfollowed by the near death experiences of some of theworld’s most venerable institutions—the most recent beingthe $300bn US government bailout of Citigroup—shook allglobal investors to the core.Lawrence Au, Hong Kong based senior vice president

and the North Asia business executive and head of assetservicing for Northern Trust, says: “Obviously everythingchanged since September after Lehman went intobankruptcy. Prior to then, the Asia Pacific region was notthat much impacted and custodians and fundadministrators were adding new resources and people.However, when the problems began, there was a realisationthat markets were a lot more intertwined and had notdecoupled as people had thought. Since then, it has been achallenging time for asset service providers. Institutionalinvestors are more concerned now about counterparty risk,certain asset classes as well as the fund managers they areusing. As a result, there has not been that much newbusiness although we are still busy helping clients adjust tocurrent market conditions.”Alastair Pow, Singapore based global head of fund

services for Standard Chartered’s securities services

business, adds: “While proving resilient at first, the trendsnow seen within the Asia funds management industrymirror those that have been apparent in the US and Europe.Investors have substantially reduced their appetite forleveraged and complex investment products.”Chong Jin Leow, head of Asia, BNY Mellon Asset

Servicing, also points out: “There has definitely been aslowdown in fund launches. The larger organisationswhether it be sovereign wealth funds, pension funds orinsurance companies are also increasing their focus onperformance and risk reporting as well as investmentguidelines reporting. In the past, fund managers wouldhave provided such services but now they are askingindependent providers to do it.”Institutional investors are also seeking refuge in plain

vanilla, risk adverse assets. Pow notes:“Fund managers willtake a hard look at theirbusiness models in light ofthese market events andwill start assessing whatsort of product mix to focuson in the future. We haveseen a flight to low fee fundclasses such as cash orETFs (exchange tradedfunds) and an outflow ofwhat are regarded to beriskier, higher fee fundclasses such as hedgefunds. This does not meanan end to alternativestrategies. Far from it. Forexample, I think old-schoolprivate equity funds

managing distressed assets will do well in this type ofenvironment.”Fund management groups are also looking at safe havens

in terms of where to outsource their custody, fundaccounting and back office functions. Marcel Weicker, headof location, Singapore for BNP Paribas Securities, says:“There is no doubt that everything seems to be on standbyand new business had dried up. Investors are staying awayfrom anything with the slightest hint of risk. They are alsolooking to do business with highly rated companies. Ourdouble A rating is a major asset and goes a long way inretaining and attracting business.”Tony Lewis, head of global custody for HSBC Securities

Services in Hong Kong, adds: “We are seeing a move toproviders who can demonstrate strong risk managementand control environments as well as strong balance sheets.Clients want to ensure that the providers they are doingbusiness with will continue to deliver and invest in theseproducts and services.They are also looking for a one-stop-shop where clients can get access to a range of securitiesand capital markets products from a single provider. Wehave this advantage as clients are able to leverage ouruniversal banking capabilities.”

Alastair Pow, Singapore based globalhead of fund services for Standard

Chartered’s securities services business,adds: “While proving resilient at first, thetrends now seen within the Asia fundsmanagement industry mirror those thathave been apparent in the US andEurope. Investors have substantially

reduced their appetite for leveraged andcomplex investment products.”



ASIANINVESTO

RSER

VICES:

CUSTO

DYSOLDIERSON

For now, all the major global custodians such as HSBC,Standard Chartered, BNY Mellon, BNP Paribas, SociétéGénérale Securities Services and NorthernTrust, are stayingthe course. The short-term forecasts may be gloomy butthey are all banking on the bigger picture which places theAsia Pacific region as one of the long-term drivers ofworldwide growth. One reason is that economists expectthat emerging markets in the Asian region will be moreresilient than their Western counterparts and will recovermuch faster. This is because the de-leveraging purge willnot be as great in general in emerging markets.This is particularly true in Asia, which had experienced its

own banking crisis in 1998. They had learnt the lessons ofthe past and had adopted much more conservative andrigorous policies towards lending. As a result, with theexception of South Korea, eastern Asia’s central banks havesubstantial foreign currency reserves, limited leverage andlow indebtedness.The Asia Pacific region is also expected to register

economic growth. Gross domestic product growth will be

slower but still relatively robust compared to the recessionaryfigures being churned out by the US, UK and Europe. Forexample, according to the latest crop of regional figures fromthe International Monetary Fund (IMF), China’s growth willslip to 9.7% for 2008 and 8.5% in 2009 from 11.9% in 2007while India will churn out 7.8% and 6.3% respectively, downfrom 9.3%. Overall, the IMF forecasts 8.3% and 7.1%respective growth rates for developing Asia as a whole.As for the funds industry, assets under management

(AUM) will slip in 2008, but then should resume theirupward curve. Data from financial research firm Cerullireveals that mutual fund AUM in Asia excluding Japancould drop by nearly a fifth this year, but reach 2007’s recordlevels of $1.13trn by 2010 and $1.583trn by 2012. As forinstitutional funds, industry reports that Asian sovereignwealth funds manage around $1trn, or 29% of the assetsheld by global funds.Chong Jin Leow of BNY Mellon says: “We are hopeful

that things will start to pick up next year. I think we will seethe insurance sector continue to develop, pension funds in

Lawrence Au, Hong Kong based senior vice president and the NorthAsia business executive and head of asset servicing for Northern Trust,says: “Obviously everything changed since September after Lehmanwent into bankruptcy. Prior to then, the Asia Pacific region was notthat much impacted and custodians and fund administrators were

adding new resources and people. However, when the problems began,there was a realisation that markets were a lot more intertwined andhad not decoupled as people had thought.” Photograph kindly supplied

by Northern Trust, December 2008.

Chong Jin Leow, head of Asia, BNY Mellon Asset Servicing, alsopoints out: “There has definitely been a slowdown in fund launches.

The larger organisations whether it be sovereign wealth funds, pensionfunds or insurance companies are also increasing their focus onperformance and risk reporting as well as investment guidelinesreporting. In the past, fund managers would have provided suchservices but now they are asking independent providers to do it.”Photograph kindly supplied by BNY Mellon Asset Servicing,

December 2008.



general looking to invest overseas, and more interest inoffshore funds in the Caymans, Dublin and Luxembourg.We have strengthened our infrastructure in custody and putmore people on the ground in Taipei, Shanghai and Seoul.We will also be looking at putting more staff in Beijing oncewe get our branch licence. While products and services areimportant, relationships are key inAsia. Clients want peoplewho speak their local language and are available to dealwith their day to day issues.”Weicker of BNP Paribas Securities agrees, adding: “It is

crucial to establish a presence in Asia and develop personalrelationships. It is not sufficient to meet someone once ortwice but you need to spend time building trust. It is moreabout taking a medium to long term approach in order towin a client.”The French based bank is on course to roll outits global custody and clearing offering in the first quarter of2009, targeting Singapore, Hong Kong, Taiwan and Japan.“It is a question of following the sun in terms of

providing our global clients including sovereign wealthfunds, large corporations and financial institutions such asinsurance companies with global custody and localclearing,”Weicker adds.Its French rival Société Générale Securities Services is

also hoping to extend its footprint through its recentlyapproved joint venture with Mumbai-based State Bank ofIndia (SBI). SBI will have a 65% stake in the company whileSGSS will have 35%. The new custodial group, which isexpected to be up and running by the first quarter of 2009,intends to offer a range of services, including safe-keepingand settlement, reporting, corporate actions, dividendscollection and distribution, proxy voting, tax reclaimservices, fund administration and securities lending.Ramy Bourgi, head of emerging markets development for

SGSS, notes, “The service will be geared towardsinstitutions who want to invest in India as well as localinstitutions who are looking to invest locally and overseas.The advantages of the joint venture are that it combinesSBI’s domestic expertise with our global capabilities whichtogether will enable us to provide a world class service.”Northern Trust is also moving forward with its plans to

roll out its global fund service platform across the region in2009, according to Au.“In the past 18 months we have beenactively building infrastructure and adding legal, audit,compliance, risk management and client facing resourcesacross the Asia Pacific. Despite market conditions, we arecontinuing with plans to build our back office processingcentre in Bangalore. This will help strengthen our globalbusiness continuity capabilities and it allows us to offer ourclients in the Asia Pacific time zone a more timely service.”In the meantime, Standard Chartered, which is one of the

region’s three dominant providers of sub-custody andclearing, made a foray into the securities services arenaabout three years ago.The bank recently broadened its fundservices coverage to 10 full-service centre locationsthroughout the region including Hong Kong, Singapore,Thailand, Indonesia, China, Philippines, India, Taiwan,Malaysia and Korea and has now also introduced an

enhanced alternative fund administration service.Pow says:“Despite the market downturn and decline in

asset values, the long-term prognosis for the fundmanagement industry is good. At Standard Chartered, weare expanding our fund administration services to meetthis expectation. Our focus continues to be to support andservice fund flows for asset managers, insurancecompanies, sovereign wealth funds and pension fundsoperating in our key markets, principally Asia.” Lookingahead, not surprisingly, the biggest challenges are tied tothe unpredictability of the financial markets. Lewis ofHSBC, says: “We have been through an intense periodwhere, for example, trading volumes have increased ordecreased dramatically on a daily basis.This has reinforcedthe need to have real time, accurate information and ascalable platform. It is also of huge importance both forour business, and for our clients, to have information atour fingertips to enable fast and appropriate decisionmaking and management of operational and credit risks,for instance.”

Tony Lewis, head of global custody for HSBC Securities Services inHong Kong: “We have been through an intense period where, for

example, trading volumes have increased or decreased dramatically ona daily basis. This has reinforced the need to have real time, accurateinformation and a scalable platform. It is also of huge importance both

for our business, and for our clients, to have information at ourfingertips to enable fast and appropriate decision making and

management of operational and credit risks, for instance.” Photographkindly supplied by HSBC Securities Services, December 2008.



CORPORATEPROFILE:

MANPOWERBUILDSONWORK

CLOSING BELL CEREMONIES at the New YorkStock Exchange (NYSE) are often fraught withsymbolism, none more so than on 14th November,

when the 60th anniversary of the founding of Manpowerwas celebrated. Participating in the bell-ringing were notonly Jeffrey A Joerres, the company’s current chief executiveofficer (CEO), but also his only two predecessors: 96-year-old Elmer Winter, who co-founded the company andserved as CEO from 1948 to 1976, and Mitchell Fromstein,CEO from 1976 until 1999, when Joerres took over. Duringthe trio’s tenure, Manpower grew into one of America’s

most respected companies, a truly global enterprise thatderives 90% of its revenues from outside the United States,operates 4,500 offices, and employs 33,000 people.Although its core business remains providing clerical andlight industrial workers on a temporary basis, the companyis steadily diversifying into more profitable services.For 2007, as the last economic up-cycle crested,Manpower

reported record sales and earnings. Revenues grew to$20.5bn, an increase of 9% in constant currency (an often-heard term in a company with operations in more than 65countries plus entities such as Hong Kong, Taiwan and theVirgin Islands). Net earnings from continuing operationssurged 59% to $485m, and diluted earnings per share fromcontinuing operations jumped 65% to $5.73 ($4.68 before awindfall caused by a retroactive change in French payroll taxrules). In addition, three key metrics continued to improve.The operating profit margin grew by 30 basis points to 3.3%;Manpower’s return on invested capital was 14.9%, up for atleast the fourth year running; and free cash flow improved to$341m, a 22% gain. The 3.3% and 14/9% are excluding thewindfall caused by a retroactive change in the French payrolltax (however, the $341m excludes this impact).Alas, when results for 2008 are tabulated the figures will

not look nearly as good, and it is almost certain that they will

Solving Tomorrow’sProblems TodayFrom its unlikely base in Milwaukee, Wisconsin,Manpower Inc has become a worldwidepowerhouse in employment services, with officesin 80 countries and territories and revenuesapproaching $22bn. After years of strong andprofitable growth, the company is facing themost threatening economic environment in itshistory. However, by controlling costs andfocusing its resources on growth markets,Manpower expects to emerge from this recessionstronger than ever. Art Detman, himself aMilwaukee native, explains why.

Photograph © Alexei Kashin/Dreamstime.com,supplied December 2008.



worsen still further in 2009 as America’s recession, triggeredby the meltdown in sub prime mortgages, deepens andspreads worldwide. “We are a cyclical company,” Joerresreadily admits. “We understand that. During any economicdownturn, we will see our revenues decrease.” Althoughrevenues for 2008 are expected to rise by 6.3% to $21.8bn,earnings will be down sharply. For example, analyst AndrewSteinerman of JPMorgan, who had once expected 2008earnings per share (EPS) of $5.10, cut his estimate to $4.88,down 14.8% from 2007’s results.Even more pain will come in 2009. “We are seeing a global

weakening,”acknowledges analyst Kevin McVeigh of CreditSuisse.“This has impacted our estimates, which we have cutdramatically in both earnings and revenues for 2009 on amagnitude that is even greater than what we saw in the lasteconomic cycle.” McVeigh looks for 2009 revenues of$18.7bn, down 14%, and EPS of just $2.50, down 48% from2008’s results and down 56% from 2007’s record.This grim outlook comes as no surprise to Joerres and his

management team. Since 1962 the company has conductedquarterly surveys among large companies regarding hiringplans for the following three months. The survey for thequarter ended 31st December found that the netemployment outlook (the difference between thosecompanies that expect to increase hiring and those thatexpect to lay off employees) had fallen to just nine percentagepoints, down sharply from the 20-point spread during mostof the 2004 to 2006 period. Similar downturns were found inkey foreign economies, including those of the UnitedKingdom, Japan, Singapore, Hong Kong, Australia, NewZealand, Ireland, Norway, Spain and Mexico. For all that,many analysts who follow Manpower believe that thecompany will emerge from the current recession in a strongerrelative position due to its geographical diversification, rangeof services, solid balance sheet, and (perhapsmost important)strong management team. JPMorgan’s Steinerman sums itup this way: “Manpower’s discipline now will provide for amore profitable recovery later.”

Weathering recessionsManpower has weathered ten recessions since its foundingin 1948 byWinter and Aaron Scheinfeld. The two attorneyswere facing a tight deadline to complete a legal brief anddiscovered there were no companies that furnishedtemporary clerical help. After they met their deadline, theyfounded Manpower and promptly ran into America’s firstpostwar recession, which lasted nearly a year. Theirbusiness survived and soon had branch offices throughoutthe Northeast. After successfully establishing offices inMontreal and Toronto, Manpower moved overseas to openoffices in the UK and France. Today, the company’s foreignoperations are conducted through more than 330subsidiaries, such as Intellectual Capital of Australia, RightGrow Talent Services of India, Elderly House of Israel,JobSearchpower of Japan, Girlpower of the UK, andManpower Business Services France. Virtually all foreignoffices are managed and staffed by locals.

The 1957 move into France has been especiallyrewarding. In a country where preserving jobs is moreimportant than creating them, employers began to rely ontemporary staffing to fill positions at the margin.Manpower’s French unit now serves not only France butGuadeloupe, Luxembourg, Martinique, Monaco, Morocco,New Caledonia, Reunion and Tunisia. Today it isManpower’s single largest national market, accounting for athird of company revenues. The French connection alsoillustrates Manpower’s willingness to take reasonable risksfor the sake of long-term growth. Fifty years ago fewcompanies of Manpower’s size were willing to go overseas.However, Manpower’s progressive thinking built it into theworld’s third-largest temp firm, behind Swiss-basedAdeccoand Randstad Holding, a Dutch company that leapfroggedpast Manpower when it acquiredVedior last year.“Manpower from its earliest days was fairly agnostic in

regards to where it would invest in terms of new offices,”saysanalyst Mark Marcon of Robert W Baird & Co.“The Frenchwere one of the earlier adopters of temporary staffing, andManpower was early to the party and established a goodposition there.”Marcon (who works from Baird’s Milwaukeeoffice, not far fromManpower’s headquarters) ticks off otherexamples of the company’s well-timed moves. It openedpermanent placement offices in Italy years before temporarystaffing was made legal there, and when it was - in 1998 -Manpower had a head start. Today, Italy accounts for 7% ofManpower’s revenues but 13% of its operating earnings.Marcon believes this will grow steadily as temps becomemore accepted by Italian business.Similarly, Manpower was among the first temp firms in

India and China, has just received a business licence tooperate in Vietnam, and expects to open offices in Egyptsoon. Recession or not, the company intends to continueexpanding abroad. “We work really hard,” says Joerres, “atbalancing between good expense management andinvesting in the future so we can accelerate on the otherside of any downturn. When we see a sharp downturn, wedo all the things that you would expect a company to do,but we will not starve high-growth markets.” Indeed,despite the accelerating downturn in late 2008,Manpower’sheadcount remained virtually unchanged from a yearearlier.“They have been extremely progressive and flexible,”Marcon says. “Manpower’s management team is almostuniversally highly admired. They are extremely hard-working and diligent and have been very progressive interms of making investments in growth markets.” As aresult, notes Marcon, Manpower has become a worldwidecompany with the ability to shift its assets across the globemuch more easily than the vast majority of companies.McVeigh of Credit Suisse is among those who agree:“We

hold CEO Jeff Joerres and CFO Mike Van Handel in veryhigh regard for their business acumen, integrity andtransparency. Under the leadership of Joerres, Manpowerhas increased its margins, returns and growth rate bypushing more aggressively into non-US markets, havingmore price discipline, and adding more specialised staffing.”



CORPORATEPROFILE:

MANPOWERBUILDSONWORK

The company regularly showsup on “best of” lists. In 2008,Barbara Beck — president ofManpower’s unit responsible formuch of Europe and all of theMiddle East and Africa — wasnamed in Pink Magazine’s list ofthe Top 15 Women in Business.Other awards have included fromInstitutional Investor (MostShareholder-Friendly Companyin the Capital Goods Industry)and Fortune (Most AdmiredCompany in the staffingindustry). Clearly, Steinerman,Marcon and McVeigh are not theonly admirers of Manpower.Even so, not everything has

worked to plan. For example,Jefferson Wells was launched in2001 but has yet to make a profit.The concept seemed inspired:Jefferson Wells is staffed by asmall cadre of full-timeprofessional accountants andconsultants who are augmentedas needed by similarly qualifiedtemps from ManpowerProfessional. The resulting taskforces help client companies witha range of complex issues, such astaxes and finance, at less cost thancomparable services from the BigFour accounting firms.ManpowerProfessional is another laggard.Although profitable, it stillaccounts for perhaps no morethan 10% of Manpower’s entirepermanent and temporaryplacement business (lightindustrial is around 50% andclerical around 40%). But Joerresis optimistic and continues toinvest in the business.“There are long-term growth trends inhigher level skills, such as engineering and finance, that areworking to our advantage.”Joerres’s desire to lessen Manpower’s dependence on the

low-margin business of placing light industrial and clericaltemps led the company to acquire Right Management, whoseoutplacement services are counter cyclical to the staffingbusiness. The acquisition — a share deal valued at $630.6m— was made in early 2004, when Right’s stock was ridinghigh. Other suitors also wanted the company, but Manpowerwon the ensuing bidding war. Since then, the company’smarket value has declined and last year Manpower took anon-cash charge of $163m, a 26% haircut on its investment.Baird’s Marcon is undisturbed at the write-off. “Even

though Manpower managementknew that it was not the optimaltime to acquire a counter-cyclicalbusiness, their hand was forced,”he says.“If they did not act then,they would have never gotten abig platform in this business.Manpower also had an HRconsulting practice and so it wasable to merge the two to createan even bigger practice thatwould have a greater impact ontheir clients.” Although Joerresbelieves that other prospectivetakeover targets (companies thatoperate at the high end of thebusiness and generate grossprofit margins of 40% or soinstead of the 18% thatcompanies like Manpower andKelly Services earn) areundervalued right now, hedoesn’t seem eager to pursueany. “It would have to be verycompelling and extremelyaccretive to earnings for us to doit,”he says.“Otherwise, we preferto wait and see what ishappening in the economy.”Then, too, it is not likely that

Joerres or Van Handel wouldwant to soon use stock again tobuy another company. From ahigh above $97 in 2007,Manpower plunged to below$28 in late 2008. Andrew Fones,a UBS analyst, believes that ifthe economic downturnbecomes severe, the stock couldgo to $15. This is hardly acheerful prospect forshareholders, but it would begood for the company’s

ambitious share buyback programme. Long term,Manpower’s fans are almost certainly right. Even with mostof its business still at the low-margin end of the spectrum,Manpower has grown and prospered. Its reputation issterling, it is expanding in value-added services, and thesecular trends are favourable.“The goal of companies is toget away from fixed costs, toward more flexibleemployment, which suits the temp industry,”says ProfessorPeter Cappelli, director of the Center for Human Resourcesat the University of Pennsylvania’s Wharton School.That is the future. In the here and now however, the

markets are unforgiving and without sentiment. On theday that Jeff Joerres and his predecessors rang the BigBoard’s closing bell, Manpower was down 5%.

Jeffrey A Joerres, Manpower Inc’s chief executive officer(CEO).We work really hard,” says Joerres,“at balancingbetween good expense management and investing in the

future so we can accelerate on the other side of anydownturn.When we see a sharp downturn, we do all thethings that you would expect a company to do, but we willnot starve high-growth markets,” says Joerres. Photograph

kindly supplied by Manpower Inc, December 2008.

Many analysts who followManpower believe that the

company will emerge from thecurrent recession in a strongerrelative position due to itsgeographical diversification,

range of services, solid balancesheet, and (perhaps most

important) strong managementteam. JPMorgan’s Steinerman

sums it up this way:“Manpower’s discipline now willprovide for a more profitable

recovery later.”



From a company offering just oneservice (office temps) andoperating in just two cities(Milwaukee and Chicago),Manpower has evolved into aglobal leader in employmentservices, including:• Permanent, temporary andcontract employment, whichaccounts for perhaps 95% ofrevenues. The overwhelmingmajority of these placements —nearly 5m a year — are lightindustrial and clerical workers, whoare placed through the Manpowerbrand. A growing number areprofessionals such as engineers,accountants and sales executives,who are placed through ManpowerProfessional. Manpower doesalmost no placement of part-timeworkers, and long ago stoppedplacing day labourers.

• Employee training, includingManpower’s online GlobalLearning Center, which offers3,600 courses in severallanguages. At any time, about200,000 trainees areparticipating.

• Outsourcing of the recruitingfunction. Through its ManpowerBusiness Solutions operation,Manpower acts as anorganisation’s recruiting office,responsible for candidatesourcing, screening, hiring andorientation. Among its clients

are Visteon, a US tier-one autoparts company, and theAustralian Defence Force.

• Human resource consulting,which is conducted largelythrough Right Management, a2004 acquisition. In essence,Right — as this operation isknown within Manpower —trains HR executives to performtheir jobs more effectively.

• Outplacement services for laidoff employees. Right is theworld’s largest provider of theseservices, and recentlyrestructured its offerings andplaced them under the newRight Choice brand (a namethat, to those using its services,might seem bittersweet).

• Professional services in areassuch as internal controls, taxplanning, technology riskmanagement, finance andaccounting. These are offeredthrough Jefferson Wells, whichhas a core group of full-timeprofessionals who areaugmented on a project basis bytemps from ManpowerProfessional. In Europe,Manpower’s Elan operationprovides informationaltechnology professionals.

Right Management and JeffersonWells are operated on a globalbasis. In contrast, permanent and

temporary placement is managedon a geographic basis.Operationally, the entire companyis divided into seven operatingunits: France is by far Manpower’sbiggest national market, generating$7bn in revenues (34% of thetotal for 2007) and $390m inoperating earnings. Revenues arelikely to be boosted in the nextyear or two now that the Frenchgovernment is allowed to usetemporary workers. Gaining onFrance is Other Europe, MiddleEast and Africa (Other-EMEA). AsCEO Joerres notes, this is adescriptive but inelegant name foran operating unit, especially onethat is growing smartly. Revenueswere $6.75bn and operatingearnings were $257m. OtherOperations is a catchall categoryfor countries not under any otherumbrella, mainly those in LatinAmerica (notably Mexico andArgentina) and Asia (includingJapan, Singapore, India and China).Revenues amounted to $2.6bn butoperating earnings were only$73.5m, reflecting the relativenewness of many of these markets.The US, Manpower’s original

market, now generates less than10% of corporate revenues andoperating earnings, just under$2bn and $80m respectively. Inthe meantime, Italy’s 2007revenues were $1.4bn, 7% of thetotal, but operating earnings were$104m, a princely 13% of thetotal and greater than USearnings. Manpower’s RightManagement subsidiary is a humanresources consulting firm that alsois a leader in outplacementcounselling. Revenues were$410m (2%) and operatingearnings were $34.6m (4%) in2007, reflecting the higher value-added nature of the business.Jefferson Wells is Manpower’s

consulting arm, formed in 2001 andas yet unprofitable. On revenues of$332m, Jefferson Wells incurred aloss of $5m in 2007.

MANPOWER: AWORLD OF SERVICES


Jim wondered if there was an easier way toget his own copy of FTSE Global Markets...

...there is:Simply fill in the Free registration

form at: www.ftse.com/globalmarkets

FTSE Global Markets gives you immediate access to 20,000

issuers, fund managers, pension plan sponsors, investment bankers,

brokers, consultants, stock exchanges and specialist dataproviders.

To discuss advertising insertions, tip-ons, supplements, sponsored

sections, bookmarks or your own special requirements contact:

Paul Spendiff Tel: 44 [0] 20 7680 5153

Fax: 44 [0] 20 7680 5155

Email: [email protected]



CORPORATEPROFILE:

AIG

THEY KNEW THE risks, watched as losses piled up,but told auditors almost nothing. In an era ofincreasingly tough oversight standards, they

routinely avoided regulatory independence and put thekibosh on finger-pointing insiders. When the house ofcards finally fell last September, AIG—at one time thesingle largest insurance entity in the world withfacilities in more than 130 countries—found itselfat the doorstep of the federal government, hat inhand. The powers that be sized up thesituation, pronounced AIG “too big to fail,”and proffered a generous credit line of$85bn, but it was not enough.By November 2008 the largest bailout

of a non-banking firm in the history ofthe United States had swelled to over$150bn, and included more favourableterms than the initial package offered.Not even that chunk of change couldguarantee a surefire recovery as long asthe company continued to go into thehole in order to cover its toxic portfolioof complex credit investments. Theseincluded the super-senior tranches ofcollateralised debt obligations (CDOs)accumulated by AIG’s FinancialProducts Corp subsidiary.

By the end of November the company finally issued somegood news: some $53.5bn in mortgage debt obligationswould be cleared from AIG’s books, part of an agreementwith the federal government to purchase upwards $70bnworth of toxic credit-based assets. AIG would continue tobe liable for assets not yet obtained, however.The government contends that its course of action has

more to do with preventing the carnage from spreadingthroughout the entire global financial community, ratherthan sparing AIG itself. Even so, it is a tremendous gamble,one with potentially enormous consequences. Should AIGrecover and its stock price rally, the government would turn

AIG’S BLANKCHEQUEWhat price saving a company from collapse? Likeother insurers, insurance giant AmericanInternational Group (AIG) has been thumped bythe severe downturn in the credit markets as fearsthat the gamut of complex, structuredinvestments it insures will default. A 24 month$85bn line of credit proved insufficient, anadditional $40bn did not help much, either.However, with its latest relief package—moreflexible terms, more payoff time, and, yes, evenmore money—the government believes it hasfinally found the formula that will allow AIG themost realistic chance of recovering from itsruinous credit-related investment activities. Thirdtime lucky? David Simons reports from Boston.

Photograph © Robert Mizerek/Dreamstime.com, supplied December 2008.


a handsome profit from its now 80% equity stake in thecompany. If the insurer collapses, however, taxpayerswould be left holding the bag, and, even worse, thesystemic aftershocks affecting innumerable companieswith business links to AIG would be dire, to say the least.

Funding or flounderingUntil recently, government efforts to address thehaemorrhaging at financially beleaguered firms such asAIG have proven largely ineffective; at least measured bythe recent numbers posted by AIG, Fannie Mae andFreddie Mac and,most recently, banking giant Citigroup. InNovember, Fannie Mae reported a third quarter 2008 netloss of $29bn, two months after the Federal HousingFinance Agency (FHFA) placed Fannie and Freddie underits control. In a thinly veiled critique of the FederalReserve’s intervention tactics, Fannie noted that efforts tohelp stabilise the ailing mortgage market were beinghindered by its“limited ability to issue debt securities withmaturities greater than one year”and has requested that itsoriginal agreement with the Federal government be revisedto include more favourable terms. Under the currentarrangement, the agency said it might not be able to“continue to fulfill our mission of providing liquidity to themortgage market at appropriate levels.”Speaking on behalf of AIG, current chief executive

officer (CEO) Edward Liddy offered a similarassessment.“It was obvious to me from the start that theterms of that arrangement were really quite punitive interms of the interest rate and the commitment fee andthe shortness of it,’’ said Liddy, the former head ofAllstate Corp. who succeeded outgoing AIG CEO RobertWillumstad last September.The government’s realisation that its initial action had had

little impact on AIG’s financial standing became obviousduring the third quarter, whenAIG lost $9.24bn, or $3.42 pershare, more than four times the consensus estimate loss of80 cents (US insurers as a whole posted a total of $100bn inwrite downs and losses through the period). The damagewas due in large part to a pre-tax charge of more than $7bnfor a net unrealised market valuation loss related to thesuper senior CDS portfolio held by AIG’s Financial ProductsCorporation. Earlier hopes that AIG could raise enough cashto begin to sustain itself through the sale of once valuablesubsidiaries were dashed once the markets began to tumble(by late October shares of AIG had fallen from a post-bailouthigh of $5 to an all-time low of $1.35). As the credit marketscontinued to deteriorate, AIG found itself struggling tomaintain payments on its structured-credit obligations,tightening the noose even further.“Confidence in the sectorhas come under considerable pressure,’’ affirmed NigelDally, a Morgan Stanley analyst.In reality, the government lacked the weaponry needed

to properly contain the damage prior to the passage ofCongress’ bailout package in early October. However, theenactment of more sweeping measures such as theTroubled Asset Relief Program (TARP) has allowed

regulators to approach the problems at AIG and elsewherewith greater clarity. The latest version of the AIG bailoutoffers the NewYork-based insurer the most realistic chanceof wriggling out of the hole it dug for itself as a result of itscredit-related investment activities, say observers.Key to the new deal is a lower lending rate as well as

three additional years for AIG to pay off its debts, with thegoal of buying the company enough time to unload itsmarketable assets to willing buyers. For AIG’s CDOholders—which include global banks like Merrill Lynch,Goldman Sachs and Deutsche Bank—the arrangementprovides for a generous settlement at or near par, notesThomas Walsh, a Barclays Capital Research analyst, whocalled the deal“a significant positive for CDO holders thatwere previously facing an impaired counterparty.”

Bankruptcy instead of bailout?Reports of lavish junkets and posh severance packageshave done little to further AIG’s cause in the months sincethe handouts began, nor have comments made bycompany executives openly critical of government policy.Though he apparently ignored the warnings of an internalauditor who had questioned the accuracy of the company’scredit default swap (CDS) valuation, deposed CEO MartinSullivan, who resigned last June, nevertheless assumed adefensive posture during a recent Congressional hearing.“When the credit markets seized up, like many otherfinancial institutions, we were forced to mark our swappositions at fire-sale prices as if we owned the underlyingbonds, even though we believed that our swap positionshad value if held to maturity,”said Sullivan.At the same time, Maurice Greenberg, former company

chairman and CEO and amajorAIG shareholder, complainedin a Wall Street Journal opinion piece that high interestpayments to the government could force the company“intoeffective liquidation”which, in turn, would ultimately “wipeout the savings of retirees and millions of other ordinaryAmericans.” However, Felix Salmon, commentator for theMarket Movers blog, bristled at the suggestion that AIG’sfederal benefactors were not doing enough. Greenberg wasinstrumental in setting up the renegade AIG FinancialProducts division, said Salmon, therefore, “he, as much asanybody, is to blame for AIG’s enormous losses. And hecertainly does not deserve a personal bailout, which seems tobe what he is asking for here.”For that matter, many believe the financial world

probably would not have crumbled had the insurer beenleft for dead. “‘Remember Lehman’ now seems to be therallying cry to justify any and all financial bailouts,” saysPeter Schiff, president & chief global strategist for Darien,Conn.-based Euro Pacific Capital.“But Lehman’s demise isin no way responsible for our current problems, and thedecision to let them fail is the only bright spot in otherwiseconsistent record of policy mistakes. We bailed out BearStearns and AIG, and what did that get us?”However, Robert Bruner, dean of the Darden Graduate

School of Business Administration at the University of


CORPORATEPROFILE:

AIG



Virginia and author of The Panic of 1907: Lessons Learnedfrom the Market’s Perfect Storm, suggests that the chaoserupting from an AIG failure would have been inestimable,therefore making government intervention mandatory.“There is no doubt that AIG met the ‘too big to fail’ criteria,being the dominant counter-party in the credit default swapmarket,” says Bruner. The step-wise progression has theappearance of an ad-hoc treatment of the crisis, and yet it isin no small part a reflection of the steady revelation of thedeepening exposure of the financial system to thedestructive quality of the sub-prime loans. I doubt that itwould have been possible for the government to havejumped in with a massive, one-shot, solves-everything typeof solution last September, at the time of the initial action.That said, this intervention on behalf of one company, bothin size and intrusiveness, is unprecedented; but then again,so is the grave exposure of the financial system to thepotential failure of this one firm.”While the bailout of a non-banking entity may be

precedent setting—one that has certainly helped frame thedebate over the current auto-industry rescue proposal—asBruner notes, the financial markets are largely agnosticabout the classification of the institution. “Whether it’s abank or non-bank, in the illuminated part of the financialsystem or operating in the shadows, counter-partiesrecognise that all money is green, and that what trulymatters is the credit-worthiness of the counterparty, itstransparency and the capital standing behind the trades.”

CDOs have got to goAt a recent presentation to the New York Chapter of theRisk Management Association, Chris Whalen, senior vicepresident and managing director of Torrance, California-based Institutional Risk Analytics, a provider of risk

management solutions, stated that the only clear wayaround theAIG problem(and others like it) is to cleanse thesystem of all CDS products once and for all. Referring toAIG’s “CDS sinkhole,”Whalen argued that even the mostconcentrated efforts to boost liquidity have beenmarginalised by the $50trn in outstanding CDS contracts.“The threat from CDS is not from a default-type event asmany fear…but rather in the normal operation of thismarket”as with AIG, says Whalen.Whalen goes so far as to propose putting AIG into

bankruptcy while requiring CDS holders “to accept anegotiated ‘tear up’ of extant contracts under authority ofthe bankruptcy court,” as opposed to “muddling along”buying back CDOs using borrowed taxpayer money which,he argues, would lead to“a death by a thousand cuts.”Thesituation is so dire, says Whalen, that Congress should becalled upon to enact legislation that makes mandatory byexchange the removal of all outstanding CDS and othercomplex products from the entire global marketplace.“Soserious and enduring are the negative effects of OTCfinancial instruments such as CDS, CDOs and othercomplex structured assets, that the only way to save thepatient and restore function to global economy andfinancial system is mandatory surgery: cut the cancer out.”Though the government appears to have finally found its

theme—corralling those toxic credit instruments that aresucking the life out of companies like AIG—the ongoingcrisis has taught us that we still don’t know the full extent ofthe exposure, or, ultimately, the silver-bullet remedy. SaysBruner hopefully,“It does seem likely that the combinationof capital infusions to relevant institutions, plus thesequestration of toxic assets, will restore confidence in thecredit-worthiness of those key institutions.”Only time willtell if that assessment is correct.

Edward Liddy, chairman and chief executive officer of American International Group Inc., (AIG), speaks after a luncheon speech in HongKong Thursday, December 11th 2008. AIG noted a day earlier that it is working on resolving nearly $10bn in soured investments, without

asking taxpayers for more money. Photograph by Kin Cheung, supplied by AP Photo/PA Photos, supplied December 2008.


IT DOES NOT compute. The price of gold fell in theautumn even while the US federal government had theprinting presses churning out greenbacks and the

country’s financial system teetered on the brink. Moreover,counter-intuitively, the dollar rose. The world is alreadythoroughly hung-over from a strongly held economictheology, so any calls for a return to the gold standard areunlikely to be well received. However, most observersexpected the precious metal to have more allure as the safehaven of first resort, as indeed it did when Bear Sternsfailed and it shot up to $1,032 an ounce.

Gold’s very success as a store of value may be responsiblefor its blip. Elaine Ellingham, until recently mining principalfor the Toronto Stock Exchange, admits that the “goldcommunity”was equally puzzled at first, until they realised.“People always say gold is something you buy for a rainyday; and this it, the rainy day,” she said. Many funds had‘investment gold’ in their fund portfolios, and faced withredemptions and margin calls they have been selling offtheir gold holdings, in part because it was a chunk of theirportfolios that had kept more of its value than bonds andstocks and in part because it was liquid. Indeed, as auctionrate securities and other previously liquid assets froze, somegold holders had no option but to cash out.Ellingham notes however that, “People who have held

gold through [this period] have certainly done a lot betterthan people who bought indices. It has proven to be a betterstore of value than the equity markets in general.” Evenallowing for the recent fall off in price, the value of gold hasrisen over 200% since 2001. Now senior vice president forIamgold Corporation, a major producer, Ellingham saysright now gold is“the logical place for people to go.”

Some analysts were surprised that the gold pricefailed to benefit at the height of the credit crisis.That may have been because gold holders shortof other ways of raising cash quickly sold out.Now the industry is pinning its hopes for arebound on supply constraints and a flow ofmoney looking for a home. VanyaDragomanovich reports.

While people anxiously wonder when peak oil willarrive, peak gold arrived long ago, back in 2001 tobe exact, and production has flattened out since

then even as gold prices continued to rise, makingnew mines increasingly viable. However, gold in allits forms is an unusual commodity. The World GoldCouncil estimates that 158,000 tonnes of it havebeen refined since records began. Of this amount,

65% has been mined since 1950, and all but 10,000tonnes has been mined since the California gold

rush of 1848. Unlike oil though, no one burns gold.It sits in gold ingots, or is stored as jewellery and

coins, and whenever possible, it is recycled.Photograph © Dmitry Sunagatov/Dreamstime.com,

supplied December 2008.

GOLD GETSANOTHER CHANCE


GOLD:SET

FORAREBOUND?



Colin Sutherland, a self-confessed“gold bug”and chiefexecutive officer (CEO) of Nayarit Gold, a Canadianjunior gold miner with a prospective mine in the SierraMadre in Mexico, notes that while investment gold hasdropped as funds take their profits, physical gold is at apremium. “Demand for physical gold is still high. If youwere to try to buy a gold coin you would have to pay ahigher price, since on the physical side of things, a lot ofthe mints just do not have the supply,” he says. Manysmall investors buy gold coins such as the South AfricanRand, the American Eagle or the Canadian Maple Leaf asthe equivalent of managed fund gold holdings, and jittersabout the dollar and indeed the whole financial system,have whetted their appetite, hence the shortage.Moreover, gold for jewellery is overwhelmingly sold to theMiddle East and South Asia.“The Indian buying season,for example, starts in October ready for the weddingseason, and the word is that fearful about where thecommodity price is going, they have been a little reluctantto engage in buying [sic]. If there is a weakness in theprice I expect them to come in buying aggressively.”If you think these issues are tangential, consider that in

South Asia male chauvinism traditionally has a lock onland inheritance, therefore gold jewellery is regarded as aform of advance alimony and a widow’s pension for Indianbrides. These days, of course, its socio-economic rationaleis also subsumed in ostentatious consumption fuelled byrising living standards. So while the central banks aroundthe world sit on 30,000 tonnes of gold, wedding buying andDiwali in India, the Lunar New Year in China and similarfestivities are enough to cause an annual surge in priceeach winter and to consume up to 60% of the new goldthat is mined and refined each year.While people anxiously wonder when peak oil will

arrive, peak gold arrived long ago, back in 2001 to be exact,and production has flattened out since then even as goldprices continued to rise, making new mines increasinglyviable. However, gold in all its forms is an unusualcommodity.TheWorld Gold Council estimates that 158,000tonnes of it have been refined since records began. Of thisamount, 65% has been mined since 1950, and all but10,000 tonnes has been mined since the California goldrush of 1848. Unlike oil though, no one burns gold. It sitsin gold ingots, or is stored as jewellery and coins, andwhenever possible, it is recycled. The World Gold Councilestimates that 95% of all gold ever mined is still in use inone form or another. However, with an expanding worldpopulation and economy, and the esoteric demands on itas a store of value, its future value seems assured by agrowing shortage.In addition, the financial climate has led to credit

constraints for the junior companies that have traditionallyundertaken prospecting and resource identification. AsSutherland notes:“In the last few years the number of onemillion ounce deposits that has been found has declinedconsiderably. If you cannot raise money then you cannotadvance your project.The supply side is going to be impairedif the credit markets do not open up enough. The result is asupply constraint [and] increasing difficulty in finding majordeposits. If the money does not start flowing for newprojects, senior producers are going to be out there with nopipeline of projects and with reserves starting to drop.”Withhis own project’s funding secured, he sees opportunity inothers’ distress.“I’m a true fundamentalist. If you have goldincreasing on the demand side and the supply side goingdown, it will play to our advantage,” says Sutherland,estimating the bottleneck to begin showing possibly in aslittle as two years.

The financial climate has led to creditconstraints for the junior companiesthat have traditionally undertaken

prospecting and resourceidentification. Colin Sutherlandnotes: “In the last few years the

number of one million ounce depositsthat has been found has declinedconsiderably. If you cannot raise

money then you cannot advance yourproject. The supply side is going to beimpaired if the credit markets do not

open up enough. The result is asupply constraint [and] increasing

difficulty in finding major deposits. Ifthe money does not start flowing fornew projects senior producers are

going to be out there with no pipelineof projects and with reserves starting

to drop.” Photograph © MirekHejnicki/Dreamstime.com, supplied

December 2008.



GOLD:SET

FORAREBOUND?

One possible brake on such optimism is that the world’scentral banks could dump their reserves on the markets.However, any concerted action in this direction wouldactually start to devalue central bank reserves. Currentlycentral banks sell less than 400 tonnes a year, although theirfive-year agreement allows them to sell up to 500 tonnes.Indeed, if ever the Asian central banks decided to put evenjust one or two per cent of the reserves they currently holdin rapidly inflating dollars, and turn those into gold, NatalieDempster of the World Gold Council points out“it wouldhave a huge impact”. China for example, with its hugecurrency reserves, has only 600 tonnes of gold in itsvaults, compared with theover 8,000 tonnes the USkeeps. China has hinted atdiversifying away from itsUS dollar reserves,leading to greatexpectations from theworld’s gold community.Dempster says gold is a

significant export for manyemerging countries withimportant revenues forSouth Africa, China, Russia,Peru, Mexico and others.However, their physicalreserves are already beingmined, and newer reservestend to be smaller, moreexpensive to work and thusmore vulnerable to pricevolatility. They are also inremote areas where minershave to build infrastructureto get the ore out, andspend on infrastructure tobuy acceptance from local,often poor, communities.Nayarit Gold’s experience in Mexico is typical. The companyinvests not only in physical infrastructure but also in socialinfrastructure, schools, churches and other facilities as a costof doing business. Such cost margins make new mininginvestment heavily reactive to the vagaries of the marketprice.“Globally, any project that has costs in excess of $500to $600 an ounce is likely to have some challenges over theshort term. Worldwide, the average production cost issomewhere between $420 and $450 per ounce. With goldapproaching $800 there is still some margin but fluctuations,with a $50/60 swing in any given week, pose an additionalchallenge for expenditure planning,”notes Sutherland.“If itwere to swing back to $600/$650 you would see a massivecorrection with gold producers trying to reduce costs andmove out some of the inflation in the system,”he adds.While gold bullion reserves are concentrated in the

industrialised world, and many of the physical reserves arein the developing world, the lodestone for gold mining

finance and the listing of gold mining companies isToronto. Canada itself is a major gold producer, but Torontois the home of major international gold miners such asGoldcorp, Barrick, Newmont and Iamgold. The TorontoStock Exchange (TSX) claims 57% of the world’s mininglistings, involving 1,200 companies, spread between themain board and its new venture arm, the TSXV. Juniorminers are the explorers and developers, and if they hit amotherlode, they grow up to be seniors and graduate fromthe TSXV to TSX.“In Canada there is a commodity driven community in

the local banks that knows what you are talking about, andon the exchanges, theregulators understand theindustry,”says Sutherland.The country also has ahigh proportion of activeindividual investors whoare attuned to gold andmining, while itsproximity to the US alsomeans that it attractsmany investors from theUS. Surprisingly though,there are few investorsfrom the Middle East andAsia where most of theminers’ product isconsumed. One wouldhave thought that bothinstitutions and sovereignwealth funds would beinterested in investingback up the value chain,but Ellingham has seenno sign of it so far.Gold has often been

lumped in with othermineral commodities for

investment purposes, but the rueful expressions of those whowent long on iron, oil and the like show that it is a separatecase. Overall, the yellow metal becomes brighter when theeconomic skies are dark, and they have rarely been as dark asnow. Like many other prospectors, Sutherland is betting hisfuture Mexican mine on anticipated demand by China’scentral bank and a slew of Indian weddings. He also looks tothe US government as a driver for pushing up gold prices.“Inthis environment, the strengthening of the dollar istemporary, and as the Federal Reserve continues to financebailouts, the excess of dollars will lead to inflation, which is aprime indicator for gold to take off. In addition, there is a lotof money being redeemed and there are people sitting oncash which they want to keep safe. With that economicenvironment, I’ve not heard anyone in the industry say thatgold isn’t going back up to $1,000.”Of course they would say that, but the flood of dollars

from the Fed is indeed highly convincing.

“Globally, any project that has costsin excess of $500 to $600 an ounce islikely to have some challenges over theshort term. Worldwide, the average

production cost is somewhere between$420 and $450 per ounce. With goldapproaching $800 there is still somemargin but fluctuations, with a $50/60swing in any given week, pose anadditional challenge for expenditure

planning,” notes Sutherland. “If it wereto swing back to $600/$650 you wouldsee a massive correction with goldproducers trying to reduce costs andmove out some of the inflation in the

system,” he adds.


OLD WINE IN NEWWORLD GLASSES

INVESTORS ACCEPT A yield lower than forconventional unsecured bonds because covered bondsrepresent both a senior obligation of a major financial

institution and a priority claim against a segregated pool ofhigh quality assets if the issuer fails. Nevertheless, issuersand underwriters face a challenge in educating USinvestors who, although familiar with traditional bondsand securitised debt, have no experience of a hybrid thatcombines features of both.

Although US regulators began to press for a local marketin covered bonds only after the credit crisis took hold, theyhave made rapid progress, according to Florian Hillenbrand,a vice president and senior analyst at Unicredito in Munich.“The first time I heard US guys speak about covered bondsas something that might be of interest for domestic bankswas in January,”he says,“Six months later they were sayingon balance sheet funding is good for asset quality and youhad co-ordinated statements from supervisory bodies. Thatis impressive.” In July, the Federal Deposit InsuranceCorporation (FDIC) put out a Final Covered Bond PolicyStatement and two weeks later the Treasury followed upwith its Best Practices for Residential Covered Bonds.Even so, it will takemore than regulatory support to develop

a covered bond market in the US.Although Bank of America,Citi, JPMorgan Chase and Wells Fargo have all expressedinterest in issuing covered bonds, investors are unlikely towant to jump on the bandwagon until they see good two-wayflow. Dan Markaity, head of global public credit at MerrillLynch in New York outlines some of the requirements. Hethinks that covered bond issues need to be large—preferably$2bn or more, so that dealers will not be afraid to sell themshort; a prerequisite for liquid secondary markets. Moreover,Markaity believes covered bonds should be available to small

In the United States, covered bonds were a longtime coming. The crème de la crème of privatesector bank credit in Old Europe since the daysof Frederick the Great did not reach the NewWorld until September 2006, when WashingtonMutual (WaMu) launched the first coveredbond programme for a US issuer. In the wake ofthe credit crisis, however, American regulatorsare pushing hard to develop a domestic marketfor an instrument that has long provided aninexpensive funding source for large banks inEurope. Neil O’Hara reports on the outlook foran old asset class in the New World.

Photograph © Lazar-x/Dreamstime.com, supplied

November 2008.


COVEREDBONDS:THEUSOUTLOOK


72 J A N U A R Y / F E B R U A R Y 2 0 0 9 • F T S E G L O B A L M A R K E T S

investors as well as institutions, given a 20% risk weighting forregulatory capital purposes and accepted at the FederalReserve discount window.The goal is to have investors treat covered bonds pari passuin credit quality and liquidity with US government agencybonds. An orderly market will require cooperation amongissuers to regulate supply, too.“If five issuers each float $2bnbonds in a single week, secondarymarket prices will tank andbuyers will go on strike,”Markaity says, “We need a trafficcop.”Merrill Lynch has urged theTreasury to set up a coveredbond council in the US made up of issuers, investors anddealers to fulfill that role and resolve competing interests thatmight otherwise undermine the fledgling market.At first blush, covered bonds backed by residential mortgageloans—the most common form of collateral—look a bit likemortgage backed securities (MBS). However, the resemblanceis superficial. Covered bond investors rely primarily on theissuer’s cash flow for interest and principal payments and onlyturn to the collateral pool in the event of issuer default.The poolis over-collateralised and dynamic, too. Issuers have to ensurepool assets meet rigorous credit quality standards. Any loansthat fall below the threshold must be replaced with others thatdo qualify. This mechanism, policed by an independent coverpool monitor, ensures that the assets upon which investorsdepend for future payments if the issuer goes bust will be topquality performing loans right up to the date of failure.“Covered bonds have nothing in common with a pool ofstatic assets that have been hived off and from whose cashflows investors are expected to live or die,” explainsTimothy Skeet, head of covered bonds at Merrill Lunch inLondon,“They have prime underlying assets and are issuedby prime financial institutions that have regulatory andgovernment support.”From the issuer’s perspective, MBS represent the outrightsale of assets for cash. Securitisation facilitates the“originateand distribute”model that allows banks to make or buy moreloans without tying up regulatory capital. The bank has onlya short term funding requirement, too; mortgage loans pileup on the balance sheet only until they can be repackaged

into MBS and sold. In a covered bond program, however, themortgages stay on the bank’s books, as does the debt; it is along term funding tool rather than a way to shed assets.US covered bonds endured a baptism of fire whenWashington Mutual hit the skids last summer. Spreads overbenchmark 6-month Euribor interest rates blew out to morethan 600 basis points (bps) as the rating agencies issued aseries of downgrades. However, both ratings and spreadssnapped back after JPMorgan Chase agreed to assume theliability—and the cover pool assets—in its FDIC orchestratedacquisition ofWaMu.“The senior unsecured debt was left outin the cold,”says Skeet,“That is a key signal that the FDIC andTreasury want to ensure that covered bonds are treateddifferently and seen as robust credits.”In contrast, MBS investors receive interest and principalpayments from a static pool of mortgages sold to a specialpurpose vehicle (SPV) that has no recourse to cash flow fromeither the loan originator or the entity that sponsored theSPV. The structure may incorporate over-collateralisation,but once any credit support is exhausted, investors have nofurther protection against deteriorating credit quality,delinquency or default. Investors assume prepayment risk,too; if a borrower chooses to repay a mortgage early (eitherthrough refinancing, sale of the house or otherwise)investors receive their share of the principal at that time andmust reinvest at whatever interest rates then prevail.“A mortgage backed securities investor is looking to theperformance of specific assets for cash flows and thereforehas to worry about duration uncertainty,”notes Ben Colice,who heads covered bond origination in the Americas assetsecuritisation group at Barclays Capital in NewYork,“That isnot the case for covered bonds.”Covered bondholders donot receive accelerated repayment if the issuer defaults; inmost jurisdictions, the covered pool monitor uses cash flowfrom the dedicated assets to make interest and principalpayments as they fall due.In a twist that distinguishes the two US covered bondprograms launched so far—for WaMu and Bank ofAmerica—the cover pool monitor does not retain the pool

Heiko Langer, senior covered bond analyst at BNP Paribas in London.Photograph kindly supplied by BNP Paribas, December 2008

Ben Colice, head of covered bond origination in the Americas assetsecuritisation group at Barclays Capital in NewYork. Photograph

kindly supplied by Barclays Capital, December 2008

CO

VER

EDB

ON

DS:

THE

US

OU

TLOO

K


assets upon default. Instead, it sells the assets and reinveststhe cash proceeds in guaranteed income contracts to fundfuture interest payments and the repayment of principal. ToHeiko Langer, senior covered bond analyst at BNP Paribasin London, the liquidation procedure poses an additionalrisk for U.S. covered bondholders. “It is always easier toliquidate part of the portfolio whenever a payment becomesdue,” he says, “It is more difficult to find a buyer for thewhole portfolio and will probably result in lower prices.”

In practice, the risk is low, however. Regulators inEurope who want to preserve the brand image ofcovered bonds prefer to arrange rescue bids for failedbanks rather than risk higher fundingcosts for healthy institutions that mightresult if the bonds went into default.

US regulators demonstrated the sameconcern when WaMu failed. JPMorgan’sassumption of the covered bond liabilityunderscored the superior credit quality ofcovered bonds over senior unsecureddebt. The precedent should encourageUS investors to bestow upon coveredbonds the same pristine reputation theyhave long enjoyed in Europe. Althoughissuing banks have failed in Europe fromtime to time—including German banks,whose Pfandbriefe, the local version ofcovered bonds, are considered the goldstandard—Merrill Lynch’s Skeet saysnobody has ever lost money on coveredbonds through default.

Most European countries have enactedcovered bond laws that prescribeminimum credit quality standards andestablish government-approvedoversight to ensure that issuers adhere tolocal requirements, which differ from onejurisdiction to the next. While countriesin which common law prevails (such asthe United Kingdom and US) canachieve the same result by contract,many investors value the additionalreassurance a statutory regime provides.The UK, another recent convert to themerits of covered bonds, passed a law in2008 to fall in line with Europeanpractice, but in the US neither federal norstate governments have yet followed suit.

The government sponsored housingfinance entities (GSEs) will play acritical role in how the US covered bondmarket develops. The Treasuryguidelines for covered bond collateraloverlap in many respects with whatFannie Mae and Freddie Mac require forconforming mortgages. As long as theGSEs are free to expand their balance

sheets, the existing highly liquid agency MBS market willcompete for available collateral. Issuers could still usecovered bonds to refinance jumbo loans and other highquality non-conforming mortgages, of course, but thelarger opportunity will arise if Congress curbs the GSEs’future growth. Says Barclays Capital’s Colice, “If theagencies go away or their role is less significant inmortgage finance, the US Treasury is likely to promote thecovered bond market to provide banks a viable way tofinance mortgages.” An innovation from Europe mayfinally take root in the New World—almost two hundredand forty years after covered bonds were first issued.

73F T S E G L O B A L M A R K E T S • J A N U A R Y / F E B R U A R Y 2 0 0 9

Guess who’s the largest

3rd party administratorof Exchange Traded

Funds in Europe?

For more information on our services please contact: Fearghal Woods (Dublin) at+353 1 670 0300 or visit www.boiss.ie

Bank of Ireland Securities Services Limited is authorised by the Financial Regulator under the Investment Intermediaries Act 1995


THE OUTLOOKFOR EUROPEANCOVERED BONDS:

MARKET COMMENTATORS:Dr. Louis Hagen, executive director, Association of German Pfandbrief Banks

Nicholas Lindstrom, financial institutions group, Moody’s Investor Services

Ted Lord, managing director and head of covered bonds, Barclays Capital

Carlos Stilianopoulos, executive managing director and head of capital markets, Caja Madrid

Tim Skeet, managing director, head of covered bonds, Merrill Lynch

Talking Point




After what looked to be a protracted period ofstability, the European covered bond market hit a highwall in the late summer/early autumn, as it began tofeel the impact of the contagion that has createdextreme volatility in the global capital markets. Whatdo you think were the main reasons for the relativelateness of this dip and the intensity of the dip whenit did arrive?

DR. LOUIS HAGEN, ASSOCIATION OF GERMANPFANDBRIEF BANKS: Until mid-September at least thePfandbrief market proved exceptionally resilient todislocations in the capital markets in general and theirimpact on the covered bond market in particular. This isdue to the solid legal foundations provided by thePfandbrief Act and the flawless track record of thePfandbrief market and its committed domestic investorbase. The different formats of Pfandbrief, i.e. bearerinstruments in traditional or Jumbo size and registeredPfandbrief offer a wide spectrum to investors. Especiallytailor made issues and private placements were sought forand the German investor community proved to be solid asa rock.The suddenness of the disruption in demand clearlyhad some irrational motives when Pfandbrief was takenhostage by negative headlines that originated in the USand in Ireland. Pfandbrief markets were shocked by twoevents. First the Lehman insolvency and subsequently theHypo Real Estate rescue action. The bail-out ofHypoRealEstate closed the market where you may haveexpected it to underpin the commitment of the entireGerman financial community to protect the Pfandbrieffrom harm. In the aftermath of the European rescuepackages and the creation of a new asset class – stateguaranteed senior unsecured bank bonds – the marketnow is going through a period of re-pricing in order to findlevels commensurate with the new credit environment andnew competitors. But I would like to make clear thatPfandbrief issuance is still working. Issuance levels,however, have halved during the last two months.

TED LORD, BARCLAYS CAPITAL: Throughout the creditcrisis and liquidity problems facing many sectors of the

capital markets, investors have maintained their faith in thecovered bond asset class. Investors still purchase coveredbonds in private placement format and in the secondarymarket. Due to the liquidity problems in the secondarymarket, however, some investors are seeing covered bondsmore as a credit product and not as much as arates/government bond surrogate product.”

CARLOS STILIANOPOULOS, CAJA MADRID: Since thebeginning of the crisis back in August 2007 investors´appetite has been draining away gradually from thedifferent products in accordance with their risk perceptionon the products. This is probably why investors have beenbuying Covered Bonds all the way up to summer 2008,whilst at the same time they had stopped buying otherproducts which they considered riskier, starting onsecuritized transactions, tier II and tier I deals, and finallysenior unsecured. However, further turmoil in the marketsduring the months of September and October has evenaffected safer products such as Covered Bonds.

Do you think there were infrastructural weaknessesor vulnerabilities in the make up of the tradingmarket, which were exacerbated by the global crisis,such as: the availability of continuous executableprices on bond screens?/ or the extreme narrowing ofbid/ask covered bond spreads?

TIM SKEET, MERRILL LYNCH: The recent re-pricing of theSSA curve, though itself not helpful in the overall picture ofthe capital markets evolution has at least served to bring ameasure of consistency to the performance of all the assetclasses. Covered bonds have suffered but withoutexception so has every part of the market

Despite the current turmoil, there is a belief thatthe European covered bond model is far superior tothat in the United States. Is this wishful thinking,or is there real substance behind the claim.Moreover, if it is true, in a post crisis market is itfeasible for Europeans to export their expertise tothe US and Asia?

Covered bonds have underlined their importance and stabilising role in mortgage financing inEurope to such an extent that the authorities in the United States are seeking to introduce a set ofguidelines designed to replicate the high quality of this quintessentially European instrument. Inpart because of the safe-haven reputation of covered bonds it appeared for most of 2007 and early2008 to have successfully withstood the credit crisis. However, partly because the availability ofexecutable prices for bonds on screens highlighted their vulnerability, and partly because the fixedbid/ask spreads in covered bonds started to become far smaller than the bid/ask spreads in anycomparable markets (most significantly perhaps in the swaps and agency markets) the contagionthat affected other credit markets began to impinge on Europe’s covered bonds. Questions are stillextant as to the true nature of covered bonds: either as a ratings or a credit product. Whatever theultimate outcome of that debate, we asked some of the leading market makers in the coveredbond market to give us their views on the sustainability and future of this deep and diversifiedmarket through 2009 and beyond.



DR. LOUIS HAGEN: The covered bond model in generalcertainly misses the shortcomings of securitizationespecially the consequences of the off-balance sheetconcept that was at the root of irresponsible lending.However, the European Covered Bond market is a verydiverse animal. Though we have seen some convergencewith a view to establishment of dedicated legal frameworksfor covered bond programmes in Europe, the specificationsand standards still do vary substantially. Covered bonds areessentially a European affair even though we have seen acouple of structured issues in the US. Recent remarks madeby officials from US Treasury or the Fed are evidence thatthere is an increased awareness of the covered bondconcept’s appeal. I do believe that covered bonds still haveto come a long way down to Main Street, though.European expertise is provided, e.g. expert opinions frominvestment banks and rating agencies. However, I suggestthe US administration ask issuers and investors, too, whata US covered bond should look like given that ratingagencies and investment banks played a prominent role inthe advent of the current crisis.

TIM SKEET: The US covered bond initiative has beenpushed back in time. The flurry of excitement last July waswelcome, but that moment has passed and other matterspreoccupy the government. Moreover, we will have to waitfor the new administration to form before we are able toget a clearer view of the degree of future governmentalenthusiasm for the asset class. Nevertheless, the coveredbond offers exciting opportunities to finance primemortgage portfolios. The asset class offers private sectormoney, new investors and longer maturities, and inaddition encourages banks to retain mortgage risk therebytightening underwriting criteria. The question still remainsas to what structures will be adopted. Certainly they willhave evolved from the early Washington Mutual and Bankof America offerings. Watch this space.

TED LORD: The European covered bond model has beencopied in North America and is in the process of beingapplied in the Asia Pacific region. Investors seek greatertransparency from the banks in general and favor coveredbonds with their cover pool disclosure and the fact thatthey remain on the balance sheet of the lender.

All things being equal, do you think that the currentcrisis has highlighted the obvious strengths of thecovered bond market: namely, the underlyingprotection against risk which is built into the product;clear asset eligibility criteria?

TIM SKEET:One of the features of the market is the villagenature of its market. It has its own press, personalities andproducts. It attracts a lot more comment than other assetclasses that cannot be so readily identified and pigeon-holed. Now the village people have woken up with anunexpected hangover after years of easy partying.Given

the dynamics of the market and how it might evolve infuture, the village people nature of the sector willfundamentally endure, although questions will be askedas to which syndicate teams and trading groups willhandle covered bonds in future. Those questions canonly be answered once markets reopen and a clearerview is formed of how investors will re-calibrate their

Tim Skeet, managing director, head of covered bonds, Merrill Lynch.According to Skeet, the recent re-pricing of the SSA curve, though

itself not helpful in the overall picture of the capital marketsevolution, has at least served to bring a measure of consistency to

the performance of all the asset classes. Covered bonds havesuffered but without exception so has every part of the market.Photograph kindly supplied by Merrill Lynch, December 2008.

COVERED

BONDS–VIRTUALROUNDTABLE



thoughts and expectations of relative value. Expect adebate in due course.

DR. LOUIS HAGEN: The current crisis has clearlydemonstrated that covered bonds have been able towithstand the earth quake when other funding marketsespecially structured products had already been destroyed.Within the covered bond family again we saw a substantialspread differentiation with some products showing moreresilience than others. Since September we are in asituation in which it seems that almost only governmentproducts or government guaranteed products are able toattract a wider audience. But even within the governmentsector there is a wide range of differentiation.

CARLOS STILIANOPOULOS: The strengths of theCovered Bond product has been highlighted by currentmarket conditions. Even though spreads have widenedsubstantially, demand has remained relatively strongduring this period. There have been many privateplacements done in the Covered Bond market lately, andthis shows there is still investor appetite for the productwhich cannot be said for other asset classes. The reasonfor this? Probably because of the strength of the productin itself.

Given the depth of the current crisis, how might itimpact on the covered bond market in theimmediate term?

TIM SKEET: The once homogeneous asset class hasdefinitively splintered by geography, structure and issuerinto a hitherto unanticipated pattern. Each jurisdictionmakes claims about the robust nature of its domesticbonds, although investors do not always appear to beswayed by the arguments. Divergent nominal trading levelsin the secondary markets illustrate this. Gone probablyforever is the notion that this is a unified asset class. Thisrealisation represents furthermore a challenge which willrequire more work on the part of investors. Let us hopethat the market, with its cadre of analysts supported infuture by credit and macroeconomic specialists, will rise tothis. Better communication, greater transparency andattention to the mechanics of transactions will be required.The way that this will impact spreads and where the assetclass trades relative to senior unsecured or agency debt isnot clear. Nevertheless, the degree of government support,specific laws in many cases, and security on the back ofprime bank credits should combine to preserve thepremium quality status of most of the asset class. Marketpractitioners can still dream on.

What does the issuance calendar look like for the restof this year and for the first half of 2009?

DR. LOUIS HAGEN: We do expect issuance to gainmomentum in 2009 especially in maturities beyond the 3-

year tenor, although very gradually given the increasedcompetition from agencies and guaranteed bank bonds.

TED LORD:Many covered bond issuers are looking for theopportunity to come to the market should conditionsimprove. The stronger names with solid business modelsshould lead the way in the tough markets for 2009.Investors want to purchase names that can keep doing aprofitable business in the current climate and those firmsthat are not too highly leveraged.

Why did registered covered bonds become morepopular over the summer of 2008? Was it to avoid anymark to market adjustments? Or is that too simplisticand where other issues in play?

DR. LOUIS HAGEN: Registered bonds are an importantpillar of the Pfandbrief market. About one third of 840billion Euro Pfandbrief outstanding comes in registeredformat. Registered Pfandbrief offer more flexibility to manyinstitutional investors like insurance companies and otherbanks given they do not have to mark them to market. Intimes of severe dislocations like today institutionalinvestors resort to registered bonds given the lack of anyindication of fair values. In addition most registeredPfandbrief are tailor made at the request of the investor.

Was the jumbo covered bond market more or lessimpacted by the crisis than other covered bonds?

TIM SKEET: Trading had been one of the market’s keyattractions. Jumbos offered a real sense of liquidity relativeto other asset classes. The jumbo market-makingconventions in force proved excellent for fair weathertrading, but exacerbated the spiral when the winds turned.Now the market is wrecked, how best should the tradersset about moving forward? Optimists point to the fact thatmembers of the trading community are taking the initiativeand moving towards more open and modern tradingstandards that suit variable market conditions better. It islikely that although Jumbo trading and that sector of themarket will revive in due course, more flexible issue sizesmay emerge into the mainstream, offering issuers greatercontrol over maturities, and investors more choice onspread and other parameters. Rating agencies mayencourage this in order to alleviate refinancing risks. It istherefore possible that issues of say €500m will be morefrequently seen in future and more flexible taps (as seenrecently in the Pfandbrief sector).

DR. LOUIS HAGEN: One cannot compare the Jumbomarket with the traditional market. The Jumbo model aimsat providing liquidity to the investor whereas traditionalPfandbrief does not. The liquidity of the Jumbo Pfandbriefwas impacted first having proven its resilience quite a longtime after the crisis loomed in summer 2007 when spreadshad remained almost unaffected as had volumes.



In 2008 we saw legislation passed which createdlegal frameworks for the issuance of covered bonds inthe United Kingdom and the Netherlands. Currentmarket conditions aside, what is the view of thepossibilities offered by these markets?

TED LORD: There is trend among many covered bondissuers to prefer those covered bonds covered by a legalversus solely on a contractual relationship. In this respect,the moves to have a legal framework for covered bonds inthe United Kingdom and the Netherlands is a positive step.

We see continued investor demand for UK and Dutchcovered bonds, but for mainly the stronger names.

How much was the European covered bond marketimpacted by the mark to market write-downs thatimpaired other structured products? How much wasthe mark down of asset backed securities elsewhereaffecting new issue premiums and/or trigger priceadjustments of new covered bonds?

TED LORD: The mark-to-market principle has had aneffect on the covered bond market - especially thosecovered bond markets where the spread widening hasbeen the most significant. Firstly, the general spreadwidening has led to performance problems against certainindexes resulting in investor redemptions at the major fundmanagers. Since many of the securitised markets shut, theinvestors needed to sell what they could and sold thecovered bonds.

Typically, covered bonds have enjoyed the highestratings. In the aftermath of this current credit crisis,what challenges will ratings agencies face in providingratings for new covered bond issues? Are ratingsconsistent, for example, across different agencies inthe covered bond segment? Should they be?

TIM SKEET: We should not underestimate the impact ofevolving rating agency attitudes. With stress in the coverpools, stress at the level of the parent banks and significantstress in refinancing capacity and liquidity, the AAA statusof some parts of the market can no longer be taken forgranted. This is something that will need to be addressedby the industry and investor expectations will need to bemanaged accordingly.Governments have consistentlysupported and sponsored the product, not just inGermany but elsewhere. Investors should take note.Nevertheless, with the ratings pressure and investorjitters, governments need to remain vigilant that theproduct will continue to benefit from their support. Thereare good political reasons for this in view of the role thisproduct plays in housing finance in Europe.

NICHOLAS LINDSTROM, MOODY’S INVESTORSERVICES: The key challenge in the current market is inthe approach to rating risks. Where ratings between therating agencies differ, typically Moody’s has the lowercovered bond ratings. We believe the primary reason forthis may be that we are more focussed on refinancing riskthan the other agencies. As already seen during the creditcrunch, refinancing risk can be a very volatile risk, and thisrisk is arguably one of the cornerstones of the creditcrunch. The vast majority of covered bonds are “bulletbonds” (i.e. exposed to refinancing risk). Refinancing riskarises following the default of the bank supporting acovered bond. When this happens, the covered bond mustbe repaid from the assets backing the covered bond. For

Ted Lord, managing director and head of covered bonds, BarclaysCapital. According to Lord, throughout the credit crisis and

liquidity problems facing many sectors of the capital markets,investors have maintained their faith in the covered bond asset

class. Investors still purchase covered bonds in private placementformat and in the secondary market. Du to the liquidity problems

in the secondary market however, some investors are seeing coveredbonds more as a credit product and not as much as a

rates/government bond surrogate product. Photograph kindlysupplied by Barclays Capital, December 2008.

COVERED

BONDS–VIRTUALROUNDTABLE



“bullet bonds”, the natural amortisation of the assetscannot be relied on to repay the bonds. This means thatfunds need to be raised against the assets backing thecovered bond – possibly through the firesale of the assets.The discount on the price achieved to complete such afiresale of the assets, in the potentially stressedenvironment following the default of the bank thatoriginated these assets, is referred to as refinancing risk.Because of the uncertainty surrounding this “refinancing

risk”, Moody’s does not believe that there is a very highcertainty that a“bullet”covered bond would receive full andtimely payment following the default of the bank supportingthe covered bond. This is the primary reason that if thesupporting bank falls below a certain rating level, then aMoody’s covered bonds rating will usually start migrating.Moody’s has published the rating levels of the supportingbanks which are expected to constrain the rating level of thecovered bonds.Some markets do not suffer such material refinancing

risks. For example, in Denmark, the majority of coveredbonds are pass-through bonds, which means that followingthe default of a bank supporting a covered bond, the coveredbonds should be able to rely on the natural amortisation ofthe assets to pay them back – i.e. the requirement for afiresale of assets into an illiquidmarket is muchmore remote.

Will these challenges be the same across all types ofcovered bonds? Or are Jumbo bonds, or bonds withcross-border pooled assets, for example, different?

NICHOLAS LINDSTROM: Refinancing risks vary deal bydeal and jurisdiction by jurisdiction. The extent to whichrefinancing risk is dealt with tends to be different underdifferent covered bond laws. Further, refinancing risk variesdeal to deal, for example based on the average life of theassets, and the type and quality of assets included in a coverpool. Some markets do not suffer such material refinancingrisks. For example, in Denmark, the majority of coveredbonds are pass-through bonds, which means that followingthe default of a bank supporting a covered bond, thecovered bonds should be able to rely on the naturalamortisation of the assets to pay them back

Are there instances of covered bond ratings de-linking from the issuer and other categories of itsdebt exposure? Is this feasible going forward?

NICHOLAS LINDSTROM: Currently Moody’s does notrate any covered bond as delinked. However, if a coveredbond structure was sufficiently sound, a delinked ratingcould be assigned. It is easier to envisage a structurewithout refinancing risk achieving a“delinked”rating thana structure that suffers from“refinancing risk”.

How might approaches to ratings change goingforward?

NICHOLAS LINDSTROM: The current extreme climate hasalso highlighted the volatility associated with“refinancingrisk”, a risk that the vast majority of covered bonds areexposed to. In response to this risk Moody’s has updatedsome of the refinancing stresses it applies to covered bondprogrammes.

Looking forward, given the nature of the product, dowe anticipate an early revival?

TIM SKEET: The key question remains as to when thecovered bond market will revive. A general expectation isthat it will be amongst the first of the asset classes to revive,although precise timing will depend heavily on the passageof the government guaranteed bonds and success of thefinancial bail outs.The second quarter of 2009 appears to bethe current hope. Investors will also be seeking assuranceson the supply situation as the risk of substantial supply in toa shrinking investor base was at least one factor thatpenalised some parts of the sector previously. Supply willneed to be carefully handled, and market participants willhave to be attentive to the conflicts of interest that will arisebetween competing issuers. Contracting bank balancesheets, de-leveraging and economic slowdown presentmacro-economic constraints on supply, but investors willneed to understand how these influences translate intonumbers. Still, regulatory pressure on banks to raise andmaintain liquidity and push out maturities, combinedfavourable treatment of the covered bond as an asset forthose additional liquidity reserves, bringing more of thisgroup of product buyers back to the game, should provide asolid basis for the return of the asset class.

CARLOS STILIANOPOULOS: We have to go a step at atime. Currently the appetite is for Government GuaranteedBonds, and I am afraid this will last for at least the first sixmonths of 2009. Probably the next asset class to come backto the market, in a substantial enough size, will be theCovered Bond market. However, the question is in whatform will it come back? Will it be mainly in jumbo deals orsmall targetted placements? What will hapen with themarket making commitments? There will be too manyquestions and it is still too soon to know the answers.

If you enjoyed this article, or any other in thisedition of FTSE Global Markets and would likereprints, please contact

Paul Spendiff,Director,Berlinguer LtdTelephone: 00 44 207 680 5153Email: [email protected]: 00 44 207 680 5155

We will be pleased to help you.


OVER THE LAST few years exchange traded funds(ETFs) have evolved to become an institutionalinvestment tool of choice across the globe.

Nowadays they are regarded as a straightforward, low costand flexible way to access the potential rewards of themarket. When looking at transparency in particular, whichis becoming key in the current market, it is believed ETFsare a preferred choice over many other financial productsaccording to Deborah Fuhr’s ETF and ETP IndustryHighlights Q3 2008 (produced by Barclays Global Investors)and ETF assets under management (AUM) is expected toexceed $1trn in 2009, rising to $2trn by 2012.With such a rapid pace of growth and a magnitude of

funding, ETFs are now available for almost every niche andmarket, allowing investors to explore new and inventiveareas of investment. Index providers are also a vital part ofthe ETF story, and many index providers including FTSEGroup have had great success in the creation of indices tosupport these products. As ETFs are designed to sit on ortrack an underlying index, in order for their performance tomirror a broader stock universe, they are often based on anaccepted benchmark, with the index contributing to themarket acceptance and understanding of the investmentopportunity. FTSE Group believes that an independentrules-based index design provides the market with thehighest level of transparency and confidence needed, whileindex liquidity rules ensure a more than acceptable level ofETF liquidity.Investors looking to diversify their portfolios should be

aware, as competition among providers ripens, the numberof ETFs based on indices in innovative areas such asemerging markets, real estate and investment strategies isgrowing considerably. With such a variety of product onoffer, choosing the right product can be confusing. Even so,

the due diligence or work involved in making the rightchoice for a particular portfolio should not outweigh thebenefits that can be derived from innovation that is basedupon a recognised index. In addition, with increasingcompetition among ETF providers, investors must ensurethey remain informed about the technical workings ofETFs.This is becoming ever more important in a time whenvolatility is high and where there is a noticeable movementaway from active to passive asset management (particularlyas factors such as rising fees and transparency becomeadditional considerations). In the current dynamic climateETFs are not only seen as attractive but also as a vitalcomponent of an effective risk managed strategy.ETF providers have committed generous marketing

budgets on promoting their ETFs, with names such as BGIiShares, Lyxor and DB x-trackers dominating the market.However, while having confidence in the ETF provider iscritical for investors, the choice of the underlyingbenchmark is also important. Investors need to payincreasing attention to the accuracy and methodology ofthose indices which are used as the basis for ETFs. In timesof market uncertainty, in particular, those ETFs trackingeffective benchmarks from reputable index providers willcontinue to offer investors a low cost and transparent wayto gain exposure to different markets.

Innovation: A new game planThe current environment creates a real opportunity for ETFsgrowth and at FTSE Group there is a strong feeling ofresurgence for index tracked investments from asset owners.This, teamed together with a rise in innovation in order tobest deal with current market trends has created a markedinterest in the concept of wrapping investment strategieswithin indices. One such approach is the use of shorting

INDICES:THE ETF DRIVER

The world of exchange traded funds (ETFs) is stillan open book. As investment trends diversifyand change in the post credit crunch world, theincreasing focus on transparency, cost efficiencyand risk mitigation has created ideal conditionsfor a resurgence in index based investibleproducts, not least ETFs which are flexibleenough to accommodate varied asset classes.Imogen Dillon Hatcher, managing director,Europe, FTSE Group, outlines the key trends.

Investors looking to diversify their portfoliosshould be aware, as competition among

providers ripens, that the number of ETFsbased on indices in innovative areas such as

emerging markets, real estate andinvestment strategies is growing

considerably. With such a variety of producton offer, choosing the right product can be

confusing. Photograph © TheaWalstra/Dreamstime.com, supplied

December 2008.


THEEXPANDINGWORLDOFETFS



strategies and FTSE Group has expanded its range of shortand leveraged indices; FTSE’s 100 Short Index serves as thebasis for DB x-trackers FTSE 100 Short ETF, as part of itsshort ETFs range.The new indices allowmoney managers toexploit volatility in the UK market by allowing investors togo short the market or gear up. The indices will serve as thebasis for ETFs, benchmarks and other index-linked financialproducts and are an extension of FTSE Group’s range ofinvestment strategy indices that are designed to provideasset managers with strategic investment tools.Another area where indices are making headway is in the

emerging and frontier markets such as Africa and the MiddleEast. Emerging and frontier markets are areas in which manyindex providers have a growing presence. This divergencefrom the developed world towards the new geographiesreflects the eagerness of investors to ensure they can achievea well diversified portfolio while, at the same time, having theconfidence of being able to rely on a transparentmethodology they can track. ETF providers are no strangersto this fact.As a result, there has been an explosion of countrybased ETFs from the BRIC countries down to the SubSaharan region of Africa and across the Middle East, such asthe Lyxor ETF based on the FTSE Coast Kuwait 40 Index.This move also ties in well with the increase in the

number of stock exchanges around the world that arebidding to create new regional and partner indices in orderto gain market exposure to an international investmentcommunity and which provide the underlyinginfrastructure for such ETFs. As a global index provider,FTSE Group works with over 18 stock exchanges across theworld to provide indices created to enhance growingeconomies, such as that achieved with the JSE (SouthAfrica) and ATHEX (Greece). Such partnerships are aperfect example of the potential successes from combiningdomestic know-how with international distribution tobring innovative product to market.Simultaneously amid the tumultuous conditions the

industry is faced with, index providers are now more thanever a much needed auxiliary to banks’ in-house quantteams who choose not to solely manage and calculateproprietary indices. Increased collaboration between thesetwo parties can prove mutually beneficial, with banksprofiting from credible products based on objective thirdparty run indices and the index provider gaining newbusiness opportunities. These trends have largely beendriven by the growing requirement among investment firmsfor transparency, risk management and cost efficiency.Moreover, it is also increasingly important these days withinthe industry to harness real and focused expertise.Equally, the world of indexing has moved on

considerably and over the past few years at FTSE Group,there has been a wave of index innovation from theintroduction of the much lauded Sharia compliant indicesand infrastructure indices to the creation of indices thatcover issues such as responsible investment. Most recentlythere has been significant development undertaken onenvironmental technology indices. In combination, all of

these are ripe for and have formed the basis of structuredproducts such as ETFs.The creation of new ways to benchmark has not stopped

at existing asset classes either. Alternative asset classessuch as real estate investment trusts (REITs) and hedgefund of funds (HFoF) have also taken off and these havegone some way to provide investors with greater choiceover and above the traditional equity class.

Indices, ETFs and the futureWith transparency being the buzzword of the moment, it isclear that both index and ETF providers must worktogether to ensure investors are not only served but alsokept informed and educated. The use of open andtransparent rules driven methodology in addition toindependent index committees (made up of marketpractitioners) is vital for a healthy and most importantlytradable index, a philosophy which FTSE Group appliesacross its 120,000 indices.With a migration towards passivemanagement and a resurgence of portfolio rebalancing, it isevident that indexing is a first choice for investors lookingfor that long term investment in a transparent, riskmanaged and cost effective way.The ETF market, in common with all areas of the

financial arena, becomes ever more competitive and in ourview is nowhere near saturation. ETF players are ensuringhealthy competition through increasing innovation,creating original products driven by investor demand.They will continue to add credibility to this investmentsegment and emphasise the benefits of a ready-madediversification of index tracking with the ease andflexibility of trading shares.

Imogen Dillon Hatcher, executive director, FTSE Group. Photographkindly supplied by FTSE Group, December 2008.



ETCsGAINASCOMMODITIES

REMAINPOPULAR

EXCHANGE TRADED COMMODITIES (ETCs) havereportedly begun the NewYear on a upbeat note asinvestor sentiment continued to favour commodities,

cash and foreign exchange over traditional equities as 2008drew to a close. Specialist ETC and ETF provider ETFSecurities, says it has seen continued strong inflows intoETCs since early November last year. By mid December thefirm reported that $323m had flowed into a range of ETCsincluding precious metals, energy and industrial metals,comprising inflows of $403m into long ETCs includingClassic, Forward and Leveraged ETCs and outflows of$80m from Short ETCs. Oil inflows continue to be strongand continued to dominate the ETC sector. Inflows intolong oil ETCs rose by $218m in late October and earlyNovember last year reversing the strong outflows duringAugust and September. Over the period, energy ETCs sawsome $225m of inflows, compared with the outflow ofsome $30m from short energy ETCs, say ETF Securitiesanalysts, with energy ETCs contributed 53% to the total netlong position added to ETCs.Physical metals, such as gold and platinum recorded

similar tends, while industrial metal ETCs also saw somesmaller scale inflow activity. In total, $13m of longindustrial metal ETCs were added. However the largesttrades were seen in outflows of short industrial metalETCs. Short industrial metal ETCs experienced outflows of$25m. This equates to a net long position of $38m beingadded to industrial metals, says the firm.The driving factors behind commodity prices in 2008

included increasing demand, particularly from China andother emerging nations, numerous supply related issues,and the global financial crisis which caused a sell off in

virtually every asset class. Over the past 12 months, goldappears to have been the standout performer with a returnof approximately 2% in US Dollars, 37% in sterling (thoughthat percentage will have risen as the British currencycontinues to dive) and 18% in Euros. Over the longer term,commodities have outperformed almost every other assetclass, with energy and precious metals some of the topperformers over the last five and ten years. Grains andprecious metals were also featured among the topperformers over the past three years.According to Nik Bienkowski, chief operating officer

(COO), at ETF Securities: "Inflows into ETCs over the pastfive weeks shows that many investors are still interested ina wide range of commodities despite the recent pull backas a result of the weakening economy. $323m of inflowsinto ETCs over five weeks is a good achievement in anymarket. … With oil having fallen from $147 per barrel toaround $45 per barrel, many investors now see this as along term buying opportunity. While demand for oil hasfallen, longer term supply issues still exist such as fallingproduction, falling reserves and a shortage of skilledworkers. Regardless of an investor's view, ETF Securitiesoffers both long and short ETCs which enable investors toprofit in a rising or falling market.”Barclays Global Investors (BGI), citing data verified up to

the end of November 2008 noted a largely positive 11month period, and posited an improved outlook for ETFsthrough 2009. In the current market turmoil investors arebecoming even more concerned about counterparty risk,transparency, liquidity and the use of derivatives andstructured products, notes Deborah Fuhr in a recentrelease. At the end of November 2008 the ETFs industryhad 1,539 ETFs with 2,580 listings, assets of $633.83bn,managed by 86 managers on 42 exchanges around theworld, with ETFs increasing overall by 31% with over 414new launches through 2008. However, Fuhr notes thatassets fell by 20.4%, though she says it is less than the43.80% fall in the MSCI World index in US dollar terms.Moreover, the use of ETFs to implement exposure to cash,fixed income, commodities and equity indices is becomingmore popular, she notes. Fuhr also points out that the useof ETFs is likely to increase significantly by independentfinancial advisers (IFAs) in the UK based on the regulatoryproposals outlined in late November last year in the RetailDistribution Review (RDR) feedback statement by the UK’sFinancial Services Authority (FSA), the official regulator.Fuhr adds that there are plans extant to launch some 570new ETFs in train, of which the bulk are in the UnitedStates (469) and the rest in Europe.

In an inaugural regular commentary on the rise ofthe exchange traded fund (ETF) industry, we lookat the key trends in exchange tradedcommodities (ETCs) as well as ETFs through therecent holiday period. Not surprisingly, given thecontinued volatility in global equities in recentmonths, investors continued to build positions inETCs, particularly in gold and oil. Whiletraditional equity based ETFs have been relativelyquiet, and equity based ETFs have been impactedby some of the outflows suffered by equity basedmutual funds and hedge funds, some marketwatchers think that by and large, equity ETFshave maintained inflows, though overall assetsheld in ETFs have fallen. What are likely to be thekey trends in the first half of 2009?

ETCs gain as commoditiesremain popular


Call +44 (0)20 7368 9465 Email [email protected] Visit www.tradetechequity.eu

2009The 9th Institutional EquityTrading & Technology Summit

21st – 24th April 2009 The CNIT Centre, Pariswww.tradetechequity.eu

-48.00 +77.00 -22.00 +212.0

0 E

98885.0

0S2565

- 4500

+87.61-23.69

E

2356 S 67889 _44.00

+ 55.00

98885.00

S 2565 - 4

500

-48.00 +77.00

-22.00 +212.0

0E98885.0

0S256

5 - 4500 +87.61 - 23.69E 235

6

S67889_44.0098885.00S2565

- 4500 +87.61

-48.00

+7

7.00 -22.00 +212.00 E 98885.00S2565

- 4

500+87.61-23.69

E23

56S 67889 _44.00

+

55.0022.00

+212.00E98885.00

-48.00 +77.00-22.

00+212.00

E98885.0

0 S 2565 - 4500 +87.61 - 23.69 E 2356 S 67889 _44.00+ 55.00

-48.00 +77.00 -22.00 +212.00 E 98885.00 S 2565 - 4500

+87.61

- 23.69

E2356

“TradeTech is the perfect opportunity to meet key people in the equity trading industry and share viewsand opinions about the future of the industry.”Johan Erikson, Head of Global Trading, DnB Nor Asset Management

“The event was a great success and well-executed -- thought-provoking enough so I always take something new away.” Kent Rossiter, Head of Asia Pacific Trading, RCM

Jean Baptiste de Franssu, CEO, Invesco

Jean-Pierre Aguilar, CEO, Capital Fund Management

Francois Bonnin, CEO, John LockeInvestments

Martin Wolf, Chief Economics Commentator, Financial Times, Author, Fixing Global Finance

Rodney Brooks, Chairman and CTO,Heartland Robotics

Stephen Grady, Head of Global Dealing, Barclays Wealth

Christoph B. Mast, Managing Director, Global Head of Trading, RCM/Allianz Global Investors

Robin Griffi ths,Technical Strategist, Cazenove CapitalManagement

Dave Cliff, Professor of Computer Science,University of Bristol

Matt Andresen, President, Citadel ExecutionServices

Lead Sponsor Principal Sponsors Organised by:

More Opportunity For Interactivity & Debate And Fresh New FormatInteractive Voting you can participate in at the Focus Day and at the Main Conference, Industry Debates, Break Out Sessions, Roundtables,and the WBR Blackberry facility so you cananonymously pose questions

Leading Speakers From Across The Value Chain Delivering New PerspectivesNowhere else can you learn from so manyexperts and thought leaders from the buy side,sell side, execution venue, vendor and academiccommunities, with many new speakers, in a freshnew format

Conference Streams SpecificallyDesigned For YouWith streams for Heads of Trading, CTOs, Heads of Front Offi ce Operations, and Hedge Fund or Alternative Investment Divisions, you andyour team can make the best use of your timeattending the sessions most relevant to your role

Over 350

Buy Side Attendees

Already Confirmed!

A Blockbuster Line-Up Of Over 100 Speakers, Including:

W


THE CITY OF London and its neighbouring areaswere always at risk from a sharp real estatedownturn. The type of building required by occupiers

is typically on such a scale that to acquire a site, secureplanning, demolish existing buildings and then construct isby its nature a drawn-out process. Consequently, thedecision to develop is often taken in a very different marketfrom the one in which the project is delivered.

Although the development pipeline is not as super-heatedas it was in the last recession, the figures do not make forcomfortable reading. Agent Jones Lang LaSalle (JLL) warnsthat 3.7m ft² of speculative office space is due for delivery inthe next 18 months. Some 5.7m ft² of office space is alreadysitting empty, up 12% in the third quarter of 2008. This putsthe vacancy rate in the City at 5.5% and JLL predicts this willmore than double by 2010, with rents falling from a peak ofmore than £65 a ft² last year to about £47.50. CB Richard Ellis(CBRE) has an even gloomier prognosis, predicting a total of6.5m ft² of new development, which will send the availabilityrate rise to 13% in the City. It forecasts prime office rents willdecline for the next two years, falling by 22% to the end of2010 and then recovering to regain their end-2007 level by2013, although it warns there are“substantial downside risksto this scenario”.Cushman & Wakefield reports that a total of 16 deals

were completed totalling around £550m during the thirdquarter of 2008 in the City, down 50% from the secondquarter and just 10% of 2007’s third quarter turnover.Moreover, the City of London could lose 62,000 jobs by theend of 2009, wiping out all the growth of the last 10 years,the Centre for Economics and Business Research warns.

The City of London’s real estate market has beenhit hard twice. Along with the rest of the UK realestate market it has suffered from thefundamental triggers of this recession: theimbalances that have built up during the pastdecade, the hyper-inflated values of housingand commercial property and the over-availability of credit. It is starting to look eerilysimilar to the market depression of the early1990s. The difference this time round is that theCity is wooing money from all around the worldand one of its biggest investment targets is thecash-rich Middle East. Mark Faithfull reports.

Arabian Knightsto the rescue?

Photograph © Jon Le-bon/Dreamstime.com,supplied December 2008.


REALESTA

TEREPO

RT:THEIMPACTONLONDON



Employment in London's financial district will have fallenby 28,000 in 2008, with a further 34,000 to go in 2009 as aresult of the credit crunch. The slump could take the Cityback to levels last seen in 1998.That is the bad news and there is plenty of it. However,

over-development is nowhere near as excessive as in the1990s and lest we forget, last time round CanaryWharf andLondon Docklands were coming on line, offering hugeamounts of space to rival the City’s dominance. So in 2008take-up, while clearly down, is still expected to reach 4mft², compared with a five-year average of 5m ft² to 6m ft².What the City needs is alternative financing and in an agewhere it has traded on globalisation, appropriately enoughit has turned to the cash-rich emerging nations, with theMiddle East a particular target. Can and will the Gulfrespond positively? “To date, the City market hasperformed differently to the West End market, in the styleof Middle Eastern money that it has attracted,” saysAndrew Hawkins, a director in JLL’s City investment team.“The West End market has been characterised by moreactive private wealth management or royal family money,but has largely been focused on wealth preservation in thesuper-prime markets of Mayfair and St James. Examplesinclude the Saudi Arabian royal family (Lancer Trust)buying 50 Stratton Street for £130m on a 5% yield.Similarly, a private Middle Eastern investor acquired 63 StJames’s Street, for £31.12m, again reflecting a yield of5.00%,”says Hawkins.This, he says, contrasts with the City, where Middle

Eastern investors have been seeking to move further up therisk curve. In particular, Hawkins cites an appetite from‘petro-dollar’ investors for development opportunities.Amid the turmoil the City has scored extraordinary

successes for landmark developments, with a strong Gulfconnection. For example, the State General Reserve Fundof Oman is one of three investors behind Heron’sdevelopment at Heron Tower on Bishopsgate. Likewise, asyndicate of Middle Eastern private family houses andinstitutional investors is backing Arab Investments'proposed development at The Pinnacle, also onBishopsgate. Finally, the Qatari royal family is thedominant partner behind Irvine Sellar’s development ofthe Shard, on the Southbank.Peter Damesick, head of UK research, CBRE says that

“Within Europe, the UK, and London in particular,maintained its absolute attractiveness to Middle Easternmoney in the first half of 2008 compared to 2007. At thesame time Middle Eastern investors have increased inimportance within the property investment market whichis showing substantially lower volumes,” says PeterDamesick, head of UK research, CBRE.CBRE Research shows that in the first half of 2008 Middle

Eastern investors spent £1.3bn acquiring UK real estate,which represented 73% of all Middle Eastern investment inEurope, with London alone accounting for 60%.The UK andLondon’s shares of Middle Eastern investment in Europe inH1 2008 were double those in 2007. In the City office

market,Middle Eastern investors spent £530m in 2008 to theend of the third quarter, compared to £524m in the whole of2007. The Middle Eastern share of total investment in theCity office market by the end of November 2008 was 22%,compared to 7% through the whole of 2007.

Headline projectsHeadline projects have provided another fillip. HSHNordbank extended a loan used to purchase the Pinnacletower site in the City for another year, as developer ArabInvestments pushes ahead with its speculativedevelopment plans. The German bank funded the £200mpurchase of the site in May last year, from German fundmanager Union Real Estate, for a consortium fronted byArab Investments. Arab Investments plans to develop theKohn Pedersen Fox-designed scheme in Bishopsgate areaand the 945 ft Pinnacle will be one of London’s tallesttowers. It will have 63 floors and around 1m ft² of officespace. At the start of 2008 privately-owned Sellar PropertyGroup defied the critics and the credit crunch to securefunding for their enormous London Bridge Shard concept.It is a project with which they have become synonymousand began with the fractious partnership with formerdevelopment partners Simon Halabi and CLS Holdings,which became immersed in lawsuits and an expensive andlong-drawn-out public planning inquiry.The entire 2m ft² scheme was almost derailed when

Sellar attempted to secure funding just at the moment theworld’s credit markets plunged into crisis. But in JanuarySellar clinched backing from a consortium of four Qataribanks (Qatar National Bank, Q-Invest, Barwa Internationaland the Qatar Islamic Bank) to bankroll the ambitiousRenzo Piano-designed scheme.Four Qatari banks snappedup 80% of the Shard's development rights at a verycompetitive price of less than £100m. However, to securethe deal Sellar had to reduce its holding of developmentrights from one third to 20%. Government-ownedTransport for London is the key tenant in a 200,000 ft²office pre-let on an initial £38/ft², rising to £42/ft² oncompletion. It accounts for about a third of the initial officeprovision. However, Sellar was unable to retain accountantPricewaterhouseCoopers, the original tenant at SouthwarkTowers, which will make way for the Shard, and had to pay£70m to buy in the long lease.With huge schemes still getting the green light the City’s

demise it not yet set in stone. Despite conjecture aboutwhether the current crisis will weaken the City, London sits inthemost opportunistic time zone to serve both theAsia PacificandNorthAmericanmarkets.Moreover, London is one of thefew global cities whose population is forecast to continue togrow and has an infrastructure which is thousands of yearsold,” stresses JLL’s Hawkins. “Cities are about people andtalent.While talent can be attracted by financial rewards, therewill always be a significant element of the employmentmarket that is driven by a wider more nebulous concept,namely quality of life for family, schools and culture, all ofwhich London has in spades.



EUROPEA

NTRADINGSTA

TISTICS

THE FIDESSA FRAGMENTATION INDEX (FFI)The Fidessa Fragmentation Index (FFI) was designed to provide the trading community with an accurate, unbiasedmeasurement of the state of liquidity fragmentation across the order driven markets in Europe. Liquidity is fragmentingrapidly as new MTFs have unveiled a range of low cost alternative trading platforms. It is essential for both the buy and thesell side to understand how different stocks are fragmenting across the new venues. To make it easy to measure andcompare fragmentation across Europe, the Fragmentation Index provides a single number to show how a stock or index isfragmenting. It is calculated using proven mathematical principles and shows the average number of venues that should bevisited to achieve best execution when completing an order. An FFI value of 1 therefore means that the stock is still tradedat a primary exchange. An FFI value of 2 or more shows that the stock has been fragmented significantly and can no longerbe regarded as having a primary exchange. The FFI is calculated daily across all the constituents of the major Europeanindices; which illustrates how many stocks are fragmenting and the rate at which they are doing so.

Electronic order book trades in major stocks:April through November 2008 (Europe only)

Apr May Jun Jul Aug Sep Oct Nov

BTE/BATS 12,912,601 1,692,679,055

CIX/Chi-X 37,304,564,510 37,670,297,814 50,543,504,106 69,784,319,667 65,485,105,599 100,401,073,369 106,153,062,152 55,474,806,309

CPH/Copenhagen 4,706,051,470 5,630,036,158 5,036,109,648 6,845,034,577 6,715,541,919 9,088,419,945 9,799,125,787 5,627,172,892

ENA/Amsterdam 54,969,452,411 44,058,608,934 53,130,208,269 58,889,709,527 40,078,363,113 62,969,948,029 58,477,575,182 29,515,979,897

ENB/Brussels 10,873,940,327 10,035,942,732 11,266,781,699 11,264,584,729 7,769,551,527 12,362,582,317 10,689,261,202 5,618,466,860

ENL/Lisbon 4,835,970,481 4,053,264,202 4,289,780,382 5,217,860,359 3,265,459,550 4,358,621,402 4,105,636,725 2,613,601,564

ENX/Paris 113,356,288,859 98,370,505,430 118,794,877,669 130,727,562,834 89,561,950,040 143,845,030,869 158,687,540,849 83,259,044,929

GER/Xetra 119,047,141,851 100,116,783,024 117,572,355,884 138,538,693,267 96,074,671,382 171,318,595,178 206,777,148,040 86,619,580,417

HEL/Helsinki 21,258,871,334 14,474,306,434 15,704,074,093 16,983,014,044 11,476,253,210 18,654,125,589 19,248,238,567 10,391,280,842

LSE/London 188,767,416,200 171,362,331,104 198,850,156,278 228,447,427,572 154,886,443,195 240,104,147,083 218,235,697,409 128,535,134,938

MAD/Madrid 72,167,290,723 59,767,720,389 73,739,528,010 76,936,873,296 44,029,717,439 79,041,830,393 86,557,745,208 47,772,645,094

MIL/Milan 88,069,977,469 115,732,058,029 76,999,997,645 68,998,216,420 47,007,014,009 103,999,753,619 69,520,744,329 40,577,825,970

NEU/Nasdaq-OMX 17,962 45,339,983 138,799,631

STO/Stockholm 41,237,977,314 31,944,689,500 28,218,322,073 28,711,580,518 22,502,159,413 35,401,145,511 34,318,445,867 20,077,565,709

TRQ/Turquoise 311,082,282 17,716,364,835 27,088,688,572 19,577,155,245

VTX/SWX 70,145,373,130 55,750,343,806 67,560,353,571 72,309,962,390 48,685,822,760 79,997,213,817 86,469,471,856 45,647,116,803

Grand Total 826,740,386,972 749,478,220,996 822,387,304,850 914,539,760,442 638,420,599,362 1,080,717,983,703 1,099,954,393,992 584,468,357,214

%Market share in electronic order book trades in major stocks:April through November 2008 (Europe only)

Apr May Jun Jul Aug Sep Oct Nov

BTE/BATS 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.29%

CIX/Chi-X 4.51% 5.03% 6.15% 7.63% 10.26% 9.29% 9.65% 9.49%

CPH/Copenhagen 0.57% 0.75% 0.61% 0.75% 1.05% 0.84% 0.89% 0.96%

ENA/Amsterdam 6.65% 5.88% 6.46% 6.44% 6.28% 5.83% 5.32% 5.05%

ENB/Brussels 1.32% 1.34% 1.37% 1.23% 1.22% 1.14% 0.97% 0.96%

ENL/Lisbon 0.58% 0.54% 0.52% 0.57% 0.51% 0.40% 0.37% 0.45%

ENX/Paris 13.71% 13.13% 14.45% 14.29% 14.03% 13.31% 14.43% 14.25%

GER/Xetra 14.40% 13.36% 14.30% 15.15% 15.05% 15.85% 18.80% 14.82%

HEL/Helsinki 2.57% 1.93% 1.91% 1.86% 1.80% 1.73% 1.75% 1.78%

LSE/London 22.83% 22.86% 24.18% 24.98% 24.26% 22.22% 19.84% 21.99%

MAD/Madrid 8.73% 7.97% 8.97% 8.41% 6.90% 7.31% 7.87% 8.17%

MIL/Milan 10.65% 15.44% 9.36% 7.54% 7.36% 9.62% 6.32% 6.94%

NEU/Nasdaq-OMX 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.02%

STO/Stockholm 4.99% 4.26% 3.43% 3.14% 3.52% 3.28% 3.12% 3.44%

TRQ/Turquoise 0.00% 0.00% 0.00% 0.00% 0.05% 1.64% 2.46% 3.35%

VTX/SWX 8.48% 7.44% 8.22% 7.91% 7.63% 7.40% 7.86% 7.81%

Grand Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%



TRADING DATA FORMID DECEMBER 2008 (EUROPE ONLY)

� BATS 1,692,679,055

� Chi-X 55,474,806,309

� Copenhagen 5,627,172,892

� Amsterdam 29,515,979,897

� Brussels 5,618,466,860

� Lisbon 2,613,601,564

� Paris 83,259,044,929

� Frankfurt N/A

� Xetra 86,619,580,417

� Helsinki 10,391,280,842

� London 128,535,134,938

� Madrid 47,772,645,094

� Milan 40,577,825,970

� Nasdaq-OMX 138,799,631

� Stockholm 20,077,565,709

� Turquoise 19,577,155,245

� SWX 45,647,116,803

Index market share by venue as of 16thDecember 2008

Venue turnover on the16th December 2008

Venue Trades Turnover Share

€ 000's %

London 568,413 4,251,708 20.11%

Xetra 163,028 3,273,703 15.49%

Paris 284,185 3,026,720 14.32%

Chi-X 330,286 1,929,602 9.13%

Madrid 89,375 1,798,618 8.51%

SWX 92,050 1,754,416 8.30%

Milan 117,759 1,234,710 5.84%

Turquoise 148,958 1,046,458 4.95%

Amsterdam 102,796 1,018,204 4.82%

Stockholm 56,901 742,664 3.51%

Helsinki 35,489 368,062 1.74%

Brussels 40,710 272,433 1.29%

Copenhagen 14,224 164,686 0.78%

BATS 37,436 164,267 0.78%

Lisbon 14,957 78,734 0.37%

Nasdaq OMX 2,706 12,893 0.06%

Primary Alternative Venues

Index Venue Share Chi-X Turquoise Nasdaq OMX BATS Copen. Amst. Paris Xetra Helsinki

AEX Amsterdam 78.56% 13.67% 6.35% 0.03% 0.74% 1 0.28%

BEL 20 Brussels 94.46% 3.99% 1.44% 0.02% 0.06% 1

CAC 40 Paris 81.24% 11.76% 5.54% 0.05% 0.84% 1 0.35%

DAX Xetra 83.35% 9.71% 4.87% 0.04% 0.64% 1 0.03%

FTSE 100 London 75.42% 14.66% 7.96% 0.14% 1.81%

FTSE 250 London 89.03% 9.89% 0.05% 0.14% 0.89%

IBEX 35 Madrid 99.84% 0.04%

MIB 30 Milan 94.25% 2.37% 2.90% 0.02% 0.19% 1 1 0.12%

NORDIC 40 Stockholm 54.55% 3.06% 2.44% 0.06% 0.01% 12.10% 1 0.68% 27.03%

PSI 20 Lisbon 99.23% 0.77%

SMI SWX 91.33% 3.57% 5.06% 0.02% 0.01%

Index Market Share by Venue as of 16th December 2008

COMMENTARYTurquoise achieved over 10% market share in four FTSE 100 stocks by early December (Wolsey, Tesco, Drax and Kingfisher).Interestingly, Chi-X had a good sliceof these stocks too and so it looks like the first hard evidence is emerging that someFTSE 100 stocks will fragment substantially over multiple MTFs. Most significant was that nearly 40% of Kingfisher (FFI 2.17)was traded away from the primary exchange on alternative MTFs. This is good news for new venues like BATS and NasdaqOMX as it seems to indicate that there is no defined limit yet as to how far a stock will fragment away from its primarymarket. Some observers thought that the new MTFs would be crabbling over the same amount of “alternative” liquidity. Infact, it seems that the opposite is the case and that, as more alternative venues launch, then more and more liquidity willdivert to the new venues. The bigger question, though, concerns viability. Just because an alternative venue can attractmarket share in some stocks there’s no guarantee that it can actually make money. Nasdaq is extending its net zero pricingmodel in “its determination to attract liquidity”. While this is to be applauded, new venues need to understand why somestocks fragment more than others and focus on these. History shows that there are no winners in wars of attrition. InFidessa's view it is far better to find a niche and expand than it is to attack on all fronts.

All data © Fidessa Group plc.All opinions and data here are entirely the responsibility of Fidessa Group plc. If you require more information onthe data provided here or about FFI, please contact: [email protected].



EXCH

AN

GE

TRAD

EDFU

ND

S:LISTING

&D

ISTRIBUTIO

NA

SO

FEN

DQ

32008

Source:ETFResearch

&Im

plementation

StrategyTeam

,BarclaysG

lobalInvestors,Bloomberg.

ETF Listings as of End November 2008

Brazil

PListings:

1T

Listings:1

Managers:

1AU

M:

US$0.71

Bn

SloveniaP

Listings:1

TListings:

1M

anagers:1

AUM

:U

S$0.01Bn

SouthAfrica

PListings:

17T

Listings:17

Managers:

5AU

M:

US$1.14

Bn

IndonesiaP

Listings:1

TListings:

1M

anagers:1

AUM

:U

S$0.00Bn

Australia

PListings:

4T

Listings:20

Managers:

2AU

M:

US$0.99

Bn

New

ZealandP

Listings:6

TListings:

6M

anagers:2

AUM

:U

S$0.26Bn

ThailandP

Listings:2

TListings:

2M

anagers:2

AUM

:U

S$0.06Bn

United

StatesP

Listings:688

TListings:

688M

anagers:19

AUM:

US$443.83Bn

Taiwan

PListings:

11T

Listings:11

Managers:

2AU

M:

US$1.29

Bn

Mexico

PListings:

5T

Listings:120

Managers:

2AU

M:

US$4.16

Bn

Hong

Kong

PListings:

11T

Listings:23

Managers:

5AU

M:

US$12.66

Bn

Canada

PListings:

77T

Listings:77

Managers:

3AU

M:

US$12.97

Bn

SingaporeP

Listings:5

TListings:

22M

anagers:5

AUM

:U

S$0.81Bn

FranceP

Listings:159

TListings:

296M

anagers:7

AUM

:U

S$34.68Bn

Malaysia

PListings:

3T

Listings:3

Managers:

2AU

M:

US$0.28

Bn

Switzerland

PListings:

21T

Listings:145

Managers:

5AU

M:

US$9.56

Bn

IcelandP

Listings:1

TListings:

1M

anagers:1

AUM

:U

S$0.04Bn

SpainP

Listings:9

TListings:

24M

anagers:2

AUM

:U

S$1.96Bn

Germ

anyP

Listings:230

TListings:

375M

anagers:8

AUM

:U

S$53.04Bn

China

PListings:

5T

Listings:5

Managers:

4AU

M:

US$2.22

Bn

SouthKorea

PListings:

36T

Listings:36

Managers:

6AU

M:

US$1.81

Bn

JapanP

Listings:61

TListings:

63M

anagers:5

AUM

:U

S$24.66Bn

Austria

PListings:

1T

Listings:21

Managers:

1AU

M:

US$0.04

Bn

IrelandP

Listings:1

TListings:

1M

anagers:1

AUM

:U

S$0.03Bn

United

Kingdom

PListings:

118T

Listings:260

Managers:

6AU

M:

US$22.51

Bn

Belgium

PListings:

1T

Listings:1

Managers:

1AU

M:

US$0.04

Bn

Netherlands

PListings:

14T

Listings:70

Managers:

3AU

M:

US$0.23

Bn

Norw

ayP

Listings:6

TListings:

6M

anagers:2

AUM

:U

S$0.25Bn

Sweden

PListings:

7T

Listings:7

Managers:

1AU

M:

US$1.28

Bn

FinlandP

Listings:2

TListings:

2M

anagers:2

AUM

:U

S$0.10Bn

Hungary

PListings:

1T

Listings:1

Managers:

1AU

M:

US$0.01

Bn

ItalyP

Listings:15

TListings:

255M

anagers:5

AUM

:U

S$0.92Bn

TurkeyP

Listings:6

TListings:

6M

anagers:2

AUM

:U

S$0.12Bn

IndiaP

Listings:11

TListings:

11M

anagers:6

AUM

:U

S$1.12Bn

Portugal

PListings:

1T

Listings:1

Managers:

1AU

M:

US$0.00

Bn

Greece

PListings:

1T

Listings:1

Managers:

1AU

M:

US$0.07Bn

ETF Data 31.qxd:. 6/1/09 16:34 Page 88


Ass

ets

USD

Bill

ion

s

ETF AssetsTotal

EquityAssets

IncomeAssets

CommodityAssets

AssetsTotal # ETFs # ETPs

1993 $0.8 $0.8 31994 $1.1 $1.1 31995 $2.3 $2.3 41996 $5.3 $5.3 211997 $8.2 $8.2 211998 $17.6 $17.6 311999 $39.6 $39.6 $1.98 33 22000 $74.3 $74.3 $0.1 $5.02 92 142001 $104.8 $104.7 $0.1 $0.0 $3.80 202 172002 $141.6 $137.5 $4.0 $0.1 $4.00 280 172003 $212.0 $205.9 $5.8 $0.3 $6.06 282 172004 $309.8 $286.3 $23.1 $0.5 $8.86 336 182005 $412.1 $389.6 $21.3 $1.2 $15.6 461 232006 $565.6 $526.5 $35.8 $3.4 $28.1 714 702007 $796.7 $729.9 $59.9 $6.3 $45.9 1171 134

Sep-08 $764.1 $664.1 $90.8 $9.2 $58.3 1499 268Oct-08 $643.0 $548.6 $87.0 $7.2 $46.2 1502 269Nov-08 $633.8 $534.9 $90.0 $8.5 $48.2 1,539 2742009-F $1,0002011-F $2,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Sep-08 Oct-08 Nov-08 2009-F 2011-F

ETF Assets Total $0.8 $1.1 $2.3 $5.3 $8.2 $17.6 $39.6 $74.3 $104.8 $141.6 $212.0 $309.8 $412.1 $565.6 $796.7 $764.1 $643.0 $633.8 $1,000 $2,000

ETF Commodity Assets $0.0 $0.1 $0.3 $0.5 $1.2 $3.4 $6.3 $9.2 $7.2 $8.5

ETF Fixed Income Assets $0.1 $0.1 $4.0 $5.8 $23.1 $21.3 $35.8 $59.9 $90.8 $87.0 $90.0

ETF Equity Assets $0.8 $1.1 $2.3 $5.3 $8.2 $17.6 $39.6 $74.3 $104.7 $137.5 $205.9 $286.3 $389.6 $526.5 $729.9 $664.1 $548.6 $534.9

ETP Assets Total $1.98 $5.02 $3.80 $4.00 $6.06 $8.86 $15.6 $28.1 $45.9 $58.3 $46.2 $48.2

# ETPs 2 14 17 17 17 18 23 70 134 268 269 274

# ETFs 3 3 4 21 21 31 33 92 202 280 282 336 461 714 1171 1499 1502 1,539

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200 Worldwide ETF and ETP Growth

Source: ETF Research & Implementation Strategy Team, Barclays Global Investors, Bloomberg.

ETF Listings by Exchange as of End November 2008# Primary ETF # Total ETF AUM 20 Day ADV

Region Country Exchange Listings Listings (US$Bn) (US$Mn)Asia Pacific 154 194 53.07 849.81

Australia Australian Securities Exchange 4 20 0.99 12.72China Shanghai Stock Exchange 3 3 1.02 183.98

Shenzhen Stock Exchange 2 2 1.19 22.78Hong Kong Hong Kong Stock Exchange 11 23 12.66 275.42India Bombay Stock Exchange 2 2 0.38 0.00

National Stock Exchange 9 9 0.74 2.47Indonesia Jakarta Stock Exchange 1 1 0.00 0.00Japan Osaka Securities Exchange 6 6 8.53 122.11

Tokyo Stock Exchange 55 57 16.13 94.41Malaysia Bursa Malaysia Securities Berhad 3 3 0.28 0.01New Zealand New Zealand Stock Exchange 6 6 0.26 0.13Singapore Singapore Stock Exchange 5 22 0.81 8.09South Korea Korea Stock Exchange 36 36 1.81 61.71Taiwan Taiwan Stock Exchange 11 11 1.29 20.77Thailand Stock Exchange of Thailand 2 2 0.06 0.70

Americas 760 888 564.31 124,009.46Brazil Sao Paulo 1 1 0.71 1.91Canada Toronto Stock Exchange 77 77 12.97 683.01Mexico Mexican Stock Exchange 5 120 4.16 163.57US NYSE Alternext US 5 5 82.33 450.59

BATS 0 0 0.00 14,882.18Boston 0 0 0.00 0.00CBOE 0 0 0.00 956.48Chicago 0 0 0.00 2,866.31Cincinnati 0 0 0.00 638.21ISE 0 0 0.00 486.07FINRA ADF 0 0 0.00 19,183.41NASDAQ 46 46 15.20 45,199.90NYSE 0 0 0.00 0.00NYSE Arca 637 637 346.30 29,368.02Philadelphia 0 0 0.00 0.00

EMEA (Europe, Middle East and Africa) 585 1,412 146.69 2,404.20Austria Wiener Borse 1 21 0.03 0.76Belgium Euronext Brussels 1 1 0.04 0.45Finland Helsinki Stock Exchange 2 2 0.10 2.95France Euronext Paris 159 296 34.68 349.24Germany Deutsche Boerse 230 375 53.04 666.48Greece Athens Exchange 1 1 0.07 0.18Hungary Budapest Stock Exchange 1 1 0.01 0.20Iceland Iceland Stock Exchange 1 1 0.00 0.00Ireland Irish Stock Exchange 1 1 0.03 0.25Italy Borsa Italiana 15 255 0.92 216.16Netherlands Euronext Amsterdam 14 70 0.23 28.81Norway Oslo Stock Exchange 6 6 0.25 63.34Portugal Euronext Lisbon 1 1 0.00 0.00Slovenia Ljubljana Stock Exchange 1 1 0.01 0.00South Africa Johannesburg Stock Exchange 17 17 1.14 7.08Spain Bolsa de Madrid 9 24 1.96 13.54Sweden Stockholm Stock Exchange 7 7 1.28 106.40Switzerland SIX Swiss Exchange 21 126 9.56 114.19

SWX Europe 0 19 0.00 6.86Turkey Istanbul Stock Exchange 6 6 0.12 20.84United Kingdom London Stock Exchange 118 260 22.51 175.94

Grand Total 1,539 2,580 633.79 117,458.62

Source: ETF Research & Implementation Strategy Team, Barclays Global Investors, Bloomberg.

ETF Data 31.qxd:. 6/1/09 16:34 Page 89


EXCH

AN

GE

TRAD

EDFU

ND

S:LISTING

&D

ISTRIBUTIO

NA

SO

FEN

DQ

32008

Top 25 ETF providers around the world ranked by AUM, as of end November 2008Nov–08 Year to Date Change

AUM %AUM % # % Change AUM Market

Manager # ETFs (USD Bn) Total Planned # ETFs ETFs (USD Bn) % Share

iShares 356 $288.44 45.5% 13 35 10.9% -$114.17 -28.4% -5.0%State Street Global Advisors 98 $129.18 20.4% 33 15 18.1% -$23.21 -15.2% 1.3%Vanguard 38 $40.23 6.3% 0 1 2.7% -$1.74 -4.1% 1.1%Lyxor Asset Management 113 $29.97 4.7% 2 26 29.9% -$2.10 -6.5% 0.7%PowerShares 142 $21.42 3.4% 41 28 24.6% -$16.60 -43.7% -1.4%ProShares 64 $20.89 3.3% 90 6 10.3% $11.19 115.4% 2.1%db x-trackers 99 $20.04 3.2% 0 48 94.1% $9.22 85.2% 1.8%Nomura Asset Management 29 $13.40 2.1% 0 22 314.3% -$4.04 -23.2% -0.1%Bank of New York 1 $5.90 0.9% 0 0 0.0% -$4.25 -41.8% -0.3%Nikko Asset Management 8 $5.55 0.9% 0 6 300.0% -$3.53 -38.9% -0.3%Daiwa Asset Management 23 $5.45 0.9% 1 18 360.0% -$2.18 -28.6% -0.1%Credit Suisse Asset Management 8 $5.31 0.8% 0 0 0.0% $0.34 6.8% 0.2%AXA IM/BNP AM 53 $4.06 0.6% 8 23 76.7% -$2.63 -39.3% -0.2%Van Eck Associates Corp 16 $3.76 0.6% 13 8 100.0% $0.27 7.7% 0.2%Nacional Financiera 1 $3.38 0.5% 0 0 0.0% -$0.36 -9.7% 0.1%Zurich Cantonal Bank 4 $2.97 0.5% 0 0 0.0% $1.93 184.5% 0.3%WisdomTree Investments 42 $2.79 0.4% 37 3 7.7% -$1.73 -38.2% -0.1%Hang Seng Investment Management 3 $2.69 0.4% 0 0 0.0% -$2.02 -42.9% -0.2%ETFlab Investment 10 $2.23 0.4% 0 10 100.0% $2.23 100.0% 0.4%BBVA Asset Management 8 $1.90 0.3% 0 1 14.3% $0.72 60.6% 0.2%Commerzbank 28 $1.85 0.3% 0 28 100.0% $1.85 100.0% 0.3%Rydex 31 $1.71 0.3% 82 8 34.8% -$0.94 -35.6% -0.1%XACT Fonder 11 $1.44 0.2% 0 2 22.2% -$1.07 -42.7% -0.1%Claymore Securities 54 $1.53 0.2% 10 4 8.0% -$0.93 -37.9% -0.1%UBS Global Asset Management 8 $1.27 0.2% 0 -1 -11.1% -$0.88 -40.9% -0.1%

Global ETF Assets by Type of Exposure, as at end November 2008Total AUM

Region of Exposure # ETFS Listings (US$bn) % TOTAL

North America - Equity 467 615 $311.58 49.2%Fixed Income - All (ex-Cash) 149 266 $79.35 12.5%Europe - Equity 328 669 $67.23 10.6%Emerging Markets - Equity 220 436 $61.83 9.8%Asia Pacific - Equity 128 204 $47.58 7.5%Global (ex-US) - Equity 58 61 $37.01 5.8%Fixed Income - Cash (Money Market) 14 24 $10.66 1.7%Global - Equity 96 197 $9.71 1.5%Commodities 48 77 $8.47 1.3%Mixed (Equity & Fixed Income) 25 25 $0.23 0.0%Currency 6 6 $0.17 0.0%Total 1,539 2,580 $633.83 100.0%

Source: ETF Research & Implementation Strategy, Barclays Global Investors, Bloomberg

Source: ETF Research & Implementation Strategy, Barclays Global Investors, Bloomberg

Fixed Income -Cash (Money Market)

1.7%

Global - Equity1.5% Commodities

1.3%Mixed (Equity & Fixed Income)

0%Currency0%

North Americas -Equity49.2%

Fixed Income - All (ex-Cash)12.5%

Europe - Equity10.6%

Emerging Markets- Equity9.8%

Asia Pacific -Equity7.5%

Global (ex-US) -Equity5.8%

NOTESAt the end of November 2008 the ETFs industry had 1,539 ETFs with 2,580 listings, assets of $633.83 billion, managed by 86 managers on 42 exchanges around theworld. Assets fell by 20.4%, which is less than the 43.80% fall in the MSCI World index in USD terms. The number of ETFs has increased 31% YTD. The average dailytrading volume in US dollar has increased by 94% to US$117.5 billion YTD.

In the first ten months of 2008 we have seen investors move assets into ETFs providing exposure to fixed income and commodity indices while the assets in ETFstracking equity indices, especially global (ex US) and emerging market indices, have declined.

European ETF AUM has decreased by 2.8% while the MSCI Europe Index is down 50.56% YTD. In Europe net sales of mutual funds(excluding ETFs) were minus $505.7 million while net sales of ETFs domiciled in Europe were positive $61.6 million during the first10 months of 2008 according to Lipper Feri.

Important InformationSource: ETF Research & Implementation Strategy Team, Barclays Global Investors, Various ETF Managers, Bloomberg. Please contact Deborah Fuhr on +44 20 7668 4276 or [email protected] if you have any questions or comments.

This communication is being made available to persons who are investment professionals as that term is defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005 orits equivalent under any other applicable law or regulation in the relevant jurisdiction. It is directed at persons who have professional experience in matters relating to investments. These materials are notintended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to local law or regulation.

Although Barclays Global Investors Limited (“BGIL”) endeavours to update and ensure the accuracy of the content of this document, BGIL does not warrant or guarantee its accuracy or correctness. Despite theexercise of all due care, some information in this document may have changed since publication. Investors should obtain and read the ETF prospectuses from ETF managers and confirm any relevant informationwith ETF managers before investing. Neither BGIL, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arisingfrom any use of this publication or its contents.

© 2008 Barclays Global Investors. All rights reserved.

ETF Data 31.qxd:. 6/1/09 16:34 Page 90


SECURITIES

LENDINGDATAbyDATAEXPLO

RERS

KEY PERFORMANCE EXPLORER STATISTICS as of 26th November 2008The market reported 1,948,937securities transactions, with 188,268 securities available for lending worth €6,928bnthrough November. Some 33,801 securities were out on loan worth €1,451bn.

The following tables show the scale of activity in the market:

The total income generated by lending a security can be split in two; the amount generated from the fee charged, andthe amount generated by reinvesting any cash which is received back as collateral. The following tables detail thesecurities generating the largest income through a combination of these two components:

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

EquitiesTop 10 Securities by Total Return

Rank Stock description

1 Sears Holdings Corp

2 Osiris Therapeutics Inc

3 Life Partners Holdings Corp

4 Usana Health Sciences Inc

5 Greenhill & Co Inc

6 Cal-Maine Foods Inc

7 Mediobanca - Banca di Credito Finanziario Spa

8 McClatchy Co

9 Under Armour Inc

10 Nutrisystem Inc

Corporate BondsTop 10 Securities by Total Return


1 Barclays Bank Plc (5.926% undated)

2 Morgan Stanley (3.875% 15 Jan 2009)

3 Freescale Semiconductor Inc (10.125% 15 Dec 2016)

4 ING Groep NV (8% undated)

5 Parex banka AS (5.625% 05 May 2011)

6 MGM Mirage (13% 15 Nov 2013)

7 Goldman Sachs Group Inc (3.875% 15 Jan 2009)

8 Torchmark Corp (6.375% 15 Jun 2016)

9 Voto-Votorantim Overseas Trading Ops (7.75% 24 Jun 2020)

10 Colonial Pipeline Co 7.63% 15 Apr 2032)

EquitiesTop 10 by Total Balance


1 Total SA

2 GDF Suez SA

3 Volkswagen AG

4 Bayer AG

5 Exxon Mobil Corp

6 Siemens AG

7 HSBC Holdings Plc

8 Telefonica SA

9 Eon AG

10 Carrefour SA

Corporate BondsTop 10 by Total Balance


1 Goldfish Master Issuer BV (4.721% 28 Nov 2099)

2 Canada Housing Trust No 1 (4.55 % 15 Dec 2012)

3 European Investment Bank (6% 07 Dec 2028)

4 Canada Housing Trust No 1 (3.6 % 15 Jun 2013)

5 Canada Housing Trust No 1 (3.95 % 15 Dec 2011)

6 European Investment Bank (5.625% 07 Jun 2032)

7 Canada Housing Trust No 1 (4.6% 15 Sep 2011)

8 Cassa Depositi e Prestiti Spa (3.75% 31 Jan 2012)

9 KfW International Finance Inc (6% 07 Dec 2028)

10 Cassa Depositi e Prestiti Spa (3% 31 Jan 2013)

Equities by FeeTop 10 by Balance >$10m <$100m


1 Osiris Therapeutics Inc

2 Life Partners Holdings Corp

3 Usana Health Sciences Inc

4 Cal-Maine Foods Inc

5 McClatchy Co

6 Nutrisystem Inc

7 Lululemon Athletica Inc (B23FN39)

8 Redwood Trust Inc

9 Lululemon Athletica Inc (B23N515)

10 Arthrocare Corp

Corporate Bonds by FeeTop 10 by Balance >$10m <$100m


1 Freescale Semiconductor Inc (10.125% 15 Dec 2016)

2 ING Groep NV (8% undated)

3 Parex banka AS (5.625% 05 May 2011)

4 Goldman Sachs Group Inc (3.875% 15 Jan 2009)

5 Smurfit Kappa Funding Plc (7.75% 01 Apr 2015)

6 Americredit Corp (8.5% 01 Jul 2015)

7 Neiman Marcus Group Inc (10.375% 15 Oct 2015)

8 Wharf Finance (BVI) Ltd (6.125% 06 Nov 2017)

9 Compagnie de Financement Foncier (6.125% 23 Feb 2015)

10 MGM Mirage (8.375% 01 Feb 2011)

Disclaimer and copyright notice

The above data is provided by Data Explorers Limited and is underpinned by source data provided by Performance Explorer participants and also market data.However, because of the possibility of human or mechanical errors, neither Data Explorers Limited nor the providers of the source or market data can guarantee theaccuracy, adequacy, or completeness of the information. This summary contains information that is confidential, and is the property of Data Explorers Limited. Itmay not be copied, published or used, in whole or in part, for any purpose other than expressly authorised by the owners.

[email protected]

www.performanceexplorer.com © Copyright Data Explorers Limited September 2008



MA

RK

ETD

ATA

BY

FTSER

ESEAR

CH

Global Market Indices5-Year Total Return Performance Graph

Table of Total ReturnsIndex Name Currency Constituents Value 3 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div

Yld (%)

FTSE All-World Indices

FTSE All-World Index USD 2,869 172.36 -34.3 -42.5 -44.5 -43.9 3.98

FTSE World Index USD 2,420 409.20 -33.8 -41.8 -43.8 -43.0 3.99

FTSE Developed Index USD 1,997 166.69 -33.0 -40.6 -43.0 -42.2 3.94

FTSE Emerging Index USD 872 323.94 -44.8 -55.8 -56.0 -56.2 4.38

FTSE Advanced Emerging Index USD 423 299.21 -45.0 -56.2 -53.9 -53.7 4.83

FTSE Secondary Emerging Index USD 449 384.26 -44.4 -55.1 -58.5 -59.3 3.72

FTSE Global Equity Indices

FTSE Global All Cap Index USD 7,768 272.63 -35.1 -43.1 -45.1 -44.5 3.91

FTSE Developed All Cap Index USD 6,005 265.59 -33.9 -41.4 -43.6 -42.8 3.86

FTSE Emerging All Cap Index USD 1,763 422.69 -45.3 -56.3 -57.1 -57.4 4.42

FTSE Advanced Emerging All Cap Index USD 919 397.30 -45.5 -56.7 -54.9 -54.5 4.86

FTSE Secondary Emerging Index USD 844 481.76 -44.9 -55.6 -59.8 -60.7 3.78

Fixed Income

FTSE Global Government Bond Index USD 713 167.78 1.8 0.4 5.4 6.0 2.75

Real Estate

FTSE EPRA/NAREIT Global Index USD 282 1591.79 -44.0 -51.3 -54.8 -52.3 7.70

FTSE EPRA/NAREIT Global REITs Index USD 185 555.00 -45.2 -50.5 -52.1 -49.7 9.32

FTSE EPRA/NAREIT Global Dividend+ Index USD 249 1107.40 -45.2 -51.0 -53.6 -51.7 8.87

FTSE EPRA/NAREIT Global Rental Index USD 230 624.42 -44.8 -50.0 -51.7 -49.2 8.79

FTSE EPRA/NAREIT Global Non-Rental Index USD 52 653.44 -41.7 -54.5 -61.6 -59.2 4.51

SRI

FTSE4Good Global Index USD 684 4488.90 -33.4 -41.1 -44.3 -43.4 4.57

FTSE4Good Global 100 Index USD 102 3970.79 -31.9 -39.1 -43.2 -42.3 4.67

Investment Strategy

FTSE GWA Developed Index USD 1,997 2418.89 -35.2 -43.2 -46.2 -45.3 4.86

FTSE RAFI Developed ex US 1000 Index USD 1,002 4076.99 -35.4 -44.8 -47.6 -46.7 5.44

FTSE RAFI Emerging Index USD 358 3516.68 -41.5 -52.4 -52.5 -52.5 5.07

0

100

200

300

400

500

600

0

100

200

300

400

500

600

0

100

200

300

400

500

600

0

100

200

300

400

500

600

0

100

200

300

400

500

600

0

100

200

300

400

500

600

0

100

200

300

400

500

600 FTSE All-World Index

FTSE Emerging Index

FTSE Global Government Bond Index

FTSE EPRA/NAREIT Global Index

FTSE4Good Global Index

FTSE GWA Developed Index

FTSE RAFI Emerging Index

May-06

Nov-06

May-05

Nov-05

Nov-04

Nov-08

Inde

xLe

velR

ebas

ed(2

8N

ovem

ber2

003=

100)

May-04

Nov-03

May-08

May-07

Nov-07

MARKET REPORTS 31.qxd:. 18/12/08 17:29 Page 92


Americas Market Indices5-Year Total Return Performance Graph


Yld (%)


FTSE Americas Index USD 846 555.35 -31.7 -37.8 -39.1 -38.8 3.11

FTSE North America Index USD 708 617.74 -30.7 -36.3 -38.3 -38.0 3.06

FTSE Latin America Index USD 138 559.44 -48.4 -59.7 -51.7 -52.3 4.09


FTSE Americas All Cap Index USD 2,651 250.08 -32.8 -38.8 -39.7 -39.6 3.01

FTSE North America All Cap Index USD 2,448 243.69 -31.9 -37.4 -39.1 -38.8 2.97

FTSE Latin America All Cap Index USD 203 777.88 -48.7 -59.9 -52.2 -52.7 4.09

Fixed Income

FTSE Americas Government Bond Index USD 151 183.01 4.0 6.2 8.1 7.7 2.98

FTSE USA Government Bond Index USD 134 180.29 4.9 7.6 9.4 9.2 2.94

Real Estate

FTSE EPRA/NAREIT North America Index USD 116 1814.64 -48.7 -51.9 -51.2 -48.6 9.45

FTSE EPRA/NAREIT US Dividend+ Index USD 93 1002.83 -48.7 -51.9 -50.6 -47.9 9.74

FTSE EPRA/NAREIT North America Rental Index USD 113 619.77 -47.0 -49.7 -48.9 -46.1 9.13

FTSE EPRA/NAREIT North America Non-Rental Index USD 3 123.29 -87.2 -90.7 -90.5 -90.2 40.42

FTSE NAREIT Composite Index USD 129 1814.81 -45.8 -49.7 -48.8 -46.4 10.42

FTSE NAREIT Equity REITs Index USD 107 4379.55 -47.5 -50.5 -49.2 -46.5 9.39

SRI

FTSE4Good US Index USD 149 3669.69 -30.2 -34.4 -39.8 -39.1 3.40

FTSE4Good US 100 Index USD 101 3543.85 -29.9 -34.2 -39.7 -39.0 3.42

Investment Strategy

FTSE GWA US Index USD 652 2260.26 -32.1 -38.0 -41.7 -41.1 3.89

FTSE RAFI US 1000 Index USD 978 3699.30 -31.5 -37.6 -41.6 -40.9 3.84

FTSE RAFI US Mid Small 1500 Index USD 1,403 3129.12 -37.8 -40.7 -41.7 -41.5 2.65

50

100

150

200

250

300

50

100

150

200

250

300

50

100

150

200

250

300

50

100

150

200

250

300

50

100

150

200

250

300

50

100

150

200

250

300

50

100

150

200

250

300

May-06

Nov-06

May-05

Nov-05

Nov-04

Nov-08

May-04

Nov-03

May-08

May-07

Nov-07

FTSE Americas Index

FTSE Americas Government Bond Index

FTSE EPRA/NAREIT North America Index

FTSE EPRA/NAREIT US Dividend+ Index

FTSE4Good USIndex

FTSE GWA US Index

FTSE RAFI US 1000 IndexInde

xLe

velR

ebas

ed(2

8N

ovem

ber2

003=

100)


MA

RK

ETD

ATA

BY

FTSER

ESEAR

CH

Europe, Middle East & Africa Indices5-Year Total Return Performance Graph


Yld (%)


FTSE Europe Index EUR 559 177.59 -28.5 -36.2 -42.5 -41.9 5.51

FTSE Eurobloc Index EUR 2,023 98.05 -29.9 -38.3 -44.5 -44.2 4.89

FTSE Developed Europe ex UK Index EUR 382 177.64 -28.8 -36.6 -42.5 -42.0 5.93

FTSE Developed Europe Index EUR 496 176.20 -27.7 -35.0 -41.8 -41.0 5.54


FTSE Europe All Cap Index EUR 1,682 273.46 -29.5 -37.0 -43.3 -42.6 5.48

FTSE Eurobloc All Cap Index EUR 832 286.86 -30.6 -38.8 -44.9 -44.5 6.28

FTSE Developed Europe All Cap ex UK Index EUR 1,135 292.43 -29.8 -37.5 -43.3 -42.6 5.90

FTSE Developed Europe All Cap Index EUR 1,562 272.96 -28.7 -36.0 -42.6 -41.7 5.51

Region Specific

FTSE All-Share Index GBP 662 2661.82 -24.8 -29.3 -32.2 -32.4 4.67

FTSE 100 Index GBP 102 2596.43 -23.1 -27.6 -30.5 -30.8 4.60

FTSEurofirst 80 Index EUR 81 3766.95 -28.1 -36.0 -42.8 -42.8 6.53



FTSE/JSE Top 40 Index SAR 41 2131.86 -23.3 -34.1 -27.8 -24.0 4.30

FTSE/JSE All-Share Index SAR 164 2319.07 -22.4 -32.0 -27.7 -24.4 4.46

FTSE Russia IOB Index USD 15 473.14 -57.9 -71.8 -66.1 -67.5 4.26

Fixed Income

FTSE Eurozone Government Bond Index EUR 233 170.23 5.6 7.6 7.6 8.1 3.84

FTSE Pfandbrief Index EUR 409 189.74 3.7 5.0 5.0 5.3 4.57

FTSE Gilts Fixed All-Stocks Index GBP 32 2200.19 4.9 8.9 9.1 7.2 4.09

Real Estate

FTSE EPRA/NAREIT Europe Index EUR 92 1373.32 -37.6 -44.0 -49.9 -47.7 7.37

FTSE EPRA/NAREIT Europe REITs Index EUR 39 518.21 -33.6 -38.9 -44.0 -42.0 7.32

FTSE EPRA/NAREIT Europe ex UK Dividend+ Index EUR 48 1508.45 -33.9 -41.0 -42.3 -39.9 8.12

FTSE EPRA/NAREIT Europe Rental Index EUR 79 538.70 -37.1 -43.2 -48.6 -46.4 7.57

FTSE EPRA/NAREIT Europe Non-Rental Index EUR 13 373.28 -47.3 -58.3 -68.4 -66.5 2.73

SRI

FTSE4Good Europe Index EUR 273 3548.37 -26.6 -33.4 -40.8 -40.0 5.84

FTSE4Good Europe 50 Index EUR 52 3233.94 -24.6 -30.4 -38.7 -37.7 5.78

Investment Strategy

FTSE GWA Developed Europe Index EUR 496 2350.64 -30.4 -37.7 -45.0 -44.2 6.49

FTSE RAFI Europe Index EUR 512 3704.55 -28.3 -35.8 -43.5 -42.8 6.33

0

100

200

300

400

500

0

100

200

300

400

500

0

100

200

300

400

500

0

100

200

300

400

500

0

100

200

300

400

500

0

100

200

300

400

500

0

100

200

300

400

500

0

100

200

300

400

500

0

100

200

300

400

500 FTSE Europe Index

FTSE All-Share Index

FTSEurofirst 80 Index

FTSE/JSE Top 40 Index

FTSE Gilts Fixed All-Stocks Index

FTSE EPRA/NAREIT Europe Index

FTSE4Good Europe Index

FTSE GWA Developed Europe Index

FTSE RAFI Europe Index

Inde

xLe

velR

ebas

ed(2

8N

ovem

ber2

003=

100)

May-06

Nov-06

May-05

Nov-05

Nov-04

Nov-08

May-04

Now-03

May-08

May-07

Nov-07




Asia Pacific Market Indices5-Year Total Return Performance Graph


Yld (%)


FTSE Asia Pacific Index USD 1,313 181.35 -34.1 -44.8 -48.0 -46.9 3.98

FTSE Asia Pacific ex Japan Index USD 854 293.68 -41.4 -52.0 -56.1 -55.8 5.17

FTSE Japan Index USD 459 68.42 -34.1 -41.4 -45.6 -43.6 2.80


FTSE Asia Pacific All Cap Index USD 3,228 304.24 -34.4 -45.2 -48.7 -47.6 4.03

FTSE Asia Pacific All Cap ex Japan Index USD 1,953 356.45 -42.4 -53.2 -57.5 -57.3 5.30

FTSE Japan All Cap Index USD 1,275 216.57 -33.3 -40.6 -44.9 -42.8 2.78

Region Specific

FTSE/ASEAN Index USD 156 289.74 -40.1 -50.0 -50.8 -52.1 5.95

FTSE Bursa Malaysia 100 Index MYR 100 6034.65 -21.5 -31.6 -37.0 -39.8 5.10

TSEC Taiwan 50 Index TWD 50 4071.08 -36.4 -44.8 -45.2 -44.7 8.60

FTSE Xinhua All-Share Index CNY 958 4566.11 -22.1 -48.9 -59.5 -64.6 1.80

FTSE/Xinhua China 25 Index CNY 25 14497.17 -37.3 -47.1 -55.9 -53.4 3.73

Fixed Income

FTSE Asia Pacific Government Bond Index USD 255 130.93 14.1 13.3 21.7 22.3 1.41

Real Estate

FTSE EPRA/NAREIT Asia Index USD 74 1372.95 -37.3 -49.1 -57.2 -54.7 6.13

FTSE EPRA/NAREIT Asia 33 Index USD 36 932.10 -35.2 -46.0 -53.3 -50.2 9.97

FTSE EPRA/NAREIT Asia Dividend+ Index USD 63 1320.48 -40.0 -49.8 -58.3 -57.3 8.32

FTSE EPRA/NAREIT Asia Rental Index USD 38 697.13 -37.5 -46.8 -53.5 -51.2 9.17

FTSE EPRA/NAREIT Asia Non-Rental Index USD 36 721.27 -37.3 -50.7 -59.6 -56.9 3.95

Infrastructure

FTSE IDFC India Infrastructure Index IRP 96 529.89 -46.8 -56.4 -68.1 -70.9 1.17

FTSE IDFC India Infrastructure 30 Index IRP 30 572.48 -46.3 -55.6 -68.5 -71.0 1.21

SRI

FTSE4Good Japan Index JPY 190 3280.71 -35.8 -43.1 -46.1 -44.4 3.01

Shariah

FTSE SGX Shariah 100 Index USD 100 3715.16 -31.3 -42.2 -43.8 -42.4 3.79

FTSE Bursa Malaysia Hijrah Shariah Index MYR 30 7245.85 -19.9 -34.6 -37.8 -41.6 4.67

FTSE Shariah Japan 100 Index JPY 100 887.26 -36.3 -43.3 -47.6 -46.5 3.09

Investment Strategy

FTSE GWA Japan Index JPY 459 2267.31 -35.4 -42.4 -45.8 -44.0 2.97

FTSE GWA Australia Index AUD 108 3027.47 -24.6 -30.7 -40.9 -38.7 7.78

FTSE RAFI Australia Index AUD 55 4853.66 -20.4 -26.6 -35.6 -34.1 7.69

FTSE RAFI Singapore Index SGD 16 4783.35 -36.0 -41.3 -42.5 -42.9 6.54

FTSE RAFI Japan Index JPY 297 3294.52 -33.7 -40.2 -43.3 -41.9 2.87

FTSE RAFI Kaigai 1000 Index JPY 1,001 2921.38 -42.2 -47.7 -53.7 -53.4 4.97

FTSE RAFI China 50 Index HKD 49 4277.73 -34.4 -58.6 -51.2 -49.0 4.52

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200 FTSE Asia Pacific Index

FTSE/ASEAN 40 Index

FTSE/Xinhua China 25 Index

FTSE Asia Pacific Government Bond Index

FTSE EPRA/NAREIT Asia Index

FTSE IDFC India Infrastructure Index

FTSE4Good Japan Index

FTSE GWA Japan Index

FTSE RAFI Kaigai 1000 Index

Inde

xLe

velR

ebas

ed(2

8N

ovem

ber2

003=

100)

May-06

Nov-06

May-05

Nov-05

Nov-04

Nov-08

May-04

Nov-03

May-08

May-07

Nov-07



Index Reviews Jan – April 2009

Date Index Series Review Frequency/Type Effective Data Cut-off(Close of business)

06-Jan FTSE/Xinhua Index Series Quarterly review 16-Jan 22-Dec08-Jan TSEC Taiwan 50 Quarterly review 16-Jan 31-Dec08-Jan TOPIX Monthly review - additions & free

float adjustment 29-Jan 31-DecMid Jan OMX H25 Semi-annual review consitutents,

Quarterly review of number of shares 31-Jan 31-DecLate Jan/Early Feb PSI 20 Annual review 02-Mar 31-DecLate Jan/Early Feb BEL 20 Annual review 02-Mar 31-DecLate Jan/Early Feb AEX Annual review 02-Mar 31-Dec05-Feb TOPIX Monthly review - additions & free

float adjustment 26-Feb 30-Jan10-Feb Hang Seng Quarterly review 02-Mar 31-Dec13-Feb MSCI Standard Index Series Quarterly review 27-Feb 31-Jan24-Feb FTSE All-World Annual review Asia Pacific ex Japan 20-Mar 31-DecEarly Mar ATX Semi-annual review / number of shares 31-Mar 28-FebEarly Mar CAC 40 Quarterly review 20-Mar 28-FebEarly Mar S&P / TSX Quarterly review 20-Mar 27-Feb04-Mar DAX Quarterly review 20-Mar 28-Feb06-Mar S&P / MIB Semi-annual review 20-Mar 28-Feb06-Mar S&P / ASX Indices Annual / Quarterly review 20-Mar 27-Feb06-Mar TOPIX Monthly review - additions & free

float adjustment 30-Mar 27-Feb07-Mar FTSE All-World Annual review Asia Pacific ex Japan 20-Mar 11-Feb11-Mar FTSE Asiatop / Asian Sectors Semi-annual review 20-Mar 28-Feb11-Mar FTSE/ASEAN 40 Index Annual review 20-Mar 28-Feb11-Mar FTSE UK Quarterly review 20-Mar 11-Mar11-Mar FTSEurofirst 300 Quarterly review 20-Mar 28-Feb11-Mar FTSE techMARK 100 Quarterly review 20-Mar 28-Feb11-Mar FTSE eTX Quarterly review 20-Mar 28-Feb11-Mar FTSE/JSE Africa Index Series Quarterly review 20-Mar 07-Mar11-Mar FTSE EPRA/NAREIT Global Real

Estate Index Series Quarterly review 20-Mar 07-Mar12-Mar FTSE4Good Index Series Semi-annual review 20-Mar 28-Feb13-Mar NASDAQ 100 Quarterly review / Shares adjustment 20-Mar 28-Feb13-Mar S&P Asia 50 Quarterly review 20-Mar 06-Mar13-Mar DJ STOXX Quarterly review (components) 20-Mar 24-Feb13-Mar DJ STOXX Quarterly review (style) 20-Mar 06-Mar13-Mar Russell US/Global Indices Quarterly review - IPO additions only 31-Mar 28-Feb14-Mar S&P US Indices Quarterly review 20-Mar 06-Mar14-Mar S&P Europe 350 / S&P Euro Quarterly review 20-Mar 06-Mar14-Mar S&P Topix 150 Quarterly review 20-Mar 06-Mar14-Mar S&P Global 1200 Quarterly review 20-Mar 06-Mar14-Mar S&P Global 100 Quarterly review 20-Mar 06-Mar14-Mar S&P Latin 40 Quarterly review 20-Mar 06-Mar17-Mar S&P MIB Quarterly review - shares & IWF 20-Mar 16-Mar24-Mar NZX 50 Quarterly review 31-Mar 28-Feb07-Apr FTSE/Xinhua Index Series Quarterly review 17-Apr 23-Mar09-Apr FTSE Nordic 30 Semi-annual review 17-Apr 31-Mar09-Apr TSEC Taiwan 50 Quarterly review 17-Apr 31-Mar07-Apr TOPIX Monthly review - additions & free

float adjustment 29-Apr 30-AprMid April OMX H25 Quarterly review - shares in issue 30-Apr 31-MarLate April FTSE / ATHEX Semi-annual review 29-May 31-Mar

Sources: Berlinguer, FTSE, JP Morgan, Standard & Poors, STOXX

CALEN

DAR



THE FTSEI WANTTHE WORLDINDEXFTSE. It’s how the world says index.

Global markets grow more complex and interconnected every day.To stay abreast, you need acomprehensive index that can slice and dice markets the way you do. The FTSE Global EquityIndex Series was the first benchmark to cover the world seamlessly with a single consistentand transparent methodology. Because FTSE indices are independently verified by a panel ofmarket practitioners, you can be sure that they will always be in line with investors’ needs.Wherever you invest, FTSE gives you the clearest view of how you are doing.www.ftse.com/invest_world

GM EDITORIAL 31.qxd:Issue 31 6/1/09 16:19 Page IBC1

MAYBE I SHOULD TALKTO THE LEADER IN ETFs.

Number one ETF House in Germany from 2003-2008 *Leading ETF market maker and broker on all European exchanges

Bid ask spreads and volumes to suit all requirements

Market maker for all ETF issuers

All ETFs – emerging and frontier markets, developed countries, style categories, bonds, commodities, credit and all EU indexes and sectors

Trading availability across global time zones

Paolo Giulianini – [email protected] +44. 207. 826. 6921Stefano Valenti – [email protected] +44. 207. 826. 6920Enrico Camerini – [email protected] +39. 02. 886. 20660Chiara Solazzo – [email protected] +39. 02. 8862. 0839 Oliver Kilian – [email protected] +49. 89. 378. 17585Florian Lenhart – [email protected] +49. 89. 378. [email protected] UCETF <GO>

*Source: Deutsches Risk

This advertisement has been issued by Bayerische Hypo -und Vereinsbank AG, a member of the UniCredit group of companies and is a part of UniCredit’s Markets and Investment Banking division. It is incorporated in Germany with limited liability.

2008

GM EDITORIAL 31.qxd:Issue 31 6/1/09 16:19 Page OBC1

Documents

FTSE Global Markets