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A Challenging First Quarter Ended with Optimism and Growth

Sandie O’Connor,
Global Head of
Financing and Markets Products

The first quarter began with a declining global economy and sustained government interventions to achieve quantitative easing, and ended with moderate equity recovery. Central banks in Canada, Europe, Australia and Asia lowered interest rates aggressively in an effort to stimulate growth. The United States enacted multiple policy initiatives to increase liquidity and strengthen the economy, including the Public-Private Investment Program, the commitment to purchase up to 1.75 trillion of agency mortgage backed securities, agency debentures and Treasuries , and a $789 billion fiscal stimulus package. The United Kingdom embarked on quantitative easing programs; Japan and Korea announced multibillion-dollar jobs packages; and China enacted its own fiscal stimulus measures. The G-20 Summit also pledged $1 trillion in emergency aid to prevent a further financial meltdown. These efforts, combined with positive United States housing data and several major banks announcing that early 2009 profits were exceeding expectations helped equity markets recover off of multiple-year lows during the last

few weeks of March. As the quarter ended, global growth was still declining, but its rate of descent moderated. Directional and dividend trading in the U.S. and Asia Pacific, and capital raising in Europe supported favorable equity lending opportunities, while fixed income general collateral met mixed demand.

Portfolio strategy remained focused on liquidity as the foremost concern within each individual account, with fixed rate investments out to 95 days delivering incremental alpha for clients.

“Back to Basics” for Owners and Agents
The volatility of the first quarter reemphasized strong risk management principles for all participants in the market, leading to a “back to basics” approach to identify, understand and manage risk. The industry’s “back to basics” approach has distilled the key value of securities lending agents, prioritizing liquidity, capital preservation, transparency and customization. Securities collateral management and cash collateral investment across the industry returned to more conservative standards, whereby high-rated, liquid securities are preferred and we continue to actively work with our clients to define cash and securities collateral guidelines for each account to reflect every owner’s unique portfolio strategy. We continue to strive to help all clients optimize portfolio returns within the construct of individual risk preferences and constraints and to provide transparent reporting that facilitates our clients’ management of their accounts. Indemnification against borrower default and an agent’s ability to honor its indemnity have been tested and proven effective. The stronger the capital base of an agent, the more confident clients can be of their indemnification protection. Global trading and distribution around the world continue to offer important revenue opportunities, and throughout 2009 we will continue to expand our global reach by launching operations in new markets that provide the appropriate risk and reward. Throughout a difficult quarter and into hopefully less challenging market conditions for the remainder of 2009, we plan to remain focused on the fundamental strength of our business – expertise, superior client service and the pursuit of incremental alpha for our clients in return for the appropriate risk.

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