Securities Lending Quarterly Q2 09

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Message From Sandie O’Connor:

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

The financial markets demonstrated increased stability in the second quarter 2009 relative to the prior twelve months, though evidence of economic weakness continued. On the positive side, economies began to grow again, most significantly in Asia. New issuances increased in Asia and Europe, and global equity markets rallied through much of the quarter. The U.S. banking sector received a nod of approval when select firms, including J.P. Morgan, passed the federal government stress test and were granted permission to repay funds distributed under the Troubled Asset Relief Program (TARP). Reliance on U.S. Federal Reserve liquidity facilities decreased, with certain liquidity programs at their lowest balances since the facilities' launch in October 2008 and other programs set to expire in the fall. (In this edition of the newsletter, we included a Regulatory Corner, to update you on the status of key liquidity programs influencing the financial markets.) Despite the positive signs of improved stability, equity gains were given back as the quarter ended; unemployment, particularly in the U.S., continues to increase; and the Federal Reserve and European Central Bank continue to advise that further quantitative easing may be necessary.

Importantly, the fundamentals of the securities lending market began to improve, most notably with better hedge fund performance (the average return through June was up 10%). Stronger hedge fund performance indicates an increased capacity to take positions and points toward greater potential demand for borrowed securities in the coming quarters. While some challenges remained in the market, including ongoing heavy Treasury issuance and compressed spreads, the intrinsic value of equity lending improved driven primarily by relaxed short-selling restrictions, increased capital raising in Europe and Asia, the dividend season, and select equity specials. As fixed income markets have normalized, clients continue to look for opportunities to expand lending opportunities in the context of appropriately conservative guidelines. Throughout the second quarter, we saw increased interest in three to six month investment products, be they for securities lending cash collateral or for money market funds. We continue to emphasize a "back to basics" approach to cash collateral reinvestment, and over the coming months will provide ongoing support to clients to implement strategies that reflect market conditions and individual risk/reward profiles.

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