Securities Lending Quarterly Q3 2009

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Message From Sandie O’Connor:

Sandie O’Connor,
Global Head,
Financing & Markets Products

September 2009 marked the one-year anniversary of a series of landmark events in the financial services industry, reflected in the near paralysis of the credit and financial markets. In response, central governments and financial firms have worked to restore liquidity and confidence, and significant progress has been made on both of these fronts. Over the past two quarters, positive signs of stability in the markets have emerged. In the third quarter, the declining spread between the three-month and one-month LIBOR rates provided a strong indicator of continued credit market improvement. The spread fell below 4 basis points in the third quarter from a high of more than 100 basis points at the start of the year. Low utilization of the federal liquidity facilities also reinforced the positive view of the credit markets and the expectation that the Fed will continue to wind down its support.

The remaining weakness in the economy and elevated Treasury issuance remain a challenge to the securities lending market, but lending activity has steadily increased throughout the year as the credit markets stabilized. In the third quarter, continued capital

raising by companies and improved hedge fund performance generated lending opportunities. Our clients' risk appetites also increased and we extended our cash collateral reinvestment horizon from a maximum of 95 days to a maximum of 275 days for AA credits. We remain focused on helping our clients realize the intrinsic value of their portfolios through a lending program tailored to each client's unique risk/reward profile. We also remain engaged in ongoing regulatory discussions, including attending the recent Securities and Exchange Commission (SEC) roundtable on various issues relating to securities lending, held in Washington, D.C. on 29 September and 30 September. This newsletter's Regulatory Corner provides an update on the SEC event, and on other governmental actions relevant to securities lending. In general, although positive changes have been implemented, misperceptions persist, particularly with respect to short selling. Our team is trying our best to share the facts. For more information about our perspective on the lessons learned from the credit crisis, please visit www.jpmorgan.com/securitieslending.

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