Securities Lending Quarterly Q4 2009

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Message From Sandie O’Connor

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

2009 was a watershed year for securities lending with sustained market challenges, regulatory reform and a recalibration of risk management for all industry participants. By year-end, stronger fundamentals were in place – on all fronts – setting the stage for a less volatile 2010. Twelve months ago, the global economy was declining; central banks actively expanded quantitative easing programs; and volatility pervaded global equity markets. The U.S. fixed income market struggled with surplus supply, and by year-end, the Treasury had issued more than $2.1 trillion gross in bond and notes, exceeding the issuance of the prior two years combined. Throughout 2009, proposed regulatory changes generated broad-based international dialogue and debate with certain improvements (such as disclosure and tighter settlement requirements) supporting a stronger securities lending market, and other reforms, such as short-selling restrictions, being scaled back by year-end.

By the fourth quarter, global markets demonstrated sustained, but still moderate recovery and quantitative easing slowed, with many programs set to expire by the first quarter 2010. Global equity markets closed the year at or close to 2009 highs. While willingness to lend stabilised, borrower demand remained at lower levels due to leveraging, the complete transformation of some prime brokers into investment banks and jurisdictional restrictions on short-selling that were mostly lifted by year-end.

For many securities lending participants, the market crisis led to a recalibration of risk management. Many beneficial owners moved the review of their cash collateral investments from the operations to the investment team and began demanding more transparency and control of their cash collateral investments. Throughout the year, J.P. Morgan worked hard to ensure our clients are well versed with respect to the risks and rewards of their securities lending programs and we have continued to emphasize the importance of separate account structures that enable clients to customize their lending programs to their unique risk appetite and strategy. In 2010, we plan to continue to engage our clients, regulators and all market participants with respect to the way forward in securities lending and anticipate ongoing discussions focused on best practices in risk management. We wish you a Happy New Year and a very successful 2010.

To view the next article, Regulatory Corner & J.P. Morgan in the News, please click here.

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