Securities Lending Quarterly Q1 2010

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Message From Sandie O’Connor

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

Global markets continued to strengthen in the first quarter as the global economy showed modest signs of improvement and inflation remained subdued. Hiring activity in the U.S. increased with the unemployment rate falling to 9.7% in March after peaking at 10.1% in October 2009. Given the fragile nature of the recovery, the U.S. Federal Reserve reiterated that rates will remain exceptionally low for an extended period of time and Central Banks worldwide maintained their target rates as well, with the notable exception of Australia. Despite growing concerns regarding the debt crisis in Greece and its potential impact on Europe’s economic recovery, short term rates (e.g., LIBOR) moved higher in March as the market began to anticipate the U.S. Federal Reserve and the European Central Bank withdrawal of significant fiscal stimulus.

The first quarter saw more developments with respect to short selling reform as the U.S. Securities and Exchange Commission (SEC) approved a new restriction prohibiting the short selling in any security that has declined 10% from the prior day’s closing price. Short selling bans were extended in Austria, France and Japan. The SEC also amended Rule 2a-7 requiring money market funds to reduce credit risk, hold more liquid assets and shorten duration.

Hedge fund borrowing demand remained at lower levels as concerns surrounding continued regulatory uncertainty, sovereign risk (i.e., Greece), the strength of the global economic recovery and a premature withdrawal of government stimulus measures weighed on their trading activity. Borrowing demand for international dividend paying equities picked up in March, however, as borrowers looked to secure supply in anticipation of the peak months of April and May.

During the quarter, we continued to invest in our business in order to offer the best-in-class product. We made significant updates to our securities lending reporting Dashboard, which includes additional metrics (number of loans, overnight liquidity and cash collateral by currency), additional flexibility to select end or start of day pricing, and the ability to export the Dashboard to Excel. This oversight tool allows clients to view and monitor key aspects of their securities lending program in a customized fashion. Feedback from clients has been very positive, so we encourage you to speak with your relationship managers to ensure you are fully leveraging this functionality. We also added new members to our team who bring with them a breadth of market and industry experience to better provide premier client service: Judith Polzer was named global head of product for securities lending; Anne Sylvester joined as WHEM sales and relationship management head for securities lending; and Sheila Swanson joined as WHEM client management team leader for securities lending.

In addition to regular contact with your relationship manager, members of our senior management team held a teleconference/webinar to discuss updates on our program and the industry in general.

We hope this all serves as further evidence of our commitment to transparency, education and communication. We continued to stay the course by adhering to disciplined risk management with the goal of maintaining liquidity and preserving capital. We maintained our emphasis on the importance of customized separate accounts that enable clients to design a lending program to meet their unique risk/reward profile.

Thank you for your business, confidence and trust.

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

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