Welcome

Overall, 2012 was a positive year; while volumes continue to be well below historical highs, revenue generation continues its recovery, delivering attractive risk adjusted returns. The first half of the year was very encouraging, with strong equity markets, better corporate activity, including increased dividends and improved hedge fund activity. 2012 faced many headwinds including the Euro Zone debt crisis, the U.S. fiscal cliff, faltering economic growth and concern about company earnings. However as we enter 2013, equity markets have been rallying, European peripheral bond yields have been falling and investors appear to have acquired more appetite for risk. In the updates from our trading desks we talk a bit more about the impacts on 2012 and our view for 2013.

For 2013, the regulatory agenda and subsequent developments are sure to dominate. There are plenty of upcoming and impending regulations and as many, if not more, white papers in the pipeline. ESMA guidelines for ETFs and UCITS, various European financial transaction tax regimes, specific titles within the Dodd-Frank Act, most notably Sections 165 and 166, the FSB Shadow Banking paper for Securities Lending and Repo, and Basel III will keep us all occupied. Taken together, when we look at all of these regulations we see a number of themes encompassing Systemic Risk & Inter-connectivity, Transparency, Investor Protection, Collateral and Tax Developments. We have therefore devoted space in this newsletter to provide you with updates on these matters and we are committed to doing so going forward.

As you read through this Newsletter you will see there are many variables, each of which could have an impact both positively and negatively on the year, but in summary:

• USD Interest rates remain 0.0-0.25%
• Treasury general collateral rebates to decline to mid-teens
• Lower issuance of corporate bonds driving strong demand
• European sovereign repo markets to trade with narrow spreads between issuers
• Early borrower interest in 2013 dividends, but some companies cancelling their dividends
• Positive demand in Asia and emerging markets
• Continued low appetite from hedge funds to add to short positions
• Potential for increased corporate activity

With so much attention on capital and balance sheet usage, collateral diversification and flexibility are critical factors for the borrowing community. In 2013, we will continue to focus on this where appropriate, adding more collateral types as well as working with clients to help them optimize their collateral parameters. We will continue, when possible, to develop our emerging market lending capabilities (Russia, Indonesia, and India) and importantly, continue with our commitment to furthering our multimillion dollar investment in new securities lending technology.

We will be in attendance at the 19th Annual IMN Beneficial Owners Securities Lending Conference in New Orleans beginning Monday, January 28, where we hope to see many of our clients. We are also hosting our inaugural Securities Lending Forum in London on February 12, with an agenda of outstanding speakers discussing thought provoking subjects. We hope many of you will be able to attend and participate.

Throughout 2012 we added more clients across all regions, both custody and third party lenders. In close consultation with our clients we assisted them in reviewing their lending parameters to identify additional ways, within their overall risk framework, to add additional returns. We know from your feedback that this is something that is greatly appreciated, so we look forward very much to working with you in the year ahead.