The recovery in securities lending demand which commenced in the second half of 2014 has continued into 2015, with multiple macro themes creating opportunities for lenders. Concerns over the Chinese and Russian economies, the strengthening US dollar, and growth in M&A and IPOs, are all serving to create demand for specific stocks in fulfillment of directional, arbitrage and hedging strategies. However, the single biggest driver of securities lending demand has been the impact of falling oil and gas prices on several sectors, a dynamic we explore in more detail on page 6. With the Fed seemingly ready to begin raising rates in June or September, we expect the volatility in the market to continue, and with it, borrowing demand.

Focusing on Fed policy, the strengthening of the US dollar against major global currencies has important impacts for our clients taking USD cash collateral. First, the large proportion of lending income generated in international currencies, such as the euro, is a headwind for USD based funds. Second, when rates do begin to increase, there is the potential for any general collateral loans to lose money if the yield in reinvestment vehicles falls below the rebate rate required by borrowers and pegged to Fed Funds. In the coming weeks, our US based Relationship Managers will be connecting with clients to discuss how the latter dynamic can be mitigated, along with the impact US Money Market reform will have on clients reinvesting cash into Prime Funds.

Given the cyclicality of demand, the market is always seeking to unlock new and diversified sources of revenue. Lending into new markets is a key example of this. At the recent PASLA conference in Shanghai, there was much excitement about the prospect of the Chinese regulators creating a securities lending and borrowing mechanism for offshore investors in support of their efforts to develop a globally accessible capital market. We will be monitoring these developments closely to ensure we are able to give our clients access to what should be a huge opportunity over time.

With the recovery in the demand environment and the emergence of new and important markets, it is again an exciting time to be in the securities lending business. I hope to see as many of our European clients as possible at our Markets Symposium in London on April 30th when, in addition to industry leaders from the asset management community, we will be joined by Sir Dave Brailsford, head of the hugely successful Great Britain cycling team, who will be speaking about how incremental improvements can lead to outsized results – a theme which surely applies to all of our businesses -- and one as a fellow Brit, I must admit to being quite proud of! Additional details on the event are included on pages 10 and 11.

I hope you enjoy this issue of The Long and the Short of It and as always we welcome your comments.

Keith Haberlin


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