Global Securities Lending Business and Market Update

Transcription

1 NORTHERN TRUST 2009 INSTITUTIONAL CLIENT CONFERENCE GLOBAL REACH, LOCAL EXPERTISE Global Securities Lending Business and Market Update Michael A. Vardas, CFA Managing Director Quantitative Management and Capital Markets 2009 Northern Trust Corporation

2 Northern Trust: Financial Strength & Stability 2008 The changing landscape in financial services S&P 500 Full Year /16/08: With U.S. Govt support, Bear Stearns acquired by JPMorgan Chase Acceleration in commercial and investment bank consolidation, with significant increase in government involvement. 4/1/08: UBS CEO steps down; $37B in cumulative writedowns 9/7/08: U.S. Govt to support Fannie Mae & Freddie Mac 9/21/08: Goldman Sachs & Morgan Stanley to become bank holding cos. 9/15/08: Lehman Brothers declares bankruptcy; Bank of America announces Merrill Lynch acquisition 9/26/08: JPMorgan Chase announces Washington Mutual acquisition 10/3/08: Wells Fargo to acquire Wachovia 10/4/08: Dutch Govt purchases Fortis 10/13/08: RBS (UK) effectively nationalized 10/14/08: U.S. Govt announces it will buy preferred equity stakes in U.S. banks under the Troubled Asset Relief Program 9/16/08: U.S. Govt to support AIG 10/19/08: ING receives Dutch Govt support 10/24/08: PNC announces National City acquisition 11/24/08: U.S. Govt to support Citigroup 12/11/08: Bernard Madoff arrested and charged with criminal securities fraud Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec 2 GLOBAL REACH, LOCAL EXPERTISE

3 Collateral Investment Market Update Collateral reinvestment: current observations and trends Short-term Fixed Income Markets Trading environment remains under intense stress with few signs of near-term improvement, and limited activity in the secondary market, both in size and frequency Minimal market activity (lack of bids) January optimism and Federal Funds Rate between 0 and 25 bps pushing short-end investors out between 90 and 180 days Liquidity Remains at a premium, and is an expensive insurance policy to purchase with rates at zero Maintaining high-quality, liquid positions to help avoid forced asset sales at severe discounts Credit Quality Closely monitoring the health of asset-backed securities sectors (credit cards, auto receivables, mortgages, etc.) Weak global economic backdrop and domestic recession are negative for the consumer sector Government Support Market participants struggle to evaluate the effectiveness of the various global government intervention initiatives TLGP allowing for issuers with FDIC-guarantee to access market, but the have nots are shut out TALF details released and the program is likely to benefit holders of newly issued ABS (late 2008 and 2009) vintages only and may increase origination slightly MMIFF expanded to include investors beyond MMFs, but the program remains unused to date and is likely to provide little benefit Outcome Continued uncertainty and macroeconomic weakness, resulting in volatile market-to-book value ratios 3 GLOBAL REACH, LOCAL EXPERTISE

4 Securities Lending Market Update Recent observations and trends Demand from the borrower community De-leveraging by prime brokers and hedge funds Ongoing reductions in overall demand and existing volume Hedge funds suffered significant redemption activity at year-end, though not as large as many anticipated Reduction of market and counterparty risk Continued increases in short covering due to increased market volatility Greater scrutiny of counterparty risk Equity markets Demand concentrated in high-intrinsic-value names with limited demand for traditional, general collateral business Expectations of strong borrowing for approaching European dividend season Fixed income markets Demand remains strong for government securities (i.e., flight to quality) Market drivers Outcome meaningful contraction in loan volumes industry-wide Heightened volatility with ongoing global equity market declines S&P 500 and Wilshire 5000 for 2008: both down approximately 37%; 2009 YTD down 10% MSCI EAFE Index for 2008: down approximately 45%; 2009 YTD down 10% Short-selling restrictions Continue to be lifted and relaxed on a worldwide basis (examples: UK and Switzerland) Outcome continued reduction in value of outstanding loans industry-wide Spread environment Wider spreads for the most in-demand equity securities Government debt spreads remain robust Outcome spreads remain fairly healthy for in-demand assets 4 GLOBAL REACH, LOCAL EXPERTISE

5 Securities Lending Future Vision Collateral Options Collateral Options Under Consideration Move biggest and most sophisticated clients into separate accounts / custom funds Offer new clients of a certain size and sophistication separate accounts / custom funds Add more conservative pooled options Allow clients to make separate decisions about cash reinvestment and acceptable non-cash collateral align risk so exposure is only to collateral type accepted Lower Risk Higher Risk Cash Collateral Custom Fund Cash Repo only Non-U.S. Clients Cash U.S. clients 2a7 Custom Fund Non-Cash Collateral Non-Cash U.S. Treasury Non-Cash OECD Government Non-Cash Including Equities High Intrinsic Value Low Intrinsic Value 5 GLOBAL REACH, LOCAL EXPERTISE

6 Evaluating the Future for Securities Lending Keeping our clients informed Securities Lending Market Intelligence Newly developed periodic newsletter featuring news, insight and portfolio commentary Notices from senior management Securities lending senior managers continue to issue market update letters to clients with our Monthly Market Reports Updates on current investment practices issued November 2008 will be issued from time to time New securities lending data block on Northern Trust Passport Facilitates the online distribution of commentary and vital, tailored information on each client s portfolio holdings, characteristics and investment performance Future versions will enable clients to access predefined, dynamic reporting output Initial rollout in January, with several updates anticipated in coming months. Client conference calls Year in Review newsletter 2008 annual review to be issued in coming weeks 6 GLOBAL REACH, LOCAL EXPERTISE

7 Weekly Deliverables Each week, clients participating in the collateral pools where a deficiency has been declared receive a series of reports from Northern Trust regarding the status of the collateral pools. WEEKLY UPDATE AS OF»Collateral Section Find important reports here about your Northern Trust securities lending collateral pool(s), with collateral section specific reporting of market-to-book, holdings and characteristics as well as market commentary. Market Summary Market-to-book (NAV) Report Holdings Report Characteristics Report Fixed Income Market Weekly Podcast Insights into events and announcements that may affect interest rates, volatility, liquidity and other factors that can potentially affect client portfolios. 7 GLOBAL REACH, LOCAL EXPERTISE

8 Summary Securities lending is an important part of global financial markets and is vital in helping our clients manage their programs. Currently, the underlying cash collateral pools are being managed to maintain unprecedented supplies of overnight liquidity in order to facilitate our clients normal course of business transaction needs. Although the market remains volatile and uncertain, Northern Trust continues to manage the securities lending program in an equitable manner for all clients. We may take additional actions in the future as appropriate to protect the interests of all clients, and are committed to providing our clients with reporting transparency. We are developing the next generation of collateral pool structures with input from our clients to align with their risk tolerances. 8 GLOBAL REACH, LOCAL EXPERTISE

9 Biography Michael A. Vardas, CFA Mike is the Managing Director of Northern Trust Quantitative Management and Capital Markets in Chicago. The Quantitative Management business comprises passive or index asset management mandates and has assets under management of $208 billion as of December 31, Mike is also responsible for Northern Trust s Capital Markets business which includes Global Securities Lending and Northern Trust Securities Incorporated (NTSI). Global Securities Lending has approximately $115 billion of securities out on loan and has trading offices in Chicago, London, Toronto and Hong Kong. NTSI provides brokerage services which include institutional execution services, transition management, soft dollar services, commission management, 10b5-1 plans and prime brokerage services. Prior to joining Northern Trust in 1983, Mike was associated with the Chicago Board Options Exchange. He received his Masters of Management Degree from Northwestern University s Kellogg Graduate Business School and a Bachelor of Business Administration Degree from Emory University. He also is a Chartered Financial Analyst and is a member of the Investment Analysts Society of Chicago and the Association for Investment Management and Research. 9 GLOBAL REACH, LOCAL EXPERTISE

10 NORTHERN TRUST 2009 INSTITUTIONAL CLIENT CONFERENCE GLOBAL REACH, LOCAL EXPERTISE Thank you. Michael A. Vardas, CFA Managing Director Quantitative Management and Capital Markets 2009 Northern Trust Corporation