Importance of Functioning Repo and Securities Lending Markets 7 th Summit for an Enlarged Europe

Evolving Environment Regulators have realised that capital controls alone are insufficient Liquidity was the key during crisis New liquidity rules being implemented Will inevitably be rolled out across a wider range of markets Will be adapted and adjusted Capital is not forgotten Increased capital requirements Collateralised transactions are treated more beneficially Central counterparty clearing is favoured

Common Characteristics of Repo and Securities Lending Original owner of securities retains economic benefits Economic risk of positions Income, dividends, other corporate events Note: Voting of shares is not possible Temporary transfer of ownership Either fixed term or open trades Collateralised transactions that are marked to market Exposure is monitored and managed on a daily basis Through either pledge or transfer of title Use standard documents Ensures greater certainty in default situations

Benefits of Repo and Securities Lending Central Bank perspective Repo is a key tool in managing market liquidity Reduces borrowing costs as buyers can finance positions Market Perspective Provide liquidity in the secondary markets Dealers, market makers, traders, investors, cash investors Price discovery is enhanced Buyers, sellers and traders Those with and without positions all contribute to price formation Positive and negative views both add value in price formation Risk management is improved Hedging of positions Collateralised lending Standardisation increases certainty

Differences between Securities Lending and Repo FeatureSecurities LendingRepo ParticipantsAgency/principalInter-professional DeliveryFree movement of stock and separate movement of collateral Typically delivery versus payment CollateralSecurities or cashSecurities (cash?) Fee earned byLender of securitiesLender of cash Over- collateralisation Received by lender of securities Received by cash lender (if applicable) MaturityPrimarily open termPrimarily fixed term Fee paymentMonthly in arrearsAt maturity

Collateral as a Money Maker Lending money in a collateralised transaction Lending securities that are otherwise idle investments Collateral upgrade trades Raising cash to redeploy into other opportunities Arbitraging yield curves & credit Increased demand for collateral

What about Short Selling? Potential Benefit 1. Efficient price discovery More market participants contribute to better price formation 2. Increased liquidity Facilitates wider trading activity, tighter spreads, more volume 3. Hedging/Risk management Managing exposures on positions Collateralised lending Potential Drawback 1. Market disorder Repricing occurs in a disorderly manner leading to overshooting 2. Market abuse Insider dealing 3. Settlement disruption Failure to deliver, particularly in naked short sales All of the Potential Drawbacks related to short selling (other than naked short sales) apply equally to long buyers and traders

Tools, Objectives and Concerns on Short Selling Disclosure Increasing transparency to either/both regulators and public Disclosure at time of order placement Short positions above a certain level to be disclosed – possibly to public Concerns Level for reporting Competitive positions Herding effect Moral suasion Restrictions Naked short selling Mechanisms that stop/limit short selling Restricted/exemption lists Circuit breakers Uptick rules Concerns Activity triggers Impacts liquidity Artificial barrier Exemptions

Summary Repo and Securities Lending are critical parts of the capital markets Used in a prudent manner they: Serve a unique function in facilitating both monetary authority and private sector functions Enhance pricing efficiency Support financial stability through enhanced liquidity Reduce risk due to collateralised nature Endorsed and supported by governments, regulators and markets Fosters development of secondary markets Include an increasingly wide variety of market participants from an increasing number of countries across the world