The Future of our Industry

1. The Future of our Industry IMN Conference, Scottsdale, February 1st mark.faulkner@dataexplorers.com

2. Agenda • Market Overview • Client Impact • Market Impact • Industry Response • Challenges • Future 2

3. Market Overview • The Markets • The Policy Makers • The Supply Side • The Demand Side • The intermediaries • Principals • Agents 3

4. The Markets • Volatility high • Extensive de-leveraging • Structural changes • Government intervention • Global phenomenon • Affecting all participants • Impacting all markets • Securities lending is not an exception 4

5. The Policy Makers • Quasi political motivation • Limited empirical support • Reactive in nature • Many differing initiatives • Inconsistent application • Temporary short selling bans • Debatable impact • Unintended consequences 5

6. T The Policy Makers on short selling bans • “… knowing what we know now, I believe on balance the commission would not do it again…” • “The costs appear to outweigh the benefits.” • Chairman Christopher Cox, SEC - in a recent Reuters interview 6

7. The Supply Side • Surprised – many still don’t fully understand the activity • Feeling trapped – some feel they can’t stop or move • Some now beginning to realise scale of potential losses • Some are taking recourse to the law • Angry – at themselves and their providers • Some considering a full or partial withdrawal • Confused by the policy makers’ stance • Shocked by some of the actions of their providers • Wondering whether the reward justifies the risk 7

8. The Demand Side • Surprised at the volatility of the markets • Many hedge funds are losing money • Significant hedge fund redemptions and closures • Many funds are restricting withdrawals • Proprietary desks are typically closing or shrinking • Huge regulatory impact – short selling bans • De-leveraging across all strategies - inability to hedge • Uncertainty with regards counterparts - they do go bust • Flight to “quality” AKA scale - large funds do best • Concern about legal framework post Lehman Brothers 8

9. The Intermediaries - Principals • “Prime Brokerage” needs renaming “Banking” • Competitive landscape reshaping almost daily • Huge transfers of balances – permanent or not? • Significant capacity issues for the winners • Shouldering bulk of the current regulatory burden • Massive compliance overhead – resource drain • Rising cost of collateralisation – cash and capital • Significant funding pressure – libor volatility a real issue • Concerned about increase in collateral margins • Worried about counterpart risk 9

10. The Intermediaries - Agents • Risk beginning to manifest itself - more to come • Many re-investment portfolios are under pressure • Some agents can voluntarily protect client base • Client communication a vital investment • Differing responses – pragmatism vs. dogma • Legal battles are beginning - more to come • Significant regulatory overhead – it will increase • Business has been mispriced by some • The need for more certainty challenges some • Client mobility dramatically reduced 10

11. Client Impact • The “terms of trade” have changed for good • Certainty, trust and confidence are the key • A “back to basics” approach is required • A proven ability to execute paramount - “this is not a drill” • Financial strength, capital and reputation are critical • Closer inspection of legal agreements vs. reality • Indemnification • Lock-ins • Re-hypothecation • Exits will increase – partial/total – demand/supply 11

12. Industry Response • Much like the G7 • Initially … • Reactive • Uncoordinated • Disjointed • Now … • Taking the initiative • More coordinated action • Actions reflect firms’ strengths & weaknesses 12

13. Challenges • Rebuilding client trust and confidence - actions not words • Engaging the policy makers globally - commit resources • Seek regulatory certainty – removal of key risk • More explicit legal procedures – clarity needed for all • Allocating capital - provide appropriate leverage • Re-investment in tradable not structured products • Reduced supply and demand environment • Dealing with the IRS and tax harmonisation • Get the message across to the clients, regulators & media 13

14. Challenges • Real and Irrational fears - differentiating between them • Widespread misunderstanding and ignorance • Misinformation and the prejudiced political agenda • Disconnected thinking and actions - from all parties • The uninformed press - bad headlines are sensational • Knee-jerk reactions from non practitioners • Policies made in haste - by parties in a panic • Unintended consequences of policy made in haste

15. This is serious … • We need to promote: - • Information not anecdotes • Education not sales • Communication not monologues • Clarity of thought not confusion • Facts not fiction • Confidence and clarity in the legal processes • Industry wide standards & terms - a la Asset Management • Recognition that all programs are not created equal

16. In the Future… • Consolidation will continue – there will be fewer players • More explicit pricing of all services - indemnities • Less bundling – might lead to higher prices? • Central counterpart • It’s now or never - capital and cost arguments • Can a model develop including the agents? • Regulatory oversight will increase globally • Custody mandates begin again in 12 - 18 months • Exclusives will have to become more flexible • The market will be smaller - much smaller 16

17. In the Future… • RFP Consultants will have to act more responsibly • More compliance oversight required • It is imperative responsibility is taken by owners • Independent empirical oversight vital • Risk will come to fore in decision making • Risk-adjusted-returns are the basis of comparison • Better engagement of Senior Management • Asset Management credentials will be widely accepted 17

18. Remember … • This Trillion dollar industry makes a positive contribution to the functioning of the global capital markets • Efficient pricing • Enhanced liquidity • Hedging facilitation • Supporting capital market financing • Any current losses need to be seen in their context • In relation to your historic annuity revenues • Compared to other activities you conduct • In relation to the demands you made of your provider 18

19. It’s not the end of the world as we know it …

20. Make sure you’re alone your meetings …

21. Don’t bury your head in the sand …

22. You are not prisoners …

23. This is serious but not fatal …

24. The Future of our Industry IMN Conference, Scottsdale, February 1st mark.faulkner@dataexplorers.com